CCTA responds to the FCA’s Alternatives to High cost Credit Report

This week, the FCA published a report on the alternatives to high-cost credit (HCC) and set out the actions and recommendations to improve the availability and awareness of those seeking an alternative to HCC. The report also notes that ‘the consideration of access to alternatives to high‑cost credit will become an integral part of the FCA’s overall work in the credit sector, reflecting the part alternatives can play in improving consumer outcomes.’

Yet, while the FCA’s intentions are understandably well meant, a scan of the publication suggests little more than a sprinkling of motherhood and apple pie, and questionable aspirations for solving access to affordable credit for consumers who are temporarily financially struggling

The report recognises that there are 3 million people use HCC in the UK, often driven by unexpected expenses including the need for essential household goods either when moving house or after breakages. The growth in gig economy workers is also a factor in demand for HCC, and the years of austerity have seen the ‘just about managing’ consumers squeezed even further.

Of all the alternatives to HCC, it is the credit union sector which is the most lauded despite being polarised between a small number of large credit unions, and many smaller credit unions. There are over 400 credit unions making loans to over 1.8 million members across the UK and credit unions are lending around £1.5bn to their members.

The FCA admits that ‘in the short term at least, the capacity of credit unions to make credit available to a significant portion of HCC users is limited, although the larger credit unions have shown that there is scope for growth without the need for any legislative change.

Credit Unions face several challenges which includes the viability of offering credit at 3% interest per month to higher risk consumers, a reliance on branch presence and a restrictive legislative framework when trying to broaden the product range. Yet the report also considers alternatives such as Community Development Finance Institutions, an option to combine credit and household goods such as credit unions partnering with a supplier of furniture or household goods, budgeting government loans and grants for essential household goods.

The FCA provides a number of recommendations for improving the market to HCC and increasing consumer awareness. It did consider asking regulated firms to signpost consumers to lower-cost credit when rejecting loan applications but rejected this as the consumer may not be lent to by the alternative provider and it would require lenders to understand each other’s criteria more than can be reasonably expected.

However while the regulator can make some changes within its own environment such as extending the exemption from its own fees for CDFIs from April 2019 onwards and providing support to RSLs help them obtain credit broking authorisation it is clear that the FCA views the provision of alternative providers as a collaborative effort and works with several others including the Money and Pensions Service, End High Cost Credit Alliance and Fair4All Finance.

As the regulator indicates, their limited remit means they “are not the most appropriate authority to address some of the challenges around alternatives to high‑cost credit” and others may be able to take an effective lead and have suggested HM Treasury should consider if there is value in a review of credit union and society legislation.

History has already shown there are no easy fixes to the long standing issue of providing a sustainable alternative to HCC so while a useful report, it does suggest an element of buck passing by the FCA to others.