Access to Credit and Funding

Updates | 18/09/17

A key theme for the CCTA in 2017-18 will be ‘Access to Credit and Funding’.  It will be a central theme of our conference in November and our engagement with the regulator and policy makers throughout the autumn and into 2018.

Put very simply, unless ‘access’ is maintained and safeguarded, the regulator will have failed — consumers will have lost a vital ‘coping mechanism’ that helps them keep their personal and household budgets afloat; and businesses will quickly go under, particularly SMEs for whom access to cost-efficient finance is a lifeline.

Happily, the Head of the FCA, Andrew Bailey, agrees — certainly as far as consumers are concerned.  And he said so explicitly at a BBA conferences in June:

“There is an issue around access to credit, which for me is at the heart of our interest in high-cost credit.  Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income.”

Mr Bailey’s comments are important because they put down a marker and enable us to hold the regulator to account.  And this is precisely what CCTA sought to do at two important events last week, both of which had ‘access’ at their heart.

The first was a meeting of the Parliamentary Group on Alternative Lending in the House of Commons on Tuesday 12 September.  CCTA is a founder member of the Group and was instrumental in its establishment.  Chaired by former BBC personal finance correspondent, Julian Knight MP, the Group provides a forum for the CCTA and the wider credit industry to engage policy makers and share concerns about regulatory and policy issues.

The topic of the meeting was the FCA’s latest response on the High Cost Credit Review, and the long-awaited consultation paper on Affordability and Creditworthiness, both of which were was published on 31 July.

At a combined length of 1,000 pages, these documents have kept the CCTA busy over the summer. There is an awful lot to digest but a clear picture is emerging.

On High Cost Credit, there are very significant challenges for businesses in the home credit, rent-to-own and catalogue lending industries.  The FCA’s proposals presage fundamental changes to these business’ lending models.

The impact is potentially worst for home credit businesses, who face the prospect of limits on refinancing and imposed ‘time gaps’ between loans.  As anyone familiar with the product will know, home credit customers use it as a safe and dependable ‘smoothing mechanism’ to absorb additional costs at four key times of the year — Easter, summer holidays, back-to-school and Christmas.  Customers have been doing this for years; and they won’t necessarily appreciate the FCA telling them when they can and cannot borrow.

The proposals on rent-to-own are perhaps less worrisome — many of the changes the FCA wanted to see have been introduced as a part of the authorisation process, and its prescriptions therefore focus on promoting competition from not-for-profit players.

Catalogue businesses face the prospect of intervention too — the FCA hints at action to limit fees and penalty charges.

The HCC proposals undoubtedly raise the prospect of a squeeze on ‘access’ for customers in these sectors, and the additional regulatory attention will certainly make it harder for businesses to secure funding lines.  But it is the ‘Creditworthiness’ consultation paper that poses the greater risk, in our view.

This consultation paper was the main topic of discussion at the second event of note last week — namely, the latest CCTA podcast on consumer credit, featuring yours truly, Walker Morris partner, Jeanette Burgess, and Secretary to the Parliamentary Group on Alternative lending, Jonathan Horsman.

My podcast guests discussed the undoubtedly tricky balancing act the FCA is attempting between protecting consumers and maintaining access to credit.  This task is trickiest in non-prime markets: the regulator wants the highest protections for the most ‘vulnerable’ but without pushing prices higher; in turn businesses cannot serve this segment viably without covering the higher costs.

Our estimation is the current proposals will condemn the FCA’s balancing act to failure.  i.e. They will restrict access.

The FCA claims the proposals to be prescription-lite, but that’s not our reading.  They may be able to make this claim for prime businesses serving mainstream customers (for whom the need to prove income and expenditure is waived), but not for near- and sub-prime businesses serving ‘vulnerable’ customers.

Put simply, the more vulnerable the customer, the greater the level of prescription, and the more arduous and lengthy the checking and decision making process.

Hence, the FCA’s rules will fall heaviest on the very lenders whose economic models are the most precarious. Put another way, the level of checking required for a £500 loan is much, much higher than that required for a £10,000 loan.

There are two possible responses from lenders: increased prices to absorb the extra costs, or market exit.  In a price capped, tightly restricted regulatory environment, the logic follows that the impact will be market exit.  And market exit means less access and choice for the consumer.

It is worth reading that Andrew Bailey quote again:

“There is an issue around access to credit, which for me is at the heart of our interest in high-cost credit.  Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income.”

This is the measure to which the FCA should be held to account.

More on access in the weeks to come.