June 17 – The rising tide of consumer credit

Following various high profile warnings over rising consumer debt, the Financial Conduct Authority has said it will review the sector. This covers credit cards, personal and unsecured loans and car finance, the latter of which has ballooned in recent years with the popularity of personal contract plans.

Latest figures from the Bank of England show that while borrowing against our homes is falling back, unsecured borrowing continues to grow quickly. April saw consumer credit grow £1.5 billion, 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 in per cent in April, when the Financial Policy Committee warned that this explosion in consumer debt is putting financial stability at risk. Not only is the risk of arrears on consumer credit higher than in the mortgage sector, these loans are also being securitised and sold on to other investors. Indeed, recent headlines have begun drawing comparisons between sub-prime car loan contagion in the US and the credit crunch in 2007.

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

It is clear that 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 the market anything, it must be that a credit score in isolation is an insufficient measure of whether a consumer is able to afford to repay debt.

Increasing reliance on short-term, expensive forms of debt over the long term may reflect both stricter affordability criteria from lenders on mortgage borrowing preventing equity withdrawal 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 Government’s triple lock on the state pension. The endemic lack of real income growth for the younger generation is becoming problematic, and if it persists, will likely pull house prices down over the medium to longer term.

Robert Sinclair
June 17