A report from the Royal Society for Public Health (RSPH) released today highlights the strong link between high-cost credit and people’s physical and mental health and wellbeing.
It comes after Provident Financial, the owner of the credit card lender Vanquis, was fined £2 million and ordered to compensate customers with a sum of £169 million for selling a misleading product that increased customer’s indebtedness.
It is easy to discount people in debt as being careless, overspending, irresponsible. Yet it can happen to all of us, far too easily. Here’s how I know.
We were late in paying a bill we did not know existed
It was a sunny day in Malaga. We had just started our relaxing holiday in Spain, when suddenly we got a threatening call from a gas supplier. The man on the other side of the line informed us that we were late in paying a bill we did not know existed, in a flat we no longer lived in, and must pay an immediate unexpected charge of £300. Apparently, an incorrect gas meter reading by the company had led to this unpleasant eventuality. Fortunately, we found the money to pay, but for the 40 per cent of the working age population in the UK, who have less than £100 in savings, this would not be an option. And turning to high-cost credit could cost you an annual rate of up to 1,500 per cent.
It is, therefore, alarming that many of us are frequently facing financial surprises. With official figures released at the end of February showing that as many as 17,000 companies entered insolvency last year, it could be argued that change is the only constant. When faced with with unexpected changes in income and expenses, an estimated nine million Britons are turning towards using credit to pay for their daily expenses, such as food, petrol, electricity meters, and household bills. 8.3 million people in the UK indicated that keeping up with their bills and credit commitments is a ‘heavy burden’.
The high-cost credit market
But where would one turn without an overdraft or an acquaintance with extra cash, and which organisations are offering solutions to such customers? The high-cost credit market in the UK includes products such as payday loans, home credit and rent-to-buy retail credit – some of which seem appealing at first sight but may later turn into a trap. In 2015, the booming market was estimated at £5 billion, serving 5 million customers, amongst which are the most vulnerable and financially-excluded people in society. A recent report by ‘Citizens’ Advice’, a charity committed to advice people with problems concerning money, law, consumer rights and more, pointed out that people with insecure incomes are five times more likely to turn to high-cost credit.
Accessible, affordable, suitable credit must be available as part of a wider holistic solution
Provident was not the only lender that was rebuked by the UK’s financial watchdog. In an attempt to address harmful practices and irresponsible lending of some of the high-cost commercial lenders, the Financial Conduct Authority recently ordered the well-known commercial rent-to-own lender Brighthouse to compensate their consumers with £14.8m for unaffordable lending and inappropriate charges. It is abundantly clear, therefore that accessible, affordable, suitable credit must be available as part of a wider holistic solution.
Luckily, responsible lenders do exist. Credit unions and community development financial institutions (CDFIs) are not-for-profit lenders, established for social purposes to provide credit to low income consumers, most of whom are female, under 35, have dependent children, are earning an average income of £15k per annum, and living in rented accommodation. They offer suitable and affordable credit, and have successfully reduced default rates by offering responsible lending alongside partnerships with money management and debt advisers, to provide customers with the tools they need to better manage their finance and improve their credit file.
In addition to being purposely affordable, these organisations also have a fair approach towards late payments. Specifically, they do not charge late penalty fees, and the methods they use to collect money owed is collaborative. However, due to small marketing budgets and localised operations, as well as limited access to capital to lend, they face challenges to scale and grow.
It’s the classic ‘chicken and egg’ situation: We’d like to see these mission-driven, responsible lenders reduce their prices even further, but they will only be able to do so with substantial injections of capital which, in turn, would allow them to grow to levels of scale that would allow such operating flexibility. The aim is to achieve a level of scale where these ethical lenders can provide fair and affordable financial services to the financially-excluded while being financially self-sustaining themselves. A Harvard University study that examined the success of community lenders in the US provides invaluable insights into the crucial role that public subsidies play in supporting the flow of capital into the sector.
Turning high cost credit into an affordable and suitable credit
Governmental capital that reduces the risk of private investment into the sector could play a catalytic role in accelerating the availability of responsible personal loans. Such ‘first loss’ funding would encourage foundations and social investors to invest further and could eventually coax more commercial banks into the space, enabling responsible lenders to scale and grow.
Big Issue Invest, the social investment arm of The Big Issue Group, has a firm commitment to the CDFI sector and tackling unaffordable and irresponsible credit. We invest in Moneyline, Street UK and Fair For You, who provide responsible credit to low income households. During 2016-2017, CDFIs have lent £22 million to approximately 55,000 consumers. This compares to £600 million to 200,000 consumers for the rent-to-own market alone, and demonstrates that responsible lenders could have an even greater impact upon low income families if they had more capital to work with. The social investment sector cannot do this alone and therefore we call on the public and private sectors to work with us and the CDFI community to eradicate irresponsible lending.
At Westminster, there is an acknowledgement of the issue of financial inclusion. Numerous initiatives have been set up over the last two decades to deal with it. But more capital is needed. Recently, the government announced they were going to unlock around £330m in dormant bank and building society accounts. They say £55m of this is to tackle financial inclusion. At Big Issue Invest we suggest moving it into affordable investment into responsible personal lending businesses, catalysing many millions more in investment into the sector and enabling it to overcome the sustainability gap it faces today.
Maayan Keren Zur is part of the investment team at Big Issue Invest.