Regulator to target guarantor loans

written by Alex Clarke | 4th April 2018

On the 4th March 2019 Christopher Woolard, one of the higher-ups at the Financial Conduct Authority, confirmed that guarantor loans were firmly “in [there] sights”.

His words came while confirming a new rent-to-own price cap, which he claims will protect vulnerable customers and save consumers up to £22.7 million per year. The cap comes into force from April 2019 and the FCA vow to closely monitor how firms implement the cap and will be reviewing in 2020 to see if any more intervention is needed.

On guarantor loans he noted 2 main concerns. He conveyed that there has been a marked increase in guarantors stepping in and take over repayments (or repay the debt in full), and that the rates charged (between 29.9% APR and 69.9% APR) could be too high. He noted that “If the guarantor is themselves highly creditworthy, then why are the rates set in the way that they are?”

His words come after less than a year after guarantor loan lender Amigo Loans floated on the London stock market valued at £1.3 billion.

Many think guarantor loans have got off scot-free over the years as the financial watchdog spent it’s time focusing on other sub-prime sectors including so-called payday loans and logbook loans.

On the alleged problems cemented into the guarantor loan business model, Woolard said that “This is not something that we are insensible to. In terms of our supervisory work, guarantor loans are absolutely in our sights. There are some questions around the business model that we see there.”

With over 10 guarantor lenders currently in the UK market, the FCA is bound to face pushback. We were told that “For a lot of customers a guarantor loan is the only alternative to high-cost short-term lending, we offer a sensible alternative. Our rates and processes reflect the complications that can arise with all credit products.”

In recent years the FCA have scrutinised predatory lenders and demanded that lenders strive for “positive customer outcomes”, an update to the age old “treating customers fairly” approach. Loan affordability has become more important than credit score and any lenders failing to ensure their products are suitable on an individual level may find they have some questions to answer, sooner rather than later.