Business, Innovation & SkillsWritten evidence submitted by Provident Financial Group plc

1. Provident Financial Group

1.1 Provident Financial Group is one of the UK’s leading suppliers of personal credit products to the non-standard lending market, serving over 2.4 million customers.

1.2 Provident Financial has been serving customers since 1880. We operate solely in the non-standard credit market in the UK and Republic of Ireland.

1.3 Our business is split into two divisions: our Consumer Credit Division and Vanquis Bank. The Consumer Credit Division offers home credit - small, unsecured loans issued at the customer’s home by a local agent of the company and repaid weekly. Vanquis Bank offers Visa credit cards, bringing the benefits of credit cards in a controlled way to people who can find themselves excluded by mainstream card issuers.

1.4 Our products have been tailored to meet the specific needs of our customers. We provide our customers with small-sum products that are straightforward and easy to understand, that are affordable and that offer high levels of flexibility and personal contact. This is the approach to lending we have taken for over 130 years and is one of the reasons we’re able to achieve consistently high levels of customer satisfaction.

2. What home credit is and how it works

2.1 Home credit has the following key characteristics:

Uniquely—and different to other forms of lending including payday lending - there are no penalty fees or extra interest for late or missed payments. The total amount payable, including interest, is fixed. Each pound repaid by the customer brings down the total amount owed by a pound. The amount owed by a customer cannot “spiral” out of control. This control and certainty is hugely important for, and valued by, people on lower, fixed or variable incomes.

Any concerns about the so-called “rollover” of a loan (when a customer is unable to repay and is issued another loan) do not apply in the case of home credit. When a customer cannot pay, home credit’s response is to show forbearance. Typically repayments are reduced or suspended (at no extra cost) until the customer is able to resume payments at the initial contractual rate.

Loans offered are small—typically in the range of £200 to £500. Lower income borrowers typically want to borrow relatively small amounts.

They are short term and unsecured, usually for a year or less.

All would-be borrowers are individually assessed in person, rather than by remote or automated means.

Also uniquely, loans are granted and repayments collected from customers at home. The majority of both customers and home credit agents are women.

Unlike other lenders, repayments are collected on a weekly basis, making the amounts collected small and manageable, while also matching lower income household budgeting cycles.

Home-based service is key to this form of lending. Customers value it as it offers access, convenience and penalty-free tolerance of missed payments. Attempts at remote repayment models have been shown to be unviable.

Home credit is not a source of consumer complaints or indebtedness. Figures from the Consumer Credit Counselling Service show home credit accounted for 0.4% of problem debt they saw in 2010.

Home credit accounts for just under 1% of unsecured lending in the UK.

3. The Needs of Borrowers on Lower Incomes

3.1 Lower income borrowers often look for specific things when seeking credit and the features they prioritise may differ from what higher income consumers would consider most important. A 2005 report commissioned by the Joseph Rowntree Foundation, entitled “Affordable credit for low-income households”,1 identified what people on lower incomes look for when they borrow. Their key needs include:

Affordable repayments—borrowers want small, affordable weekly repayments that can easily be accommodated in their household budget. They may want to make smaller but more frequent payments, typically weekly, because this fits in with their weekly budgeting pattern.

A suitable, flexible repayment method—the ideal method would be one which is regular and convenient but which can also offer flexibility. It would make it as easy as possible for customers to pay when they could but wouldn’t penalise them when they couldn’t.

Transparency—with the total cost fixed and clear upfront. This means no hidden charges emerging after the credit agreement is signed, typically in the form of late or missed payment penalties.

Access—quick, convenient access without an overly long or intrusive application process.

3.2 Unless a credit provider can match these requirements the credit offered will not meet the needs of lower income borrowers. Home credit matches all of the above requirements of lower income borrowers. Dame Deirdre Hutton, when Chair of the National Consumer Council, summarised the home credit product and service:

“Home credit offers a unique service - there’s nothing else quite like it. Small, short-term unsecured cash loans, perhaps for as little as £100, are a lifeline to people on long-term low incomes who are excluded from the mainstream credit market. When they need extra cash for household bills, their child’s school uniform, or to cope with the financial demands of relationship breakdown, a new baby or sickness in the family they turn to the friendly agent who calls every week. The deal is done quickly, informally and face-to-face with local collectors who may have been known to the family for generations. Trust, flexibility and fixed weekly payments - with no penalties for missed payments - are the hallmark of a service that fits the needs of this vulnerable group like a glove.”

4. Why Some APRs and Total Cost of Credit Appear High Compared with “Mainstream” Loans

4.1 APR is an annualised percentage rate. This means that the formula set down in legislation has the effect of creating ever higher APRs the shorter the term of the loan. Experts agree that APR isn’t a good indicator of value for shorter term, small loans. As Martin Lewis (MoneySavingExpert) put it to the Treasury Committee (and in similar terms to the BIS Committee on November 22 2011):

“I did a pet calculation the other day which showed that if I lent you £20 and said, ‘Pay me back a pint of beer next week; buy me a pint for it,’ and the pint cost £3, that’s 141,000% interest, if you compound it. Yet most people would say, ‘Buy me a pint and £20, is a pretty reasonable deal.’”2

4.2 Whether you provide a loan of £100 or £10,000 the administrative and regulatory costs are the same. For short-term small sum credit the Total Cost of Credit (the cost per £100 lent) therefore can appear significantly higher than for larger, longer term loans.

