Has the penny dropped?
August 25, 2017
By Niall Alexander, Carnegie Associate
Evidence beats assertion
“Myth busters” a popular television programme, ran from 2002 to 2017, testing common urban myths and theories such as, “Will a penny dropped from a skyscraper kill a person if it hits them?” “Is it quicker to weave in and out of traffic, or stay in the same lane?” “Could inflated balloons save a person in a car crash?” and “Do unusual meats all taste like chicken?” They debunked many of them.
Like myths, reputations can be easy to earn and hard to shift. McDonalds Marketing Manager Alistair Macrow, says of the views commonly held about McDonalds that “Some of the things we found [on social media] have been, quite frankly, crazy. But once it’s been viewed a couple of million times by people, that starts to become real in people’s minds.”
Effective policy relies on fact-checking and great analysis. As the world changes, it is even more important to monitor change and its effects. A recent one is the more stringent regulation of the commercial high cost credit market. It has stopped much of the deliberate exploitation of borrowers. But are some now left without legal and sustainable credit options to meet their needs? At Carnegie UK Trust we like the maxim evidence beats assertion so here we try to find the evidence on what has happened since those regulations were introduced.
Why does this matter for public policy and practice? Put simply, there is a risk that as those who are the least well off are now wholly excluded from credit because of the new regulations. It appears it is the poorest and most vulnerable that could be regulated out of credit markets entirely.
More than 10 million loans were issued to around 1,700,000 customers (see chart #1 below) in 2012 by high cost credit short term credit (HCSTC) companies that were subsequently subject to the payday cap. A significant proportion to the poorest people in the UK, living on low or very low incomes, overpaying for small sums of money. The poorly regulated market meant those with the least paid the most. Borrowers were trapped in a calculated cycle of default fees and rollovers. The profitability of those loans rightly propelled payday lenders to the top of every newspaper, policy maker and politician’s hit list.
Dramatic decline in loans
New regulations resulting from that public scrutiny has had a marked impact on both in the volume of loans issued by high cost credit companies and the profile of their borrowers. The number of loans dropped from 10 million a year to a figure under 4 million a year.  Those now no longer able to obtain loans are more likely to be in households receiving income from benefits and less likely to be in full time employment. The remaining customers are now almost always in work, with mean net individual incomes of £23,600.
Parallel changes have taken place in other commercial high cost credit markets. The high cost credit sector previously identified as having the greatest number of ‘vulnerable people’, with the fewest alternative options, was “home collected credit”. Provident Financial Group (PFG) holds around 2/3rd of this market.
The home collected credit sector is not subject to the new price cap on lending, but is subject to increasing regulatory scrutiny. In response, PFG have also shifted their focus in the past five years, repositioning away from the £10,000 to £15,000 a year income doorstep borrower to those with average incomes between £20,000 and £35,000 . These higher earning borrowers use the PFG Vanquis credit card to access funds. (See chart #2).
The same pattern of change is also evident in the high cost ‘rent-to-own’ market, companies that supply white and brown goods on credit. One of the largest companies in this sector is BrightHouse, a retail store that grew spectacularly through the financial crash. BrightHouse internal score carding determines their better paying, “CRG1” customers (credit risk grade based on assumption of consumer creditworthiness, CRG1 being the most creditworthy) now represent around 60% of their loan book – up from 40% just a few years ago. Their customer numbers are declining too. BrightHouse lost around 50,000 customers last year, and the pattern of who is being declined appears similar to PFG and HCSTC – it’s the poorest who are being rejected. (see chart #3)
One challenge tacked but another emerges
The new regulations from the FCA have had a significant and positive effect in clamping down on exploitative lending practices and reducing exposure to harmful, expensive loans for the poorest borrowers. The FCA originally estimated that 160,000 fewer people would access HCSTC as a result of the payday cap, the figure is over five time higher.
The question now though, is what more needs to be done to support fair, socially-motivated alternative credit options, such as credit unions and Community Development Finance Institutions (CDFIs). We need to think of where those excluded from commercial markets turn whenever they need to borrow money – and do not end up paying an even higher poverty premium.
Borrowing from friends and family
The FCA commissioned a survey on ‘declined borrowers’. 40% of those rejected from high cost lenders borrowed the money from another source “mainly friends and family”. On the face of it this may seem a positive outcome – many people being helped by people they know, and not having to pay high interest charges. However, borrowing from friends and family is very unlikely to be a sustainable solution. It is likely to place a significant strain on personal relationships, as well as on the finances of those now be asked to provide these loans.
Illegal money lending
The FCA say “We have not seen any clear indication that declined or former users of HCSTC are increasingly turning to illegal money lenders as a result of the price cap”. That is good news, although it is of course, notoriously difficult to capture accurate information about the scale of illegal money lending, as people are, understandably, very reluctant to report that they are using these services.
It’s hard to reconcile that optimism with the FCA’s own reporting which identify around 40 illegal websites that are clones of either authorised, or pending sites or are sites that sound legitimate but are in fact illegal. These include Little Loans Limited (clone of FCA Authorised firm), Loan2Pocket (clone firm) Dash Loans (clone of FCA authorised firm), suggesting that the practice of illegal lending or nefarious activities to con low-income borrowers is far from uncommon, and not a stereotyped view of a “bloke down the pub”.
60% of declined lenders have – according to their credit files – not gone on to borrow from other sources. Of these around a third indicate they were ‘going without’ and 7% state that they have cut expenditure as a result. Again, while on first glance this may appear a positive outcome, it is at the very least debatable whether for those already on very low incomes, ‘going without’ purchases such as school trips, washing machine repairs, fridges, or days out, or cutting expenditure further, is really a viable or desirable long-term solution. This seems a little incongruous too as Citizens Advice Scotland and other debt agencies report more people defaulting on other bills like rent, council tax and utility.
