GovernanceRegulationThe FCA is working hard to correct market failures

The FCA is working hard to correct market failures

Daniel Tannenbaum, consultant for fintechs and financial companies, discusses why the FCA's focus on regulation is perhaps long overdue.

correct market failures
Daniel Tannenbaum

It has been four-and-a-half years since the FCA took over from the Office of Fair Trading and as we reflect on this time period, we have seen a huge shake up of major industries across banking and finance.

This includes a price cap on payday loans in 2015, a price cap on the rent-to-own sector in 2019 and most recently, a cap on bank overdrafts coming into effect in 2020.

Many business owners and managers will be agonizing over the increased compliance and push on their profit margins – but the reality is that many of these high-cost industries have been trading with limited regulation and enjoying large profits for too long.

This can only be described as ‘market failure’ whereby customers are overpaying for the utility of a product and market forces are intervening in order to correct the market.

The adoption of high cost financial products has grown faster than the speed at which regulators can address them

From someone who consults in the financial sector, one of the biggest issues is for customers with bad credit ratings. Many are rejected from mainstream banks and lenders and resort to bad credit loans where the fees are significantly higher and the amount they can borrow is limited.

Even if those with bad credit can afford to pay off the loan, the high cost means that it is unlikely to get them out of a spiral of debt and make a very limited impact to their financial position. Meanwhile for the comfortable, good credit customers, they enjoy very low rates for credit, only giving them better financial security. In other words, the gap between rich and poor only increases.

The popularity of high cost products, rising complaints and increased debt can be attributed to the scalability of financial providers being able to promote online – no doubt fuelled by consumers ever-increasing needs and demands to live a material lifestyle.

Nevertheless, the adoption of high cost financial products has grown faster than the regulators can address them, meaning for years, everyday consumers have been overpaying for products.

Nothing could be more evident than the cost of unarranged overdrafts where banks and card providers have made £2.4 billion in the last year alone. Some individuals have been charged between £80 to £100 per £100 borrowed which is an alarming rate. Regulation to be introduced next year will include a price cap from existing fees of £5 per day to just 20p per day.

The invisible hand will correct the market

The invisible hand of the market means that any anomalies or products deemed unfit, should eventually disappear. Interestingly, we have seen a huge number of payday lenders fall into administration in the last year, including payday giants, Wonga.com and The Money Shop.

This has been recently followed by Lendy, once a promising peer-to-peer lender, and a fall in share price for Funding Circle, claiming that they have not been able to attract the same quality of customers as mainstream banks.

The next financial products on the FCA’s agenda includes car finance, guarantor loans and catalogue finance.

Either way, we should not be surprised when we are faced with increased regulation. It may be long overdue.

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