The changing
face of the
short-term
credit market
An extract from Perspective:
The affordability and responsible lending issue
Essential insights into the issues facing your industry today
The changing face of the short-term credit market
An industry commentator
talks to Perspective about
how the short-term credit
market is transforming
before our very eyes.
So what does this mean?
Having made it clear through numerous
Given that classic short-term borrowers
different publications, as well as regulatory
are now being offered larger and longer
enforcement action, that the affordability
lines of credit, this places an even bigger
assessments being carried out by the
emphasis on the much-discussed notion
market on the previously popular short-
of affordability.
term loans were falling far below expected
The short-term credit market has
Can they afford it?
ensure that their decisions on instalment
changed: it’s no longer short-term in
The FCA has made it extremely clear
loans meet the approval of the FCA.
the way we have always known it.
that it expects lenders to be carrying
standards, lenders have a big job to do to
out extremely stringent affordability
With complaints data over the last 12
Rewind 12-18 months and those who
assessments, both at the point of
months from bodies such as the Financial
wanted to borrow over a period of days
application and on an ongoing basis.
Ombudsman Service (FOS) and Citizens’
needed to do no more than carry out a
Advice dominated by consumers querying
simple Google search. The results would
Lenders who move to provide what
their lenders’ decision to provide them
show any number of lenders offering
are generally known as ‘instalment
with credit, this issue doesn’t look like it’s
them the chance to take out a loan over
loans’ need to ensure that their lending
going away any time soon.
a period of days.
decisions make a similar migration.
Now if you try to search for those same
The FCA is likely to be of the opinion
bodies such as the FOS, and consumer
companies, you will find that they have
that it is easier for consumers to manage
credit firms, once they receive full
not disappeared, as many in the industry
a one-off, short-term product with one
authorisation, will have to periodically report
expected after the FCA’s introduction of
repayment than to manage a larger loan
complaints data to the regulator. If those
a price cap, but are now instead offering
over a period of many months at prices
figures show high levels of complainants
larger loans for longer periods. As detailed
that still fall under the High-Cost Short-
unhappy at lending decisions, the risk of
in the Consumer Finance Association’s
Term Credit bracket.
investigation and enforcement action is real.
lenders have evolved their products to
Can lenders afford not to check?
Unless lenders begin to tighten up their
continue to appeal to consumers’ needs.
With this in mind, the FCA will expect
affordability assessments further, using
Most of the larger players in the market
affordability assessments to become even
as much data and as much granularity of
now offer slightly larger instalment loans
more stringent and take into account
data as possible, they run the risk – more
over a number of months and early
the higher amounts being borrowed over
than ever – of facing balance write-offs
customer feedback has been positive.
longer periods.
and enforcement action.
The FCA monitors complaints data from
recent Credit 2.0 report, short-term
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The changing face of the short-term credit market
Russell Hamblin-Boone,
Chief Executive of the
Consumer Finance
Association, shares his
response to our commentator.
New rules mean that lenders have
loans increased by 46% to 1,157. This
imposed tighter lending criteria on their
increase reflected the proactive attempt
customers and loan approval rates
by the FOS, supported by Citizens’
have declined by 70%. As lenders work
Advice, to encourage complaints about
through the FCA’s authorisation process,
payday loans. Nevertheless, this figure
they are refining the affordability checks
is dwarfed by the 329,509 total of new
made during the application stage.
complaints about financial services.
Let’s get digital
The consequences of regulation
A key feature of the market is the use of
As one of the first markets to be
digital technology which has reformed
scrutinised under the new FCA regulatory
the way short-term lenders make lending
regime, short-term lenders are setting the
decisions, and meets the needs of
standard for affordability assessments
modern consumers for quick but rigorous
that will be required for all consumer
lending decisions. Short-term lenders are
credit products. Short-term loans
leading the financial services market in
account for less than 1% of all unsecured
data analysis to assess risk and through
consumer credit, but the regulator’s
real-time data sharing.
intervention in this market clearly
Inevitably the short-term credit market has
demonstrates its objective to improve
evolved. The FCA’s rules, including a cap
The FCA’s recent thematic review found
conduct and culture across the financial
on the amount that lenders can charge,
that short-term lenders are on a path
services sector. The early experience of
have created a new lending landscape
of improvement, which is evidenced by
HCSTC firms is a lesson to all other firms
and there are now fewer lenders granting
the latest data from Citizens’ Advice,
facing FCA supervision.
fewer loans, yet the demand for short-
which shows the number of payday
term credit remains high.
loan cases has halved in the last year.
However, during 2014/15, the number
The commercial reality is that single-
of complaints to the FOS about payday
payment loans are not viable for many
lenders and have been replaced with
longer term instalment loan offers of three
to six months.
But the value of the loans has not
increased significantly. Early signs are that
debt repayment levels are higher, partially
because the increased loan duration gives
borrowers more opportunity to smooth
their finances in a sustainable way.
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