Written by Kunal Sawhney, CEO, Kalkine
Inflation at a near 30 years high has increased the chances of another rate hike by the Bank of England (BoE) in February. Now the emphasis has shifted from Omicron to the surging inflation, whose damage could be vast and long-lasting on the households. When speculations are rising for a spate of rate hikes in 2022, there has been growing clamour for tighter scrutiny by the financial regulator on the banks against them charging higher interest rates from the customers than originally publicized.
APR and the actual rate concern
The Annual Percentage Rate (APR), the yearly interest rate charged to the borrowers, has been under debate for a long with calls getting stronger for scrutiny by the regulator Financial Conduct Authority (FCA). It’s a concern not only for the borrowers but lenders as well. A widespread higher than advertised average interest rates could even lead to the collapse of some lenders if a major number of customers’ default.
Debt campaigner Alan Campbell, in a submission to an all-party parliamentary group’s name for proof on the FCA’s efficiency, had accused it of staying idle when some lenders overcharged debtors. He even said that banks were overcharging, and the regulator’s inaction left almost 8.3 million borrowers within the UK struggling under excessive debt even earlier than the pandemic.
What does FCA have to say?
FCA rules clearly state that banks and other regulated lenders must offer promoted rates to at least 51 per cent of their borrowers. In a letter sent to Lord McNicol, the regulator argued that it is not for them to keep continuously checking the calculation of representative APRs and the onus lies on the companies to put in place a system that could safeguard customers’ interest and treat them fairly, viz-a-viz following all the regulatory responsibilities.
It has been said that the regulator keeps a thorough watch of lenders’ APR rates by asking them to submit their unique average APR, as well as their highest APR, through regulatory filings. Additionally, it takes a proportionate approach to supervision of almost 58,000 companies being monitored by it. The regulator added that all those customers who feel to have been overcharged could complain to them or to the Financial Ombudsman Service.
What has been the actual bone of contention?
In the last couple of years, borrowers have noticed a growing gap between advertised and actual interest rates, forcing them to pay millions more than what they should have paid. The disparity in the advertised and actual charged rates has been growing, making the representative rates only the unrepresentative rates and making borrowers feel misled and dissatisfied.
The lenders have been saying that they comply with the 51 per cent rule and many say that their business model and processes are scrutinized by the regulator periodically. Still, more is expected from them, something similar to what they had done with financial agreements, including the overdrafts sometimes back. A few years back, when the concern was raised on overdraft charges, many banks had decided to adjust their overdraft structure to be more transparent to customers. Some even went for flat fees and went ahead without interest charges.
As the cost of living has been rising since the pandemic, households are bound to use high-cost credit to cover essential household costs hence the demand for the financial regulator to pitch in is a valid one; however, the regulators point also needs to be taken into consideration, given ambit and scope of their overview. As it has broad discretion of oversight on lenders, it can’t drag its heels altogether, and if it does so, the government needs to intervene.
