An issue of financial exclusion
Taking stock of the market changes following the 2014 change of regulatory regime.
The review of the high-cost short-term credit (HCSTC) market is a valuable opportunity to take stock of the market changes that resulted from a new regulatory regime in 2014.
Since the establishment of the Financial Conduct Authority (FCA) the financial services sector has seen rapid development in fintech, which in turn presents new experiences for consumers.
Three years ago the regulator was issuing warnings that threatened to decimate the short-term lending market. Its bold prediction was that just three or four payday firms would remain after the price cap was implemented. One could argue that the FCA was correct because only a handful of firms still offer an old-style payday loan, with most shifting to instalment loan products.
But it is to the credit of non-standard finance firms which, with the entrepreneurial spirit that characterises alternative lending, have adapted to regulations and price control and continue to meet the demand for small sum loans. It is to the credit of the regulator that it did not throw out the baby of alternative lending when it threw out the dirty bath water of rogue lenders.
Instead, the result of considered regulation has in the main been good for consumers. Short-term loans are now cheaper for the seven percent who meet the criteria lenders use as part of their affordability checks. CFA data shows that borrowers save £39 compared to the cost of borrowing in 2013. With more stringent checks, just eight percent of loans attract extra fees for missed payments. This means the number of defaulting customers has halved since 2013 and is on par with other sectors.
The practices that were identified as causing concern, such as roll overs and dipping into bank accounts multiple times, have been replaced with a more responsible approach. Consequently, debt charities are reporting dramatic declines in the numbers of clients with problem debt from HCSTC firms.
Three years ago one of the main accusations was of predatory lending and tempting vulnerable people to take out unaffordable credit. Despite defying the logic of lending money to someone who did not have the funds to pay their debts, critics continued to insist that lenders were targeting low income, financially illiterate and desperate consumers.
This was never the intention and a recent study from the Social Market Foundation, commissioned by the CFA, shows that lenders are serving a broad population of people who are faced with stagnant incomes and higher living costs. The average salary of a HCSTC customer is £25,000, which is close to the national average of £28,000.
These consumers are predominantly a generation that is familiar with the digital economy, and the majority of alternative lenders have an online presence. Consequently, the financial service sector has benefited from huge strides in data science and digital technology. The use of data analytics has led to a safer lending environment for people with impaired or thin credit files, which is especially helpful in a modern working environment of fixed-term contracts and variable income.
The fledgling alternative lending market that was so nearly lost to misguided campaigns aimed at banning HCSTC products has grown into an innovative industry.
But the tighter controls of regulation have not come without a price. While the FCA has achieved its objectives of cheaper, less debt, and more competition, it cannot ignore the many people who are no longer able to access credit.
The HCSTC market is functioning well for the vast majority of borrowers, and the FCA appears to have achieved the fine balance of maintaining viable markets while ensuring consumers are properly protected, but there is a social policy issue of financial exclusion yet to be addressed.