The Financial Inclusion Centre

Today (14th July 2016), The Financial Inclusion Centre publishes a pamphlet calling for the creation of a Renters and Leaseholders Protection Agency (RLPA) to protect renters and leaseholders from unfair, abusive practices and to help raise the quality of homes in the rented sector in the UK.

There is a compelling social justice and consumer protection argument for a new RLPA. The authorities recognise that, given the importance of financial services, the complexity of the products, and the lack of consumer sovereignty, a person transacting with the financial services industry deserves the protection of a well-resourced, effective financial regulatory and redress system. Yet, if the same person pays money to rent a property, s/ he is not afforded the same degree of consumer protection. Having a decent home is as important as financial services and detriment can have a huge impact on those affected. Consumer sovereignty is weak in this market.

Renters spend around £63bn a year on rent. It takes up a huge share of their incomes. There has been a major growth in the private rented sector. Overall, there is now a greater proportion of households renting (private and social) than owning a home with  a mortgage. There is a worrying level of detriment in the rented sector. The regulatory anomaly between the two sectors is unfair and surely unsustainable.  

But, the unfairness and inconsistency is worse if we consider the profile of renters. Consumers that use regulated financial products and services tend to be better off than average. Whereas renters tend to be on lower incomes, so the detriment caused can have a disproportionate effect. Similarly, renters tend to be younger and may not have had the opportunity to build up high levels of financial capability leaving them more vulnerable to unfair practices than experienced older consumers.  Therefore, if we apply the principles of consumer theory, consumer-renters should be a priority for consumer protection.

The current system for protecting renters is complex, fragmented and poorly resourced. With FIC proposals, renters would be given a new charter of consumer rights.  The new RLPA would have powers to set fit-and-proper tests and authorise landlords and agents, supervise and enforce renters’ rights, impose fines and sanctions on landlords and agents, recommend the setting of local rent caps, and direct local authorities to improve local markets.

The new pamphlet can be found here: FICrentersprotectionagencypamphletfinalcopy

Today, The Financial Inclusion Centre and partners published a new report, Britain’s debt, how much is too much?, commissioned by the ACCA.

The report examines household financial resilience, its links with household income, credit use and overindebtedness with a focus on three at risk groups – the self-employed, households on variable incomes, and students.

It also looks in more detail at the non-standard credit market assessing the impact of the much needed clampdown on payday lending and the higher risk end of the credit card market where serious problems are evident. Of active credit cards, the FCA estimates that 5.1 million accounts (nearly 9% of total) will take more than 10 years to pay off their balance (on current repayment patterns and assuming no further borrowing).  Nearly one in five credit cardholders are financially vulnerable in some way – either already struggling or at risk of problem debt. Higher risk borrowers have very limited choice and are paying much higher costs for their credit.

As well as identifying problems, the report makes a series of recommendations to support households who are overindebted and, crucially, to help households build financial resilience and long term financial security.

We set out a road map to long term financial security with measures designed to: help households deal with debts; improve access to fair and affordable credit; encourage more positive financial behaviours; and support the build up of savings. Supporting savings is critical as the UK household savings ratio has fallen dramatically over the past five years and is projected to remain low. Yet we know that when households have a savings cushion this can help them avoid getting into problem debt.

We argue for a combination of:

• more robust, targeted regulation to deal with consumer detriment in the non-standard credit market;
• greater use of ‘nudge’ techniques and fintech to encourage positive behaviours such as greater use of alerts to warn households of credit limits being breached, persuading people who have completed debt management plans to start saving, and extending auto-enrolment to include a savings element; and
• financial innovation in the form of social lending bonds and ethical lending markets to enhance the capacity of the non-profit alternative lending sector to replace payday lenders and rent-to-own providers.

We are keen to promote social lending bonds as a way of encouraging much needed long term, patient capital into the alternative lending sector.

The full report can be found here: britains-debt final report

Today, The Financial Inclusion Centre publishes a new report into the Rent to Own (RTO) sector. Over 400,000 households, almost exclusively on low incomes and reliant to some degree on benefits, take out expensive credit to spread the cost of purchasing consumer goods from furniture and large household items such as cookers and washing machines to electrical items such as TVs and computers.

