Britain’s credit gap will widen in this livelihood crisis

This article is the latest part of the FT’s Financial Education and Inclusion Campaign

Just a year ago, the financial supervisory authority sounded confident: Stricter regulation of expensive lending has not pushed those in need to loan sharks and illegal moneylenders. The evidence was that people either gave up or turned to friends and family for help.

You wonder if the Financial Conduct Authority is as sure of that now. Aside from the fact that seemingly harmless loans from friends and family, that in fact has jumped since 2017, may turn out to be anything else. Against a backdrop of the strongest pressure on living standards in generations, the void left by the numerous exits from the subprime credit market over the past year is likely to be felt.

That’s not to say that the regulator and the Treasury Ombudsman have been unfair in cracking down on rip-off payday loans or repeat lending, and have given little consideration to affordability in areas like home or doorstep lending. Even some in the industry acknowledge that there were patchy practices that needed to be eliminated.

But the crunch that saw home lender Provident Financial exit the market and others like Amigo halted lending was not followed by a proper assessment of what came next. In fact, analysis of what happened to the people who once relied on the sector is sketchy at best.

What we do know is that the number of loans originated in the high-rate short-term loan and home loan sectors increased by more than 3.2 million in 2021 compared to 2019 (following the demise of payday lender Wonga), or by about 1 billion pounds had fallen. And that the number of people excluded from universal coverage, already estimated at 11 million, will almost certainly be rising, not falling.

The largest banks, already reluctant to serve the poorest in society, will continue to pull up the credit drawbridge in a downturn. Meanwhile, rising energy and food bills and other spending could easily add £120 to £150 a calendar month to spending on an affordability check, an expert notes. Around a fifth of UK adults have less than £100 in savings.

It seems likely that the explosive growth of the unregulated Buy Now Pay Later market, BNPL, has filled part of the gap, potentially replacing a low or free source of credit with a very expensive source of credit. A community finance organisation, a sector that tends to serve a similar demographic to expensive lenders (and indeed loan sharks) in terms of high proportions of beneficiaries and those earning less than £20,000, said BNPL was by far the become the dominant form of credit among its customers since 2020.

That fits with concerns about ‘stacked’ BNPL loans, using such facilities to cover essentials like energy bills and some proposals benefiting those who rely on the sector more expensive loans such as credit cards to keep up with payments. As default rates are likely to worsen and providers anticipate tighter regulation, this source of credit could also become more difficult to access.

Meanwhile, illegal money lending seems to be on the rise. The links between denial of regulated credit and illicit provision are not well traced. But research this year by the Center for Social Justice estimated that more than a million people could borrow from a loan shark, up 700,000 from the last major survey in 2010. Well more than half of the respondents said they initially viewed the loan shark as a friend.

What has not happened is a truly concerted effort by the government to expand the local authority lending sector, which is capacity constrained and remains tiny at around £34m a year in lending.

There is also not much evidence for the emergence of a “compliant, responsible high-cost commercial lending sector,” according to the regulator, which it believes should be able to meet some of the rising demand. Amigo, which recently won court approval for its program to resolve past customer complaints, is seeking approval to resume lending with a new product that includes the ability to reduce the interest rate paid over time. Other companies are also considering new models.

The question is what contribution they could make in the near future. The gap in the UK credit market will be harder to ignore this winter.

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