The failings were uncovered following a review by the Financial Conduct Authority (FCA) into the practices of credit firms that allow repeat borrowing.
The regulator found that some firms were using online accounts and apps to encourage customers to borrow more.
Borrowers were targeted with marketing messages that emphasised the ease, convenience and benefits of getting further into debt.
Some providers suggested to borrowers they could use the extra borrowing for a holiday and tempted them with images of exotic locations or normalised repeat borrowing by saying it was a common thing to do.
These messages, said the FCA, were not being balanced with the risks that come with taking on more debt that you may not be able to afford.
Vulnerable borrowers
High-cost credit customers are more likely to be vulnerable, have low financial resilience and poor credit histories, said the FCA.
They often held multiple credit products and had to juggle repayments, sometimes having to decide which priority debts to pay when they do not have enough for all.
Nearly half of consumers who took part in research commissioned for the review said they regretted their decision to borrow more money, and for some products this rose to over 60 per cent.
Firms were also found to be inadequately assessing borrowers’ affordability before agreeing to give them another loan.
Some consumers admitted that after taking out further credit with a firm, they experienced financial difficulties including missing payments.
To solve their financial problems, some borrowers were allowed to take out more debt. The regulator said it wanted to firms to consider if forbearance or debt advice was a more suitable option.
Significant concerns
Jonathan Davidson, executive director of supervision, retail and authorisations, said: “We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.
“Before the pandemic we saw increasing numbers of complaints about high cost lenders’ re-lending practices, which showed that firms had failed to adequately assess affordability, and they were not re-lending in a way that was sustainable for customers.
“We expect firms to review their re-lending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes. We will continue working with firms to raise standards, and we will continue to take action where we see harm.”
