Payday Denied: Exploring the lived experience of declined payday loan applicants - Dr Lindsey Appleyard, Carl Packman, Jordon Lazell - Toynbee Hall
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Payday Denied:
Exploring the lived experience of
declined payday loan applicants
Dr Lindsey Appleyard, Carl Packman, Jordon Lazell
Fulfilling Work
Research
Payday Denied 2018
Carnegie UK Trust
The Carnegie UK Trust works to improve the lives of people throughout the UK and Ireland, by changing
minds through influencing policy, and by changing lives through innovative practice and partnership work.
The Carnegie UK Trust was established by Scots-American philanthropist Andrew Carnegie in 1913.
Barrow Cadbury Trust
The Barrow Cadbury Trust is an independent, charitable foundation committed to bringing about socially just
change. Its mission is to use all its assets, especially its money, to work with others to bring about structural
change for a more just and equal society. The Trust was founded in 1920, by Barrow Cadbury, grandson of John
Cadbury, the founder of the family-run Cadbury chocolate, and his wife Geraldine Southall.
The Centre for Business in Society (CBiS), Coventry University
The Centre for Business in Society (CBiS) is the principal research centre within the Faculty of Business and
Law at Coventry University. Through understanding and interrogating the impact of organisations’ activities,
behaviours and policies, CBiS’s research promotes responsibility and inclusivity, seeking to change behaviours
in order to achieve better outcomes for economies and societies. To find out more please visit:
https://www.coventry.ac.uk/research/areas-of-research/business-in-society/
Toynbee Hall
Toynbee Hall, founded in 1884, is a community organisation that pioneers ways to reduce poverty and inequality.
Based in the East End of London, we provide free advice and support services which are all geared towards tackling
social injustice and improving financial health. Our research looks at communities and groups suffering from
financial exclusion, helping us to pilot new ways to deliver financial inclusion services and share our learning with
partners and policy makers.
Acknowledgements
We are very grateful to Barrow Cadbury Trust and Carnegie UK Trust for funding this research. We would like to
thank Clare Payne and Diana Ruthven at Barrow Cadbury and Niall Alexander and Douglas White at Carnegie UK
Trust for their feedback, editing, and support through the various iterations of the report. We would also like to
thank Dr Hussan Aslam for his research assistance, all the postgraduates that provided research support and our
project steering group. Finally, we would like to thank all the participants for sharing their experience with us.
The text of this work is licensed under
the Creative Commons Attribution-
ShareAlike 3.0 Unported License.
To view a copy of this license visit,
http://creativecommons.org/licenses
by-sa/3.0/ or send a letter to Creative
Commons, 444 Castro Street, Suite 900,
This report is printed on paper
Mountain View, California, 94041, USA. that is FSC certified.
Payday Denied 1 Contents Foreword 2 Executive Summary 4 Recommendations 5 1. Introduction 7 2. The payday lending market and consumer debt post-crash 8 2.1 Context 8 2.2 Pre-regulation of HCSTC 8 2.3 Key changes in the debate around high-cost credit: a chronological review 10 2.4 Post-regulation of HCSTC 13 2.5 Declined payday applicants 16 3. Analysis 17 3.1 Research participants 17 3.2 Declined applicant actions 19 3.3 Access to credit: From a different payday lender 21 3.4 Access to credit: Irresponsible lending and borrowing 23 3.5 Access to credit: borrowing from family and friends 24 3.6 Access to credit: Use of family and friends to access formal credit 26 3.7 No access to credit: went without 27 3.8 No access to credit: cutbacks and budgeting 27 3.9 Financial capability and confidence 28 3.10 The role of time and constrained choice 30 4. Conclusion 31 5. Recommendations 33 Appendix 1: Glossary of terms 35 Appendix 2: Methodology 36 Endnotes 38
2 Payday Denied
Foreword
families and communities. Debt is a part of
everyday life and access to affordable credit
an essential part of smoothing budgets and
responding to financial shocks.
The high-cost short-term credit (HCSTC) market
has seen very significant and welcome changes
Martyn Evans Sara Llewellin since the FCA took over the regulatory powers in
2014 and a total cap on credit was introduced in
2015. The shift in borrower numbers (downwards)
This research has been commissioned by the and borrower incomes (upwards) has resulted in
Carnegie UK and the Barrow Cadbury Trusts. The better outcomes for consumers, and withdrawal,
Carnegie UK Trust vision for affordable credit and more recently, the demise of many firms
is outlined in its ’Gateway to Affordable Credit’ operating in the market.
report. It sets out an ambition that everyone,
wherever they live, should have access to more Nevertheless, the demand for unsecured consumer
affordable forms of credit, which reduce the cost credit in the UK remains at a historical high at £215
of borrowing for those outside of the mainstream, billion (September 2018, Bank of England). If the
support financial inclusion and promote equality supply of harmful credit is constrained then that
and fairness. brings clear, positive benefits, but it also raises a
fundamental question – what happens next? It is
In recent years, the Barrow Cadbury Trust has unrealistic to think that the demand for credit which
worked with partners including the Centre for fuelled the rise of payday loans has dissipated
Responsible Credit, the Money and Mental overnight – particularly when the underlying
Health Policy Institute and most recently the conditions which drove much of that demand
New Economics Foundation (NEF) as convener remain the same – stagnating wages, heightened
for the ‘End the Debt Trap’ campaign, to raise job insecurity, significant pressures on the cost of
understanding of the damaging impact of living and the exclusion of millions of people in the
unsecured debt and high cost credit on individuals, UK from mainstream financial services.
Payday Denied 3
We wanted to understand the real-life choices – or households. It should be a matter of concern
lack of choices – that people who had previously and priority to policymakers that almost all of
borrowed from payday lenders but who are now the research participants were wholly unaware of
unable do so are making about their finances. ethical, fair, more affordable alternatives, often
Are they borrowing money from other sources? located in their own communities.
