By Sinead Cruise
LONDON (Reuters) - Britain's financial watchdog is stepping up its vigilance of credit providers who encourage customers to take on more loans than they can afford, putting them at risk of a personal debt spiral that could ramp up their financial difficulties.
In a review of the high cost credit market published on Thursday, the Financial Conduct Authority (FCA) said it was worried about firms' conduct, including poor practice in use of online accounts, apps and marketing messages that emphasised ease, convenience and benefits of taking on more credit.
The study, which was completed prior to the coronavirus pandemic, also showed that nearly half of consumers regretted borrowing more money while some had missed payments and were forced to prioritise repayment of debt over other expenses.
"We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer," Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations, said.
The FCA has described the fair and efficient running of credit markets for vulnerable borrowers as one of its key priorities, highlighting concerns about the increased costs of refinancing compared with other ways of accessing new credit.
Before the pandemic, it saw increasing numbers of complaints about high-cost lenders' relending practices and affordability assessment failures, which suggested some were not relending in a way that was sustainable for customers, Davidson said.
"We expect firms to review their relending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes," he said, adding that the FCA would take action where it saw harm.
The FCA reviewed the borrowing history of around 250,000 customers, a sample of firms' loan books to analyse how much relending is taking place; and firms' marketing materials, to understand how firms promote relending to existing customers.
Some academic studies since the pandemic suggest borrowers with stronger credit profiles might also be at risk, as lenders push products they don't need to offset losses on relief lending to poorer customers that are only partly covered by the state.
"Banks have a record of engaging in 'window dressing' and 'profit pumping'. If government guarantees will be partial or remain uncertain, banks will find ways to cope with even worse implications for the economy," Massimo Massa, Professor of Finance at INSEAD, said.