03Jul

The House of Commons Library has published research looking at how the high cost consumer credit sector has changed since 2014, when the Financial Conduct Authority (FCA) took over as consumer credit regulator. It finds that:

• There are fewer firms operating in this area – 188 firms who commenced the FCA authorisation process subsequently withdrew their application, possibly because they realised that they would not be able to meet the FCA’s stringent criteria. While there are currently 144 firms authorised in this area, many of these actually do very little high cost short-term lending, and the number of firms whose main focus is in this area is actually much smaller
• Fewer people are taking out these loans – when comparing the time periods January 2012 to June 2013 and January 2014 to June 2015, the number of people taking out at least one high cost short-term loan fell by more than 800,000
• Fewer people are having their applications approved – acceptance rates for high cost short-term loans fell from 50% at the start of 2014 to 30% in the middle of 2015
• Firms are finding it harder to be profitable – when looking at the firms operating in this sector, their combined losses in the first six months of 2015 were greater than their combined losses for the entire year back in 2014
• The number of customers being charged late payment fees has fallen – in January 2014, 16% of high cost short-term credit customers were forced to pay these fees, but by April 2015 it had fallen to 8%. The report also highlights that some firms no longer charge these fees
• Longer loans are being offered – the average loan term has almost trebled, from 30 days to 80 days, according to the report
• Costs for borrowers have reduced – at the start of 2014 the typical customer paid £100 in interest and fees. This reduced over the course of 2014 to around £80, and then reduced further to £60 once the FCA’s price cap had taken effect

The only area in which the Commons report indicates no change has occurred is in the average loan size. The typical high cost short-term credit borrower still takes out a loan of £250.

The report cites new rules introduced by the FCA, such as a limit of two on the number of times a loan can be rolled over, as reasons why these changes have occurred in the market.

The report also addressed the issue of the increasing number of complaints being made to firms in this sector. The Financial Ombudsman Service (FOS) reports that payday loan complaints rose by 227% from 3,216 in 2015/16 to 10,529 in 2016/17. In 2014/15, there were only 1,157 complaints made to the FOS about these loans, so complaint numbers have risen by a factor of nine in just two years. The overall number of consumer credit complaints made to the FOS rose by 89% in 2016/17 to 25,984 – large increases have also been recorded in the numbers of complaints being received about instalment loans (up by 318%) and guarantor loans (up by 182%).
The Commons report suggests that this increase in complaint volumes “may be more to do with the greater focus on the industry and the more interventionist approach from the Regulator than the fact that the industry has gone from bad to worse.”

The FCA’s price cap on payday and other similar loans has now been in force for two and a half years, and the regulator has denied suggestions that this cap is soon to be raised significantly.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.