What are the pros and cons of these alternatives?
Are they ‘going without’ rather than borrowing? As commercial high cost credit providers withdraw
Is this a sustainable proposition? What are the or fold, there is an unprecedented opportunity
characteristics they want to see from any source of to fill this space through the provision of more
credit they might require in the future? affordable alternatives, which meet people’s
needs, broaden choice and can act as a gateway
Carnegie UK Trust and the Barrow Cadbury Trust to financial inclusion.
commissioned this research to explore these
questions and others, to inform policy and practice, There are lessons in this report on why there
and ultimately to help create better financial is a need for credit, and the importance of
options and opportunities for everyone who needs social capital and self-esteem as factors within
them. individual’s borrowing decisions. Credit remains an
emotive issue. The personal accounts in this report
The research reveals that most people who can no indicate that for the majority of people it remains
longer access a payday loan seek to source that an important, necessary part of their lives.
credit elsewhere. Most commonly they are turning
to family and friends. While this might be seen as
a positive outcome, the study found evidence that
this experience is by no means always beneficial,
brings significant additional burdens and pressures, Martyn Evans Sara Llewellin
and is highly questionable as a long-term solution CEO CEO
to support the financial needs of low income Carnegie UK Trust Barrow Cadbury Trust
4 Payday Denied
Executive Summary
When the government announced a cap on high- As another of our interviewees told us:
cost short term credit (HCSTC) in 2015, in the
face of public outcry about the conduct of some “My mum actually took out a bank loan for me to
lenders, many campaigners were delighted. But for pay off payday loans....
the millions of people with limited access to credit, The whole family I think were affected by it.”
what was the impact of this tighter regulation? Did
it limit their choice and ability to make ends meet? Some go without. Again, if the borrowing was for
luxuries, then this might also be considered a good
We listened in depth to 80 of these people, who thing. But it wasn’t. As one of the people we talked
needed money, and yet were rejected or ineligible to put it:
for ‘payday loans’ because of the new criteria.
“I’m not really throwing money about anyway,
This report presents our findings and makes I don’t have that much money to throw about.”
recommendations and suggestions for further
work. For some there are benefits: Being refused can
be a wake-up call – a signal that a problem needs
Almost everyone needs help to manage the ebbs addressing and borrowing may not be the best
and flows of income and expenditure at some answer. There is a huge responsibility on financial
point in their lives, and credit is the main tool which services industry – but also on others, such as
has been provided to households to assist with housing providers, debt advice agencies and
this. For those on low incomes or facing periods health and social care providers – to identify the
when they simply don’t have enough money for challenges and be open to offering support.
essentials, accessing credit is often critical.
There are many more detailed findings which this
As Courtney told us, her borrowing was report uncovers. The process of listening to people
with real, lived experience of needing credit but
“never just for fun… it was always like, stuff for the being turned down was an extremely revealing
kids, clothes, uniform.” and important one. The people we spoke to were
articulate, sensible, and reflective and understood
So, while the consequences of taking out high very well their own difficulties. They were often
interest payday loans are well documented, we frustrated at the difficulties in accessing, what for
wanted to know what happened when Courtney them was essential finance to live their lives.
and others like her were turned down from even
the costliest of lenders. The findings were incredibly It is important that their voices are heard: by
revealing: government; by the financial services industry;
by others who might unwittingly cause people to
Most people turned to friends and family: while fall into debt; and by advice services and other
this could be considered a good thing, in that it agencies.
keeps people away from the risk of the formality
of debt recovery or legal sanction, the human cost We wanted to hear direct from those with lived
to families, relationships, dignity and respect is experience. Now we’ve heard from them, it is vital
significant. While the FCA originally predicted that we take action.
60 percent of borrowers with no access to high-
cost credit would no longer borrow at all, we found
a significant proportion of the people we spoke to
were still looking for borrowing options, making the
issue far more complex than originally anticipated.
Payday Denied 5
Recommendations 4. Government, regulators, and third sector
organisations to scope the feasibility of a UK
In this context, our recommendations include: No Interest Loans Scheme (NILS):*
This research showed that some declined
1. People need access to more and better payday applicants of payday loans do not need
credit products: a traditional credit product for their immediate
The alternatives – of borrowing from family financial issues and that any form of interest-
and friends, going without essentials or seeking bearing credit is too expensive. This is particularly
illegal lending – are often worse for some of the the case for those potential borrowers not in
people we spoke to. There needs to be greater work and for whom a formal credit product
investment in developing low and mid-cost, would not be appropriate, or who have longer
affordable products, and in marketing the term issues arising from benefit delay or income
social, ethical alternatives. reduction during the transition from legacy
benefit to Universal Credit (we saw evidence of
2. Increased regulatory activity to tackle a this during the course of this project).
two-tier payday loans industry:
Our research shows evidence of an industry Not all declined payday applicants had access
split, with some lenders heeding to new to, or wanted to, borrow from friends and family.
stricter rules by the FCA on assessing For this group of people, we believe there is a
affordability, whilst others appear not to need for more innovation around how to extend
do so. This suggests that some lenders are finance in a productive way. We recommend
interpreting rules on affordability differently different organisations including the FCA, the
and haven’t yet achieved harmonisation in Treasury, and client-facing organisations such
their approach to affordability. Some appear as debt advice charities, coalesce to carry out a
not to have taken sufficient steps to improve feasibility study on the provision of NILS similar
their affordability checks and are providing to those running in other jurisdictions, to identify
loans to people who may not meet the criteria its potential to support those most in need
set by the FCA. We call on the FCA to tighten (Australia, for example, has a NILS that is run by
monitoring of regulated firms with regards Good Shepherd Microfinance and supported by
to their affordability assessment process. We the Australian Government the National Bank of
suggest increasing the use of mystery shopper Australia). Such a scheme would sit alongside the
exercises, including in how online lenders check scale-up of affordable credit alternatives.
creditworthiness using automation tools.
