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A new report from Fair4All Finance, released yesterday, argues that there has been a severe decline in the availability of credit for lower income households.
“High-cost short-term credit (HCSTC) loan values have declined from £2.5bn in 2013 to £244m in 2022; home collected credit from £1.2bn to £200m; mainstream credit availability has moved upmarket.
From being 4% of the outstanding consumer credit loans market in 2013, forms of legal, high-cost credit reduced to under 0.3% by 2023, raising the legitimate question – where have these borrowers gone?”
The report suggests that this reduction in high-cost lending has created a ‘credit vacuum’, and that this is responsible for an increase in borrowing from family and friends, and illegal lenders.
Is it true?
There has been a collapse in payday, and door to door moneylending (as well as rent-to-own) in recent years. Irresponsible lending practices – notably failing to properly assess affordability and encouraging a cycle of repeat borrowing - finally caught up with companies in these sectors and fuelled a surge in complaints to the Financial Ombudsman. These not only cost a lot of money to settle, but the uncertainties over the extent of liabilities for past misdeeds also deterred potential investors. Firms could no longer raise capital and went bust.
It should be noted that the responsible lending and affordability requirements which ultimately led to this rise in complaints have been a 'slow burner'. They originate from a responsible lending requirement in the Consumer Credit Act, 2006. This subsequently led to the Office of Fair Trading introducing 'Irresponsible Lending' guidance in 2010, and finally into rules enforceable through the Financial Ombudsman after the creation of the Financial Conduct Authority in 2014. It's not as if the high-cost sector didn't have time to put it's house in order.
Whilst more direct regulatory action, such as the caps on the total costs of the payday and rent-to-own lenders played a part, their role shouldn’t be over-emphasised. The caps were set at very high levels, and these measures didn’t apply to home credit, which has suffered the same overall fate.
Whilst we do not dispute the near £3.7 billion decline in high-cost credit over the past decade, we take exception to the notion that this has resulted in a credit vacuum.
Buy Now Pay Later
There has been a booming Buy Now Pay Later ('BNPL') market in recent years.
Fair4All Finance themselves identify that:
“Buy Now Pay Later increased from 17% to 27% of UK adults from May 2022 to January 2023.”
And, according to The Guardian, just last month, this market has “more than quadrupled in size since 2020 and is expected to reach a record total of £30bn this year.”
It’s clear that much of that £30 billion of BNPL lending is being accessed by lower income households. For example, the Money and Pensions Service reports that whilst BNPL use extends across the income distribution, “there’s a slight skew towards households with an income of under £20,000 per annum”. It also notes that:
• 65% have a mismatch between income and outgoings at least some of the time (vs. 33% of UK population).
• 54% have arrears on bills/credit commitments (vs. 25% of UK population), and
• 29% often use credit for food or bills (vs. 12% of UK population).
That looks very similar to the group of hard-pressed households that Fair4All Finance is concerned about.
Whilst BNPL isn't regulated, and, as we have previously reported can certainly be harmful, it's expansion is likely to have easily offset the loss of access to credit resulting from the demise of payday, home credit, and rent-to-own lenders.
Credit cards
There is even less of a case for the notion of a ‘credit vacuum’ when we factor in the credit card market. In Fair4All Finance’s report this is strangely absent from the big picture.
“Outstanding consumer credit stands at £150bn”, reads the report. But a footnote indicates that this is based on Bank of England data excluding credit cards. That's a sizeable omission - £69.8 billion as at the end of February this year. It's annual growth rate is also about 12%. So, that's expanding not declining.
What has been happening in this part of the market with respect to lower income households? In 2020, the Resolution Foundation reported:
“Over the past ten years there has been a 10-percentage point rise in the proportion of lower-income households using some form of consumer credit (excluding student loans) – they have nearly caught up their counterparts at the top of the income distribution. This includes, for instance, a 13-percentage point rise in the share of households in the bottom income quintile using a credit card, as compared to a 4 point rise among those in the middle and 2 points among those in the top.”
Credit card use amongst lower income households was therefore rising between 2010 and 2020, and there was certainly no credit vacuum prior to, or in the first year of, the pandemic.