The report describes the detriment faced by vulnerable consumers using the sector and makes a number of recommendations to encourage the development of a socially responsible alternative RTO sector.

The sector has proven to be recession proof, more than doubling in size over the last five years since the onset of the economic crisis and is dominated by just three providers – BrightHouse, by far the most well recognised and largest firm, PerfectHome, and non-store based provider Buy As You View. Over the last five years, annual gross profit within the sector has grown by 139% from £127 million to £303 million.

RTO providers can be found on the high streets of our more deprived communities. There are now 373 RTO stores, spread across the country – a figure that has grown by 140% from 155 stores in 2008. According to BrightHouse there is a potential market for 650 stores across the UK.

Consumer detriment

The typical RTO customer profile is a young female lone parent, living in rented accommodation and almost exclusively from low income households that are wholly or partly reliant on welfare benefits. There are a range of detrimental practices found within the RTO industry, including:

• RTO agreements are expensive and price transparency is poor – with interest rates reaching 99.9% APR and charges for additional cover, the cost of goods can almost triple.
• Customer experience high levels of financial difficulties – with roughly half having some degree of late payment and failing repay.
• High numbers of customers have their goods taken back – with over 10% of customers having their goods repossessed.
• Poor value and often unnecessary bolt-on service cover, warranties and insurances – with at least 85% of BrightHouse customers estimated to purchase such services.
• The market structures make customers exposed to over-charging and poor practices – with few choices consumers are therefore more vulnerable to over-charging and unfair activities.
• RTO is inappropriate for a proportion of customers – with firms found not to be considering user’s financial circumstances.

Such issues have placed the industry firmly under the spotlight of policy makers and the regulator, with the Financial Conduct Authority (FCA) set to outline new rules in 2016 giving greater protection for vulnerable consumers as well as creating a more level playing field for better value alternatives.

Responsible alternatives

In response, over the last few years a number of social businesses have responded by developing alternatives to compete with the RTO retailers. These combine some of the more ‘positive’ characteristics of the RTO model that appeal to consumers but delivered in a way that designs out some of the more harmful aspects. By doing so, these alternatives are able to generate significant cost savings for low income customers and thus help avoid paying a poverty premium for their essential goods.

The report contains a number of case studies of RTO alternatives run locally and nationally that offer differing delivery models.

Delivery model options:

The five case studies demonstrate just how different the delivery models can be and highlight the particular challenges which need to be addressed if the alternative sector is grow. The key issues are:

Credit provision – who will deliver the lending facility.

In-house loan delivery directly by the social RTO firm – This requires the creation of new lending vehicles with effort and time to obtain regulatory permissions and raising of capital finances.

Outsource credit delivery to an existing social lender – Partnering with an existing affordable credit provider (typically a credit union or CDFI) can benefit from its ability to raise capital, its existing lending track record/infrastructure and user’s access to other financial services. Yet, it can be more restrictive, being tied to certain lending criteria, approaches or risk appetites.

No matter who provides the borrowing, three important lessons have emerged:

• The consumer’s selection of the goods and their credit application/decision needs to be seamless, even if it is actually operated by two different entities.
• The loan process needs to be straightforward and decisioning making needs to be made almost immediately through the social lender’s own systems.
• Some degree of automation and access to credit scoring/reference data is important and therefore the selected credit provider will require appropriately developed IT technology.

Lending capital – who provides the capital for lending and who shoulders the lending risk.

If the credit provision is undertaken in-house or via a franchise model, significant capital will need to be secured. Equally, an outsourced credit partner could still require external capital to be raised depending on their available funds and willingness to lend for this type of purpose/product.

Moreover, lending risk could be shared by establishing either ‘ring-fenced’ lending capital or an underwriting agreement to cover potential defaults. This gives greater flexibility to lend to ‘those in the grey area’ who might ordinarily be too risky for the social lender’s traditional credit assessment.

Delivery outlet – how will household goods and lending be promoted and accessed by customers.

Retail shop – for some, creating a high street retail outlet that mimics the look of BrightHouse is seen as essential. The main consideration is the huge start-up and ongoing operational costs and whether it can be financially viable from the income generated primarily from product mark-up.