Socially-driven lending options
A healthier, more realistic, long-term goal is that lowest income borrowers can choose, when appropriate, to access more affordable, socially-driven, not-for-profit lending options. Options that also have a goal of drawing their customers closer to mainstream lenders. But without investment and support, these social alternatives are not in the places and spaces they need to be.
The community finance sector in the UK has a tiny proportion of the market. (see chart #4) Lending just £20 million in 2016, and c£156m over the past decade. The credit union sector lent £788m but only a proportion of their loan book is to people who are financially excluded. Many credit unions struggle to lend small sums to those on the lowest incomes as the administrative and risk costs of doing so are not sustainable within their interest rate levels. Sustainably priced, not for profit, alternatives need support, marketing, better use of data, increased understanding from regulators and access to loan capital.
Affordable Credit Action Group
At the Carnegie UK Trust we are supporting new community finance operations, and are working through our Affordable Credit Action Group, chaired by the Very Rev John Chalmers, former Moderator and Principal Clerk at the Church of Scotland, to address some of these wicked problems. The need for credit among low income households will not go away. Especially as wages and benefit levels are depressed, inflation is rising and in turn affecting prices.
Success which needs to be replicated
We are delighted to see the Group has supported and encouraged the extension of community finance provision into new local authority areas. In 2016, there was one only personal lending CDFI operating in Scotland and only in one local authority. Now there are six local authorities where community finance operates with visible outlets and an online presence. Glasgow has been joined by Edinburgh and Inverclyde (where Scotcash operate) and Fife, Falkirk and West Lothian have outlets of the CDFI Conduit Scotland. We also are supporting other initiatives that we will report on and highlight on our website in the near future. Meanwhile for more information on why access to affordable credit can make such a positive difference, our Gateway to Affordable Credit report can be accessed here.
Has the penny dropped
Oh, the penny dropped from the skyscraper, Myth Busters says it won’t kill you!
 FCA, Call for Input: High-cost credit Including review of the high-cost short-term credit price cap (November 2016) and FCA High-Cost Credit Review Technical Annex 1: Credit reference agency(CRA) data analysis of UK personal debt (July 2017)
 Where a borrower cannot afford to pay back a loan many lenders offer the opportunity to ‘rollover’ or extend the loan. The FCA were concerned that rolling over loans led to over indebtedness and placed a restriction on the number of rollovers permissible to two. Many commentators believed that rolling over loans meant that the most vulnerable borrowers became the greatest revenue providers for HCSTC companies as they, in effect, repaid the most on their initial borrowing agreement.
 High Cost Short-Term Credit (HCSTC) loans are subject to the so-called payday loan cap introduced in January 2015 and the same companies were subject to more intensive scrutiny and regulatory controls from April 2014
 FCA High-cost credit Including review of the high-cost short-term credit price cap FS17/2 (July 2017) pp 17
 FCA High-Cost Credit Review Technical Annex 1: Credit reference agency (CRA) data analysis of UK personal debt July 2017 (PP 68)
 The information in this chart was extrapolated from the FCA papers on HCSTC and their technical annex. Notably “Call for Input: High-cost credit Including review of the high-cost short-term credit price cap” (1st November 2016) and FS17/2 Feedback statement High-cost credit Including review of the high-cost short-term credit price cap (31 July 2017)
 The impact on business and consumers of a cap on the total cost of credit Personal Finance Research Centre University of Bristol 2013 identifies home credit and pawnbroking borrowers as the most vulnerable high cost credit consumers, followed by retail payday and then online payday It states “Following the OFT’s definition of vulnerable consumers (Burden, 1998), a high proportion of home credit customers in the Consumer Survey (77 percent) were classified as vulnerable based on a measure that comprised age, employment status, income and ethnicity. This reflected that a high proportion of home credit customers were on low incomes (72 percent) and that a large minority were over State Pension Age (23 percent). Customers of home credit were the least likely to have access to mainstream credit (10 percent)”
 PFG Annual report 2016 (page 35) typical borrower “low incomes £10,000 to £15,000 per annum”
 PFG Annual report 2016 (page 29) typical borrower “full time employed, average incomes between £20,000 and £35,000”
 The information in this chart was taken from Provident Financial Group Annual reports covering the relevant years
 BrightHouse presentation Q316/17 Results 23 February 2017 delivered by Hamish Paton (Chief Executive Officer) and Alex Maby (Chief Financial Officer) https://www.brighthousegroup.co.uk/files/3714/8777/9535/Investor_Presentation_Q3_2016-17.pdf
 The information in this chart was extrapolated from quarterly reports sourced on BrightHouse corporate website and an analyst investor presentation and audio call available on the website
 Critical Research TEN-16-075 Price Cap Research Summary report 16 June 2017 prepared for the FCA
 FCA High-cost credit Including review of the high-cost short-term credit price cap FS17/2 (July 2017) pp 18
 FCA High-cost credit Including review of the high-cost short-term credit price cap FS17/2 (July 2017) pp 19
 Responsible Finance : The industry in 2016 (Feb 2017) http://responsiblefinance.org.uk/policy-research/publications/
 http://www.abcul.org/media-and-research/facts-statistics sourced August 2017
 Data from FCA High-cost credit Including review of the high-cost short-term credit price cap FS17/2 technical annex and Bank of England credit union statistical release 31/7/17 and Responsible Finance. All figures are from 2016, except credit union which is from 2015.
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