On May 31st, the FCA published their much anticipated consultations on
High-cost Credit (CP18/12) and on
Overdrafts (CP18/13). Covering rent-to-own, catalogue credit, store cards, home-collected credit, bank overdrafts and other high-cost credit alternatives, the papers put forward a number of new measures designed to give customers greater control and protection.
The consultation papers highlights the need for ‘mid-cost’ alternatives to high-cost credit, particularly those offered by credit unions and community development finance institutions. The current lack of alternatives is cited as a driver of demand for higher-cost
products, which in turn is fueled by the significant costs alternative lenders face in assessing creditworthiness and verifying identity. The reports explain, “Credit Reference Agency (CRA) data may not give lenders a clear picture of the circumstances of
high‑risk applicants, particularly those with little credit history or where there are gaps in CRA reporting such as rental data and non‑bank income.”
The lack of actionable credit data on a significant portion of the UK public is a well known issue. Traditional measures of creditworthiness have been the same for decades, despite significant changes in the way individuals behave in the digital era. Incorporating
widespread trends including the rise of zero-hours contracts, delaying of major life events, and the decline of credit card use among the young presents a significant challenge.
Alerts, eligibility tools and prompts are among the remedies put forward by the FCA. Newly available technology can go a long way to solving this problem: Open Banking enables customers to share financial data with lenders directly from their banks, while
AI tools offered by technology-driven Fintechs allow customers to interact with their own financial data. Customer touchpoints can help empower consumers to better understand the link between their behaviour and habits and the availability and cost of credit.
Creative solutions can help established firms thrive in a shifting regulatory environment. Technology built by Fintechs has the power to help solve many of the problems the FCA has identified, and innovative lenders who partner with them will find it easier
to adapt. Regulation need not be a burden when it spurs businesses to adapt to the modern age.