Friends and Family can’t pick up the slack

Commentary | 20/05/21

It has been a busy time period for alternative lending sector. In recent years it has faced many challenges including a constantly changing approach from the Financial Ombudsman Service and the impact of the ‘claims culture’ driven by Claims Management Companies.

Many firms have already left the market. Since 2016 the number of firms offering HCSTC has more than halved. To add to this there has been much media speculation about the future of various companies in wider sector in recent weeks. We await news about the future of Amigo loans, but it has been confirmed that Provident is to leave the sector, shutting down its home credit business that has been operating for over 130 years.

For some this will be seen as a victory, another firm gone. But we know that when supply is affected, the demand remains. Provident served over 300,000 customers at the end of 2020 which now must look elsewhere. These are individuals and communities that have been left behind by mainstream lenders.

Whenever market exit is mentioned, there is often the misconception from the FCA that borrowing from friends and family can move in to fill the space left behind.

In reality, things are not so simple. There must be money available to lend out, which is not the case for many. We know that a large number of households in the UK have little or no savings to help deal with financial shocks themselves, never mind supporting friends and family. The Covid-19 pandemic will also have had a negative impact on the financial situation of many households.

Borrowing from friends and family can also quickly turn toxic, damaging relationships and causing them to breakdown. There is a fine line between ‘friend’ and illegal lender.

The Woolard Review noted the recent change and innovation within illegal lending. It is becoming more sophisticated. The Illegal Money Lending Team in England has also expressed their concerns over the growing use of social media platforms to manipulate and blackmail victims. They are also concerned about the impact the Covid-19 pandemic will have on finances at a time when legal credit continues to dry up.

Stakeholders need to be alert to consequences of the decreased availability of credit. To do this they need to understand the alternative lending consumer and why they use these forms of credit.

Regulators in particular need to understand how the market operates. The FCA should take a holistic approach to regulation, looking at the entire lifecycle of a credit product and the associated customer outcomes to avoid negative consequences.