The importance of smaller lenders

The news that Santander may leave the UK market has grabbed the headlines. There has been, and we are sure there will continue to be, a lot of discussion about the regulatory burden.

The costs mentioned are significant, often more like telephone numbers. The risk is that we focus on those big numbers and the big brands. However, elsewhere, some lenders face burdens that are certainly smaller numbers but can significantly impact that firm.

Last year, firms moved to implement the Consumer Duty, introducing new systems and structures. Over recent months, we have seen movement on new data systems required by the FCA. There are plans for a new governance body for credit information funded primarily by lenders. All of this adds up and makes it more challenging to operate.

We would suggest that smaller independent lenders frequently provide agility, innovation, and customisation to meet the needs of UK families. We mustn’t lose sight of their health.

Filling the gaps

Filling that gap has always been an idea that is close to the CCTA. We were formed in 1891 by a small group of retailers and lenders that saw the need for new regulated credit products.

Smaller lenders have always looked for the gaps as the banks focus on smoothing their processes. Many large banks focus on high-volume, standardised lending products, prioritising economies of scale. Unfortunately, this approach often leaves certain groups with non-standard credit histories or special borrowing requirements without access to financial support.

Doing so, they help ensure financial inclusion, enabling consumers and small businesses to access credit that might otherwise be unavailable. This is particularly important in the consumer credit sector, where access to affordable lending can make a critical difference in people’s lives.

Driving innovation and competition

Smaller lenders are often at the forefront of innovation in financial services. Unencumbered by the bureaucratic layers that can stifle creativity in larger institutions, they are more nimble in adapting to emerging technologies and market trends.

Many have pioneered advancements in digital lending platforms, open banking, and data-driven credit assessments, setting new standards for efficiency and customer experience.

Moreover, smaller lenders foster competition within the financial services industry. Their presence challenges the dominance of larger players, encouraging a broader range of products and services at more competitive rates.

This dynamic benefits consumers, ensuring they can access choices that better suit their needs.

Supporting local economies

The impact of smaller lenders extends beyond their immediate customers to the communities they serve.

Unlike global banking giants, many smaller lenders have strong ties to their local areas, which enables them to understand and respond to the unique challenges and opportunities within those communities.

Smaller lenders often take the time to build relationships and trust within their communities, creating a ripple effect of economic resilience and opportunity. That includes CDFIs and credit unions, alongside commercial branch-based lenders.

This localised approach is particularly evident in areas where access to finance is limited due to geographic or socioeconomic factors. We have seen the loss of banking facilities as branches close or other lenders have withdrawn from non-standard lending.

Providing credit to local businesses and individuals helps fuel economic growth, job creation, and social mobility.

Navigating regulatory challenges

Despite their many contributions, smaller lenders face various challenges, not least of which is the regulatory burden. Compliance with complex and evolving financial regulations requires significant resources, which can disproportionately impact smaller firms.

While regulation is essential to maintaining the integrity and stability of the financial system, it is crucial to strike a balance that allows smaller lenders to thrive without compromising consumer protection.

And let’s be clear: we are not calling for deregulation.

The ongoing review of the Consumer Credit Act presents an opportunity to ensure that regulatory frameworks reflect the diverse modern lending landscape. It is also an example of the CCTA not calling for less regulation, instead, we are seeking a new direction from the regulators.

While we know that some would seek the removal of all rules, we support reform that maintains direction from the regulator. We welcome the certainty from dialogue and understanding of the regulator’s expectations.

Advocating for fair and pragmatic regulatory approaches is crucial to preserving the viability and competitiveness of smaller lenders.

 A call to recognise the value of smaller lenders

As the financial services sector continues to evolve, the importance of smaller lenders cannot be overstated. They are not merely alternatives to larger institutions but essential partners in delivering a diverse, inclusive, and innovative financial ecosystem.

Policymakers, industry leaders, and consumers alike must recognise and support the contributions of smaller lenders to ensure they remain a vibrant part of the financial landscape.

By championing the role of smaller lenders, we can create a consumer credit market that is more competitive, fair, and responsive to all needs.

Policymakers and industry must collaborate to ensure these lenders have the support they need to drive innovation and inclusivity.

It is time to celebrate their achievements and advocate for their continued success in shaping the future of financial services.