The high cost consumer credit market in the UK
This note outlines issues about high cost credit lending and attempts to reform it. It looks at evidence from various academic research and other reports into the impact of the sector on individuals both here and abroad. It also looks at the opportunities for other lenders to enter the market and to offer more competition to the current market leaders. A section at the end of the paper looks at the implications and justifications for the cost of credit cap proposals published by the Financial Conduct Authority in July 2014.
Credit on all levels has become an emotive issue encompassing everything from reckless lending, problem debt, and the burden of student debt. But no subject has a higher profile than the credit providers in the sub – prime or high cost credit (HCC) sector summed up regularly as “legal loan sharks”.
In fact the HCC sector is made up of a number of different markets. Some are highly competitive others, e.g. the home credit market, less so. However, it has been the online and high street lenders – the pay day loan companies - which have attracted most criticism and examples of individual desperate to meet short term needs and paying 5,000% for a loan taken out because of seductive adverts, and then getting locked into a cycle of taking new loans simply to repay old ones, can be found.
The industry points out that there are good reasons why credit is expensive when measured in terms of its APR.
First, the loans are much smaller starting at £50 and up to £500, whereas loans available from banks are £1,000 or more. Second, the length of the loan is very different. Most HCC sector loans are for periods of a couple of weeks. Bank loans start at a year. Third HCC customers are often people who have poor credit records and cannot borrow from anyone else.
There have been numerous recent attempts to curb the activities of pay day lenders and others. Regulation of the sector has passed from the Office of Fair Trading to the Financial Conduct Authority. The biggest single regulatory change has been the cost of credit cap proposals published by the Financial Conduct Authority in July 2014.