On the 24th January 2019, the FCA published regulatory data on the high-cost short-term credit (HCSTC) market for the first time ever, drawn from both regulatory return data and the FCA’s Financial Lives Survey 2017.
The data paints the picture of over-indebtedness among UK borrowers. However, despite loan volumes increasing, lending volumes remain much lower than they were in 2013.
FCA Product Sales Data (PSD) recorded just over 5.4 million loans originated in the year to the 30th June 2018 which, when compared to previous data on the HCSTC market, showed an upward trend in volumes over the last two years. In 2013, however, this number topped 10 million per year.
Price caps introduced within recent years have also somewhat stabilised the high annual percentage interest rates (APR) within the sector (now hovering around a mean value of 1,250%). Borrowers now tend to repay 1.65 times the amount they borrow. If a person borrows £250, for example, they will generally be repaying around £413. While the numbers do still seem high on face value, it should be remembered this is well below the limit set within the 2015 price cap, which prevented consumers paying back more than twice the amount borrowed (including all charges).
The regulator does make the point that the HCSTC market is rather concentrated, with only ten lenders accounting for 85% of the total number of loans. 90 lenders have reported their loan transactions to the FCA, with two thirds reporting that they made fewer than 1,000 loans each in the second quarter of 2018.
There was also a 15% decrease in the number of active lenders over the previous two years, but even with fewer lenders in the market, total lending has not decreased. In fact, it’s done quite the opposite, as previously noted.
In terms of geography, Central and Greater London once again top the list in terms of number of loans taken out. Consumers in this region took out 15% of all UK HCSTC loans (796,202) between June 2017 and June 2018. The North West followed close behind, with 13.8% of total loans, and the South East taking out 12.1%.
The FCA highlights that there were far more loans taken out per capita, however, in the North of England, with 125 adults in every 1,000 taking out an HCSTC loan. In Northern Ireland, only 74 out of every 1,000 did, perhaps as a result of a greater presence of Credit Unions in this region.
Interestingly, but perhaps not surprisingly, despite having far more loans per head than most other regions, the average value of loans was lower in the North. Greater London’s borrowers took out an average of £284 with each loan, driven by higher costs of living in the capital, while the average value in the North West was £234.
Borrowers remain a predominantly young group, with 25 to 34-year-olds making up 37% of all payday loan borrowers. Borrowers over 55 were significantly less likely to have taken out HCSTC loans. Borrowers were also likely to be renting tenants rather than home owners, with 26% still living with parents.
The FCA’s High-Cost Credit Review is still ongoing, with consultation on a number of matters of concern to the regulator due to come to a close in the first quarter of 2019. For example, the Final Rules on the FCA’s overdrafts review will be released in June. Consultation on Buy Now Pay Later (BNPL) offers will also be open until 18 March.
CONSIDERATIONS FOR FIRMS
High-cost short-term credit lenders have certainly found the regulatory landscape change in recent years. It is likely that, as loan volumes continue to grow, the sector will see continued, if not more thorough, regulatory supervision. Firms will need to be prepared for the figurative ‘knock on the door’ and be able to evidence that they remain compliant with the numerous price caps already put in place (as well as any potential new interventions that may be required).
Banks and building societies will need to join payday lenders in monitoring developments in this sector, as overdrafts, which could almost be seen as a different form of high-cost, short-term lending with similarly high charges, have increasingly come under the regulator’s magnifying glass.
Overall, firms need to continue shoring up policies and procedures that identify and protect vulnerable customers. The simple fact is that considerate lending does not mean giving out sums of money to anyone who asks for it. Firms should be using intelligent technological systems, perhaps connected to the Open Banking architecture, as well as trained customer-facing professionals to stop borrowers taking on more debt than they can comfortably manage.