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Consumer credit and consumers in vulnerable circumstances FCA report

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

The new Financial Conduct Authority has published a report on factors contributing to debt problems. Change in individual circumstances and high levels of existing debt are central factors. Others include  lack of savings, and lack of confidence in managing financial products.  Low income individuals are more vulnerable to these risk factors and have higher debt-to-income ratios than other groups. The FCA therefore conducted qualitative research on attitudes and uses of credit among individuals with low incomes (bottom 10-15 percent of household income). The research identified three groups: “survival borrowers”; “lifestyle borrowers” and “reluctant borrowers”.  The first two groups used primarily low-income credit such as home credit, rent-to-own,  and catalogues. The last group who had faced income setbacks and were struggling to manage credit, would ‘reluctantly’ access mainstream credit such as overdrafts and credit cards.

The research is part of FCA work on high cost short-term credit, problems with credit cards, overdrafts and log book lending, and debt management. The paper represents an ongoing discussion on the concept of “vulnerability” in credit relationships–a concept which the report admits is hard to define. They define a vulnerable consumer as ‘someone who, due to their personal circumstances, is especially susceptible to detriment”. This does not take one much further since it might include personal characteristics (impulsiveness, lack of confidence)  particular circumstances or  structural factors (low income).

A number of previous policy studies exist on  the vulnerable consumer by for example the Office of Fair Trading and Consumer Focus and  modern concern about  the high cost credit for low-income consumers goes back to  the famous books by David Caplovitz, The Poor Pay More (1963)and Consumers in Trouble: Debtors in Default (1974). The  continuing problem is that credit is generally a regressive product i.e. the more income and assets you have the less you pay.

The FCA  might find some  assistance  in the recent  book Scarcity  by Sendhil Mullainathan and Eldar Shafir. They  suggest that lower-income consumers have similar behavioural biases to other consumers but that the pressures of  poverty make it difficult to focus, resulting in a ‘tunnelling’ of vision. The poor are often as well-informed as affluent individuals but they have much smaller room for errors in decision-making  and therefore must make better quality decisions. The many pressures on their time mean that they are more likely to be myopic in decision-making and not attentive to long-term costs. Mullainathan and Shafir refer to the problem as an absence of ‘bandwidth’ –represented by scarcity of money, unpredictability of income, and lack of buffers. Policy solutions might  change the institutional context of lending along with measures which radically reduce the costs of decision making. Mullainathan and Shafir’s focus on the context of decision making  provides a better explanation of vulnerability than individualistic explanations which  ‘assume that the problem lies with the person’ and imply policies to change the consumer rather than the institutional framework.

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