This article is the last part of the FT Inclusion and Financial Education Campaign
Even a year ago, the financial regulator seemed confident: Tighter regulation of high-cost loans did not drive the needy toward loan sharks and illegal lenders. The evidence was that people either ran out of them or turned to friends and family for help.
One wonders if the Financial Conduct Authority is so sure of that now. Let us put aside the fact that seemingly benign loans from friends and family, who have in fact jumped from 2017, it can be anything but that. Against the backdrop of increased pressure on living standards for generations, the gap left by the slew of exits from the subprime loan market last year is likely to be felt.
This is not to say that the financial regulator and ombudsman were wrong in cracking down on scam payday loans or repeat lending and little regard for affordability in areas like home or front door credit. . Even some in the industry admit that there were incomplete practices that needed to be eliminated.
But the squeeze, in which mortgage lender Provident Financial exited the market and others like Amigo stopped lending, was not followed by any proper assessment of what came next. Indeed, analysis of what happened to the people who once trusted the industry is fragmentary at best.
What we do know is that the number of loans issued in the high-cost short-term mortgage and credit sectors fell by more than 3.2 million in 2021 compared to 2019 (after the demise of the day lender). payment Wonga), or about £1 billion. And that the number of people who find themselves excluded from the general provision, already estimated at 11 million, is almost certainly increasing, not decreasing.
The largest banks, already refusing to serve the poorest in society, will further draw the credit bridge in a recession. Meanwhile, rising energy and food bills, as well as other expenses, could easily add £120-150 per calendar month to spending on an affordability check, one expert says. Around a fifth of UK adults have less than £100 in savings.
It seems likely that the explosive growth in the unregulated Buy Now Pay Later BNPL market has filled part of the void, potentially substituting a low or zero cost source of credit for what was very expensive. A community finance organisation, a sector that tends to serve a similar demographic to high-cost lenders (and indeed loan sharks) in terms of high proportions of benefit recipients and those with incomes of less than £20,000 , said that BNPL had become by far the dominant one. form of credit among its customers since 2020.
That is consistent with concerns about “stacked” BNPL loans, about using such facilities to meet essential requirements such as energy costs, and some suggestions that those dependent on the sector are using. more expensive loans, such as credit cards to keep up with payments. As default rates are likely to worsen and providers act ahead of tighter regulation, that source of credit could also become harder to access.
Meanwhile, illegal money lending seems to be on the rise. The links between the denial of regulated credit and illegal provision are not well traced. But research by the Center for Social Justice this year estimated that more than a million people could be borrowing from a loan shark, 700,000 more than the last big survey in 2010. Well more than half of the respondents they said they initially considered the loan shark as a friend.
What hasn’t happened is a really concerted government effort to expand the community lending sector, which has limited capacity and remains small, with loans of around £34m a year.
Nor is there much evidence yet of the emergence of a “compliant, responsible high-cost commercial credit sector”, in the words of the regulator, which believes it should be able to meet part of the growing demand. Amigo, who recently won court approval for his scheme to resolve complaints from previous clients, is seeking approval to restart lending with a new product that includes the ability to lower the 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.