FCA insight finds consumer credit growth is not driven by ‘subprime’ borrowers

Until recently, many regulators have relied on aggregated data from larger lenders to monitor which lenders and products are driving credit growth. However, this data doesn’t include use of short-term high cost credit and non-mainstream products that many people with low incomes rely on. It also doesn’t show overall debts across different lenders and products.

It is often questioned how far credit growth is driven by ‘non-mainstream’ borrowers and assumptions are often made – and then made real – in the media.

We were pleased to see this week insight from the FCA into ‘who’s driving consumer credit growth’. The FCA requested and analysed CRA data on one in ten UK adults to “build a better, fuller picture of borrowing” and to identify any potential risks stemming from the UK’s growth in credit usage.

Three important insights emerged from their analysis:

1. Credit growth has not been driven by subprime borrowers
2. People without mortgages have mainly driven credit growth
3. Consumers remain indebted for longer than product-level data implies

Credit growth is not being disproportionately driven by subprime borrowers

The FCA found that “only a small proportion of all consumer credit debt (is) held by subprime customers.” Rather, it is individuals with the highest credit scores who are taking advantage of motor finance deals and 0% interest free credit card opportunities that are driving the credit growth.

This flies in the face of the assertions made by many economists that another ‘subprime debt bubble’ is growing. On the contrary, the FCA clearly states that the high cost credit market is “not rapidly expanding” but rather contracting following recent changes to the market.

People without mortgages are driving credit growth

People without mortgages are contributing to current consumer credit growth, following a tightening of mortgage lending requirements. Perhaps an unintended consequence of reducing access to home equity release, or a greater need for credit amongst renters who are experiencing increased costs? This is an area that the FCA will need to monitor as rental payments rise and renters are left with less disposable income.

Consumers remain indebted for longer than product-level data implies

The analysis also finds that consumers are remaining indebted for longer than product level data implies, with consumers opting to clear their debt on one credit product but merely transferring the balance; drawing down on existing credit lines or taking out a new product instead.

Access to responsible credit is as important as ever

It is welcome news that the FCA insight signals healthy growth in consumer credit and that much of this growth is generated by the borrowers that are least likely to suffer financial distress.

The importance of access to credit for everyone, including those that can’t or choose not to access mainstream products, will not wane and continues to be as important as ever. The FCA’s insight shows that well-regulated, responsible products are serving the non-standard market well and that “credit growth not being disproportionately driven by subprime borrowers is reassuring”.

The FCA’s open consultation on ‘Future Approach to Consumers’ sets out the regulator’s views on ensuring markets provide high quality products and services that meet consumers’ needs and are sold in a clear and fair manner. We also await publication of the FCA’s priorities for the next stage of their High Cost Credit Review which is due to be published in the Spring.

Ends

Greg Stevens

Chief Executive

10th January 2018