FSA: High debts may hit 'significant minority'
Monday, February 4th 2008
A significant number of Brits could experience financial problems because of their high levels of debts, warns the Financial Services Authority (FSA) today.
The regulator's Financial Risk Outlook highlights the risks for consumers and banks in "a significantly less benign economic environment" with higher inflation, weaker outlook for the US economy and more fragile financial markets.
The report finds: "A growing number of consumers are likely to experience debt repayment problems in 2008."
While many claim the credit crunch and interest rate rises of the last 18 months will be responsible for greater debt problems – the report find a sharp rise in personal loan and credit card defaults pre-dates these.
The report added: "Given the lags in the mortgage possessions process, it will take time for any problems to materialise."
The report also warns the tightening up of lending criteria may also mean some consumers with few remaining assets could find few options available to them when trying to secure credit.
"The numbers of mortgage repossessions, bankruptcies and IVAs could therefore rise further," the FSA warned.
There were also warnings for the 1.4 million fixed-rate mortgage holders coming to the end of deals in 2008 and finding interest rates now substantially higher than when the took out their home loans.
The FSA estimates monthly repayments rising by £210 as fixed-rate deals switch to mortgage lenders' standard variable rates (SVRs).
"Consumers near the end of a fixed rate (or other product with a fixed term) will need to start planning early to be able to cope with the potential increase in the cost of these products," the report stated.
"In addition to higher mortgage rates, many consumers are also faced with lenders lowering loan-to-value (LTV) ratios. There is a risk some consumers could find it increasingly difficult to obtain funding given the tightening of lending criteria and the reduction in the LTV ratios."
Callum McCarthy, chairman of the FSA, said: "To be clear, these are not firm predictions about what we think will actually happen but are a prudent attempt to highlight the risks that could impact consumers and firms in a less benign economy.
"Firms and consumers need to recognise there are both short and long term risks and should think about the implications."
The Financial Risk Outlook also highlights the dangers of financial institution's business models being put under strain, consumers losing confidence in banks, and increasing risks of financial crime.
