FSA warns of bad debt risk

Consumer lending has rocketed by 50% during the past three years, risking an avalanche of bad debts for the banking system should the economy turn down, the chief City regulator, the Financial Services Authority (FSA) warned yesterday.

Chairman Howard Davies told MPs that Britain may be on the verge of a new era, in which individuals would carry significantly heavier debts, but that banks may not be prepared for the consequences.

Combined with the explosion in outstanding mortgage debt - now totalling nearly half a trillion pounds - the FSA fears a witches' brew of new risk for the banking and financial system.

His comments on unsecured lending follow remarks Mr Davies made last month to the Council of Mortgage Lenders about relaxed standards and aggressive competition in the homeloan market. Yesterday he repeated his mortgage concern: "There...[are] signs of a relaxation of credit standards which were the kinds of signs that we saw in the late 1980s boom," he said.

Mr Davies was speaking to the backbench treasury select committee in Westminster.

He told MPs FSA research showed the outstanding amount of unsecured consumer credit stood at £1.02bn in 1998-99, and had shot up to £1.15bn in 1999-2000, a 13% increase in one year.

This underestimates the total amount of consumer credit outstanding, because the FSA does not regulate credit created by pawnbrokers, shops or some hire-purchase companies.

Mortgage lending, he said, had surged 8% in 1999-2000, from an outstanding total of £459bn to £497bn.

Managing director Michael Foot said the authority was not trying to second-guess lenders, but was concerned to ensure "the right prudential measures are in place". The authority is conducting a full-scale review of unsecured consumer lending, although no completion date has been given.

Quizzed about the boom in hi-tech stocks, Mr Davies said that the relaxation in margin lending and credit standards by some brokers and banks had fuelled this surge in share trading in the second half of 1999 and early 2000. The FSA had warned these brokers about their more relaxed stances and had been encouraged by their response, with some subsequently tightening up their credit processes, he said.

• Lenders were warned yesterday that they face fines and possible imprisonment should they flout the rules on publishing an annual percentage rate (APR) on credit offers. The Office of Fair Trading said the rate must reflect the total cost of credit, including the expense of any insurance schemes.