We recommend that additional government
3. Organisational innovation for people to departments, including the Department for Work
avoid unaffordable credit: and Pensions, work closely together to determine
We call for a wide range of organisations, who would be eligible for a no interest loan and
including housing associations, local authorities, who would qualify for a non-credit, welfare-
social and private landlords, employers, other based solution such as a grant.
creditors like utilities companies, to recognise
the different roles they can play in preventing We recognise that this approach would need
individuals with short term cash flow issues to be targeted on a relatively small group of
from falling into hardship and seeking credit, people who are most in need and would require
when this is not appropriate. We ask these substantial public funding.
organisations to impact assess their internal
* Since the report was drafted and edited the UK Government made an
processes to ensure they are not causing announcement in the Budget statement of 29th October 2018 on NILS
financial harm to their customers, clients, or stating “No-interest loans scheme pilot – For some people, even borrowing
from social and community lenders can be unaffordable. Therefore, the
other beneficiaries of their services. We believe government, working with leading debt charities and the banking industry,
having some duty of care towards individuals’ will launch a feasibility study to help to design a pilot for a no-interest loans
scheme early next year”
financial health and potential exposure to the
poverty premium should exist beyond credit
providers.
6 Payday Denied
5. The development of guidance on informal should be starting to demonstrate how it
lending: is innovating internally to help customers
Another major theme of this research is that enhance their financial health and keep pace
there is an unseen price to pay for informal with other financial service providers looking to
borrowing from friends and family, which to the do the same.
best of our knowledge has not been explored
in previous research looking at the impact of 7. Guidelines for debt advice charities on
payday loan reform. We endorse the creation specific courses of action for declined
of a set of guiding principles on what informal payday applicants:
lending ‘good practice’ looks like, as these tools The Money Advice Service should, in
will help some people to manage their money consultation with advice providers, design
when lending informally to family and friends. a specific set of guidelines on how advice
professionals advise declined payday
6. Payday lenders contributing to the financial applicants, premised by findings from this
capability of their customers: research showing their additional needs.
One finding from our research is that an This would set out, for all advice professionals
individual can simultaneously be a declined in the regulated advice sector, a framework
applicant of a payday loan and an existing or describing potential additional needs and
prospective payday loan borrower. The ways in signposts to address these such as other
which payday lenders can improve the financial forms of credit, benefit advance information,
health of borrowers is therefore also relevant to or guidance for borrowing from friends and
declined borrowers. Payday lenders themselves family. Because declined payday applicants
have an opportunity to help borrowers rebuild are likely to be in a more vulnerable financial
their credit scores and provide roadmaps to situation debt advice charities should establish
improve financial standing for the future by a clear set of guidelines on how to deal
helping them move into less expensive credit effectively with this group.
where appropriate. The payday loans industry
Payday Denied 7
1. Introduction
This research was carried out between January research provides deeper and more specific insights
2017 and April 2018. It was originally supported to complement existing quantitative data on the
by Barrow Cadbury Trust to undertake research in experiences of declined payday loan applicants.
England, and then extended through additional
support from Carnegie UK Trust to include Specifically, our research asks the following three
Scotland. questions:
The aim of this research is to explore from a • What impact has the new set of regulations
consumer perspective the impact of the 2015 on HCSTC had since January 2015 on the
cap on the cost of High-Cost, Short-Term Credit behaviour of borrowers (and to an extent,
(HCSTC), as well as other rules governing the lenders)?
high cost credit industry put in place at a similar • Have those regulations positively reshaped the
time. Our focus is on the group of consumers credit options for borrowers?
who previously had access to a payday loan and • What is the lived experience of those who are
are now either not eligible or have experienced a now declined payday applicants and how, if
decline in their payday loan application. From here at all, are they accessing credit, or managing
on, we call this group of people declined payday financially under changed circumstances?
applicants (See Glossary in Appendix 1).
We begin by setting out the context in the first
We undertook 80 in-depth interviews with declined section, outlining the payday lending market
payday applicants to draw out the financial actions and its borrowers pre- and post-regulation.
people took subsequently and to understand the Second, we analyse our findings to look at
lived experience of the regulation, to examine the the specific consumer journeys taken by those
behaviour and strategies of borrowers as a result of that are declined access to a payday loan and
not having access to their previous credit provider. identify key themes that have emerged from the
Due to the number of participants in our research research. Third, we address the implications of
the findings are indicative rather than exhaustive. our research and findings in the discussion and
The sample size was not large enough to support conclusion section. Finally, we set out a series of
testing for statistical significance. Instead our recommendations.8 Payday Denied
2. The payday lending market and
consumer debt post-crash
2.1 Context Between 2006 and 20147 a number of conditions
created the perfect storm for the growth of the
Economists and policymakers are again sounding payday loans industry including:
the alarm on UK household debt growth1. Similarly,
the Financial Conduct Authority (FCA) has noted • The increase in the numbers of working poor
the warning signs about the financial health of UK whose incomes could not compete with the
consumers, with levels of consumer borrowing back rising cost of essential goods;
to 2008, pre-financial crash levels. • A contraction in mainstream credit after
the economic recession, as well as a loss of
The increased use of consumer credit comes at more than 1,800 bank branches in the period
the same time as real wages (after outgoings) had between 2003-2012 changing the look of many
fallen to the point where they were lower in 2017 high streets across the country, particularly in
than in 20072. The Personal Finance Research less affluent areas8; and,
Centre at the University of Bristol have described • A significant interest from US providers of
this post-crash period for consumers making alternative high-cost credit in establishing a
cutbacks on their essential expenditure as the presence in the UK market.