Since then, sub-prime providers – who are most likely to be serving lower income households – have certainly faced pressures. Chief amongst these has been the cost-of-living crisis. As we wrote in 2022:
"The ability of consumer credit lenders to help households through this crisis is severely constrained. Firstly, because many households simply cannot afford to borrow and will fail any reasonable affordability assessment, and secondly, because lenders are also facing increased defaults amongst their existing customer base."
This is certainly true. For example, NewDay – which includes the Aqua credit card brand – reports a 10% fall in customer numbers between 2021 and 2023. It has tightened its underwriting criteria in response to rising defaults caused by the cost-of-living crisis. But a 10% drop in customers isn't sufficient to create a 'vacuum'. It still had 3.3 million customers in 2023.
Neither is there much evidence that additional regulatory requirements have had a dramatic impact - despite the Fair4All Finance report implying this is the case on several occasions.
At the Provident off shoot, Vanquis Bank, customer numbers in 2019 were only marginally impacted (3%) on the previous year, despite Vanquis (according to that year's annual report) introducing “new measures in relation to the FCA’s persistent debt regime”, which involved “downwards repricing for around 100,000 customers and reduced late and over-limit fees”.
It's latest annual report, published in March this year, notes customer numbers of 1.75 million – slightly up from the 1.7 million in 2019.
In the absence of evidence that access to credit cards has dramatically declined amongst lower income households in recent years, Fair4All Finance instead point to disparities in credit card holding based on income and housing tenure.
“…only around two in five of those with income under £15,000 possess one, whereas four in five of those with income over £50,000 have one. Only one in two renters hold a credit card, while three in four owners have access to a credit card.”
But these disparities in levels of access to credit cards have been with us for decades. There's little to see there with respect to causes of a new 'credit vacuum'.
Why this matters
Having argued that there is a credit vacuum, Fair4All Finance maintain that this is responsible for a huge increase in borrowing from both family and friends and illegal lenders. Borrowing from family and friends – it argues – isn’t always “benign”, although it then admits it doesn’t have much in the way of evidence to back this up and certainly can't quantify how many 'friends' are actually 'loan sharks'.
For the rise in illegal lending, Fair4All Finance reports the results from two small scale surveys undertaken in January (2,547 respondents) and June (1,859) 2023. We have previously reported in detail concerning problems of weighting and extrapolation from small-scale surveys when it comes to estimating the scale of illegal lending.
Evidence from the much larger Financial Lives Survey (approximately 18,000 respondents) indicates that the use of illegal lenders is clustered in households containing people with long-term health conditions and amongst those who have previously borrowed from high-cost lenders. Recent small-scale surveys, including those commissioned by Fair4All Finance, have not weighted responses with respect to these factors. As a result they are at risk of over-representing illegal lending use.
Having previously alerted Fair4All Finance to this problem it is extremely disappointing that they did not respond to our recommendations with respect to their data analysis. Their survey data need to be reweighted to take account of the clustering effects we have identified if they are to be reliable.
But far more troubling is the report's recommendation that there should be a reconsideration and “broader definition of what constitutes good consumer outcomes that includes access to credit, consumer protection as well as its affordability...”
This is a poor call based on a false narrative. There has been a reduction in access to regulated credit because more people are poorer and can't now realistically afford it. Many are going to the unregulated BNPL market instead. That sector clearly does need to be regulated urgently by whoever forms the next government.
But the reduction in access to regulated credit does not constitute a 'vacuum' in provision. Many are still able to gain access to regulated credit. The problem is that they are now being charged higher prices because of the financial pressures those lenders are under. For example, the CDFI Fair Finance is now charging £435 in interest and fees on a £500 loan over 12 months. We doubt that the outcomes for its borrowers are entirely positive! Yet there has been little, if any, evaluation by Fair4All Finance of how 'access' at these, disgracefully high, prices is impacting customers. Charging the poorest more for their credit than their better off counterparts, as in other areas of life, also inevitably deepens wealth inequalities.
Our position is clear. Responding to the report today, we say:
"Access to high-cost, unaffordable, credit - no matter who provides it - is not a solution to poverty. The cost-of-living crisis is responsible for fewer people being able to afford to take out credit. Low income households taking out credit are at greater risk of exploitation, not less, as the cost of credit increases. Fair4All Finance should not be supporting high-cost lenders – such as those represented by the Consumer Credit Trade Association on its 'Project Sounding Board' - in their campaign to wind the regulatory clock back and abandon hard won, and extremely valuable, consumer protections."
