Bank fear over boom in credit

Lenders must be protected against debt risk

LENDERS will be forced to prove they’re not taking on too much risk as fears rise that consumer credit is getting out of control.

The Bank of England has ordered lenders to show how they are protected against customer debt risks by September. Separately, the Financial Conduct Authority (FCA) is cracking down on pay and bonuses in consumer credit firms to cut down mis-selling. The Bank of England’s Prudential Regulation Authority (PRA) has highlighted worries raised during a review of lending in personal loans, credit cards and car finance. Last week, it said banks needed to find a further £11.4billion in the next 18 month to beef up their finances against the risk of bad loans. Yesterday it said firms would face stress tests to see how they would cope with potential credit losses.

There have been particular concerns about car finance, which the PRA described as “the fastest growing consumer credit product”.

But it also warned that lenders need to assess the credit scoring of a “new generation of borrowers” who have had no experience of higher interest rates.

It said banks need to take a borrower’s total debt, including mortgages, into account when lending and that finance firms should justify their assumptions when selling 0% credit card balance transfer deals. The FCA is conducting its own reviews into high-cost credit and into car finance. Yesterday it launched its crackdown on bonuses in consumer credit firms by warning companies that they must ensure staff payments don’t affect the way they deal with consumers. Its study of the bonuses and commissions paid out by 25 credit providers found nearly half were at high or very high risk of pressure selling. The FCA plans to force firms to “identify and appreciate the risks” that their pay practices could lead to mis-selling.