“practical recession”3 which to some extent makes
it akin to a personal financial crisis. In the next section, we explore the development of the
payday market in the UK up to the point when new
According to one analysis the current rise in UK regulations were introduced and highlight the type of
consumer debt is primarily being fuelled by use of households which were using this form of credit.
credit by safer prime borrowers, contrary to some
economists’ fears of a surge in borrowing by sub-
prime borrowers4 . However, there are increasing 2.2 Pre-regulation of HCSTC
numbers of sub-prime customers that:
While the formal payday lending sector in the
may struggle, or believe that UK, where shops would offer services including
they may struggle, to meet the exchanging cash for post-dated cheques, has
credit criteria of mainstream existed for many years, it grew in prominence at
financial institutions and are around the same time as the 2008 recession. DFC
often included in the definition Global Corp, a large US company whose most
of nonstandard [credit]5 . profitable companies are outside the USA, include
the Money Shop in the UK, a subsidiary of Dollar
Financial exclusion from mainstream sources Financial UK Limited, which has provided cheque
of credit is an increasing problem for many cashing services since 1992. In 2009, The Money
people. Mainstream financial services have often Shop recorded 273 stores and 64 franchises across
focused on super-included, financially stable the UK, as well as the 2011 acquisition of PayDay
households with high, secure incomes on the one UK, one of the UK’s biggest online payday lending
hand while bypassing lower income households outlets9.
whose exclusion has in turn led to many seeking
alternative high-cost lenders such as home The payday lending industry is reported to have
collected credit (aka doorstep lenders), rent to own, grown from an estimated £100 million worth of
pawn shops, and payday lenders6 . loans made in 200410 to over £2.5 billion in 201311.
The number of loans taken out more than doubled
from 2009 to 2013 to reach 10 million in total,
taken out by 1.6 million of customers, across 400Payday Denied 9
companies12. This growth has been combined with Furthermore, all lenders have been urged to
exceptionally high profits for many payday lenders. voluntarily sign up to real-time data sharing services
to better help identify credit risks. The Competition
In the UK since at least 2010, payday loans have and Markets Authority (CMA) in 2015 recommended
been the subject of considerable attention by improving real-time data sharing between lenders
politicians, the media, and regulators. Before and credit reference agencies15. Callcredit and Equifax
regulatory changes were made in 2015, the developed services for short term lenders to use16.
average value of a payday loan taken out by a
consumer was £270 for 30 days13 and the cost of a The FCA estimates before the cap was set or
payday loan could be between £15-£35 per £100 introduced, the regulator predicted that 70,000 people
borrowed for 30 days, equating to between 448 every year from after the cap would be denied access
percent and 3,752 percent annual percentage rate to a payday loan due to the cap’s impact. That was
(APR)14 . based on 7 percent of the number of payday loan
borrowers in 201417. Coupled with wider reforms to the
In November 2013, Rt Hon George Osborne MP, industry, a total of 160,000 people – or 11 percent of
then the Chancellor of the Exchequer, announced those who had previously sought to take out a payday
that there would be a legal cap on the cost of a loan – would lose access to this form of credit18.
payday loan or HCSTC, which the newly created
consumer credit regulator, the FCA, would enforce. Before the price cap came into force, the FCA
The cap, which came into effect in January 2015 estimated that:
was structured in three ways:
if consumers no longer had access
1. An initial cost cap of 0.8 percent per day – to HCSTC, approximately 60
interest and fees charged must not exceed 0.8 percent would not borrow, 25-30
percent per day of the amount borrowed; percent would go to family and
2 A £15 cap on default fees – if borrowers default, friends (we have taken steps to
fees must not exceed £15. Firms can continue differentiate between ‘friends’ and
to charge interest after default but not above ‘illegal lenders’), and around 10
the initial rate; and, percent would borrow from formal
3 A total cost cap of 100 percent – borrowers sources of credit, and 5-10 percent
must never pay more in fees and interest than would find funds in other ways (e.g.
100 percent of what they borrowed. decrease savings).19
For credit firms, the price cap covers agreements The FCA added that less than 2 percent said they would
with an annual percentage rate which is equal to borrow from illegal money lenders which are sometimes
or exceeds 100 percent and must be substantially misidentified as family or friends. While it is difficult
repaid within a maximum period of 12 months. For to see whether or not declining borrowing figures for
contrast, the FCA points out that its definition of payday loans has translated into borrowing from illegal
HCSTC does not cover: lenders (notoriously difficult to calculate due to it being
criminal activity), it is interesting to see whether it has
• Credit agreements secured by a mortgage, a translated into additional pressures elsewhere.
charge or pledge;
• Credit agreement where the lender is a Again in 2014, the FCA estimated that only four
community finance organisation; of the 400 payday lenders in existence at the time
• A home credit loan agreement, bill of sale loan would remain in the market20 . The FCA and the
agreement or overdrafts. city competition regulator, the Competition and
Markets Authority (CMA), anticipated that the
Other rules set for the industry, as of July 1st 2014, remaining lenders would have to change or diversify
included restrictions on rollovers (where borrowers their business model and/or products in order to
can extend their loan), use of the continuous be sustainable operations. For example, products
payment authority (CPA), and risk warnings to be offering longer terms would be an example of where
included on financial promotions. lenders were diversifying21.10 Payday Denied
In short, regulation was designed to curb Office of Fair Trading (OFT) refers
2013
irresponsible lending and protect borrowers in the payday lending sector to the
payday loan market. This research adds depth Competition Commission
to the FCA’s research and highlights the lived The Office of Fair Trading, which was the
experience of declined payday applicants since the regulatory body with oversight of the consumer
introduction of the regulation. In the next section credit market before the Financial Conduct
we explore the post-regulation HCSTC market and Authority, referred the entire payday loans sector
the impact on borrowers. to the Competition Commission, the body that
preceded the Competition and Markets Authority
(CMA), to assess what was referred to at the time
2.3 Key changes in the debate around as “deep-rooted problems”22.
high-cost credit: a chronological review
Government to cap payday
2013
Payday lending has been hotly debated in the UK loan costs
since 2010. A number of key policy changes, as well The Rt. Hon. George Osborne MP, Chancellor of the
as other events of significant interest, have taken Exchequer at the time, announced that the
place in that time, including the establishment of the government would legislate to introduce a cap on
Financial Conduct Authority in 2013. In this section the cost of payday loans. The announcement took
we detail the most significant of these events to many people by surprise. The cap was formally
illustrate the context behind some of those debates: established through amendments to the Banking
Reform Bill which was currently going through
Attempted creation of the Consumer Parliament. This gave the FCA powers to set and
2010
Credit (Regulation & Advice) Bill 2010-12 enforce that cap.