Online provision – websites enabling product selection and ordering combined with loan application and assessment should be an essential aspect of any RTO alternative. Whether this is the sole route to market or one of many channels is the key consideration with the choice set in the context of the target customer and their ability to access a purely online facility.

Catalogue delivery – a complementary brochure is also very important, particularly with a restricted access model focused on social housing residents. Consideration also needs to be given to a telephone-based facility that enables customers to both apply for credit and place orders.

Product operations – who manages the stock, order delivery and customer relationship.

Developing in-house product operations – this option is particularly challenging as it needs extensive scale and volumes to make it financially viable and significant upfront / ongoing costs.

Outsourcing by partnering with an existing RTO provider – the far easier option would be to piggy backing on an existing RTO alternative and utilising their supply chains – either by working with a formal franchise (e.g. Smarterbuys or Coop Electical) or a particular scheme (e.g. Fair For You). However, this may limit the scope for product tailoring and reduce income generation.

Creating direct arrangements with individual suppliers – either local/regional businesses (e.g. Furniture 4U) or national firms/manufactures (e.g. Fair For You). This enables the selection of certain product lines based on quality and income generation potential and could also be attractive from a local economic development and employment perspective.

Customer base – should it provide open access to all or be restricted to certain users.

Open access – with the need for scale and volume an open access model would appear to provide the greatest scope for financial sustainability.

Restricted access – this model is often found amongst social housing providers delivering a RTO alternative specifically for their residents and is confined primarily from a wish to focus resources only at their own users. Alternatively, this could still be achieved through an open access model but with the ring-fencing of funds for specific groups of users.

Conclusion

By exploring the current crop of social providers offering RTO alternatives, it is clear that there is no single approach that offers the perfect delivery solution. Instead, there are a number of delivery considerations that can developed to best match the specific local circumstances and aspirations. One common feature of all the featured case studies is the need to involve a range of stakeholders. Partnerships are needed to bring together local authorities, social housing providers and other third-sector organisations looking to address this issue.

Ultimately, it is hoped that the research stimulates debate, providing further focus on the rationale for intervention in this market and providing a starting point for anyone considering the various options for which type of RTO alternative offers the most appropriate solution.

Summary Report can be accessed here – Better and Brighter – Responsible RTO Alternatives (Summary 150316)

Full Report can be accessed here – Better and Brighter – Responsible RTO Alternatives (Full Report 150316)

UK citizens have gained much from a huge range of consumer and social protection measures introduced through, or influenced by, EU legislation and regulations[1]. Consumer protection measures can be found across a wide range of markets including financial services, food, health and medicines, utilities, electronic goods, transport and tourism, and so on. The measures were introduced to make products and markets safer, give us access to a wider choice of better value products and services, and enforceable rights and redress if things go wrong. But, it’s more than that. These measures have given us a better quality of life. However, there is a very real risk that UK citizens could lose valuable protection as a result of the EU referendum – regardless of whether the UK votes to remain or leave.

Of course, we would still have consumer protection if the UK leaves the EU. But, experience tells us that the degree of protection available to UK consumers is higher in key areas because of UK membership. Put bluntly, the EU has had a ‘civilizing’ effect on the UK. Other major EU member states attach more importance to social justice, the rights of citizens and the belief that markets should serve society – in contrast to the dominant ideology in the UK which puts the market first. Therefore, if the UK votes to leave, we think there is a very high risk that consumer rights and power would be weakened.

But, why might consumers lose regardless of which way the vote goes? One of the key planks of the UK Government’s negotiations relates to ‘competitiveness’. That is, the UK Government says it is trying to get the other EU governments and EU institutions to agree to a programme of deregulation to aid competitiveness and the development of the single market.

We note with growing concern the regular scaremongering about regulatory ‘burdens’ and ‘red tape’ stifling innovation and competitiveness. In our experience, this is code for deregulation and reduction of important consumer protection and other social protection measures. This, of course, would benefit big business and the UK financial sector in the short term. But, it is a misguided approach and could increase the risk of consumers being ripped off and being exposed to risky products and services. Ultimately, this would harm consumer confidence and trust in the single market and actually hurt the long term interests of industry. Regulation levels the playing field for consumers, promotes consumer confidence and creates the conditions for true innovation and effective competition.

