Most firms that provide high-cost credit will be all too aware that the Financial Conduct Authority (FCA) regards their sector as being one of its priority areas. The regulator has taken action against firms who failed to treat their customers fairly and has also introduced price caps in certain areas.
Now the FCA has turned its attention to examining the alternatives to high-cost credit, and has been prompted to do so by two factors:
• Many consumers will not be able to access lower cost credit
• When they may be able to obtain lower cost credit, some consumers will not know where to go to obtain it
The FCA’s paper on the subject also says that consumers may end up paying more than they need to for credit as they may have an immediate need for funds and so may not have time to shop around.
The regulator says that high-cost loans may be taken out for a number of reasons:
• To pay for living expenses and bills
• To meet the costs of emergencies, such as funeral costs or replacing broken household goods)
• To pay for expected one-off events, such as providing funds for Christmas or school uniform
• To provide funds to replace lost earnings following illness or unemployment
• To fund addictions to gambling, drugs or anything else
• To supplement lost earnings when work was not available under a zero hours contract or other flexible working arrangement
• To meet the costs of moving home, when it may be necessary to purchase a number of items and/or carry out a lot of maintenance work in a short period of time. Alternatively, some landlords may require an upfront payment of three months’ rent from their tenants
Credit unions are sometimes promoted as sources of lower cost credit, and these organisations are prevented by law from charging interest of 3% per month (1% per month in Northern Ireland). However, membership of a union is usually restricted to people who live in a specific area, or who work for the same company, or who hold a particular occupation. The FCA notes that there are now nine different trade associations who represent credit unions in the UK and suggests that this fragmented set up could be hampering the efforts of credit unions to effectively promote their services.
Furthermore, with the strict caps on the interest they can charge, many credit unions are unwilling to lend to higher risk borrowers. Some unions have a limited online presence, carrying out much of their business face-to-face, which may not satisfy the appetite for ‘instant credit’.
The FCA calls on the Government to consider carrying out a formal review of credit union legislation and for the various trade associations to work together and speak with a unified voice.
The next possible alternative examined in the FCA report is loans from community development finance institutions (CDFIs), who usually only accept customers from a limited geographical area. However, many of these organisations concentrate primarily on lending to small businesses, and when they do lend to individuals, they are not subject to any price cap. Seeing their customer base as high-risk, many CDFIs charge an APR of 200% or more.
With their significant overheads, their occasional difficulties in obtaining funds from banks and their limited online presence, again the FCA questions whether CDFIs will be a viable alternative for many consumers. However, it suggests matters could be improved if the law was changed to encourage entrepreneurs to invest in CDFIs, or if CDFIs were to partner with credit unions and take on consumers who are rejected for a credit union loan.
The paper then comments on retail finance, which helps consumers purchase the larger household goods they need when they are unable to pay the full price upfront. However, the terms on which retail finance is offered may mean that it is not available to many consumers with low incomes, low credit scores and/or a thin credit file.
The FCA summarises the crux of the problem by saying that most providers of lower cost credit are small, locally based organisations. They tend to have limited reach and aren’t linked to a national brand with marketing capacity.
Other recommendations of the FCA include:
• Charities, local government and lenders should be encouraged to refer consumers to sources of lower cost credit – the report notes that Lloyds Banking Group are already signposting consumers to credit unions. However, the FCA acknowledges that charities and local councils may need credit broking permissions in order to make these referrals, and encourages the Government to relax the rules in this area
• More effective promotion of the information on the Money Advice Service (MAS) website about low-cost credit options. Organisations who may not have the permissions to make referrals direct to low-cost lenders could instead direct consumers to the MAS website information
• Encouraging prospective providers of technology based low-cost credit to contact the FCA’s Innovation Hub
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