Stella Creasy MP, with a high-profile interest in the
payday loans industry, raised the issue of payday New rules on CPAs, risk warnings
2014
lending in Parliament in a 10-minute rule bill. and rollovers
Creasy was aiming to introduce the Consumer The FCA introduced brand new rules for payday
Credit (Regulation and Advice) Bill 2010-12, a step lenders and other firms offering high-cost short-
that would have given lawmakers the ability to cap term credit. The new rules related to use of the
interest rates and fee charges. This would have Continuous Payment Authority (CPA), risk warnings
introduced a Total Cost of Credit cap: a price ceiling and rollover loans.
on how much a lender can charge in absolute
terms, including interest on the principle, fees and CPA: A Continuous Payment Authority, which
other ways of introducing extra costs to a loan may also be called a recurring payment, is where
contract. Creasy’s Bill wasn’t passed. a business has permission to take a series of
payments from a customer’s debit or credit card.
Credit Union Expansion High-cost short-term lenders were now limited
2012
Project (CUEP) to two unsuccessful attempts to use a CPA to
Department for Work and Pensions (DWP) take a repayment and could not use a CPA to
announced that £38m would be spent on what it take a part-payment. The use of CPA was seen
called the Credit Union Expansion Project (CUEP). as advantageous to collections. With only 2
One significant reason that government unsuccessful attempts allowed, the onus was on
policymakers were interested in developing the lending more responsibly.
credit union sector was in response to the growing
use of high-cost credit. CUEP aimed to attract one Risk warnings: As of July 1st 2014, firms
million new members by 2019, and to modernise offering high-cost short-term credit must now
the credit union sector with new technology – the include a prominent risk warning in electronic
so-called Model Credit Union initiative. communications on all financial promotions (unless
the medium used makes this impracticable). The
In 2015 the project was pushed back by one year and to risk warning is now also required on print, TV and
date three credit unions utilized the new platform. The radio promotions.
CUEP contract was terminated in 2017 by the DWP.Payday Denied 11
Rollovers: Where a borrower cannot afford to pay in order to “encourage greater competition”23. The
back a loan many lenders offer the opportunity CMA also found that most borrowers were not
to ‘rollover’ or extend the loan. Where a high- shopping around before borrowing from a payday
cost short-term loan has been rolled over twice, lender and that 53 percent of payday loans were
including before 1 July 2014, lenders will not be used for everyday expenses.
able to rollover the loan again.
Applying for re-authorisation
2016
Since 1 July 2014 the FCA has required lenders to
st
provide prospective and existing borrowers with an After the introduction of new regulations on the
information sheet on the risks of extending a loan. payday loans market all firms were invited to
re-apply for authorisation. They were allowed to
The introduction of the cap on the continue to operate with interim authorisations.
2015
cost of a payday loan Later in the year the FCA granted authorisations
The Financial Conduct Authority (FCA) introduced to firms to continue their operations in a changed
a cap on the initial cost of credit at 0.8 percent regulatory environment.
per day; default fees were limited to a maximum
of £15 and a 100 percent repayment cap assured FCA opens consultation reviewing
2016
that borrowers would never have to repay more the cap on the cost of credit
than double the amount they borrowed. The FCA opened a call for input on high-cost credit
(including rent-to-own, home collected credit,
FCA on credit broking and CMA on catalogue credit) and overdrafts, including a review
2015
Price Comparison Websites (PCWs) of the payday loan price cap.
The FCA introduced new rules on credit broking and
fees, which affect payday lenders. The rules included: The consultation calls for input on the following
items:
• Banning credit brokers from charging fees to
customers, and from requesting customers’ High-cost products – The FCA will look across
payment details unless they meet FCA all high-cost products to build a full picture
requirements. of how these are used, whether they cause
• Credit brokers must make sure customers are detriment and, if so, to which consumers. This
given clear information about who they are will enable the FCA to consider whether further
dealing with, what fee will be payable, and policy interventions are needed.
when and how the fee will be payable.
• Fee-charging brokers will need to notify the Overdrafts – The CMA identified a number
FCA, quarterly, of the websites they operate. of competition issues with overdrafts, which
• All brokers will need to include their legal include poor price transparency and the
name (as it appears in the FCA Register) in nature and level of charges, especially for
all advertising and all correspondence with unarranged overdrafts. The FCA will look in
customers. more detail at overdrafts from a consumer
• Advertising must clearly state that the firm is a protection perspective, as well as a competition
credit broker and not a lender; if the firm is both perspective using its full range of powers.
a credit broker and a lender, the advertising will
need to make clear that they are advertising The high-cost short-term credit
their broking services, not their lending. (payday loan) price cap – The price cap
• There are additional rules on cancellation rights came into force on 2nd January 2015.
for distance contracts (for example, online
credit broking), including rights to a refund. Repeat and multiple high-cost short-term
credit (HCSTC) borrowing – The FCA will
The CMA published findings from their investigation continue to monitor the impact that repeat
into the payday loans market, where they and multiple borrowing has on the market and
recommended that lenders must make their product consumers.
available on at least one price comparison website,12 Payday Denied
• Across users of less mainstream products we
FCA high-cost credit review and CRA observe a consistent pattern of their financial
2017
data analysis of UK personal debt situation worsening over time. However, that
The FCA carried out an analysis of personal debt it not to say it is the credit product itself which
held by UK consumers using credit reference causes this deterioration. It is possible for
agency (CRA) data, including non-mortgage debt consumers to recover from these positions –
such as credit cards, personal loans, motor finance we observe that former borrowers who are
agreements and utility bill debt. no longer using these products often have
improved financial outcomes.
