High-cost credit can become low-cost credit
What is to be done about high-cost credit? The lofty ambition of regulation can appear to lack urgency.
I’ve now been at StepChange Debt Charity for six months, and as you’d expect I’ve spent a lot of time out and about, listening and talking to people from across the whole financial spectrum. One subject seems to come up virtually everywhere I go, and that’s what still needs to be done about high-cost credit.
It’s a simple question, without an easy answer. I may not be an alchemist, but I know we need to turn this market into something better. I firmly believe it can be done. After all, through determination we’ve succeeded in seeing a new statutory “breathing space” debt respite scheme finally make its way into primary legislation.
The number of people using high cost credit to meet essential everyday spending rose from 1.1 million in 2016 to 1.4 million in 2017.
We know that, even as I write, the Financial Conduct Authority (FCA) is poised to publish its further update and next steps on various aspects of the high-cost credit market. We anticipate an update on overdrafts, but the FCA will also be reporting on the results of its analysis of evidence on rent-to-own, home-collected credit (doorstep lending), and catalogue credit. We are also promised more later in the year.
Another thing we have recently learned is that, disappointingly, the government will not be progressing the Goods Mortgages Bill, which would have reformed the logbook loans market. So all eyes are now on the FCA to see if there is some alternative way of addressing the well-known problems in this sector.
So far, so regulatory. The only problem is that the lofty ambition of regulation can appear to lack urgency when held up against the real problems that we see clients experiencing, day in and day out.
In our world, clients don’t have the luxury of waiting patiently for new regulatory interventions to make minor incremental inroads into the landscape of difficulty. Where difficulty occurs, it can be immediate and highly concentrated. For example, among the 20 percent of current account holders using unauthorised overdrafts, around half of all the charges are concentrated on just two percent of accounts. Such concentrations of difficulty require laser-focused intervention – the risks of debt spirals are both obvious, and avoidable.
Still, on the upside, ministers and policymakers appear to be ‘getting it’ as far as high cost credit is concerned. We’ve seen a positive flurry of engagement from ministers, regulators and civil servants recently. Thoughtful speeches from both Andrew Bailey and Jonathan Davidson at the FCA have honed in on the need for better alternatives, and at the charity we have undertaken and published serious research attempting to segment the different types of users of high-cost credit, and what good alternatives for them might look like.
Ultimately, this issue is going to need a concerted act of will by government, regulators, the credit industry and consumer advice organisations. We already know that the government and regulators have an appetite for upscaling the affordable credit sector such as credit unions, community lenders and the like.
We support this, but as a strategy it has limitations. Even if the sector could scale up enough to be the main go-to borrowing sector for lower-income households, it probably couldn’t afford to lend to them at affordable rates (at least, not without subsidy).
So we need a more creative approach. It isn’t exactly rocket science to say that eye-wateringly high cost credit for indebted, poor households is likely to hinder rather than help them in terms of rehabilitating their finances. The fact that this is a problem that is difficult to solve isn’t a good reason for hand-wringing and doing nothing.
The good news is that there are potential alternatives out there. We are keen on no or ultra-low interest loan schemes, which operate successfully internationally and should be piloted here. We believe there is a shared desire from many in the credit industry to try to help deliver them. If you are one of them, please talk to us.