There are examples of duplication and inconsistency in EU legislation and regulation which could be streamlined. But, claims that regulation stifles innovation and competition is just scaremongering and is just plain wrong. This is all part of a campaign by industry lobbies to reduce corporate costs and liability and transfer risk and responsibility to consumers and wider society.

The media has been distracted by the sensitive issue of welfare benefits (which in all likelihood will have very small monetary impact on UK households) and the political drama of the referendum itself. But the issue that could have a very real effect on our citizens’ rights and quality of lives has not been subject to any meaningful scrutiny. Real progress has been made in many of the major consumer markets as a result of EU legislation and regulations. But there is still much to be done particularly in areas such as financial services. Now is not the time to reverse the progress made. We need to have a proper, transparent debate about this rather than sleepwalking into losing valuable consumer protection and rights.

More detail can be found in the Blog. See: https://inclusioncentre.co.uk/blog/what-has-the-eu-ever-done-for-us-the-eu-referendum-and-uk-consumers

[1] There is also a huge body of employment rights at jeopardy. These are not within our remit but it should be pointed out that if these are weakened, financial and social exclusion could be exacerbated.

HM Treasury and the Financial Conduct Authority (FCA) have recently launched the Financial Advice Market Review (FAMR)[1] to address the so-called ‘financial advice gap’ in the UK – concerns that large numbers of consumers do not have access to good quality financial advice.

Good advice is critical for promoting financial inclusion, financial resilience and security amongst households – particularly lower-medium income households which are the focus of our work at the Financial Inclusion Centre. So, we welcome the FAMR. But, it is important that we understand the real causes of the advice gap. In our new paper, we explain how claims that the advice gap is caused by or has emerged because of over-regulation are wrong – or disingenuous and used to try to reduce much needed consumer protection. Remedies based on false analysis would exacerbate rather than improve the situation.

A more accurate assessment is that robust, better regulation has exposed a long established advice gap. Of course, many lower-medium income consumers were ‘advised’ on and sold insurance, investment and personal pension products in the past. But, as we now know from the litany of misselling scandals, these products were all too often unsuitable and represented poor value for consumers due to high charges and commission payments to advisers/ intermediaries. In effect, consumers were cross-subsidising the sale and distribution of these poor value products.

It would be easy to close the advice gap if we just allowed the industry to go back to advising on and selling poor value, unsuitable products. But, of course, that would be unacceptable.

The real reasons for the advice gap in our view are: growing numbers of consumers simply cannot afford to save and invest, or pay for for-profit advice; and large numbers of consumers are ‘underserved’ by the financial services industry because the industry is still too inefficient to meet their needs. In other words, the advice gap can be explained by the economics of access and distribution, not over-regulation.

Reducing consumer protection to encourage the industry to serve more consumers is not the way forward. Instead the industry would more likely continue to serve medium-higher income consumers but with weaker constraints on its behaviours. The overall effect would be to just transfer the risk of misselling to consumers thereby undermining confidence and trust in financial services. Closing the advice gap means focusing on making the financial services industry more efficient so it can extend its reach to more consumers and providing alternative provision for consumers who are not commercially viable for the for-profit advice sector.

The new paper can be found here: financial inclusion centre FAMR blog final

[1] https://www.fca.org.uk/firms/firm-types/financial-adviser/financial-advice-market-review

We recognise at the Financial Inclusion Centre that London isn’t the only region in the UK facing a housing crisis. But, for a number of reasons, the crisis does seem particularly acute in London and requires special interventions. We take the view that four policy interventions are needed to tackle the housing crisis in London:

• Efficient funding mechanisms to fund the necessary increase in supply of housing in London;
• Targeted rent controls to protect renters, reduce the amount spent by taxpayers on housing benefit, and to address the high rent/ buy-to-let/ high house price spiral (this could also be addressed through prudential regulation of buy-to-let mortgages);
• A decent consumer protection regime for renters with similar rights and protection available to financial consumers; and
• Reforms to property and land taxes, and the planning system.

In this discussion paper, we summarise some of the key problems facing people wanting to get access to a decent home and focus on the need for efficient funding mechanisms to fund new supply of social housing.

