A woman shops for bread in a supermarket
Rising energy and food bills, as well as other outgoings, could easily add £120-150 per calendar month to household bills © Daniel Harvey Gonzalez/In Pictures/Getty Images

This article is the latest part of the FT’s Financial Literacy and Inclusion Campaign

Even a year ago, the financial regulator sounded confident: tougher regulation of high-cost lending didn’t push those in need towards loan sharks and illegal money lenders. The evidence was that people either went without, or turned to friends and family for help.

You wonder if the Financial Conduct Authority is quite as sure of that now. Leave aside the fact that seemingly benign borrowing from friends and family, which has indeed jumped since 2017, can turn out to be anything but. Against the backdrop of the tightest squeeze on living standards for generations, the gap left by the slew of departures from the subprime lending market last year is likely to be felt.

This is not to say that the regulator and the financial ombudsman were wrong to crack down on rip-off payday loans or on repeat lending and scant regard to affordability in areas such as home or doorstep credit. Even some in the sector concede that there were sketchy practices that needed to be stamped out.

But the squeeze, which saw home credit lender Provident Financial leave the market and others like Amigo stop lending, wasn’t followed by any proper appraisal of what came next. Indeed, the analysis of what happened to the people who once relied on the sector is patchy at best.

What we do know is that the number of loans issued in the high-cost short term credit and home lending sectors had dropped by more than 3.2mn in 2021 compared with 2019 (after payday lender Wonga’s demise), or by about £1bn. And that the number of people who find themselves excluded from mainstream provision, already estimated at 11mn, is almost certainly going up, not down.

The biggest banks, which already decline to serve the poorest in society, will draw the credit drawbridge up further in a downturn. Meanwhile, rising energy and food bills, as well as other outgoings, could easily add £120-150 per calendar month to outgoings in an affordability check, notes one expert. About a fifth of UK adults have less than £100 in savings.

It seems likely that explosive growth in the unregulated buy now, pay later market, BNPL, has filled some of the void, potentially substituting a low or zero cost source of credit for what was a very expensive one. One community finance organisation, a sector that tends to serve a similar demographic to high-cost lenders (and indeed loan sharks) in terms of high proportions of benefits recipients and those on incomes of under £20,000, said BNPL had become by far the dominant form of credit among their customers since 2020.

That chimes with concerns about “stacked” BNPL loans, about use of such facilities to meet essentials such as energy costs, and some suggestions that those reliant on the sector are using more expensive lending, such as credit cards to keep up with payments. As default rates likely worsen, and providers act ahead of tighter regulation, that source of credit could too become harder to access.

Meanwhile, illegal money lending does appear to be on the rise. The links between denial of regulated credit and illegal provision aren’t well tracked. But research by the Centre for Social Justice this year estimated that more than a million people could be borrowing from a loan shark, up 700,000 from the last large survey in 2010. Well over half of those surveyed said they initially considered the loan shark a friend.

What hasn’t happened is a really concerted effort from government to expand the community lending sector, which is capacity-constrained and remains tiny with lending at about £34mn a year.

Nor is there much evidence yet of the emergence of a “compliant, responsible commercial high-cost credit sector”, in the regulator’s words, which it believes should be able to meet some of the rising demand. Amigo, which recently won court approval for its scheme to settle past customer complaints, is seeking approval to restart lending with a new product that includes the ability to reduce the rate paid over time. Other companies are also considering new models.

The question is, what contribution they might make in the near future. The gap in the UK credit market will become harder to ignore this winter.


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