This article is the last part of the FT’s Financial Education and Inclusion Campaign
Just a year ago, the financial regulator seemed confident that tighter regulation of high-cost loans has failed to drive those in need toward loan sharks and illegal lenders. The proof was that people either went without or turned to friends and family for help.
You wonder if the Financial Conduct Authority is just as sure now. Leave aside the fact that seemingly benign borrowings from friends and family, who indeed have skipped since 2017, may turn out to be anything but. Against the backdrop of the greatest pressure on living standards in generations, the gap left by the multitude of exits from the subprime loan market last year should be felt.
This is not to say that the regulator and the financial ombudsman were wrong to crack down on fraudulent payday loans or repeat loans and that they paid little attention to affordability in areas such as home or home loan. Even some in the industry admit that there were sketchy practices that needed to be eradicated.
But the pressure, which saw home-based lender Provident Financial exit the market and others like Amigo stop lending, was followed by no proper assessment of what was to come. Indeed, the analysis of what happened to people who once relied on the sector is patchy at best.
What we do know is that the number of loans issued in the short-term credit and high-cost mortgage sectors fell by more than 3.2 million in 2021 compared to 2019 (after the disappearance of the lender Wonga payday), or around £1 billion. And that the number of people who find themselves excluded from mainstream provision, already estimated at 11 million, is almost certainly up, not down.
The biggest banks, which already refuse to serve the poorest in society, will pull the credit drawbridge further in a downturn. Meanwhile, rising energy and food bills, as well as other expenses, could easily add £120-150 per calendar month to expenses 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 BNPL market has filled some of the void, potentially substituting a low-cost or no-cost source of credit for what used to be very expensive. A community finance organisation, a sector which tends to serve a similar demographic to high-cost moneylenders (and indeed loan sharks) in terms of high proportions of benefit recipients and incomes under £20,000, said that BNPL had become by far the main form of credit with their customers since 2020.
This echoes concerns about ‘stacked’ BNPL loans, the use of these facilities to meet basic needs such as energy costs, and some suggestions that those dependent on the sector use more expensive loans, such as credit cards to track payments. As default rates likely worsen and providers act ahead of tougher regulation, this source of credit could also become harder to access.
Meanwhile, illegal money lending seems to be on the rise. The links between the refusal of regulated credit and the illegal provision are not well followed. 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 considered the loan shark a friend.
What hasn’t happened is a really concerted effort by the government to grow the community lending industry, which is limited in capacity and remains tiny with loans of around £34m a year.
There is not yet much evidence of the emergence of a “compliant, responsible high-cost trade credit sector,” in the words of the regulator, which it says should be able to meet some of the growing demand. Amigo, which recently won court approval for its past customer complaint resolution program, is seeking approval to restart lending with a new product that includes the option to reduce the rate paid over time. Other companies are also considering new models.
The question is what contribution they might make in the near future. The gap in the UK credit market will become harder to ignore this winter.