Watchdog concern over lenders targeting high-risk customers
HIGH-INTEREST lenders are urging vulnerable borrowers to take on debt for an exotic holiday in a bid to boost their profits, the City watchdog has said.
Credit firms are guilty of a string of poor practice as they seek to lure in customers, according to the Financial Conduct Authority. In some cases, con- sumers already struggling to get by were told that they could use borrowed cash for a vacation.
Almost half of customers who use so-called high-cost credit firms regret borrowing the money, the regulator found. The industry includes payday loan companies, doorstep lenders, store cards and rent-to-own providers. Many players target customers with a poor borrowing history who cannot get a bank loan.
The research was conducted before the pandemic, but the FCA warned that many borrowers have since entered financial difficulty because of Covid-19. These borrowers are more likely to be vulnerable, have a poor credit record and have little in savings to fall back on.
Some companies also used underhand tactics to suggest that it is normal for consumers to repeatedly borrow money – with repeat business accounting for more than 80pc of trade in several cases. The regulator’s report said that many firms would advertise that customers could borrow high sums to normalise the idea of taking out large loans, a process known as “anchoring”. Customers are told they can borrow “up to £1,000” to tempt them into taking out larger loans than needed.
Often lender websites would have large sums displayed as the default option, with long repayment periods suggested so that the expensive interest rates appeared manageable.
In other cases, apps were used to encourage customers to borrow more.
The FCA said that without adequate warnings, customers were tempted to take on more debt than they could afford.
Some customers were then forced to open new credit accounts to pay off other lenders. This left them juggling multiple credit accounts with no way of paying them all off each month.
The review of 250,000 accounts also found that rising debt levels caused anxiety and stress among borrowers.
Jonathan Davidson, of the FCA, said: “We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.”
Mr Davidson called on firms to review their practices immediately and make changes to their systems.
He added: “We will continue working with firms to raise standards, and we will continue to take action where we see harm.”