Specifically, we are floating the idea of developing a London Social Housing Bond to raise funds from large institutional investors through the bond markets and ordinary Londoners to build new social housing. Papers on the other interventions will follow.

These are very much preliminary ideas. A great deal more work needs to be done to develop the legal structure of the LHA Social Housing Bond, how the bond would be marketed and distributed, pricing and, most importantly, estimating more accurately how much could be raised from institutional investors and ordinary households.  But, we think it is critical to start a debate on how to fund the necessary housing in the most cost effective way.

We are concerned that, for whatever reason, more expensive options such as using pension funds and insurers are being heavily promoted. This will be to the detriment of ordinary households (who could foot the higher costs) and/or renters who could end up paying higher rents than is necessary. It would also simply result in huge fees being generated for City advisers – money which should be going to fund affordable housing.

We would very much welcome collaborating with interested parties on developing the bond and investigating other ways of addressing the housing crisis in London.

The discussion paper can be found here:

Financial Inclusion Centre-London Social Housing Bond

We have spent the first weeks of the New Year undertaking a stocktake of the critical policy issues in financial services to help us plan our work and target our campaigning activities.

Below we summarise what we think are the major issues facing consumer groups, policymakers, regulators and, of course, households. There is a dedicated page with links to ‘mini-essays’ explaining why we think these are major concerns – please see the main page Financial services priorities – 2015 and beyond for more detailed explanations.

We would welcome any feedback and are keen to hear from organisations who are interested in exploring ways of working together to tackle these major problems. We are also keen to hear from potential sponsors who might be interested in funding further work on these issues.

It is only fair to acknowledge that progress has been made in ‘retail’ financial services – particularly in terms of cultural and behavioural change in some areas and amongst certain individual financial institutions. But, of course, there is much still to be done and new risks continually emerge. Progress has been very slow on some issues so a renewed effort is needed in 2015. There are a number of issues where the problems are so daunting that these cannot be fixed in one year – but work needs to begin to prevent any further deterioration in consumer detriment. There are also a number of issues on which we need to maintain constant vigilance and be alert to potential crises or risks and events that threaten to reverse progress already made.

The major categories are: consumer issues; major public policy issues; wholesale and institutional market issues; external threats to financial inclusion; and consumer policy theory.

Consumer issues

There is a wide range of specific consumer issues which we could choose from given the sheer size of our financial services industry and the number of customers (existing and potential). But the issues we think merit the most attention in the near-medium term are as follows:

• Protecting consumers from the fall-out from the pensions free-for-all
• Access to fair and affordable credit
• Building financial resilience and long term financial security
• Access to banking
• Cybercrime and financial fraud
• Socially useful financial innovation – research and development

For more detail on these issues please see: Consumer issues

Major public policy issues

In addition to the specific consumer issues highlighted above, we have identified a number of major public policy issues which require a much greater degree of analysis and coordinated interventions from the state, regulators, civil society, and the financial services industry. These are:

• Access to affordable, good quality housing
• Income and pension security in an age of economic uncertainty
• Funding long term care
• Income in retirement – asset decumulation

For more detail on these issues please see:major public policy issues

Institutional financial market issues

Most of our work relates to retail financial services and financial exclusion. But our own research suggests that the cost to society of market failure in the hugely important wholesale and institutional financial markets that make up the wider financial system is much greater than the cost of failure in retail financial services. Moreover, this market failure is transmitted through the supply chain to affect households and the real economy. Reforming wholesale and institutional financial markets so they work better for society should be a priority. However, civil society groups have largely been absent from the big debates on the role and efficiency of these markets. So we have included three issues which we think civil society organisations could influence in the near terms.  The three core issues are:

• Value destruction in the asset management/ pension fund industry
• Inefficient financial intermediation/ resource allocation and the real economy
• Financial networks and system resilience

For more detail on these issues please see: institutional financial market issues

In terms of our wider priorities, we will return to the wholesale and institutional markets at a later date.

