High cost consumer credit: the new regulatory regime

Credit has always aroused strong feelings and debate.  At issue are things such as access to credit, reckless lending, problem debtor or the burden of student debt.  But no subject has had a higher profile recently than the credit providers in the high cost credit sector: summed up regularly as “legal loan sharks”.  No other symbol better epitomises the anger which its critics feel, than the eye wateringly high interest rates it charged.

The sector is now regulated by the Financial Conduct Authority which has introduced a new regulatory regime in 2014, which included limits on the number of loan ‘rollovers’ and caps the amount that loans can cost.

It was to be expected that the regime chnage would have a profound impact on the HCC sector.  The FCA were very comfortable with the expectation that the new rules would result in a much smaller industry and that some people (people who previously only just qualified for loans) might no longer have access to credit but that, in economic welfare terms, they would be better off if without it. 

Post change the FCA found that:

Market size

• Between January 2014 and June 2015, there were over 800,000 fewer individuals taking out at least one HCSTC loan than between January 2012 and June 2013.
• A clearly discernable decrease in acceptance: rates [which] dropped from 50% to 30% from the start of 2014 to the middle of 2015.

Number of firms

• 188 firms which originally applied for HCSTC permissions withdrew their applications, often after a direction from the FCA following consideration of the firm’s authorisations application and where it was clear that the firm did not meet the standards expected by the FCA.

Firms’ profitability

• Profitability has decreased: combined losses in the first half of 2015 were larger than the combined losses in the whole of 2014.

Default rates

• Declined through 2014 to June 2015: the proportion of loans being charged a late payment fee has steadily decreased from 16% in January 2014 to below 8% in April 2015. Some firms no longer charge late payment fees.

Changes to products

• The average length of loans has almost trebled whilst the average loan size – has remained around £250.

Lower costs for customers.

• Loans originating at the start of 2014 typically resulted in the customer being charged around £100 in interest and fees. This declined over 2014 to around £80. Once the price cap was introduced, there was a further sharp drop to around £60.

The industry itself recognises the FCA’s findings but ascribes the changes to more than simply the price cap.  It stresses the impact of the limit on ‘rollovers.

The industry feel that its response to the new rules and the move towards longer loans, in a more controlled framework has effectively blurred the lines between HCC and other consumer lending.

Given how differently the industry operates it is something of a surprise that complaints against it have increased sharply. Financial Ombudsman complaints data show a nearly fourfold increase in complaints and a tenfold increase in referrals.  This may be more to do with the greater focus on the industry and the more interventionist approach from the Regulator than the fact that the industry has gone from bad to worse.  The fact that the upholding rate of complaints has dropped sharply may provide some clue as to the quality of the complaints.

In May 2018 the FCA produced new proposals to change the rules surrounding, especially, the rent to own market, and that of unarranged overdrafts.