Call for a Total Cost Cap on all forms of Consumer Credit 

For years we’ve seen stories of customers who end up paying extortionate prices in rent-to-own schemes. One person was reported by the Guardian as having paid £2000 for a washing machine worth only £300. Last month marked the implementation of the Financial Conduct Authority’s rent-to-own price cap. Though default fees are excluded from the cap, it signifies a move in the right direction. However rent-to-own is far from the only form of high-cost credit driving people into perpetual debt.

A total cost cap on all forms of consumer credit would mean nobody has to pay back more than twice the principal amount they borrow, including all interest, fees and charges.

Anybody who argues that a 100% return is not enough profit for these lenders is clearly out of touch with the 9.3 million people among us who have to resort to using credit just to cover their everyday living costs – as found in research by debt charity StepChange.

The cap on payday loans in 2015 has cut the cost of loans by one-third and the number of payday loan problems coming through the Citizens Advice network by half.

Most importantly the cap has reduced the incentive for lenders to target and push vulnerable borrowers into deeper debt and instead restructure products in a way that helps them repay what is owed once the cap’s threshold is met.

In other words, real sweeping structural change of predatory lending practices that is comparatively cheaper and more effective to enforce and implement than other approaches.

The overlapping nature of many peoples debt across many different forms of high-cost credit only intensifies the need for this safety net to now be extended across all forms of consumer lending.

Credit cards for example only make up 15% of the market yet account for half of all interest payments. One-third of customers do not fully understand the interest rates they are paying and 4 million people are caught in the trap of persistent credit card debt - typically paying £2.50 for every £1 borrowed.

And these people really are among the most vulnerable, with the FCA saying the most likely to use high-cost credit are those with financially dependent children, single parents, the unemployed, people with no savings or investments, those renting their home or with a physical or mental health condition or illness that affects their day-to-day activities.

Many find themselves caught in a debt trap due to unexpected events in their lives such as loosing their job or becoming ill. Consistent with what we know about users of high-cost credit, clients helped by Citizens Advice with doorstep loans usually have little or no access to mainstream borrowing options, only 32% are in employment, half have a long-term health condition or disability and a third are single parents. Half are also in arrears on council tax and 43% are behind on water bills. 37% also hold catalogue credit debts while a third also have credit card debts.

We have seen steadily falling unemployment figures and yet the number of people going insolvent in England and Wales was at a 7 year high last year, up 16.2% from 2017 with a surge in debt relief orders - up 11.2%. That tells us that people are in work, but are still unable to pay the basic costs of living, like utility bills and rent, or servicing their debt. Look further at the day-to-day uncertainty for those in the gig economy and wages barely keeping pace with inflationary rises after a sustained period of real terms decline, and you start to get a stark picture of why so many are reliant on credit and the inherent problem that poses.

Nobody is claiming this proposal as a simple fix for those deeper underlying causes, but it will go a way to safeguarding those who are right now in the most dire circumstances, enabling them to gain control of their lives, taking back an estimated £6 billion a year for extorted consumers.

FCA head Andrew Bailey and Economic Secretary to the Treasury John Glen have expressed opposition to extending a total cost cap across all forms of consumer credit. They claim it will be too hard for lenders of revolving credit (specifically credit cards) to keep track of customer costs determining when to apply the cap.

However we know credit card lenders already track the data needed because it is required for the standardised annual statements introduced in 2012.

According to the UK Cards Association the statements “specify the time period covered and include total spending, the amount repaid and any interest fees and charges incurred. The statement also shows exactly how the card has been used during the year - broken down by point-of-sale spending, cash advances, balance transfers, and the applicable interest fees and charges for each of these types of transaction. Information will also be provided on charges for foreign transactions.”

Furthermore the FCA’s own rules on persistent credit card debt require lenders to monitor accounts and determine if borrowers have paid more in interest and fees than they have repaid of the amount borrowed over an 18 month period.

The market is clearly not working for a vast amount of people and Government ministers have a duty to ensure the FCA is delivering on it’s pledge to protect consumers. John Glen agrees that a cap on rent-to-own and payday loans became a moral and practical obligation, what separates those products from credit cards, overdrafts or doorstep loans?

Please join us on June 20th for an event exploring how predatory lenders are able to extort customers and how best to reform the credit market.

Mitchel Johns