Financial Conduct Authority sees ‘warning signs’ for UK debt

There are “warning signs” about the health of the consumer credit market, the director of supervision at the Financial Conduct Authority (FCA) has said.

Jonathan Davidson said most of the rise in UK debt levels in recent years has been among better off borrowers and stressed this was not harmful to the economy, but he said this still left a large number of people with problems.

He said: “Most borrowers can still comfortably afford their credit. But it’s most – not all. The Bank of England’s financial stability report last year noted that consumer credit has grown rapidly and that, relative to incomes, household debt is high.

“And there are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads.”

Mr Davidson said an example of this trend was in the motor finance sector, where the number of agreements for new and used cars has grown rapidly from around 1.2m in 2008 to 2.3m in 2017.

Recently the FCA published an update on its review on motor finance which found that while its growth had been strongest for consumers with better credit scores, there were concerns about whether firms were properly assessing those with lower scores.

Mr Davidson added: “We are seeing that arrears and default rates, while still low, are on the rise, particularly for higher credit risk consumers. This is despite favourable credit and economic conditions, which begs the question: if we’re seeing this pattern now, what would happen if there was an economic downturn?

“We are also seeing younger people borrowing a lot more relative to their incomes than my, baby boomer, generation. Why is this? It’s because of more student borrowing.

“Our Financial Lives survey showed that 30 per cent of 25-34 year olds have a Student Loan Company loan. It’s because of the higher cost of getting onto the housing ladder. And it’s because of shifting patterns of savings, borrowing and consumption. You don’t need to wait, you can have it now.”

He said many credit card customers are perpetually in debt, and this has prompted the recent rule changes introduced by the regulator around credit card fees are aimed at preventing the warning signs mutating into a crisis.