Bank of England fears over consumer debt

The rapid rise in UK consumer credit, partly due to credit cards and personal loans, has been highlighted by the Bank of England.

The bank's financial policy committee says consumer credit reached an annual growth rate of 10.9% last November – the fastest rate of expansion since 2005 – before easing in subsequent months. 

Growth had been broad-based across different segments of the market. 

Cars

Car dealer finance had seen the fastest expansion in recent years, but credit cards and personal loans had contributed materially to the acceleration in consumer credit in 2016. 

The committee, at its latest meeting, noted that an easing in credit-supply conditions appeared to have contributed to the growth in consumer credit, with intense competition in some segments of the market. 

This had been evident for example in:

• The gradual extension of interest-free periods on credit card balance transfer offers.
  
• An increase in maximum loan limits in some parts of the unsecured personal loan market.

Stress test

Consumer credit accounts for less than 10% of major UK banks’ total stock of lending to domestic real economy borrowers. This compares with a share of around 70% for mortgage lending.

But bank stress tests had shown that the scale of losses on consumer credit books in an economic downturn was likely to be greater than that on mortgage lending. 

For example, in the 2016 stress test, stressed impairments on UK consumer credit exposures totalled around £18.5 billion, compared with £11.8 billion for UK mortgages. 

The committee said the credit quality of the stock of consumer credit had the potential to deteriorate quickly, especially in an environment of very rapid credit growth. It judged that the recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards.

New measures

Meanwhile, it also emerged this month that credit cards firms could be forced to cancel any interest or charges for customers in extreme and persistent debt.

The Financial Conduct Authority (FCA) is proposing new rules to help customers who are in persistent credit card debt.

This follows the FCA’s study of the UK credit card market, which found significant concerns about the scale, extent and nature of problem credit card debt.

Under the FCA’s definition, credit card customers are in persistent debt if they have paid more in interest and charges than they have repaid of their borrowing, over an 18-month period. Customers in persistent debt are profitable for credit card firms, who do not routinely intervene to help them.

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