It was said that the Budget contained an ‘assault’ on the lending industry, but the truth is that this assault has been going on for years, cheered on by debt campaigners and claims companies.
As yet more lenders go out of business, it is now time to wake up to harm this is causing consumers.
All credit executives know their ‘three Cs’: character, capital and capacity. These are the key factors a lender takes into consideration when deciding whether to accept a borrower’s request for credit.
But for many in the industry the ‘three Cs’ have taken on a wholly more sinister meaning, because they also neatly denote the three perils that pose an existential threat to the viability of their businesses.
These alternative ‘three Cs’ are caps, claims and competition; and all three are being utilised by the Government and its agencies to ‘clamp down on high cost credit’ and ‘protect consumers’.
The alternate three Cs
But some ‘Cs’ are more worrisome than others. To take each in turn.
Caps, or rate caps, are the lender’s traditional foe: the ultimate regulatory sanction that can be imposed on the industry when the regulator has exhausted all other options. There is one in place at the moment, covering payday, and one in production, covering rent-to-own.
Debt campaigners want to see more. They are arguing for a blanket, industry-wide cap instead of sector-specific ones.
Caps undoubtedly have a big impact on the way companies operate, but they can be accommodated. Lenders can relatively easily reconfigure their businesses to bring down their rates and continue lending. They might not be able to serve the exact same customer base, but they will stay in business.
Lending rate caps: cheaper lending not guaranteed
The main outcome of a cap, therefore, is not necessarily cheaper lending, it is the removal of access and choice for certain groups of previously-served customers, notably the most risky. These people will either stop looking for credit altogether or, more likely, seek out second-best choices.
This particular penny has seemingly started to drop with even the most ardent anti-credit campaigners. Stella Creasy MP led the charge for the payday cap and regularly insists it has been a great success.
Lenders have shape-shifted
But in the same breath, she also acknowledges its great failure: lenders have ‘shape-shifted’ in order to comply with the new regulations and keep meeting consumer demand (which isn’t affected by a cap).
Most economists could have pointed this out. And they would also warn against the same ‘substitution’ effect if a ‘blanket’ cap were to be imposed.
The more threatening ‘c’ is claims. The compensation claim phenomenon is a genuine Black Swan event that has arisen out of nowhere to pose a greater threat to the credit industry than rate caps ever did.
The source of the threat is commercial Claims Management Companies (CMCs) which, since the summer, have started targeting lenders now that the end of the PPI bonanza is in sight. Wonga was the first, well-publicised victim.
Claims Management carpet bombing
The CMCs are ‘carpet bombing’ lending businesses with hundreds, in some instance thousands, of claims at a time. The actual consumers often have no idea that claims are being made in their name. There is ample evidence of widespread abuse of GDPR and data protection rules.
If the lenders refuse to settle, the CMCs simply refer the claims en masse to FOS which charges a £550 case fee for every individual claim, regardless of its validity or data legality.
This is a form of institutionalised blackmail. And unless the FCA and FOS recognise what’s happening and act to stop it, it will lead to more business closures.
This might be great news for the debt campaigners, but not for the consumer. The regulators are overseeing the destruction of a regulated industry and its replacement with an unregulated one.
The third and most benign ‘c’ is competition. This has the potential to pose a threat but, in contrast to caps and claims, lenders welcome it.
The credit industry has always been a diverse and competitive space. It is well used to new entrants and innovation. Like in any functioning market, businesses react or die. No complaints there.
But Monday’s Budget Statement contained measures that should give lenders something to think about. It proposed a trial of a No Interest Loan Scheme, similar to one that has won plaudits from campaigners in Australia.
As with all not-for-profit or social lending schemes, this new scheme will run headlong into all the same challenges that commercial lenders face every day: customers who only want small loans over short periods (which vastly increases the unit cost compared to larger, longer-term loans), high levels of bad debt and very high loan-servicing costs.
But if the Government is committing to subsidise the cost of the lending, it could be a different story.
So, of the three rogue ‘Cs’, claims is undoubtedly the biggest threat. But there is a fourth ‘C’ which the Government needs to think very closely about, and that’s ‘choice’.
If lenders exit the market, there will be less of it. This will be welcomed by a handful of vociferous campaigners, but not by millions of consumers who rely on it to keep their finances afloat.