Context

Three million consumers in the UK use high-cost credit (excluding overdrafts). Many of these consumers have low credit scores, low incomes and cannot access mainstream credit. Research has shown that people displaying potential vulnerabilities are twice as likely to use high-cost credit as other UK adults. A survey in 2017 by the Financial Conduct Authority (FCA) revealed that 13 per cent of UK adults had no cash savings, with 76% of consumers who applied for a payday loan having no accessible savings. Between 2015 and 2017, the credit scores of people who used high-cost credit products significantly worsened, showing that high-cost credit users are often financially vulnerable.

The study

This 2019 briefing paper from the FCA:

• Examines the market for alternatives to high-cost credit;
• Sets out the actions taken by the FCA following commitments made in previous reports;
• Explains the FCA’s and other organisations’ roles in supporting alternatives to high-cost credit.

Much of the data used to contextualise this report comes from the FCA’s 2017 Financial Lives Survey.

Key findings

• Three million consumers use high-cost credit, with demand often driven by the need for essential household goods.
  • When an essential item (fridge, washing machine, cooker, etc) breaks down, consumers with a low disposable income and no savings often turn to high-cost credit as it can provide the significant sum required at short notice.
• There are however often alternatives to high-cost credit such as loans from credit unions, community development finance institutions (CDFIs) or other lenders with social objectives.
  • There are over 400 credit unions in the UK, taking deposits from, and lending to, over 1.8 million members. Credit unions are currently lending about £1.5 billion to their members.
• There are further opportunities to improve the market for alternatives to high-cost credit, including:
• HM Treasury considering if there is value in reviewing credit union legislation, believing that local authorities and social landlords can play a role in directing consumers to these alternatives.
  • CDFIs considering working more closely with credit unions, by taking referrals from them regarding members who are not eligible for a credit union loan.
• The report summarises the FCA’s work to improve the regulatory environment for organisations involved in the provision of alternatives to high-cost credit. This includes:
• With effect from April 2019, the existing fees concessions for community finance organisations and credit unions have been extended to exempt them from payment of all FCA annual consumer credit fees.
  • Updated guidance for social landlords on helping tenants to find alternatives to high-cost credit.
  • Recent Treasury amendments to the definition of credit broking, indirectly helping social landlords strengthen existing and new local partnerships with credit unions and CFOs.
• The report encourages the Money and Pensions Service, social landlords and others to actively signpost consumers to alternatives to high-cost credit.
• The report also explains how the FCA is looking to innovate and encourage new market entrants to increase the availability of lower cost credit alternatives.
• The report summarises how the FCA is working with Government and other stakeholders to provide expertise on and support for their initiatives on alternatives to high-cost credit, including:
• A study into the feasibility of a no-interest loans scheme;
  • Creating a fund to promote innovative fintech solutions to problems faced by community and social lenders.
• The report sets out the next steps for the FCA, based on the recommendations earlier in the paper:
• Organisations that directly interact with customers, such as social landlords, local authorities and charities are better placed to take the lead by directing consumers to sources of helps that fit their individual needs (such as providers of low cost credit, retailers of discounted household goods or other support and advice services).
  • The FCA will continue to work with Government and others, for example by providing regulatory expertise on a possible no-interest loans scheme.
  • The consideration of access to high-cost alternatives will become an integral part of the FCA’s overall remit.

Points to consider

• Much of the context and background to the report comes from the FCA’s 2017 Financial Lives survey. However, the paper contains very little information about this survey, so it is hard for the reader to ascertain how much confidence they can place in these findings without further investigation beyond the bounds of this paper.

• This paper is likely to be of interest to:
• Providers of low cost credit;
  • Organisations that work with consumers who use high-cost credit (social landlords, local authorities, charities, etc);
  • Innovators in the area of social finance;
  • Relevant Government departments.

• This report concerns the high-cost credit sector, which is situated in a fast-moving regulatory environment. Therefore, the findings and recommendations in this report may quickly become dated.