Dear FCA, Harm is harm, whoever the lender

Harmful debt is not concentrated in one section of the market alone.

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Jo Salter is a researcher at Demos and author of Demos report The Borrowers

Dear Financial Conduct Authority,

As you are probably aware, next week you officially take over from the OFT in regulating the consumer credit industry – a motley ensemble of payday lenders, credit card companies, hire purchase providers, pawnbrokers, debt management and collection firms, and debt advice services.

Regulating all of these industries together in the same place – alongside banks, building societies, mortgage lenders and insurance companies – is a vital opportunity to judge them all on the same measures, and move away from regulating by sector and towards regulating by the harm caused by different debts.

Demos has been researching the way that unsustainable debt affects peoples’ lives – on measures such as affordability and potential legal consequences, but also behaviour of creditors around debt collection, impact on mental and emotional wellbeing, and disruption to relationships with family and friends. We have created a ‘Harm Index’, using these factors and others to assess the overall level of harm caused by different debts.

Our report, published today, contains three clear concrete recommendations for the FCA, intended to alleviate these impacts, by targeting the debts that cause the highest impact, and the areas where impact is felt most keenly.

Firstly, in the energy sector, a ‘three strikes’ approach to dealing with arrears is standard practice. When a payment is missed, an initial reminder letter is sent detailing what help is available if you are struggling to pay your bills. This is often followed by an overdue notice before a third and final warning. Only then do companies begin to take legal steps to recover the money owed.

The FCA could learn a lot from this system, which opens up a channel for conversation between people and their creditors early on in the process, preventing the situation reaching crisis point.

Secondly, a lot of people are not prepared for the true cost of the debts they take on, and do not have a realistic sense of how easy it will be to repay a loan. Information about early and late repayment processes, additional costs, and default and rollover rates needs to be displayed clearly and simply.

We suggest a ‘traffic light’ rating system on all adverts for debt products to empower consumers – similar to the ones showing nutritional information on food packaging. Rather than using just unclear APR rates, these should be displayed in cash terms based on previous customers – showing, for example, the average amount repaid on £100 borrowed.

Finally, the level of harm caused by different debts should also help shape the way that the FCA administers the debt advice levy, used to fund debt advice services. The current lender-specific approach, where those who lend the most (i.e. mortgage companies) pay the most, allows some sections of the industry to get off scot-free – as does the alternative proposed by some to issue a specific levy on the payday loan industry.

Harmful debt is clearly not concentrated in one section of the market alone – and targeting one section sends the wrong message; that there are ‘goodies’ and ‘baddies’ in the credit market, rather than individual ‘good’ and ‘bad’ experiences. Harm is harm, whatever the lender. Expanding the debt advice levy to cover all sections of the lending industry – and assessing contribution based on harm caused – would help ensure that those who cause the most harm would pay the most towards picking up the pieces.

I hope that these are ideas that the FCA can use to mitigate some of the impacts of debt, and look forward to a conversation about debt that aims to reduce the impact of debt – and in so doing pave the way for people to recover from debt in a better, more sustainable way.

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