High-cost credit is minuscule compared to the overdrafts, credit cards and motor finance that comprise the lion’s share of consumer lending by volume. And yet it presents the FCA with the trickiest of political challenges: do the campaigners’ bidding and target the lenders; or prioritise the consumer and maintain access to credit.
The leading debt charities are clamouring for tighter controls. In recent weeks their efforts have been greatly boosted by the involvement of actor-turned-activist Michael Sheen whose presence has electrified the debate.
The FCA is trying to balance the need for consumers to access credit with the necessity to protect them from harm; and Andrew Bailey is acutely aware of the precariousness of this balancing act.
In a speech to bankers last year he acknowledged that “there is an issue around access to credit, which for me is at the heart of our interest in high-cost credit. Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income”.
The debt charities are more single-minded. For them the prescription is simple: cap the lenders’ charges and vulnerable consumers will be less indebted. If demand persists, social lenders like credit unions will meet it. Past experience shows this to be wishful thinking.
The political allure of rate caps is undoubted. Even George Osborne was susceptible: it was he as Chancellor who introduced the cap on payday lenders. But the FCA must resist the pull of politics and regulate in the interests of the millions who need credit to manage their household budgets. It must look at the economic facts and regulate for the many, not the few, or for Michael Sheen.
Uncomfortable as it may be, the bald truth is there is a causal link between moves to increase consumer protection and a constriction in the supply of legal sources of credit. The irony is that moves to cap charges and protect consumers end up having the opposite effect.
Debt campaigners contest this, but the evidence is mounting by the day.
First, look at the Bank of England's own statistics. Its Credit Conditions Survey for Q1 showed the availability of unsecured credit to households had decreased “significantly” in the first quarter as lenders tightened their criteria. The Bank’s Money and Credit survey in May reported a further constriction: the first reported monthly decline since 2013.
Second, the Government’s April announcement of a 16% increase in funding for its Illegal Money Lending Teams. The Treasury concedes there are over 300,000 people in debt to illegal lenders with many experts saying numbers are much higher in the “ghost economy”. The FCA’s own statistics show 3.6 million UK adults are borrowing from ‘friends and family’, for many a euphemism for unregulated lenders.
Third, a remarkable admission from Andrew Bailey in Parliament in May. Despite claiming there had been no ‘waterbed effect' since it brought in the cap on payday lending, Bailey admitted the amount of outstanding ‘rent-to-own’ and ‘home credit’ debt had more than doubled in the two years since the cap was introduced. If ever there was going to be a waterbed effect as a result of a cap, it would be to these two sectors.
The conclusions are clear: the overall availability of credit is decreasing; the FCA’s interventions are reducing choice but not demand; and, correspondingly, the incidence of illegal, unregulated credit is rising.
The lessons should also be clear: limiting the supply of credit does nothing to reduce the demand. Take away first choices and consumers will hunt out alternatives. These may be in the regulated sector, equally they may not.
Worryingly, there is more to come. The FCA is about to bring in new regulations that will drive even more companies out of the market. Its proposed rules on affordability will fall much more heavily on businesses serving ‘non-mainstream’ consumers than the banks. Given the economics of small sum lending, these extra costs will be impossible for many to bear.
The result will be market exit and less access and choice for consumers. This may be what the campaigners want to see, but it will not be welcomed by the vast majority of consumers up and down the country.