FCA Warning to High Cost Lending Firms

FCA Warning to High Cost Lending Firms

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Loans requiring a guarantor are “in our sights”, according to a senior Financial Conduct Authority official reported in the Times. The increasing focus on guarantor loan companies is driven by an “anecdotal” observation that more guarantors were being forced to pay off loans themselves and by the very high price of the loans themselves. The same official told the Times, “if the guarantor is themselves highly creditworthy, then why are the rates set in the way that they are?”

In this article, 786 Loans looks at the coming clampdown on guarantor loans and remembers how intervention from the Financial Conduct Authority rebalanced the payday loan market and short term loan market back towards the borrower.

The growth of guarantor loans in the UK

If you want to take out a guarantor loan, you need to find someone who will, in case you can’t repay the loan, make the repayments on your behalf. More often than not, guarantors are friends or family members. Generally, the person borrowing the money will have a poor credit history and the person acting as the guarantor will have a very strong credit rating.

Borrowers can take out guarantor loans for between £500 and £15,000 with up to five years to pay the loans back. Interest rates on guarantor loans can be as high as 60% per annum.

BM Magazine reports that there are around 12 guarantor lenders in the UK with a few new entries each year “meaning that it remains quite a niche industry.”

Jonathan Davidson, executive director of supervision, retail and authorisations at the Financial Conduct Authority, told AOL that there had been a “dramatic increase” in the use of guarantor loans with balances on current loans now “fast approaching £1bn”.

Mr Davidson said that “there is growing anecdotal evidence that guarantors may not understand how likely it is that they will be called upon to make a payment”.

More and more guarantors are having to step in

The FCA has presented no concrete proposals yet on how they might seek to more tightly regulate the market but, in recent interviews, Mr Davidson gave an indication on their particular direction of travel towards the sector:

  • Making sure that guarantors get better and more understandable information about the guarantee they’re being asked to sign and the effect that it may have on their lives if the guarantor is triggered
  • Checking that the same level of due diligence is performed on the creditworthiness and the current financial situation of the guarantor as they perform for the borrower.
  • Better communication with the guarantor if the guarantee is triggered include giving better notice periods on when the continuous payment authority will be activated.

The Epoch Times reports that new regulation surrounding the provision of guarantor loans is unlikely to change in the short-term but that it may do so in the medium term. However, the Financial Conduct Authority is keeping an open mind on the sector as it has become increasingly concerned that more borrowers are unable to repay their debts leading to guarantors having to make those repayments instead.

How the FCA changed the payday loans market

For the best part of a decade, there was a lot of controversy surrounding payday loans, the companies offering payday loans, and how much they cost.

In 2016, the Financial Conduct Authority, under pressure from politicians, the media, and borrowers who had felt they had been wronged by the sector, decided to act to make payday loans and short-term loans (loans lasting 12 months or less) in the High-Cost Short Term Credit (HCSTC) market fairer.

New regulations were passed for all HCSTC lenders, the three most important of which were:

  • Debt could be charged at no more than 80p per day per £100 borrowed
  • Default fees (for missing payments) could be no more than £15
  • The total amount paid back by a borrower in interest and other fees could not add up to more than the original value of the loan.

In 2017, the FCA renewed its cap on fees for another three years, with a further review due next year (source: Out-Law).

Other rules were passed too, specifically targeting the way that HCSTC companies could deal with borrowers who fell behind on their repayment. The rules proved far too difficult for many lenders to follow so, one by one, many of them withdrew from the market and they handed their licenses back to the Financial Conduct Authority.

Although the cost of HCSTC loans rose slightly in 2018 (source: Out-Law), lending volumes are much lower than in 2013 and the costs of loans are also lower than before the pay cap was introduced (source: FCA).

No guarantor loans at 786 Loans

We agree with the FCA. We feel guarantor loans are fundamentally unfair and, because we feel that way, we won’t work with companies offering them. Considering that a guarantor must have excellent credit, we believe that the rates they charge should reflect the much lower risk of not having a loan paid back. It makes far more sense for someone with an excellent credit history to borrow money under their own name and then make their own private arrangements with their friend or family members to pay them back personally.

We also do not feel comfortable with the fact that, should a borrower lose their job or fall ill over the long term, their relationship with a guarantor should become strained because they have to take over the repayments – family relationships and friendships are too important to put at risk over money.

Here at 786 Loans, we’re brokers and not lenders. Access our panel of specialist lenders and let us arrange a loan with one of them for you.

Whatever your credit history, 786 Loans helps consumers with doorstep loans, quick loans, instalment loans, short term loans, self-employed loans, no guarantor loans, 12-month loans, payday loans, and homeowner loans.

Our service is free of charge and you’re under no obligation to accept any loan we find for you. Let us find the very cheapest deal for you on terms that you’re happy to work with. To start your application, please click here.