U.K. Gets Fresh Warning on Consumer Borrowing From Top Regulator

(Bloomberg) -- The head of the U.K.'s Financial Conduct Authority issued a new warning on the levels of consumer indebtedness and called for fresh thinking on how lending is run.

With borrowing surging, FCA Chief Executive Officer Andrew Bailey highlighted his growing concern about payday lenders, excessive rates on overdrawn accounts and credit-card debts. He said that about five million credit-card borrowers are experiencing difficulties paying off their balance, resulting in costs of 2.50 pounds in interest and charges for every one pound of balance they repay.

“We are concerned about the cost and terms of such credit and the propensity for over-indebtedness,” he said in a speech in London on Wednesday. “And these things are linked. Some of the terms encourage over-indebtedness with little or no incentive to pay down debts.”

Bailey also said firms may not be doing enough to protect consumers, saying they “lack incentives” to tackle credit card debt as such customers are profitable.

The Bank of England has been warning about what it calls “pockets of risk” since the beginning of the year. The central bank's Financial Policy Committee said Sept. 25 that banks could suffer bigger losses from defaults than they're expecting if the economy faces a sudden downturn.

Lower interest rates in response to slower economic growth, the unreliable income flows of workers in the gig economy, longer lifespans and new financial technology have all contributed to the rise of consumer credit, according to the FCA head. BOE data show it grew at an annual pace of almost 10 percent in August.

“It is important that credit is sensibly available to those with lower incomes and means,” Bailey said. “It can smooth income flows and enable the purchase of household appliances etc. I am not convinced that we have an appropriate system in this country for the sustainable supply of such credit.”

Previous policies aimed at bringing greater control over elements of the industry have shown signs of success. A cap on customers' repayments to payday lenders that was renewed by the FCA in July has saved as many as 760,000 people about 150 million pounds per year in charges, he said.

Now, the regulator is concerned about the practices of some so-called door-step lenders and whether greater oversight of unarranged overdrafts is needed. Bailey also said there is a risk in the current low-rate environment that people are saving too little for retirement to meet their expectations.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Fergal O'Brien