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High-cost lenders using ’exotic holidays’ to encourage debt

Exotic beach with recliners

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High-cost lenders are using pictures of holidays and “nudge” tactics to encourage vulnerable people to take on more debt, the finance watchdog says.

The Financial Conduct Authority found borrowers were getting into financial trouble after taking on extra credit.

Lenders are accused of poor practice by using online accounts and apps to encourage consumers to borrow more.

“Repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer,” the FCA said.

It reported firms using images of exotic locations to suggest consumers take on extra borrowing to have a holiday.

Some use “nudge” techniques such as appealing to social norms by suggesting that relending is common practice and normal behaviour.

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “As a large chunk of the population has been forced into debt by the current Covid-19 crisis, the regulator is clearly worried about debt companies using misleading marketing and pushy tactics to keep customers in high-cost debt.”

Debt adviser Sara Williams, who writes the Debt Camel blog, said it was good that the FCA had recognised the harm caused by repeat lending.

“If you have had to take a high-cost loan, you are often left short of money and are then vulnerable to marketing offering you another loan as being ‘easy’ and ‘convenient’, but this traps people in expensive debt for much longer,” she said.

Juggling repayments

High-cost credit customers are more likely to be vulnerable, have low financial resilience and poor credit histories, the watchdog said in its review.

They often have several debts forcing them to juggle repayments, sometimes having to prioritise which debts to pay when they do not have enough money for all.

But lenders target vulnerable borrowers with marketing messages which emphasise the ease, convenience and benefits of taking more credit.

The FCA said it was concerned that lenders were not balancing their marketing messages with warnings about the risks of people taking on more debt than they could afford.

“Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ relending practices, which showed that firms had failed to adequately assess affordability, and they were not relending in a way that was sustainable for customers,” said Jonathan Davidson, executive director of supervision, retail and authorisations at the FCA.

The watchdog said lenders should assess whether further borrowing is in the customer’s best interests.

“Rigorous affordability assessments are key to avoiding harm in this area, and firms should ensure they are making proportionate and responsible assessments of the sustainability of borrowing,” it said.

Coronavirus pressures

Looking ahead, the FCA said it had been forced to act to help consumers who were under additional financial pressure due to the impact of coronavirus.

It has encouraged firms to offer payment deferrals to help struggling borrowers.

“We are closely engaged with firms to understand the impacts of the pandemic on consumers,” said Mr Davidson.

“Where consumers are experiencing payment difficulties, we encourage them to contact their credit provider as soon as possible and explain their situation and get the help that lenders have agreed to provide.”

Laura Suter warned that during the pandemic more people had been using payday loans or doorstep lending either to pay their normal bills or to pay off other debt.

“That becomes a very slippery slope that’s tough to get out of,” she said. “Any crackdown on these practices would be good news for consumers at a time when many find themselves in spiralling debt.

“This is particularly the case as the Covid-19 measures introduced by the regulator to ease the burden of debt, such as payment holidays or reductions in interest rates, start to be unwound and people face hefty bills for their borrowing.”

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