© Reuters. FILE PHOTO: A pedestrian is reflected in a sign for a payday loan shop in London on March 6, 2013. REUTERS / Suzanne Plunkett
By Muvija M
(Reuters) – The number of Britons with poor credit ratings is on the rise in the wake of the COVID-19 pandemic, just as many lenders serving them are closing, driving a gap in the market that some lenders warn it may allow. illegal loans prosper.
The subprime lending industry has been under regulatory scrutiny for more than a decade due to complaints that it was charging interest rates in excess of 1,000% to people struggling to survive.
But a sudden spike in customer complaints about unfair treatment during the pandemic is proving to be the last straw.
Data from Britain’s Financial Ombudsman Service (FOS) showed that claims filed against the mortgage loan industry reached 6,091 in the last quarter of 2020 compared to 445 in the first.
That was up from just 30 in the first quarter of fiscal 2014/15, when the sector came under the supervision of the Financial Conduct Authority (FCA).
Since then, lenders have paid clients 900 million pounds ($ 1.27 billion) in compensation for unfair practices, according to the regulator.
Regulatory crackdown and waves of customer complaints have prompted Amigo, one of the nation’s largest sub-prime lenders, to say that unless it can agree to a reduction in its compensation bill, it will close.
Competitor Provident Financial said last month that it was closing its once-booming home collection business after a mountain of compensation lawsuits, while its smaller rival, Non-Standard Finance, announced a capital increase that , he said, depended on discussions with the FCA about compensation payments.
Executives in the subprime industry say many of the complaints they face come from claims companies (CMCs) seeking new sources of revenue after years of targeting Britain’s payment protection insurance scandal. . The association founded by five of the UK’s leading CMCs did not respond to a request for comment.
“The mortgage market is shrinking rapidly,” Goodbody analyst John Cronin said. “Customer complaints are driving a contracting industry, and high-cost credit is now a very difficult space to play in.”
NO PLACE TO GO
Debt charities say tough regulation was long needed to ensure clients are treated fairly, but now that companies are struggling to survive, the industry is warning vulnerable borrowers may have nowhere to go.
About 138 mortgage lenders exited the sector in 2020, according to subprime lender Morses Club.
Following news of the closure of Provident Financial’s home loan business, England’s Illegal Money Lending Team (IMLT) warned consumers to be wary of “opportunistic illegal lenders who may try to fill the void.”
“I don’t think competitors are involved in all areas and we may see an increase in illegal loans,” Consumer Credit Trade Association (CCTA) Chief Executive Jason Wassell told Reuters.
The most financially vulnerable have only found their position to have become more precarious during the COVID-19 pandemic.
According to ClearScore, the average credit score for high-risk borrowers fell to 197 from 200 between January and October 2020, while the average number of credit products available to them dropped to 1.82 from 1.91.
The FCA said it had acted to ensure that expected industry standards are upheld, including the need for companies to only make loans to customers who can pay.
He said his research suggests that only “a very small proportion” of those who were unable to obtain credit have used or considered using illegal money lenders.
ExcludedUK, a nonprofit group created in response to the pandemic to represent people who did not qualify for government support, said most of its 500,000 members felt that subprime loans were their only way to survive.
Its director, Jennifer Griffiths, says better government support is needed, such as low-interest bridge loan schemes with repayments that only start when the person has a basic standard of living.
Debt charity StepChange said credit unions or community finance providers could provide alternative financing, though it acknowledged that many are still unable to access those loans.
Credit unions generally require a member to accumulate savings before they can obtain a loan, which may be impossible for borrowers living from paycheck to paycheck.
“This is why we have long argued for schemes like an interest-free loan scheme, a pilot program of which is being explored with financial backing from the government,” said Sue Anderson of StepChange.
Meanwhile, analysts say that buy-now-pay-later (BNPL) firms such as Klarna and Clearpay, which offer interest-free payment options in installments, could fill part of the gap left by downsizing mortgage credit providers.
But their use is limited to registered merchants, and they charge late fees and sometimes interest if payments aren’t made. One analyst said that many consumers are unlikely to have the required credit rating for BNPL.
Numis analyst James Hilton said the future of the mortgage market as a whole was highly in doubt after the Provident news.
“You need to question the viability of an industry when a major player that has been around for 141 years says they can no longer make it work.”
(Chart: UK sub-prime lenders vs. broader market: https://fingfx.thomsonreuters.com/gfx/buzz/ygdpzxjqbpw/Pasted%20image%201623326490941.png)
($ 1 = 0.7087 pounds)