Although most high cost credit products are advertised as a solution to short-term cash flow problems, many borrowers struggle to repay in accordance with the terms of their agreements, in which event lenders have been found to frequently refinance agreements or offer loans on a repeated basis – practices which appear to be highly lucrative for lenders but which can also lead to borrowing spiralling out of control with negative impacts on the overall welfare of consumers and for wider society. We reviewed the evidence regarding these issues and provided a critical assessment of the regulatory response made to the expansion of high cost credit markets in the UK. The report particularly focused on the role that real time databases, established by regulators in a number of US states, can play in enforcing effective responsible lending requirements and help to deliver more effective support to over-indebted borrowers. It’s recommendations include:
- The Financial Conduct Authority should establish a real-time database of all high cost credit agreements;
- The FCA should use the regulatory database to ensure the effective targeting of its enforcement activity and to inform the ongoing development of responsible lending requirements, including the level of any caps on the total cost for credit, over time; and
- Government should establish a ‘Rescue Fund’ of at least £50 million per year to provide ‘heavy high cost credit users’ and those turned down for credit because of the responsible lending requirements, with an opportunity to access affordable alternatives.
The full report is available here.
The publication was influential in the final stages of the Banking Reform Bill, during which the Liberal Democrat Lord Sharkey tabled an amendment to impose a duty on the Financial Conduct Authority (FCA) to cap payday lenders in line with the Florida model, which is detailed in the report. This amendment was supported in the Lords by Lord Mitchell and the Labour front bench. Responding to the prospect of a certain defeat in the Lords on the issue, Government subsequently announced that it would require the FCA to introduce a price cap on high cost short term credit agreements, but the design of this was left to the FCA to decide.
Much has been made of the potential benefits of increased credit data sharing for low income consumers in recent years, with arguments advanced by Government and regulators that this can (i) increase competition in credit markets and reduce the price paid by consumers with good repayment records; (ii) help lower income consumers build up a credit record, enabling them to transition from high cost to more ‘mainstream’ lending, and (iii) assist consumer credit firms to make more responsible lending decisions.
Reviewing the practice of data sharing in high cost credit markets we found that there were reasons to be cautious about these claims. In the absence of caps on the cost of credit, increased data sharing leads to the segmentation of borrowers according to risk and the consequent charging of higher prices to some and exclusion of others. In the absence of effective competition firms may also not have an incentives to pass on savings to lower risk customers.
Increased data sharing is therefore unlikely to lead to better consumer outcomes unless firms use it to (i) focus on customers with lower risk profiles; (ii) experience a reduction in bad debt levels and increased profitability as a result; and (iii) pass on the benefits of these in the form of cheaper prices to good payers. There is no guarantee that data sharing per se will result in these outcomes.
The full report is available here.
Written during the passage of the Financial Services Act 2012, and cited in Parliament by Government as influential on its decision to provide the Financial Conduct Authority with a power to cap prices, this report followed a study trip to Japan to look at the impact of measures contained in the Japanese Money Lending Law of 2006.
Empirical evidence of the impact of the 2006 Law is presented alongside the pro-industry arguments made at the time in Japan, which are often echoed in debates in the UK today. The evidence presented provides a robust challenge to the claims made in the UK that caps on the cost of credit will lead to an increase in illegal lending. The report is available here.
The Rent to Own (RTO) sector of the UK consumer credit market comprises firms providing household goods such as furniture, white goods, and electrical items on rental agreements to lower income households with an option for the consumer to purchase these at the end of the rental period. Although the sector provides a means for lower income households to obtain essentials when they would otherwise not be able to do so, the report revealed a number of concerns. These included extremely high costs, poor quality of account statements, bad customer service and an absence of standards concerning repair and replacement, and a lack of payment options and forebearance for those in financial difficulty.
The report recommended a number of amendments in practice, and sought the voluntary agreement of leading RTO firms to adopt these. Unfortunately, these commitments were subsequently reneged upon and more recently the All Party Parliamentary Group on Debt and Personal Finance has taken up the problems in this market.