The Responsible Finance sector remains a critical but under-resourced source of responsible credit for hard pressed families
In June, almost exactly 10 years after the start of the banking crisis, the Bank of England ordered banks to hold more capital due to surging consumer debt.
Experts have repeatedly highlighted car financing as one of the fastest growing problems. But more concerning is that debt charities have repeatedly highlighted that around 8.8 million individuals are using credit for essential household bills. Often this credit is in the form of credit card debt or overdrafts.
The 2015 FCA clamp down on high cost, short term credit (HCSTC) has definitely had an impact. StepChange Debt Charity has seen significantly fewer clients coming to them with HCSTC debts. But their report, Payday Loans: The next generation, highlights that pay day lenders are finding new ways to get around the regulations, for example by providing loans over longer periods of time. And those declined for loans by pay day lenders are turning to other sources of expensive credit, such as credit cards or home credit loans. Or more worryingly, missing bill payments or going without family essentials.
In addition doorstep lender Provident Financial unveiled a suite of woes including an FCA investigation into one of their products and a spike in bad debt – leaving more consumers in a vulnerable financial position.
Responsible finance providers, such as Moneyline, play a key role in providing affordable credit to people who cannot access mainstream financial services. They also support people on a journey from financial exclusion and reliance on high cost credit to financial inclusion and resilience.
In 2016 responsible finance providers lent £19.8 million to 36,957 individuals, and £2.8 million to 389 homeowners for home repairs. In 2016 when it was revealed that 4 in 10 people in the UK have savings of less than £500,8 responsible finance providers helped their clients deposit £3 million into personal savings accounts, an average of £158 per client. You can read here about how responsible finance provider, Scotcash, helped one customer get their finances back on track.
Responsible finance providers could help many more people than they do currently. But to do so, they need access to more capital at affordable prices to on-lend and investment in marketing to reach out to new customers.
Responsible finance providers that lend to businesses and social enterprises benefit from tax reliefs such as community investment tax relief (CITR) or social investment tax relief (SITR). These schemes encourage investment in responsible finance providers by giving tax relief to investors. But at the moment there is no tax relief scheme available to responsible finance providers who lend to individuals, despite the impact this has on tackling financial exclusion.
Like other financial institutions responsible finance providers must cover their operating costs (which include the provision of financial capability support), financing costs, and risk costs. Because of the markets they serve, the cost of risk is often higher than for mainstream lenders. Additional services such as money management advice also increase costs. Without any type of tax relief or other incentive investors, raising capital is challenging and so personal lenders must generate the risk/return through their reserves or raising interest rates.
Responsible Finance is calling on the Government to introduce a tax relief for personal lenders, which would attract new investors into the sector while also lowering the financing costs (investors can lower the cost of capital as they generate return through the tax). This would support responsible finance providers to help many more people across the UK.