It appears that half of all payday lenders have pulled out of the UK market in the last 18 months, according to news reports. The increased focus by the Financial Conduct Authority (FCA) on the business practices of payday lenders and the prospect of greater regulation is clearly having an effect. The UK's high-cost short-term credit market has been coming under relentless pressure from the media and campaigners to change its ways. There was a story this month about loan sharks using dangerous dogs to intimidate parents to pay back loans when they collected children from the school gates. It emerged that the Illegal Money Lending Team in England is offering schools readymade lessons to warn pupils about the dangers of loan sharks.
The FCA is only part of the way through its thematic review of payday lenders and will consult on a cap on the total cost of credit for all high-cost short-term lenders in the summer, to be implemented early next year.
But even if they are leaving the market, not all are going quietly. Quick Loans Dot UK Ltd, which trades as QuickLoans.co.uk, has recently stopped lending, citing regulator and political interference as the cause. Its director, Graeme Wingate, has launched a blistering attack on MPs, calling them hypocrites with no understanding of the lending market and a mistaken belief that less competition will benefit consumers. Quickloans claims that 16 jobs will now be lost. The Consumer Finance Association, the trade body for payday lenders, has repeatedly expressed concern about the impact of regulation on the industry, arguing that a regulated and innovative financial services industry will be replaced by unregulated and illegal lenders.
While the number of payday loan providers may be declining, credit unions and community development finance institutions (CDFIs) are slowly scaling up and offering a wider range of services, such as short-term loans, at affordable prices. Barclays has announced a £1m fund for credit unions, along with a range of other measures, including helping with access to premises. Lloyds Banking Group has revealed that it will invest £1m a year in credit unions and has piloted a project in Leeds signposting appropriate customers to the Leeds City Credit Union and local money management charities. The government is also investing £38m to support credit unions to modernise and grow. The Community Development Finance Association, the trade body for CDFIs, estimates that in 2013, almost 10,000 small and social businesses were able to launch and grow with a CDFI loan. These businesses created and saved more than 17,000 jobs, many in the UK's most disadvantaged neighbourhoods.
But the geographic reach of credit unions and CDFIs is still patchy, and many of their potential customers are not aware of their existence. Community projects such as Big Local and Community First are helping to tackle this, but it is an uphill battle. The £38m invested in credit unions is almost the same amount as the top five payday lenders spent on advertising in 2013 (an estimated £36.3m). The financial services market is still distorted, with poorer communities offered a wealth of choice of high-cost credit providers but no choice of other types of financial services. The Guardian has previously reported on the scarcity of free-to-use ATMs in poorer areas. Nottingham University has produced research that shows similar areas bear the brunt of bank branch closures.
Of course we need tighter regulation of payday lenders. Some have cynically exploited vulnerable consumers, taken advantage of the main high street banks' withdrawal from poorer communities and made millions of pounds worth of profits in the process. But we need to see a massive scaling up of credit unions and CDFIs as well as encourage the main high street and new challenger banks to serve poorer communities if we are going to keep the dogs from the school gates.
