Credit fears fuel crackdown on loan sales tactics

City regulators raised the alarm today over runaway consumer credit amid fears high-pressure sales tactics are pushing people into loans they can’t afford.

The Prudential Regulation Authority said it will write to more than 20 firms with exposure to the UK’s £198 billion stockpile of consumer credit loans asking them for reassurances they can withstand a massive collapse in the economy.

At the same time the Financial Conduct Authority, the other arm of the UK’s two-pronged regulatory regime, told consumer credit firms to tighten up bonus schemes for loan salesmen after finding bad practices.

The interventions coincide with the Bank of England Governor Mark Carney flagging up consumer credit as a major issue in Threadneedle Street’s twice-yearly assessment of financial risks last week.

The consumer credit market has grown by an eye-watering 10% a year recently, as families shun borrowing in favour of whacking purchases on the plastic. That has stoked fears from regulators the consumer debt market is heaving under too much weight.,

The PRA, led by Sam Woods, today asked regulated firms to expand their stress-testing scenarios to include more severe downturns and explain how prudently they underwrite consumer borrowing risks.

The regulator has previously made similar forays into the mortgage market, but this is the first time consumer credit firms have been asked to prove they are not taking too much risk.

The FCA, led by Andrew Bailey (pictured), also pushed back against the rising tide of credit by publishing a study that found “inadequate systems and controls” used by firms to manage bonus schemes paid to staff selling loans.

The review, which has been two years in the making, found some companies failed to ask whether their incentive schemes were fuelling unaffordable credit for families. Around 40% of the 98 firms looked at by the watchdog had sales practices which posed a “high or very high” risk of customer harm, while nine in 10 paid variable bonuses on performance.

Worryingly, 15 firms paid staff their salaries based purely on commission-made loan sales.

In response, the FCA will consult on plans to force firms to shore up their bonus schemes. The proposal hopes to make companies take into account the damage they potentially pose to fuelling unsuitable credit sales.