FCA Alternative to High-cost Credit Report

The FCA published its report on Alternatives to High-cost Credit on 22 July 2019.  The report highlights that many people turn to high cost credit due to them not having access to mainstream credit due to factors such as lower cost credit not being available to them or because they are unaware of the alternative options open to them.

Interestingly the report notes that people displaying characteristics of vulnerability are twice likely to use high-cost credit. Not only this but the report shows that the credit scores of those accessing high-cost credit is likely to worsen upon use and as such confirms that users of high-cost credit are often financially vulnerable.

The report focuses on alternatives to high-cost credit, such as credit unions, community development finance institutions, retail finance (for purchasing essential household goods) and other non-credit solutions (grants, welfare schemes etc).

To try to improve market conditions, the FCA make a number of recommendations:

Facilitating improvements in the market for alternatives to high-cost credit

To help credit unions and CDFIs maximise their potential for growth, they recommend that:

• HM Treasury consider a review of relevant legislation to facilitate growth;
• Credit union representative bodies work closely together to speak in a more unified voice;
• Fair4AllFinance considers using some of the £55 million of dormant assets to help fund CDFI personal lending;
• The Government looks at new options to incentivse investment in personal lending CDFIs;
• CDFIs look at whether working closer with credit unions to receive cross referrals would help users avoid high-cost credit alternatives.

Availability of essential household items

To facilitate the purchase of second household goods, retailers are encouraged to:

• Make unwanted stock available to reuse centres, charities and other distributors of second-hand goods
• Promote to their customers the importance of recycling or reusing unwanted household goods (e.g. through new for old collection schemes)

Awareness of and information about alternatives to high-cost credit

The FCA found that there is a lack of awareness about lower cost credit alternatives and the availability of access to second hand goods and the FCA would like to see improvements in this.

The FCA feels that the starting point would be to encourage front line service providers (registered social landlords, local authorities, charities and consumer bodies) to provide consumers with information they need such as contact details for key organisations. To facilitate this, the FCA intend compiling a list of national contacts.

The FCA highlights that front line service providers should check their permissions to ensure they have broking permissions if they intend to refer customers to individual credit providers.

Further recommendations:

• RSLs, local authorities, relevant charities and consumer bodies consider how they can signpost consumers to where they can find further information (e.g. the MAS website).
• Credit providers consider signposting customers to alternative low-cost credit providers when they have been declined (so long as they have the correct credit broking permissions).
• Housing representative bodies consider how they can promote the exchange of information between RSLs on experiences with helping tenants to access household goods
• The National Housing Federation and the Furniture Re-use Network consider reviewing and updating their 2007 guide to partnership working
• Housing representative bodies consider whether to develop guidelines or recommendations for RSLs to encourage them to provide information to tenants about sources of low-cost household goods.
• The FCA will continue working with alternative credit providers through FCA Innovate and their authorisation process to help bring new entrants to the markets who provide low-cost alternatives.
• The FCA is continuing to work with the Government on a number of initiatives including:
  • A study into the feasibility of a no-interest loans scheme.
  • Creating a £2 million affordable credit challenge fund to promote innovative fintech solutions to the challenges faced by social and community lenders.
  • Piloting a prize-linked savings scheme under which consumers who save with participating credit unions are entered into a draw to win cash prizes.
  • Making it easier for RSLs to direct tenants to alternatives to high-cost credit.