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Watchdog begins crackdown on high-cost credit to protect the vulnerable

The FCA is now considering imposing a cap on rent-to-own merchants.
The FCA is now considering imposing a cap on rent-to-own merchants.

Britain's financial watchdog has launched a sweeping crackdown on high-cost credit as part of efforts to protect vulnerable consumers.

The Financial Conduct Authority (FCA) is proposing reforms to bank overdraft charges, rent-to-own operators, door-step lending and catalogue credit and store cards.

FCA chief executive Andrew Bailey said: "High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society.

"Today we have proposed a significant package of reforms to ensure they are better protected, including the possibility of a cap on rent-to-own lending.

"The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer."

The FCA estimates that banks raked in an estimated £2.3billion in revenue from overdraft charges in 2016, arguing that the system needs "fundamental reform".

The watchdog is considering a number of measures to make it easier for customers to manage their accounts, including mobile alerts warning of potential overdraft charges and stopping the inclusion of overdrafts in the term "available funds".

This is on top of requiring online tools to make the cost of overdrafts clearer, introducing mechanisms to assess the eligibility for overdrafts and making it clear whether overdrafts are credit or borrowing.

Mr Bailey added: "Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place.

"However, we believe more fundamental change is needed in the way banks charge customers for overdrafts.

"Given the size of the market our work here will be completed as part of our wider review into retail banking."

The FCA believes that these measures alone will save customers up to £140million a year.

Beyond that, the FCA will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.

The rent-to-own sector has also come under scrutiny from the watchdog, which found that costs for 400,000 customers who rely on the sector can be exceptionally high.

It cited examples of people having paid over £1,500 for an electric cooker which could be bought on the high street for less than £300.

The FCA is now considering imposing a cap on rent-to-own merchants.

In the home-collected credit market, the watchdog is introducing new requirements to raise standards in "disclosure and sales practices".

They will prevent home-collected credit firms from offering new loans or refinancing during home visits without the customer "specifically requesting this".

In catalogue credit and store cards, the FCA will ask firms to "do more" to help customers avoid persistent debt.