UK takes tougher approach to consumer lending boom

The Bank of England took a tougher approach towards banks over their booming lending to UK consumers, ordering them to apply credit rules prudently and prove by September they are not being too complacent about risks to their balance sheets.

The Bank of England, which has powers to force firms to curb their lending, said last week it had spotted weaknesses in the way companies have been ramping up their offers of credit to consumers who are the main driver of Britain’s economy.

Consumer borrowing is growing at more than 10% a year, while the household savings rate has hit an all-time low, raising concerns that some British people are overstretching themselves and could struggle to make repayments if interest rates rise.

The Bank of England’s Prudential Regulation Authority (PRA) did not set out new rules, but its move was the first time it’s ordered firms to apply consumer credit rules more conservatively and think harder about their assumptions.

It is also making company boards directly responsible for acting on its recommendations. The Bank of England previously announced measures to tighten standards in mortgage lending.

The PRA requested evidence from providers of consumer credit, such as credit cards and personal loans, of how they will ensure they are not taking too much risk after years of low-interest rates.

Some interest rate-setters at the Bank of England want to raise borrowing costs to control Britain’s fast-rising inflation rate, suggesting a first rate hike in a decade might be approaching more quickly than had been expected until recently.

Lenders will have until September to respond to the PRA, and could then be asked to fix any specific areas of weakness. As well as any follow-up action by the PRA, the Bank of England could introduce sector-wide measures.

Separately, the UK’s Financial Conduct Authority (FCA), Britain’s lead regulator for smaller consumer credit providers, proposed a new rule to stop incentives from encouraging staff at lending firms to loosen standards for granting credit.

“We expect firms to understand the effects their staff incentives might be having,” said Jonathan Davidson, executive director of supervision at the FCA.

The PRA said it did not believe growth in lending had been driven primarily by lowering credit rules or scoring. But the growth plans of lenders might only be achievable with some loosening of underwriting standards.

Lenders seemed to be assuming Britain’s economy will remain healthy and low arrears rates will continue, it said.

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