The UK has always had a financial divide; those with money have always found it easier to borrow than those with less. Provident Financial was created in 1880 to help tackle this problem, lending to those less well-off for coal and clothing - in those days essential consumer products.
The financial divide is unfortunately still alive and well, however, and there are around 10 to 12 million adults in the UK who cannot access conventional banks; basically they can’t meet their lending criteria, and, as a result borrow from companies like Provident - for the basics of cars, holidays, and consumer goods. Whilst society’s definition of essential products may have changed, access to finance for the underserved has not.
In the period since the last financial crisis, as is well documented, some companies providing finance to the underserved behaved very poorly, and the government and regulators took appropriate action. The market has moved on significantly since then, through self-help and regulatory support.
No doubt there are still some bad apples out there, but in my view, the market is looking after its customers far better. For example, the Citizens Advice customer caseload for debt advice has shifted from circa 70% financial services related prior to the last financial crisis, to circa 30% now. It has been mainly replaced by utility companies and local government debt. I’m not saying circa 30% is great, but it is an improvement, and we will strive to do better.
The financing divide today is also turning into a funding divide, due to the pandemic, which will hit less well-off borrowers hard. The government has sought to provide considerable short-term funding to both individuals and small businesses, be it furloughing or providing access for the High Street Banks to the Term Funding Scheme for Small and Medium-sized Enterprises (TSFME). However, non-bank lenders - which traditionally lend to the underserved - can’t rely upon furlough payments in the longer term as a source of income to support underserved lending. Nor can they access the Bank of England schemes to continue to fund their lending, just as their customers’ requirement to borrow becomes more necessary.
Based on recent disclosures, consumer lending at present is significantly down across the board. At Vanquis Bank, our credit card business, customer expenditure on cards was down around 40% year on year in April. However, demand will pick up over time as people work out how things fit in this new dynamic. When it does, providers of credit in our sector will be lending less, and there will be fewer of them because the sector could not access government support.
We are fortunate at Provident Financial that we don’t have this problem as we are a bank. However, many of our competitors who don’t have our capital base and access to deposit funding will struggle, and less well-off customers will lose out. I believe our customers should be treated the same as High Street Bank customers in relation to government financial support. It is vital that providers of sub-prime finance have the capacity to lend to their customers.
Payment holidays is another area that could disproportionately impact the less well-off customer, as for some it may prove to be more of a hindrance than a help through increasing their debt. Payment holidays work best for people who need short-term help. They do not work well for someone whose financial difficulty is being masked by a payment holiday. What borrowers who face this scenario really need is forbearance, not a payment holiday in the first place.
The unintended harm of a payment holiday is perhaps best demonstrated by car finance, particularly the extension of credit through hire purchase, the form of finance adopted by the underserved car borrower. Like others, they can access payment holidays. However, if the customer goes into forbearance after a payment holiday, and ultimately returns the car, the asset will have gone down in value during the payment holiday, but the amount the customer will have to repay will not have been reduced (in fact with interest it will have gone up). Had the customer gone into forbearance earlier, and not taken a payment holiday, the lender would have had an opportunity to have identified an appropriate repayment arrangement for them (and, therefore, they would have less debt outstanding against a depreciating asset).
Here at Provident Financial, we put in place a triage system early on for payment holiday exits, and welcome the FCA’s guidance on this. A triage process gives customers a tailored outcome, which some may not get if they don’t go through it. The outcome could be a short-term extension, or forbearance in the form of a reduced payment, a referral to a debt support charity, and for some it would be a return to their normal repayment activity. To do this though, the industry needs to be able to interact with its customers, without them having the option to request a payment holiday automatically, which may not be in their best interests.
In my view, the government could help the less financially well off by ensuring a level playing field on company funding, and making sure customers get the right exit strategies for payment holidays.
There’s one other measure the government could implement to help families through the pandemic, which is to bring forward its debt Breathing Space scheme planned for 2021. “Breathing Space” is a debt respite scheme which will see enforcement action from creditors halted and interest frozen for people with problem debt for a period of 60 days.
This excellent initiative will stop hundreds of thousands of people from getting into debt, and ultimately having their credit records impaired, resulting in either no access to borrowing, or more expensive borrowing. It’s a great idea, and it makes no sense to make people wait for that support, we need to get on with it.
Malcolm Le May,
CEO Provident Financial plc.