News that after 141 years Provident Financial, the UK’s largest provider of unsecured credit, was calling time on its doorstep home credit business felt like an important moment. ‘The Provi’ as generations have come to know it, reached parts that other mainstream financial services companies neglected – the unwaged, the unemployed, and those with disrupted credit histories. It typically offered under the ‘doorstep’ lending model small loans that bridged a gap between pay-days. Such loans, came at a price. The cost of capital, delivery via doorstep agents and the sub-prime nature of the risk all increased the cost to the end user. Provident disliked talking about APRs as they maintained – to some extent fairly – that the fee they charged was fixed and without penalty. Provident typically offers credit in the range of £100-£3000. A typical loan of £300 paid back over 13 weeks would have an APR of 1,557.7% or 172% PA fixed.1
Since the Financial Conduct Authority (FCA) began regulating the sub-prime credit sector over 1,400 organisations have either been refused a license to operate, or like Provident, have withdrawn their application to trade2. It is estimated that between 10-14m adults in the UK have no alternative except recourse to near or sub-prime lenders to access the kind of products and services the majority of us take for granted. It remains a troubling reality that this significant number of people are neglected and overlooked by the mainstream financial service providers – the banks and building societies in particular. The pandemic will have only exacerbated this phenomenon as furlough and redundancy among shift, contract and ‘gig economy’ workers places even more strain on their ability to bridge financial gaps.
Many years ago, on behalf of the Church Commissioners for England, one of the Church’s National Investment Bodies, I spent a week or so on one of England’s largest estates in the North East to listen and understand from the women who lived there how their reliance on Provident Financial doorstep loans left much of the estate in perpetual, long-term debt. It was heart breaking to hear how a cycle of multi-generational poverty had been caused by the closure of industry, poor job opportunities, a lack of investment and the cycle of debt created by their necessary recourse to sub-prime credit.
The work we conducted in the North East led to changes in investment thinking and a move away from investing in the sector by emphasising the need for alternatives. Whilst recognising the legitimacy of the service Provident provides, my views have not changed: We urgently need an alternative to this cycle – one that provides assurance, access and fairness for the end consumer. A disrupted or intermittent credit history should not mean the near impoverished suffering the double whammy of heightened credit costs. This is a situation all Governments have routinely ignored and failed to address. With no cap on the cost of credit, some providers have been allowed to exercise predatory approaches with APRs in the thousands of percent. The much admired credit union sector has neither the critical mass nor the means to take over from the credit doorstep companies – I remember all too well the women of South Shields telling me there was no savings culture on the estate and so accessing credit unions was – at that time – impossible. In the UK the 277 registered credit unions service 1.4m people and have a modest loan book of just £1.1bn3.
At EdenTree we have had some exposure to sub-prime credit providers as it has never been excluded under our ethical screens. In 2020 we consulted with a number of clients on their appetite for investing in the sector and whether they perceived this to have reputational challenges for them as clients, and for us as leading responsible investors. The results indicated, by and large, that clients would prefer to avoid non-standard finance, recognising it has its place but was deemed an uncomfortable fit with ESG mandates given the perception of predatory pricing and trapping customers in a spiral of poverty. As a result, we moved to make non-standard finance (sub-prime credit) a specific ethical exclusion from 1 May 2021 in all of our screened Responsible & Sustainable Funds. Our charity funds adopted the screen on 1 January 2021. The exclusion is very specific and extends to doorstep home credit providers, pay day lenders and pawnbrokers. It excludes a small range of UK companies including Provident Financial, International Personal Finance (IPF), Morses Club, Non Standard Finance, and Ramsdens. The screen rests on the product offer being sub-prime at interest rates significantly above mainstream commercial, mainstream credit rates i.e. over 50% APR.
Whilst Provident Financial will no longer be operating its door step home credit business, it is to be hoped that digital technology and online access might reduce the cost of credit when compared to an agent led door-to-door model – but it may be too much to hope that the overall cost of debt will reduce. It remains true that Provident was a responsible lender, but an expensive one and in a complex way was part of both the solution and the problem. As PwC remarked in a recent investor briefing ‘the bigger picture…is that a very substantial number of adults in the UK now fit the profile of a near-prime borrower; these consumers should not be denied access to credit – lenders must find new ways to serve them’4. Financial inclusion of the most marginalised remains unresolved and pressing – it remains an urgent, if somewhat neglected, ESG issue.
1. Example provided for a typical Provident Financial personal credit at www.lenderscompared.org.uk
2. Banking the under-banked: the growing demand for near-prime credit (pwc.co.uk)
3. Association of British Credit Unions Limited (ABCUL) About ABCUL - Association of British Credit Unions Limited
4. Ibid PwC