FCA may clamp down on unsecured mortgages and motor finance

The UK financial watchdog plans a crack-down on unarranged overdrafts, following a nine-month review of the high-cost credit market amid warnings from the Bank of England to lenders about climbing levels of debt.

The Financial Conduct Authority has proposed several changes to the way banks and other lenders operate in this area, and said it was conducting a separate probe into the motor finance market, where there have been suggestions a bubble is forming or already has formed around personal contract purchase (PCP) plans.

Banks could be forced to undertake more due diligence on vulnerable customers before lending them money, the FCA said.

FCA chief executive Andrew Bailey, issuing a statement on what happened to be the same day as credit agency Moody's downgraded its outlook on UK structured finance including motor PCPs, said the "nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option".

The review identified particular concerns in the “rent-to-own, home-collected credit and catalogue credit sectors” and said the regulator was devising a means of protecting consumers as there were some significant differences between products.

But having closely examined the effectiveness of the payday loan price cap, the regulator said it will leave the existing measures in place.

The FCA said it has begun working on developing "tailored solutions" to these issues and will consult on action to address its concerns next spring.

FCA chief executive Andrew Bailey said: "High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers. We are pleased to see clear evidence of improvement in the payday lending market after a period when firms’ treatment of customers and their business models were often unacceptable."

"However, there is more that we can do, and this review is about identifying the areas where consumers may be suffering harm so that we can focus our efforts accordingly."

Unarranged overdrafts were a particular area of concern. "We are now working to resolve these issues while preserving the parts of the market that consumers find useful.”

Last week, Bank of England financial stability director Alex Brazier warned that fresh action would be taken against careless lending in what he referred to as a "spiral of complacency" regarding creeping levels of consumer debt as outstanding payments on car financing, credit card balances and personal loans had all risen 10% in the last 12 months.

MOODY'S WARNING

Moody’s on Monday downgraded the collateral outlooks on most ‘UK structured finance sectors’ to negative as it believes they will perform negatively over the next 12-18 months.

Structured finance, whereby a large number of individual loans are packaged up into a single security that is then sold onto to institutional investors, is designed to provide investors with a guaranteed income stream but as happened in the subprime crisis of 2008 they can lead to spectacular losses.

Moody’s expressed particular concern about non-prime residential mortgages bonds as they have smaller savings pots to absorb any shocks; bonds involving the buy-to-let due to the risks if house prices fall as there are a "high proportion" of interest-only underlying loans; and structured securities using motor finance, where it fears “delinquencies are likely to rise slightly” as the economy deteriorates, especially PCPs as they have been widely taken up by those with poor credit histories.