The UK government is facing growing pressure to toughen the financial regulator’s policing of rules that forbid lenders from charging a majority of customers higher interest rates than those originally advertised.
The Financial Conduct Authority rule book says banks and other regulated lenders must offer advertised rates to at least 51 per cent of their borrowers.
The measure is intended to prevent people getting sucked in by attractive offers and taking on higher interest loans that they cannot afford.
In a submission to an all-party parliamentary group’s call for evidence on the FCA’s performance, debt campaigner Alan Campbell accused the financial regulator of “failing the public” by standing idly by as some lenders overcharged borrowers.
In the letter from the FCA to Lord Iain McNicol, sent in November 2021, the regulator said: “It is not for us to periodically check the calculation of representative APRs [annual percentage rate]. It is a firm’s responsibility to have systems and processes in place to make sure they meet all regulatory responsibilities and treat customers fairly.”
Campbell, founder of advice service Debt Hacker, argued the regulators’ inaction has contributed to a crisis that left 8.3m in the UK struggling under excessive debt even before the pandemic.
Karim Aldohni, a senior lecturer in law at Newcastle University, said it “is reasonable to expect the FCA to routinely review the extent to which the firms are complying with the 51 per cent”. The FCA has broad discretion over how it supervises firms.
Campbell said it was “startling” that the regulator was relying on companies to be the “final arbiter” of “fair treatment of customers”.
He said regulators and auditors should take a more active role in reconciling companies’ actual APR interest rates with those advertised.
McNicol, who chairs the oversight board for Salad Money, which offers affordable loans to NHS and public sector workers and is owned by Campbell, called on the government to take action on how the FCA polices APRs.
Ministers are due to respond to Campbell on the matter on Wednesday.
“We need to, through Treasury and parliament, put pressure on them [regulators] so they change that and do periodic spot checks.”
The FCA said: “We always look into reports that a firm is not meeting our requirements and we will take action where appropriate.”
A person familiar with the FCA’s thinking said the regulator oversees 58,000 firms and takes a “proportionate approach to supervising” in order to “make the best use of our resources and deliver the greatest public value”.
The regulator monitors APR rates by asking lenders to submit their single average APR, as well as their highest APR, through regulatory returns, the person said.
They added that this provided “an indication of where a firm’s average APR is dramatically different from the one they state on their promotions”.
“[The regulator’s] current intelligence has not suggested a widespread issue with representative APRs,” they noted.
Customers who feel they have been charged an unfair rate can complain to the FCA or the Financial Ombudsman Service.
An analysis by Campbell of one lender suggested the actual interest rates were almost six times the advertised rate on one of its standard products — equal to a rate far higher than that authorised by the regulator under its standard lending rules.
While recognising the company was an “outlier”, he said the general issue of higher than advertised average interest rates is widespread and could in some instances lead to lenders collapsing if their customers were to default en masse.
Paul Elliott, head of mortgages at app-based lender Atom Bank, said his company’s models and processes were checked by the FCA at launch.
He said that APRs for its mortgages were validated with external auditors and that the calculator is reviewed annually.
Another UK lender said that it had processes in place to monitor its APR and said it was confident with the requirements. It added that it received some scrutiny on the topic during discussions with the FCA.