They sought to answer the following questions: • The composition of debts varies considerably
across people borrowing on different less
• Market size: How large are the different high- mainstream credit products. Credit card and
cost credit product markets? unsecured personal loans commonly account
• Credit performance: What are the outcomes for a high proportion of personal debt. Home
for consumers using different high-cost credit credit, guarantor loan and rent-to-own borrowers
products? typically have the largest proportion of their
• Consumer circumstances: What are the socio- outstanding debt on each of those products
economic circumstances of consumers using respectively. We observed that it is common for
different high-cost credit products? these individuals to have outstanding debt on
household bills – though this accounts for a small
A summary of the findings show: proportion of their overall personal debt24.
• Over half of UK adults hold outstanding FCA high-cost credit review
2018
personal debt. Over 30% of outstanding and Consultation
personal debt is held by 1.3 million people – The FCA published a review and consultation call
2.6% of UK adults. on HCSTC and overdrafts.
• There is large variation in the sizes of less
mainstream credit markets. Of these, catalogue Their main finding on the price cap on HCSTC
credit is a lot larger than others by number of regulatory changes which had been introduced
consumers. was that outcomes had improved for consumers.
• There are large differences in the arrears, This finding informed the decision to maintain the
default rates and repeated consumer use of cap at its current level for a further three years.
different less mainstream credit markets.
• There are similarities in the distribution of credit In the document the FCA identifies other credit
scores of borrowers using less mainstream credit products for review: overdrafts (arranged and
products. The exception to this is catalogue unarranged), for which there is a separate
credit borrowers who, despite having noticeably consultation25, rent to own (RTO), home collected
better credit scores, have relatively high arrears credit and catalogue credit.
and default rates on these products.
• A greater diversity in the socio-economic profile The FCA details plans for further work assessing
of people borrowing across less mainstream potential rules around introducing a price cap
credit products is observed via measures other on RTO goods, and the level and structure of a
than credit scores. Rent-to-own borrowers have possible cap26.
much lower incomes, higher debt-to-income
(DTI) ratios and hold debt on more products The other significant element of FCA reports
than those using other less mainstream recently has been their willingness to extort the
products. HCSTC borrowers are much younger virtue of “mid-cost” credit delivered by ethical,
than home credit borrowers. social lenders. This is a significant departure for the
regulator recognising that credit demand will likely
continue, even if supply is constrained, and that
alternatives need to be supported.Payday Denied 13
2.4 Post-regulation of HCSTC • 42 percent of the 126 firms, who were operating
in the market in 2013, have received full
Post-regulation of HCSTC, payday lenders have authorisation to carry out payday loan or
changed their operations and created new instalment loan activity.
products to remain competitive alongside the • 20 percent remain active in the market awaiting
regulation. Stepchange reported that: the outcome of their authorisation application.
…the HCSTC market has Today, HCSTC regulation has had a positive impact
changed and adapted to the post for borrowers. The FCA report that of those that
price cap landscape. The market “took out an HCSTC loan in 2015, over 30 percent
has broadened to encompass no longer did so in 2016”30. This suggests that the
different forms of loans that, market is markedly smaller and there is a high
unlike the ‘traditional’ 30 day turnover of payday loan customers.
payday loan, are repaid over
two months to a year. Giving The FCA shows that since the regulation was
customers a longer period introduced, borrowers tend to have more
to repay and breaking up outstanding debts (particularly HCSTC, credit
repayments into smaller chunks cards and overdrafts) and have lower credit scores,
can be beneficial, but it can also making them higher risk borrowers. However, they
mean interest builds up over a go on to say that:
longer period making borrowing
more expensive overall. 27 We found no evidence that
consumers who have not been
Citizens Advice, for example, has not reported a able to get HCSTC products
surge among its clients towards other forms of since the cap have generally
high-cost credit28 . However, among StepChange had negative consequences as a
clients in 2017, two in five were in arrears on at result. The majority (63 percent)
least one of their priority household expenditures, of consumers turned down for
such as an energy bills, council tax, or their monthly HCSTC products since the cap
mortgage or rent payments29. StepChange also was introduced believe that
reported an increase in the percentage of clients they are better off as a result.
eligible to pay Council Tax who are in arrears rising We have not seen a significant
from 22 percent (in 2012) to 30 percent (in 2017). ‘waterbed effect’ with consumers
The figure in Scotland rose from 18 percent (in increasing their use of other
2010) to 41 percent (in 2017). This does not show a high-cost credit products after
direct correlation but we need to ask whether non- failing to get a HCSTC loan.
priority debts have risen as people that previously We also found no evidence
had access to a payday loan are no longer able. that consumers who have been
turned down for HCSTC are
Citizens Advice’s analysis of the market post-cap more likely to have subsequently
found the following: used illegal money lenders.3114 Payday Denied
Of those that applied for a payday loan and were
declined, the FCA reported that: In our research we found that informal
use of credit from friends or family is more
15 percent of declined complex. People do not feel this option is a
consumers take out an long-term solution for them, often finding
alternative credit product … that they can do this type of borrowing only
while around 25 percent turn to once. For this reason many of the people we
informal forms of credit such as spoke to would prefer to take an alternative
friends or family32 credit product, or even continue to look for
a payday loan, than ask friends or family.
While consumers might feel better off
today, this has the possibility of changing
significantly in the near future.
