FCA consumer credit review sorely needed: Robert Sinclair


Affordability standards required of mortgage lenders are not being applied to personal and car loans, PCP and credit cards

Following various high-profile warnings over rising consumer debt, the FCA says it will review the sector. This covers credit cards, personal and unsecured loans, and car finance.

Latest figures from the Bank of England show that, while borrowing against our homes is falling, unsecured borrowing continues to grow quickly. In April, consumer credit increased by £1.5bn, pushing the annual growth rate up from 10.2 per cent to 10.3 per cent. This was largely driven by growth in credit card lending from 8.9 per cent in March to 9.7 per cent in April, when the Financial Policy Committee warned this explosion in consumer debt was putting financial stability at risk.

Not only is the risk of arrears on consumer credit higher than in the mortgage sector, these loans are being securitised and sold on to other investors. Headlines have begun drawing comparisons between sub-prime car loan contagion in the US and the 2007 credit crunch.

Concern is mounting that the underwriting standards applied to consumer lending are insufficient. This is worrisome given the introduction of clear affordability rules on mortgage lending under the MMR and the inclusion of consumer credit lending in the FCA’s regulatory remit in 2014.

The affordability standards required of mortgage lenders are not being applied in the sale of personal and car loans, PCP and credit cards, despite this being a requirement of the FCA consumer credit conduct rules.

If the philosophy that sits behind the MMR rules on affordability has taught us anything, it must be that a credit score in isolation is an insufficient measure of whether a consumer is able to repay debt.

Increasing reliance on short-term, expensive forms of debt over the long run may reflect both stricter affordability criteria on mortgage borrowing and a decade of little to no real wage growth.

This is particularly acute for the younger and still working generations, whose incomes have not been protected by the state pension triple lock. The lack of real income growth for the younger generation is becoming problematic and, if it persists, will likely pull house prices down.

Robert Sinclair is chief executive of Ami