Yesterday afternoon the Treasury Select Committee summoned the chief executives of some of the country’s highest profile ‘high cost’ lenders for a ritual grilling. Listening to the committee members’ questions, you would think British consumers were drowning in debt with our poorer consumers forced to borrow the most. It will surprise many, including some on the Committee, to hear that the opposite is actually true. The problem is too little credit, not too much.
In fact, the number of specialist, regulated consumer credit firms has fallen sharply since the FCA took over responsibility for regulating the industry. The upshot is that hundreds of thousands of consumers are no longer able to enjoy the same choice of products, if they have any at all. On top of that, the growth in consumer debt over the last few years – which has recently slowed – has been driven by richer households. “A small proportion of all consumer credit debt is held by subprime consumers”, according to FCA researchers.
Making the argument in favour of high cost lenders tends not to win you friends down the pub. Certainly our politicians stay firmly on the side of bashing the lenders and ‘protecting’ the consumer. Who can blame them; there are limited votes in high APRs.
But it is essential that Government and Parliament understand the impact that wave after wave of regulation is having because, contrary to what is intended, it is consumers at the bottom who stand to suffer from the closure of specialised lenders – when these firms shutter their doors, poorer householders have fewer places to turn.
The FCA’s own statistics reveal the increasing constriction in the market that its constant interventions are causing. In October 2017, the FCA published a large-scale tracking survey of the financial lives of 13,000 UK consumers. It found that 3.6 million adults were borrowing from ‘friends and family’ – for many a euphemistic reference to unregulated lenders – and 100,000 households admitting to borrowing from illegal sources, such as illegal loan sharks. The government-funded Illegal Money Lending Team puts the latter the figure closer to 310,000 and rising.
All this points to a crisis of access for consumers who rely on credit to smooth the inevitable peaks and troughs of precarious incomes. It may be a mark of success for debt campaigners, but not for consumers who are prevented from using credit to smooth the income and expenditure ‘shocks’ that are a part of their lives.Worryingly for the politicians, there is more bad news to come. In the spring or early summer, the FCA is due to publish new rules on creditworthiness and affordability. These might sound innocuous, indeed welcome given the growth in consumer borrowing in recent quarters, but they will add significant additional operating costs to smaller lending businesses serving more vulnerable customer groups.
These businesses will be required to undertake a level of additional affordability checking that is totally disproportionate to the typical amounts being lent. Businesses serving richer households will be largely unaffected. What the policymakers need to understand is you can carry out forensic examinations of a consumer’s finances and extrapolate for every conceivable future variation if you’re providing a £400,000 mortgage over 25 years, but not if you’re lending £400 over 6 months.
Protecting consumers, particularly those on the lowest incomes, is a noble pursuit and exactly what we would expect and want our legislators to be doing. But there is a point where access to credit is choked off and consumer protection becomes consumer harm. Politically, it is a very difficult line to draw, such is the enduring popular appeal of ‘a clampdown on loan sharks’. But we have reached such a tipping point.
In June last year, at the time the FCA published its proposals on creditworthiness and affordability, Andrew Bailey said: “There is an issue around access to credit. Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit.” Ministers need to find the courage to hold him to his word.