4.3 Independent research commissioned by the Joseph Rowntree Foundation demonstrated that, even with favourable assumptions, as well as costs of funding excluded, providing home credit on a not-for-profit basis would need an APR of 123%.3

5. Price Controls

5.1 The government and regulators have reviewed price controls on a number of occasions in recent years. The Competition Commission, the Office of Fair Trading and the previous Labour Government all considered the issue of price controls and all came to a similar conclusion—that introducing price controls could lead to unintended consequences that would be detrimental to consumers. In particular, price controls could restrict the supply of credit and force those who need it into the hands of illegal moneylenders. In its review of the high cost credit sector, published in June 2010, the OFT review concluded:

“introducing price controls would not be an appropriate solution to the particular concerns we have identified in this market”

and that

“developing a system to enforce and monitor price controls or interest rate caps in the UK would be complex, expensive and difficult to administer”.

5.2 Proponents of price controls have only recently accepted that a cap on APR has serious shortcomings. They are now arguing for a cap on the Total Cost of Credit (TCC).

5.3 For home credit, capping the TCC is as blunt an instrument and as potentially as damaging to consumers as capping APR. This is because home credit APRs are inclusive: they must be calculated on the basis of all the costs of providing credit. Proponents of a TCC cap have so far failed to produce evidence that such a cap would not have the same impact as a cap on APR. Nor have they explained how, in practice, it would work.

5.4 Indeed, price controls based on TCC would specifically discriminate against home credit providers compared to other forms of credit, because of the higher costs of home collection. As a result it would distort the consumer credit market.

5.5 Our view is that a cap on TCC would have exactly the same negative effects as a cap on APR - ie it would exclude more people on lower incomes from accessing credit and would reduce the availability of small sum lending, thereby reducing competition and increasing illegal lending (along with the social harm that follows).

5.6 We welcome the Coalition Government’s commissioning of research in this area and expect it to arrive at similar conclusions to those of the Competition Commission, the OFT and the previous Labour Government, all of whom studied these issues in depth.

6. What Others Have Said on Price Controls

6.1 While price caps might seem a simple way of reducing the cost of credit for consumers, independent research4 has shown it can mean:

less transparency with greater back end penalty and ancillary charges;

lenders withdrawing from the market; leading to

increased exclusion for higher risk borrowers;

higher levels of illegal lending;

greater consumer detriment when in credit difficulties;

greater chance of complete financial breakdown for consumers; and

less product diversity and innovation in the market.

6.2 Some of the comments of the regulatory, consumer and money advice experts who have considered the issue of price controls:

“…there are a number of problems associated with interest rate ceilings: The UK has a sophisticated and diverse credit market. There would be many practical difficulties in introducing a capping regime that would apply to so many different types of credit arrangement... A rate ceiling may also result in some lenders withdrawing from the market. This, in turn, may lead to groups of consumers being denied ready access to alternative forms of credit, forcing them to resort to illegal moneylenders.”
Fair, Clear and Competitive: The Consumer Credit Market in the 21st Century, White Paper 2003

“We consider that price caps would have significant disadvantages in this market… We further noted that there would be considerable practical problems with the implementation of price caps.”
Competition Commission, Home Credit Market Investigation, November 2006

“It would appear likely that credit exclusion will result from the imposition of a ceiling and that the consequences will include significant hardship for excluded households who will no longer be able to access small sum cash credit to manage cash emergencies or peaks of expenditure or to enable them to spread the cost of major purchases.”
Policis, “The impact of interest rate ceilings”, 2008

“…at this point in time, if the Government were to legislate now and put in a cap of any percentage rate for the people who were paying 700%, you would actually put a lot of those people, two or three million people who are using even just home credit for example, in a position where they would not have access to any kind of affordable credit at all.”
Mark Lyonette, Chief Executive Officer, Association of British Credit Unions Limited, in evidence to Scottish Affairs Committee, July 2009

“The Taskforce believes that there is no case for introducing an interest rate cap on unsecured credit until there is an adequate alternative supply of affordable credit. Attention and resources would therefore be better focussed on improving the supply of affordable credit rather than introducing further restrictions to supply.”
Financial Inclusion Taskforce, March 2010

“The research showed that imposing a cap on interest rates could result in lenders withdrawing from the riskier end of the market, including the home credit market, denying vulnerable consumers access to legitimate sources of credit and potentially forcing them to resort to illegal money lending. This was a view shared by leading consumer groups including Citizens Advice, the Association of British Credit Unions, the Institute of Public Policy Research, Which? and Advice UK.”
Former consumer affairs minister Kevin Brennan MP, March 2010

“The OFT is concerned that such [price] controls may further reduce supply and considers there to be practical problems with their implementation and effectiveness.”
Office of Fair Trading press release on publication of review of high-cost credit, June 2010

“…there is quite a lot of evidence to suggest that it [a cap] may drive some consumers into the hands of the illegal or less good sector... we would be concerned about some of the unintended consequences of caps.”
Philip Cullum, Deputy Chief Executive Consumer Focus, in evidence to the Treasury Committee, November 2010

“We agree with the view that an interest rate cap may have unintended consequences and not provide the protection such a cap would be intended to provide.”
Money Advice Trust submission to BIS, December 2010

24 November 2011