External threats to financial inclusion

Rather than levels of financial inclusion and provision improving in the UK, we have very real fears that a confluence of major socio-economic, demographic, commercial and financial market and technological forces and trends will exacerbate problems and make it more difficult for vulnerable households to meet their core financial needs. Before we develop appropriate responses, we need to understand these forces and trends and what’s at stake. The key issues are:

• The role of ‘Big data’ and potential abuse of financial information
• The impact of the new economic and financial reality on financial services business models
• Legacy business models and transition risks

For more detail on these issues please see: external threats to financial inclusion

Rethinking consumer policy theory

In addition to dealing with specific policy issues such as financial exclusion, housing and long term care we think there is a real need to change the way we understand market failure and develop financial services policy – this may not seem an obvious problem but unless we change the way we develop theories to explain why markets fail and make policy we are condemned to repeat the mistakes of the past. To help us do this, we think there are three key issues to be confronted:

• Is rolling back the state a false economy – accounting for private sector replacement of public services
• The need for a new consensus between the state, civil society and financial sector to tackle chronic financial exclusion and underprovision
• Rethinking competition policy and financial innovation

For more detail on these issues please see: consumer policy theory

The investment returns achieved by pension funds are critical. Underperformance affects the retirement incomes of savers, affects the levels of contributions required by employers, employees, the state and other savers, and has other wider externality costs for the real economy. Achieving decent investment returns is particularly important for a nation such as the UK given the importance of private pension schemes in overall pension provision. Therefore, FIC wanted to analyse how well UK pension funds perform compared with its international rivals. To do this, we analysed the data available in the OECD’s Pension Fund in Focus, No 10, 2013 study (http://www.oecd.org/finance/PensionMarketsInFocus2013.pdf). This report uses a standardised methodology for calculating returns across the different OECD member states included in the study.

Main conclusions

Based on analysis of the OECD data we estimate that UK pension funds have produced an annualised net real return of –0.7% per annum over the 10 year period 2002-12[1] (see Table 1, below). That is, the returns have not even kept pace with inflation.

Looking at the OECD country pension funds for which we have full 10 years data, we estimate the median return was +2.5% per annum (an average of +2.3% per annum). This means that compared with the OECD median country performance, the UK underperformed by over 3% per annum. The UK ranked 21^st out of the 22 countries for which we had full 10 years data. Country by country data can be found in Annex I of the briefing paper.

Analysing individual years, we find that UK pension funds underperformed in nine of the 10 years covered. UK pension funds significantly outperformed in 2008. However, even taken this into account, over the 5 years (2008-12), UK pension funds produced an annualised real return of -1.5% per annum compared to the median fund in the sample of -0.2% per annum[2]. Over the five years, the UK ranked 23^rd of the 29 countries covered.

It is difficult to quantify with certainty the welfare loss resulting from this underperformance against benchmarks over 10 years[3]. But, depending on the assumptions used, we estimate that the hypothetical loss to UK pension funds over the 10 years may be in the range of £112bn-£215bn (see briefing for methodology).

The Briefing Paper can be found here: OECD Pension fund performance Financial Inclusion Centre briefing

[1] 2012 is the latest available data

[2] OECD Pension Funds in Focus, No 10, 2013, Table 1. Pension fund nominal and real 5-year (geometric) average annual returns in selected OECD countries over 2008-2012

[3] For example, it may be unfair to UK schemes to directly compare their returns against other OECD countries in the study as they may have different regulatory systems, different objectives etc. This is why we have tried to estimate hypothetical welfare loss using two benchmarks i. the OECD peer group and ii. a modest benchmark return of inflation plus 1% per annum.

Sponsored by the ACCA, the objectives of the report were to: develop a detailed understanding of the business models underpinning UK payday lending; inform the debate about the level and structure of the new charge cap; and examine which other regulatory interventions may be necessary to create a small-sum lending market which allows lenders to innovate and also delivers good outcomes for borrowers.

MAIN CONCLUSIONS

Payday lending is currently causing enormous consumer detriment and harm, often to people who are among the most beleaguered and vulnerable in our society. In 2012 borrowers spent over £900m on payday loans, with £450m spent on loans which were subsequently ‘rolled over’.

The evidence presented in this report suggests that existing online payday lending business models are reliant on repeat borrowing for their profitability. Consumer detriment, in the forms of default, repeat borrowing and the taking of multiple loans from different lenders, appears to play a highly profitable role in existing business models.

