What will be the consequences of FCA proposals?

The net result of the proposals in the Financial Conduct Authority’s High Cost Credit Review published on 31st May is that fewer people, particularly those on lower or uneven incomes, will be able to access regulated consumer credit as firms will be unable to lend to them.

This is no bad thing, according to the FCA, when the same effect resulted from its cap on payday loan charges in 2015. People should go without rather than take on high cost credit which might lead to debt problems. What the FCA did not say though, was go without what?

In 2017, 140,000 people who received debt advice from StepChange Debt Charity were behind on at least one of their essential household bills, such as an energy bill, council tax, mortgage or rent – two in five of their clients. Across Great Britain, the charity grosses this up to estimate the number of people behind on priority bills to be over three million. An estimated 9.3 million people last year used credit to meet a household need – with 1.4 million of these using high cost credit.

But many are finding access to regulated credit to use as a smoothing mechanism more and more difficult, and are turning to informal sources, often referred to as friends and family, but also unregulated illegal lenders. Statistics from StepChange show a significant increase in both the number of clients who borrow informally and the value of how much they borrow:

  • In 2015, 26.8% StepChange of clients (82,140 people) owed an average debt of £3,639 (totalling £298.9 million) to friends and family.
  • In 2016 28.3% of clients (96,121 people) owed an average of £4,512 (totalling £433.7 million)
  • and in 2017 this increased to 31.9% of clients (113,997 people) with an average debt of £5,070 (totalling £578.0 million).

Since 2014, the total amount owed to friends and family has more than doubled from £236 million to £578 million. StepChange has acknowledged the significant rise in unregulated debt held by its clients, but says it has no idea why. The FCA is not interested in conducting research into this phenomenon, even though its actions are likely to be the cause, because of course, unregulated lending is outside the remit of the regulator.

The Illegal Money Lending Team for England assess that 310,000 households borrow from illegal lenders. There is a grey area between borrowing from “friends” and borrowing from outright illegal lenders.

John Lamidey, Regulatory Consultant at Arminius Associates says: “Since StepChange considers that 140,000 of its clients behind on at least one of their essential household bills grosses up to over 3 million in the population as a whole, then 357,386 clients who borrow informally would gross up to 7,658,271 in the population as a whole.

“It follows that if over seven and a half million people borrow informally from unregulated sources it does appear that the applauded FCA regulatory interventions which have reduced regulated commercial lending significantly since 2014, and continue to do so, have “protected” many millions of consumers – right out of the market, leaving them to fend for themselves.”