Analysis: UK risky lenders crack under the weight of complaints

June 15 (Reuters) – The number of Britons with bad credit rises in the wake of the COVID-19 pandemic, as many lenders caring for them go out of business – breaching the market Some credit agencies warn can allow illegal loans to flourish.

The subprime lending industry has been in the crosshairs of regulation for more than a decade with complaints that it charged interest rates above 1,000% to people who were struggling to get by.

But a sudden increase in customer complaints for unfair treatment during the pandemic is proving the final straw.

Data from the UK Financial Ombudsman Service (FOS) showed that claims against the mortgage industry reached 6,091 in the last quarter of 2020, up from 445 in the first.

This was an increase from just 30 in the first quarter of fiscal 2014/15, when the sector was first placed under the supervision of the Financial Conduct Authority (FCA).

Since then, lenders have paid customers 900 million pounds ($ 1.27 billion) in compensation for unfair practices, according to the regulator.

Regulatory crackdown and waves of customer complaints have led Amigo (AMGO.L), one of the country’s largest risk lenders, to say that unless it can accept a drop in its credit bill. compensation, it will cease its activities.

Competitor Provident Financial (PFG.L) announced last month that it was shutting down its once-booming door-to-door collection business after a mountain of claims, while its smaller rival, Non-Standard Finance, announced a capital increase which he said depended on discussions with the FCA on Compensation Payments.

Executives in the subprime mortgage industry say many of the complaints they face come from claims corporations (CMCs) seeking new sources of revenue after years of focusing on the payment protection insurance scandal in China. Britain. The association founded by five of Britain’s leading CMCs did not respond to a request for comment.

“The mortgage market is shrinking rapidly,” said Goodbody analyst John Cronin. “Customer complaints lead to a declining industry, and high cost credit is now a very difficult space to play. “

NOWHERE TO GO

Debt charities say tighter regulation to ensure customers are treated fairly was long overdue, but with businesses now struggling to survive, the industry warns vulnerable borrowers may have nowhere where to go.

About 138 mortgage lenders left the industry in 2020, according to risk lender Morses Club.

After announcing the shutdown of Provident Financial’s home lending business, the Illegal Money Lending England Team (IMLT) warned consumers to beware of “opportunistic illegal lenders who may attempt to fill the void “.

“I don’t think the competition is going to step in in all areas and we could see an increase in illegal lending,” Jason Wassell, chief executive of the Consumer Credit Trade Association (CCTA), told Reuters.

The most financially vulnerable only saw their situation become more precarious during the COVID-19 pandemic.

According to ClearScore, the average credit score of at-risk borrowers fell to 197 from 200 between January and October 2020, while the average number of loan products available to them fell to 1.82 from 1.91.

The FCA said it has acted to ensure that expected industry standards are met, which includes the need for companies to lend only to customers who can afford to repay.

He said his research suggested that only “a very small proportion” of those who couldn’t get credit have used or considered using illegal money lenders.

ExcludedUK, a nonprofit group created in response to the pandemic to represent people who were not eligible for government support, said most of its 500,000 members felt subprime loans were their only way to to survive.

Its director, Jennifer Griffiths, says better government support is needed, such as low-interest bridging loan programs with repayments that only begin when the individual has a basic standard of living.

Debt charity StepChange has said that credit unions or community finance providers could provide alternative finance, although it acknowledges that many still cannot access these loans.

Credit unions typically require a member to build up savings before they can take out a loan, which may not be possible for borrowers who live paycheck to paycheck.

“This is why we have long advocated for programs such as an interest-free loan program, a pilot of which is under consideration with financial support from the government,” said Sue Anderson of StepChange.

Meanwhile, analysts say BNPL companies such as Klarna and Clearpay, which offer interest-free installment payment options, could fill some of the void left by shrinking mortgage providers.

But their use is limited to registered merchants, and they charge late fees and sometimes interest if payments are missed. An analyst said that many consumers are also unlikely to have the required credit rating for BNPL.

Numis analyst James Hilton said the future of the mortgage market as a whole was in great question after Provident’s announcement.

“You have to question the viability of an industry when a major player that’s been around for 141 years says they can’t make it work anymore.”

($ 1 = 0.7087 pounds)

Reporting by Muvija M in Bengaluru; Additional reporting by Huw Jones in London; Editing by Rachel Armstrong and Jan Harvey

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