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  • Easy Money, Tough Debt: Learning from the bookies Posted on 26 June 2019

    BBC Panorama's Easy Money, Tough Debt episode last week showed how recent regulatory efforts to solve the problem of unaffordable consumer debt might have achieved less than expected. A new voluntary levy on bookmakers may now be a useful model for helping to solve the remaining consumer credit affordability problem.

    The programme investigated why the FCA’s cap on payday loans - that Panorama suggested marked the beginning of the end for Wonga - has not solved the problem of unaffordable credit for some consumers.

    Unsurprisingly, Panorama set out the lenders as the villains; the borrowers or their guarantors, innocent victims. Yet the core problems that the programme set out, or were implied by the case studies, seem accurate:

    The FCA’s High Cost Short Term Credit (HCSTC) price cap may have shifted the problem of unaffordable consumer debt towards other types of non-prime credit (including unsecured installment loans, secured car loans, guarantor loans, credit cards, pawnbroking, home-collected credit, logbook loans and rent-to-own), with some non-prime lenders now growing fast

    - Non-HCSTC options for non-prime consumers may have lower interest rates than payday loans, but because they are typically for longer periods they still result in some customers owing large amounts of interest

    - Whatever information is provided about the cost of loans, consumers in some situations focus on solving their short-term needs rather than the longer term financial impacts

    - However diligent lenders try to be (and readers from the industry will know firms are continuously improving their affordability and underwriting procedures) a small proportion of borrowers will find themselves unable to repay and will need support

    So, what’s to be done? For now, more of the same seems to be the default:

    - The FCA making further incremental changes to the myriad of existing consumer credit affordability rules, including the new price cap on rent-to-own services

    - The Financial Ombudsman Service trying to apply the complicated laws and regulations to the unique circumstances of individual cases, and in so doing sometimes being accused of making inconsistent judgements, or even taking regulatory decisions away from the FCA

    Some MPs including Stella Creasy are calling now for a price cap on all non-prime credit. That might extend the HCSTC control that maximum total payments can’t be more than double the amount borrowed. The momentum for tighter regulation is likely to grow as the non-prime credit sector expands to fill the gaps left by the decline of the payday sector.

    Perhaps a better outcome for lenders and borrowers alike is for the industry to take the lead from the regulators in solving the affordability problem.

    An example of another industry doing something like this is the recent news that the leading bookmakers have promised to increase their voluntary contributions to tackling problem gambling from 0.1% of revenue to 1% within five years.

    The bookies' move builds on the already high-profile work of that sector to address gambling addiction, including its 'When the Fun Stops, Stop' campaign (although the bookies' credentials are marred by their failure to self-regulate fixed-odds betting terminals).

    Many lenders do already contribute to debt charities and to helping to develop industry best practices. The Independent Review of the Funding of Debt Advice, the Wyman review, also last year set out some important recommendations for how firms should contribute fairly to debt advice.

    But could more be done? Could, for example, non-prime lenders contribute a small proportion of revenue to an innovation fund that could support new technology-based initiatives to address affordability concerns, such as:

    - More consistent, effective and efficient ways of checking affordability of loans or repayment plans

    - Improved sharing of information between lenders, dealing not only with loans held but also covering existing repayment plans

    - More widely publicised and standardised routes to fairly addressing debt problems at early stages, particularly where multiple lenders are involved

    None of this seems beyond the capabilities of the industry - with some exciting fintech initiatives already emerging - or far removed from what lenders would want to achieve or be willing to pay for. The issue is more one of organisation and coordination, so that the best technology can be adopted quickly and widely across the industry.

    A simple measure of a standard percentage of revenue being contributed voluntarily by non-prime lenders to an existing or new coordinating body - following the approach of the bookies - seems a good place to start. It could help avoid further regulation that risks outlawing loan options that are important to, and successfully used by, many non-prime consumers.

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