Figure 1: Number of HCSTC originations (January 2012- December 2016)33
Number of origintations
(per month)
1,050,000
900,000
750,000
600,000
450,000
300,000
150,000
0
Jan 12 July 12 Jan 13 July 13 Jan 14 July 14 Jan 15 July 15 Jan 16 July 16
Month of origintations
Price Cap Consultation Paper data Call for Input data Feedback Statement data
Table 1: Size of HCSTC market (2013-2016)34
Number of consumers Average Number of Value of Value of
taking out product (mean) value originations originations outstanding
(millions) of originations (millions) (billions) debt (billions)
2013 1.7 £240 10.3 £2.5 £2.5
2014 1.2 £240 5.3 £1.3 £1.3
2015 0.7 £260 3.3 £0.8 £0.8
2016 0.8 £290 3.6 £1.1 £1.1Payday Denied 15
The FCA also report the number of new loans to • A 45 percent reduction in clients accessing
consumers between 2012 and 2016 to show the advice about payday loan issues, which is in
extent of the market and regulatory changes: contrast to the trend with all debt advice which
has remained stable and all advice given which
• 10.3m to 3.6m loans has increased slightly.
• 1.7m to 0.8m customers • An 86 percent reduction in clients contacting its
• £2.5bn to £1.1bn outstanding consumer service about payday loans between
2013 and 2016.
The FCA was also able to show a reduction in • A 61 percent post-cap reduction in unique users
default loans in the time that the cap on the cost accessing payday loan content on the external
of credit was live in the HCSTC market: website.
• The expert advice team had 29 complex cases
The ‘default rate’ is defined as the on payday loans referred to them leading up to
proportion of loans originated the cap and have had no cases since the cap38.
which enter default as recorded
on a borrower’s credit file. [We Before the cap payday loans were commonly
show] these to have significantly associated with sub-prime borrowers (borrowers
decreased with fewer than 6 with tarnished or limited credit histories),
percent of loans originated during particularly in media discussions about the
the first half of 2016 entering industry. Since the cap, some lenders still in the
default compared to over 8 market have restructured their business models
percent of loans at times in 2015 to focus more attention on a new category
(and double digits in 2014 as of borrower: the near-prime borrower (which
shown in prior data analysis).35 also describes a borrower with a tarnished or
limited credit history but who is nearer the stage
Using industry data, the Social Market Foundation of repairing their credit histories). One report
found that: estimates that the near-prime borrower group in
the UK is between 10 and 14 million people39.
…the number of loans sold in
the period January to April 2016 At the same time, in discussing not just the regulation
were 42 percent lower than in of the payday loans sector but the provision of
the period January to April 2013. alternative affordable credit, the FCA refer to the
This data is drawn from firms that ‘mid-cost’ credit market, which it describes as being
operated through to 2016 and may “above prime borrowing rates, but below the HCSTC
underestimate the drop in loans cap level.” The FCA in an update on its review of high-
– for instance, a large number of cost credit said the following:
firms exited the market in this
period, such as many cheque We recognise the value of high-
centres. Consumers buying loans cost credit for consumers who lack
in 2015 are on average coming other options, where firms have
from higher-income brackets than made appropriate assessment of
in 2013.36 their creditworthiness. However,
we are also exploring why
After the cap on the cost of a payday loan was relatively lower cost, mid-price,
introduced StepChange found that just 16 percent lower risk credit options are not
of its clients had HCSTC debts in the first half of more widely available. We have
2016 compared to nearly a quarter (23 percent) in been looking at barriers to the
201337. In 2016, Citizens Advice found a significant provision of alternatives and have
reduction in the numbers of clients with payday been considering what might be
loan problems since the introduction of the price done to address these.40
cap in January 2015. This included the following:16 Payday Denied
2.5 Declined payday applicants • 15 percent of declined consumers take out an
alternative credit product and 25 percent turn
The main remit of this research was to find out to informal forms of credit such as friends or
about the lived experience of a borrower who family.
previously had access to payday loan credit, but • No evidence that decline leads directly to illegal
after the cap on the cost of payday loans and money lenders.
increased regulation over that industry, is unable or • 63 percent thought it was ‘for the best’.
ineligible to access that form of credit. • 60 percent do not go on to borrow from other
sources.
In 2017, the FCA reported that the borrower profile • 37 percent took no further action (including
tends to be male, employed, with an average ‘going without’).
net income of £23,600, and an average age of • 7 percent cut expenditure as a result.42
3541. This shift in income and borrower profile
is significant particularly in an era of frozen, In addition, the FCA stated the following:
stagnant or reducing wages and benefits. A shift
in demographic toward less risky customers is also • “We do not consider the price cap is currently
reported by Rent to Own retailer, BrightHouse, too tight … consumers declined for HCSTC do
and is also evident in the customer profiles of the not generally appear to be harmed as a result”
largest home credit provider, Provident Financial • “We found no evidence that declined payday
Group. applicants were generally taking out other high-
cost products. We also found no robust evidence
This research supplements insight from the FCA of declined payday applicants increasingly
on its initial findings on outcomes for a borrower turning to illegal money lenders”
now declined a payday loan. In July 2017 the
FCA published a feedback statement on why they In the following section, we present our own
made the decision to maintain the price cap of findings about declined payday applicants which
a payday loan. In this statement they presented provides qualitative detail to the existing snapshot
their findings on declined payday applicants: of this group of people.Payday Denied 17
3. Analysis
Our analysis is based on 80 interviews with • Employed full-time,
declined payday applicants to examine the • Single or living alone in rented (private or social)
lived experience of the HCSTC regulation. In this housing,
section, we: • Parents with dependent children and
• Educated to HND level or equivalent.
• Detail the key demographics of the 80 • Almost 50 percent of participants were living
participants. on a low income, in a household earning
• We outline the journeys of declined payday less than £20,000 per annum (39 out of 80
applicants. participants)44
• We then examine the lived experience and • Most people we interviewed did not consider
different impacts of being declined. themselves to have a disability (See Figures 2 to
9 below).
