LONDON (Reuters) – Soaring funding costs for Britain’s subprime lenders are making it hard for them to meet growing demand from households crushed by the pandemic, industry executives and experts told Reuters.
While banks with hefty mortgage books and deposits have been able to tap billions of pounds in cheap debt from the Bank of England to keep pumping out loans, lenders focused on low income households with poor credit profiles rely on capital markets.
Investors concerned about strained household budgets in a historic downturn have pushed up borrowing costs for subprime door-to-door and credit card lenders, including major players Provident Financial and Non-Standard Finance.
This in turn makes it harder to expand their loan books to people who may find themselves unable to borrow from banks, particularly once Covid-related loan repayment holidays run out in March.
Provident’s June 2023 bonds are trading at a yield of 8.7% – up from 5.9% a year ago, while Non-Standard Finance has an August 2023 loan trading at a yield of 11.32%, according to Refinitiv data.
By contrast high street banks like NatWest have been able to pay around just 0.1% for the Bank of England’s Term Funding Scheme, which is not open to non-bank lenders.
“Our customers aren’t able to benefit from government lending schemes and low Bank of England rates. said Gary Jennison, chief executive of guarantor lender Amigo, who predicts the number of subprime borrowers in Britain will jump from 10 million to 15 million next year.
“Why don’t they have a scheme for this demographic?”
The Bank of England declined to comment. Debt charities have long argued that the government could better support struggling households by helping to fund affordable borrowing options to supplement commercial options, but a no-interest loan scheme proposed by the government in 2018 is yet to materialise.
The Treasury argues that it has provided unprecedented financial support through the crisis and recognises extra help may be needed, giving extra funding to debt advice providers and expanding the welfare safety net.
The trajectory of funding costs for Amigo, which has been beset by company-specific problems including a deluge of customer complaints, is particularly stark.
Its debt maturing in Jan 2024 is trading at a cash price of 59 cents on the dollar — considered distressed territory — translating to a yield of over 27%, Refinitiv data shows, compared to a cash price of about 94 cents and a yield of 9.26% at the start of the year.
The lenders have also bombed in equity markets, with Amigo and NSF both down around 85% this year to date – massively underperforming mainstream banks – while Provident is down 42%.
Since taking over regulation of consumer credit in 2014, the Financial Conduct Authority (FCA) has introduced rules to deter repeat borrowing and payday lending price caps, forcing some high-profile names like Wonga and QuickQuid out of business.
The interventions have been broadly welcomed by consumer protection groups, but some subprime lenders say they have gone too far.
John Cronin, analyst at Goodbody, said an uncertain regulatory environment is one reason some investors are abandoning Britain for markets like the United States, reflected in lower comparative funding costs.
In the U.S, major subprime lenders Capital One and Discover Financial Services enjoy funding costs of less than 1%, according to Refinitiv data. This, say some investors, is partly because it is easier to judge risk.
“The UK consumer debt market doesn’t have an established and widespread system for assessing consumer credit risk as the U.S. does, so it’s harder to invest in,” said Federated Hermes senior credit analyst Filippo Alloatti.
Cronin said UK lenders are hopeful a review of the unsecured credit market led by former FCA board member Christopher Woolard, due in early 2021, will provide clarity and inspire more investor interest.
An FCA spokeswoman said its work has focused on ensuring firms have robust policies in place so loans are affordable, customers are treated fairly and supported when necessary.
Amigo, which stopped lending to all new customers bar essential workers in March, last month said it had topped up its complaints provisions to nearly 160 million pounds ($214.14 million) and flagged “material uncertainty” over its future.
While he admitted Amigo has made mistakes, Jennison said lenders should not have to foot the bill to process what he described as dubious referrals to the Financial Ombudsman Service (FOS) by claims management companies.
Many of these, which cost 650 pounds each to process by the FOS, include attempts to re-open settled cases or claims from people who have never borrowed from Amigo, he said. The FOS said most cases brought before it had merit.
“The very high uphold rate for these products indicates these are not frivolous complaints. If businesses learn from our approach, as they are required to do, then our service would not need to get involved,” a spokeswoman for FOS said.
Jennison – who joined Amigo in September – said the company aims to restart lending early next year, with beefed up affordability checks and alternative products beyond guarantor loans.
“The government doesn’t care about this market and they need to start caring,” he said.
($1 = 0.7472 pounds)
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