It seems that many payday loans serve only to increase the likelihood of future indebtedness. Many payday borrowers would have been better off without these loans.

Allowing capital to flow into the development of products which cause consumer detriment also carries a high opportunity cost. True innovation is stifled and products capable of answering consumers’ needs cannot be developed. This issue is of increasing importance and relevance to all of us; unless an economic miracle occurs, a growing proportion of our population will need to seek recourse to the high-cost credit sector.

Appropriate regulation has the potential to fix the payday lending market, which is currently failing due to asymmetric information, detrimental practices and behaviours, and poor product design. The new cap on the total cost of credit, in particular, could transform this industry. Not only will this protect vulnerable consumers, the constraints it will place on the business models of payday lenders should clear space to allow community lenders to grow and offer fair, affordable loans to more households.

The FCA now has a unique opportunity to enable the high-cost credit sector to evolve into a sector which is genuinely ‘fit for purpose’.

The full report can be found here: Payday lending full report

Our long-awaited evaluation of London Mutual Credit Union’s payday loan scheme has been published today. The report demonstrates that not only does affordable short term borrowing through a credit union have the potential to be an effective way of diverting borrowers away from high cost lenders and give borrowers welcome flexibility about how to repay but also shows that even with the current interest rate restraints, such a product can be financially viable and sustainable in the long term.

Our research measured the success of the pilot project, examining actual performance over its 12 month lifetime, profiling of the new and existing borrowers together with their attitudes and behaviours towards payday loans and finally assesses subsequent patterns of financial service usage amongst new members to help determine the actual cost implications of delivering such a payday loan product. We hope that it provides the credit union sector with valuable insight and evidence that will encourage more affordable short-term lending products to be developed and launched.

Key headlines:

• A total of 2,923 payday loans with a value of £687,757 were distributed over the course of the year-long pilot to 1,219 different borrowers.
• Applicants liked the option of repaying payday loans over a longer repayment term. Just 29% of loan applicants wanted to borrow over the traditional one month term, with the majority (59%) opting to repay over three months.
• Just over a quarter of all those borrowing during the pilot were new members, specifically attracted into the credit union by the payday loan product. A total of 331 new members joined in order to take out a payday loan – on average they borrowed fewer times (1.8 loans compared to 2.6) but loaned higher amounts (£249 compared to £226) compared to 888 existing members.
• Delinquency levels appear to be relatively low with 6.3% of all LMCU payday loans being at least one month in arrears compared to 28% of all payday loans across the industry being rolled over, as identified by the Office of Fair Trading (OFT). Arrear levels amongst new members (12% of loans) are over twice the level of existing members (4.8%).
• By borrowing through LMCU instead of high cost payday lenders, the 1,219 who borrowed during the pilot have collectively saved at minimum of £144,966 in interest charges alone, equivalent to almost £119 per borrower.
• If the 7.4million and 8.2million payday loans taken out in 2011/12 from high cost lenders had been through a credit union alternative, we estimate that between £676 million and £749 million would have been collectively saved.
• Before accessing their first LMCU loan, 74% of surveyed borrowers had taken an average of 3.2 over the 12 months before their first payday loan from LMCU. Worryingly, 17% of these had taken six or more loans.
• Payday lending through a credit union is an effective way of diverting borrowers away from high cost lenders – over two-thirds of surveyed users would be unlikely to borrow from other payday companies again.
• Crucially, new members do go on to utilise and benefit from accessing other financial services offered by the credit union:
  • LMCU membership actually encourages recent joiners to build financial resilience with almost £18,000 accumulated by the 331 new members during the pilot – a £53 average saving level per member.
  • Almost a quarter of all new members opened a current account with LMCU
  • New members were initially attracted by access to short-term borrowing but over 40% of all new members who have been with LMCU for at least six months then went on to take out a longer term loan, which increases to 52% with at least nine months of membership.
• The ‘loss leader’ model adopted during the payday pilot is financially viable in the long-term taking into account the additional income from subsequent longer term borrowing by new members. Projecting the additional income generation levels amongst those new members who have been with LMCU for at least nine months across all new members, the payday loan pilot would actually realise an overall profit of at least £8,950 or £3.06 for every loan given, making the model financially sustainable.

The full report can be found here and the summary version here.