What Does the Future Hold for the High-Interest Credit Market?

The consumer credit sector has changed a lot, and the Financial Conduct Authority (FCA) says that they are focused on affordability of loans. They say their commitment to affordable credit and sustainable business models won’t change. Behind this sentiment there is the idea that a purposeful culture is the best way to deliver value to borrowers, success for firms, and less pressure on their employees.



It is important, according to a watchdog of the UK’s markets, to curb risky lending operations. In recent months, lawmakers have been increasing the pressure on the FCA to protect the most vulnerable people from predatory lending and risky relending practices. Its job, after all, is to protect consumers from excessively high interest rates. So now that legislators are pressuring the FCA to regulate and hold lenders accountable, how will this market change in the future?







Business Models



The FCA will focus on creating business models that are sustainable and fair to customers. Their price capping initiative on rent-to-own companies was introduced on the first of April and will, according to the agency, save consumers up to £22.7 million a year.



They will also launch an investigation into motor finance companies, which have raised concerns about the way lenders are choosing to reward automotive retailers and other credit brokers. Changing this business model is a key component of their initiative.



Culture of Firms



Another point of interest for ensuring that these high-interest credit are made more affordable is the culture of these firms. The relentless outlook of profit hinders affordable loans. For example, the lack affordability was a key component of the collapse of Wonga.



The debt management sector is also identified as an area where the affordability of loans and the culture of the company are related. Not only is managing credit loans in the best interest of the consumer, companies that do the best go beyond the compliance culture. These businesses are focused on customer outcomes, not maximizing profit at all costs.



According to the experts at MoneyPug, a website used to compare the best payday loans, some of these firms offer the most reasonable payday credit options. While payday loan companies are rarely the ones we commend for reasonable interest rates, if you bother to look for firms with the most reasonable loans you will typically find the most sustainable company culture.



Focusing on Affordability



With the consumer credit sector taking up the largest portion of firms the FCA supervises, they are continuing to grow. The focus of the regulator’s new push is to ensure that credit options are affordable for the average citizen. Last year the FCA published their Approach to Supervision, which highlighted the ways in which the agency aims to supervise credit firms. This includes a pre-emptive approach when engaging with credit companies of varying sizes.



It is a collaborative process in the way that the regulators work with the firms of similar sizes to create a strategy to make loans more affordable. The theory is that this will make credit more accessible to the average consumer, but some people don’t like the idea of the government and lenders working so closely together.



Relending



While the majority of consumers who pursue high interest credit are those who have poor credit histories and low financial resistance, the FCA says focusing on making them less expensive for consumers is the most important thing. But getting these people out of the relending cycle is another topic of interest for the regulators. New work will be done to reveal the amount of people taking out additional loans as well as understanding their motivation for doing so.



Making sure that credit loans are reasonable is a key factor to avoid the relending process. Implementing the necessary legislation to ensure that firms cannot charge above certain amounts for a designated amount of time will be one of the many steps regulators suggest to lawmakers in the future.



Furthermore it is pivotal that borrowers understand what they are getting into. Guarantors need enough information to fully see the implications of high credit loans. To make the high interest credit market a success in the long run, it is necessary for these firms to offer loan options and for the consumers to be fully educated about their rates as well as the need to escape the cycle of debt and relending.

By Juan Vittori

© 2019 Copyright Juan Vittori - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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