Inquiry into Alternative Lending
The All Party Parliamentary Group Report of the Inquiry into Alternative Lending and Borrowing Post Covid
The Inquiry ran from 20 May to 10 June 2020.
It covered a wide range of credit-related issues from the availability of debt management services, to consumers’ needs for ongoing forbearance and new borrowing, the impacts of the Financial Ombudsman Service (FOS), the future viability of credit files and the likely increase in illegal lending as a result of the pandemic.
The Inquiry looked at the following issues -
The scale and nature of anticipated debt problems post-Covid and their impacts on money advice provision;
Consumers’ short and longer-term forbearance and borrowing needs as they deal with the impacts of the crisis on their household finances;
What the supply picture needs to look like in terms of new and ongoing lending
What regulatory adjustments might be needed to ensure continuing consumer access to a fluid and functioning credit market, and adequate forbearance from lenders, in the recovery period.
Money Advice
On money advice, the extra £38m announced by the Government in June was welcomed and timely given the expected rise in debt cases in the aftermath of Covid.
This will help to alleviate capacity problems, but agencies will also need to find ways to help new debtor groups they have not encountered before at scale, such as the self-employed and the formerly ‘better-off’.
Forbearance
On forbearance, the Financial Conduct Authority (FCA) responded quickly to alleviate borrowing related problems by instructing lenders to offer ‘payment deferrals’.
This too was necessary, but lenders will need to be able to use a wider toolbox of forbearance measures to bring borrowers’ accounts back under control,
Access to Credit
Consumers will need safe, available sources of liquidity to help them to deal with disruption to their budgets and play an active role in the recovery.
Alternative, not-for-profit lenders will only be able to meet a fraction of the demand; ministers and regulators need to ensure a viable mix of alternative and commercial providers to ensure the availability of credit at sufficient scale.
Bank of England funding for Non-Bank Lenders
Despite positive sounds from the Treasury at the time of the evidence sessions, ministers have since announced there will be no Bank of England funding for Non-Bank Lenders (NBL’s).
This is an oversight: NBLs are the ‘small boats’ that provide working capital to millions of small and micro-sized businesses, plus individual borrowers who banks won’t touch.
Their inability to lend due to lack of funding would significantly hamper the recovery.
Public Sector Debt Management
Concerns about public sector debt management techniques have been widely aired.
Therefore, the Cabinet Office’s consultation on ‘Fairness in government debt management’ announced in June 2020 was welcomed.
A Government Debt Management Bill, plus a pre-action protocol to prevent any immediate bailiff action against debtors, are ideas well worthy of close ministerial consideration.
Consumer’s Credit Files
On consumers’ credit files, again, the FCA moved quickly to prevent the reporting of ‘payment holidays’ back to Credit Reference Agencies.
This might help in the short term, but it will leave ‘black holes’ in consumers’ files for the long run.
The FCA and the CRAs need to quickly find a way to restore the integrity of credit files, otherwise both lenders and borrowers will suffer.
Financial Ombudsman Service
There was significant unease about the Financial Ombudsman Service’s policies and procedures towards lenders, and more widely about possible statutory over-reach and a lack of accountability.
Whilst the issues are complex they are also fundamental to the future viability of sections of the credit industry.
Therefore, ministers should consider a National Audit Office review of FOS’s structures and processes, the first in a decade.
The risk of increased illegal lending
The Panel heard a consistent message about the risk of increased illegal lending as a result of Covid.
Job losses and tighter underwriting policies create perfect conditions; lending business closures and new forms of online illegal lending greatly exacerbate the threat.
The Government should address the risk as a priority through a combination of preventive and punitive measures, as detailed in the findings section.
3 of the 8 Conclusions and Recommendations
Access to Credit
Consumers will need a full array of financial tools to help them deal with the disruption caused by Covid, so that they can rebalance their budgets and also play an active role in getting the economy back on its feet.
Access to new credit needs to be part of the solution, both as a mechanism for bridging income-expenditure gaps, and as a stimulus for renewed spending on the high-street.
Alternative providers such as credit unions will need continuing government support so they can play a part. But given the large disparities in size, the commercial lending sector will need to do the heavy lifting.
This calls for a shift in mindset amongst regulators and officials, and a deeper appreciation of the role specialist lenders play, particularly in lower income and ‘poor credit file’ households where banks choose not to tread.
The FCA should continue to address residual concerns with commercial lending models. But ministers and regulators also need to be clear-eyed about the potential for ‘alternative’ suppliers of credit to supplant commercial providers: it is not going to happen any time soon.
Consumers will need access to credit during the recovery; we will need regulated, viable lenders to provide it at the requisite scale.
Funding for Non-Bank Lenders (NBL’s)
The wider alternative lending sector has pushed hard for access to Term Funding or equivalent on the same generous terms as the banks.
The mood music from Treasury ministers at the time of the hearings was encouraging, but ministers have since declined to extend access to Bank of England funding for NBLs.
The Finance & Leasing Association had produced its own blueprint for bypassing the blockages in the banks and getting funds into the hands of lending businesses that can provide liquidity to SMEs and consumers, and this looked promising.
There was universal consensus from panellists that it needed to happen.
As one witness put it, the philosophical case is established, the Treasury just needed to find the technical means.
Non-bank lenders to SMEs and consumers are dutifully offering extended payment holidays to borrowers. But lenders that are reliant on the wholesale money markets for funding cannot do this endlessly.
The lack of funding support could threaten the viability of specialist NBLs, and the Government should keep the situation under close review.
Illegal Lending
The Panel heard a consistent message about the risks of increased illegal lending as a result of Covid.
As the English Illegal Money Lending Team pointed out, economic conditions are ripe, with job losses, increased loan delinquency and tighter underwriting policies.
Policis’s research findings from the US and Japan also presage the arrival in the UK of worrying ‘new variants’ of digital illegal lending, in the form of fake lending sites and scam broking and identity theft operations — all online, all difficult to distinguish from legitimate, legal sites.
On top of this, the recent closure of many regulated lenders threatens a perfect storm of increasing demand for credit from consumers, shrinking provision from regulated lenders, and a criminal sanctions regime that fails to disincentivise illegal operators.
To head off the worst of this, we suggest three actions.
More in-depth research to establish the scale and nature of illegal operations in the UK.
A review of both the thresholds for regulated lending in the Consumer Credit Act and prison tariffs for illegal lending.
Consideration of the impacts of the affordability regime and FOS on the viability of regulated suppliers. While Covid inevitably means there is limited bandwidth in Government for wider policy initiatives, we would argue that these are priority requirements in view of the potential for acute consumer harm and the threat of organised crime taking route.