Drawing on our evidence, we highlight the
complexity within each declined applicant journey Our participants are similar to those participating
which adds nuance to the existing research on in previous studies focusing on the consumers of
declined payday applicants (and users) of payday HCSTC prior to the regulation45 . First, borrowers
loans. Finally, we summarise the key findings reflect a socio-economic profile which generally
identified through the research. positions them as socially marginalised, in low paid
and insecure work at risk of financial exclusion and
3.1 Research participants living in poverty46 . The majority of the participants
were in full-time employment highlighting the
We undertook 80 in-depth interviews with declined financial precarity of those experiencing in-work
payday applicants’ of HCSTC43 who were generally: poverty. Our interview locations centred on payday
loan ‘hotspots’ of Glasgow47, Birmingham48 and
• Female, London49. Further details of our methodology can
• Aged between 25-44, be found in Appendix 2.
Figure 2: Participants gender Figure 3: Participants’ age
80
1%
70
64
60
50
36%
40
30
63%
20
14
10
1 1
0
Male Female Transgender 16-24 25-44 45-64 65+18 Payday Denied
Figure 4: Participants’ employment status Figure 5: Participants’ marital status
40 39
1%
35
11%
30
25
21% 20 20
67% 15
11
10
5 5
3
1 1
0
Single
Married
Cohabiting
Divorced
Separated
Widowed
Unknown
Full time Part time Unemployed Student
Figure 6: Participants’ household income Figure 7: Participants’ housing
40 34
1%
35 4%
26
30 15%
27
25
21
40%
20
15 13
15
12
10 10 7
5 40%
5 6
4
0
Under £10k £10-20k 20-30k 30-40k 40-50k 50k+
Rented private Social housing Owned with mortgage
Number of participants Percentage Living with family Shared ownership
Figure 8: Participants’ highest level of Figure 9: Participants’ disability
education and qualifications
20
16
14%
15
14
13
51
10 10
7
86%
5
13
4
0
No qualifications
GCSE or equiv
A-level of equiv
NVQ or equiv
HND or equiv.
Undergraduate
Postgraduate
Unknown
Yes NoPayday Denied 19
3.2 Declined applicant actions Our research found that when declined or unable to
access a payday loan, participants were more likely to
We interviewed 80 people, 64 had been formally seek credit from another source (either an alternative
declined from a payday loan since the regulation formal lending route or friends and family) than “go
was introduced. The remaining 16 participants that without” credit by cutting back spending.
had not been formally declined were self-excluded
from this type of credit as they would no longer be Of the 64 people that were declined a payday
eligible for a payday loan for a number of reasons loan, we found that 58 percent (37 out of 64
(See Table 2 for typical examples). For example, participants) took action to seek access to other
they had been declined from other sources of credit after being declined (e.g. applied to another
credit such as a bank overdraft or credit card, which lender, friends and family) (Table 3). Between
due to over-indebtedness or lack of affordability, these participants, a total of 46 different possible
positioned them in a constrained environment, and actions were identified to seek access to credit. For
therefore put them in a similar category to those example, participants employed multiple strategies
that were formally declined. to manage their financial situation:
From this point onwards, our findings focus on “So, really, just manage my money
the 64 participants that were formally declined better. Stop buying things that I
for a payday loan since 2015. From these 64 can’t afford, really…. I’ve got an
qualitative research participants, we have created overdraft and that’s it.
a typology of 16 actions that a declined applicant (Susie, Birmingham)
carried out after being declined a payday loan (see
Table 3 and Figure 10). We found that participants The remaining 42 percent of participants (27
took a series of different actions after being out of 64 participants) took action towards other
declined that can be categorised in two ways: strategies that did not involve seeking credit (e.g.
increased working hours) (Table 3). Between these
1. access to credit, or; participants, a total of 48 different possible actions
2. no access to credit. were identified to deal with the consequences
of being declined a payday loan, which did not
Due to the number of participants in our research include seeking access to credit.
the findings are indicative rather than exhaustive.
In the findings that follow we use percentages The most common step that an individual took
but the sample size is not large enough to support after being declined was to access credit from
testing for statistical significance. Instead the friends and family (taken by 23 of the 64 declined
findings provide deeper and more specific insights payday applicants or 36 percent) (Table 3). Our
to complement existing quantitative data on the research found the number resorting to family and
experiences of declined payday loan applicants friends to be similar to the 40 percent identified
Table 2: Examples of the 16 participants that were self-excluded from payday loans
Participant Declined applicant of payday and Reasons why they may be declined
other credit from payday post-regulation
Steven Overdraft Existing loans from Street UK and
Provident
Paula Vanquis credit card Previous arrears with rent-to-own
Co--op bank for personal loan
Nikki 0 percent credit card Yes, previously in a debt management
plan with credit card debt
Molly Home improvement loan Too many payday loans
Equity release20 Payday Denied
Table 3: Declined applicant actions
Declined outcome England Scotland Total
Access to credit 23 23 46
Successful at a different payday lender 9 2 11
Unsuccessful at a different payday lender 0 2 2
Successful at sister company 2 0 2
Community finance 2 0 2
Credit Union 1 2 3
Credit from credit cards 1 0 1
Money from family and friends 6 17 23
Family member took out loan 1 0 1
Entered false information to payday lender 1 0 1
No access to credit 28 20 48
Went without 6 5 11
Arrears 1 3 4
Savings 1 0 1
Cutbacks and Budgeting 7 8 15
Debt management advice 2 3 5
Debt management plan 9 1 10
Increased working e.g. overtime 2 0 2
Figure 10: Declined applicant journeys51
Key
London, Birmingham
Glasgow
Access to credit No access to credit
(37 people) (27 people)
Payday loan
Different access via false Went without
payday information (6) Debt management
lender (1) (5)
Credit card
(1) Arrears
Community Successful at (1)
finance sister company (3)
Credit Union Plan Advice
(2) (2)
(1) (9) (2)
(2) Savings Increased (1) (3)
Family and friends (1) working
(2)
Successful
(9) Unsuccessful Cutbacks and
(2) (2) Budgeting
(7)
Borrowed (8)
from family Family
and friends member
(6) took out loan
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