• One million people now estimated to be using illegal loan sharks as households face unprecedented rise in energy bills
• Single-parent families, who are often women with children, are most likely to be living in poverty
• Cambridge academic is calling for affordable borrowing to be made legally available for those who need short-term loans to plug the gaps

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“The illegal credit market has expanded hugely”

Britain is seeing an explosion in the number of people falling into a ‘debt spiral’ and using illegal loan sharks as the cost of living crisis bites, warns a Cambridge academic.

Dr Jodi Gardner, University Lecturer in Law at the University of Cambridge and a Fellow of St John’s College, warns there has been a sharp rise in illegal lending, with a report from The Centre for Social Justice showing that more than one million people could be relying on illegal loan sharks – which is over 700,000 more than previous estimations.

She said: “In response to the cost of living crisis and the lack of access to legal credit options, the illegal credit market has expanded hugely. There are other drastic measures people take when they cannot make ends meet – they go without food, they’re reliant on food banks, they go without heating their home, which has a variety of different kinds of social and health outcomes, or they ask for money from family or friends.

“Those suffering are being pushed further down the line. Unless we make sure that there's some sort of safety net for the people who are already struggling, then the reforms done so far to try to improve welfare by cutting off the financial products, are likely to do more harm than good.”

The pandemic and current cost of living crisis laid bare the consequences of financial laws brought in to prevent the predatory tactics of high-interest ‘payday’ credit companies such as Wonga, which famously collapsed in 2018, on people who are financially insecure.

Although welcomed by many at the time, it has become clear that the reforms left many families on the fringes of poverty with no access to quick, legal finance, such as credit cards or payday loans – and sparked a growing reliance on illegal loan sharks.

Dr Gardner said: “Petrol is being thrown on the fire. High-cost credit is harmful in lots of ways but if they’re the one access to legal credit for already struggling borrowers, cutting them off can create a bunch of other side effects.

“If you want to regulate an area of finance, you have to really understand the impact it is going to have on the most vulnerable in our society.”

The global financial crisis of 2008 resulted in a tenfold increase in just six years of people taking out short-term, high-cost credit loans simply to pay their bills from one week to the next, until the Financial Conduct Authority (FCA) toughened up regulations.

This move saw 160,000 people who used to access high-cost credit suddenly cut out of the market. “The Government said, ‘Well, this is a good thing because these financial products are exploitative and very expensive, people are better off’,” says Dr Gardner.

“But the other side of the coin is that there were no alternatives. So the impact of austerity measures and the cut down of the social security network meant that benefits were lower, and there was very little flexibility in getting them prepaid in the event of unexpected expenses. The Universal Credit transfer also meant that applicants had a six-week wait until they got any benefits. Then there’s the cut-down of the social fund – councils have less funding available for any sort of support networks. So there was nowhere else people could go when access was cut off to legal but expensive loans.”

“There will be a perfect storm of people with no social security network and very limited access to legal credit. It is going to be a catastrophe”

So while high-cost credit can be expensive and exploitative, Dr Gardner argues it is nowhere near as dangerous and harmful as borrowing from illegal lenders. Reforms that cut off access to legal credit, particularly during a cost of living crisis, have the potential to push even more people desperate for funds into the arms of loan sharks.

Single-parent families, who are often women with children, are more likely to be living in poverty and are therefore disproportionally affected. In her new book, The Future of High-Cost Credit: Rethinking Payday Lending, Dr Gardner recounts the experiences of payday borrowers trying to ‘make ends meet’.

In 2019 Citizens Advice saw approximately 1,500 people get in contact about difficulties with prepaid energy meters. Last year the figure was just over 3,000 – this summer, it's more than 10,000. With the cost of living crisis only expected to get worse, Dr Gardner is fearful about the devastating impact on struggling households. “The increased demand for high-cost credit came about because of the global financial crisis, and we are seeing exactly the same thing now with the cost of living crisis,” she said.

“I am terrified about what it’s going to be like in winter for those families who are already struggling to pay their electricity bills in the middle of summer.

 “There will be a perfect storm of people unable to make ends meet, with no social security network and very limited access to legal credit. We’re going to see more families reliant on food banks, more people being disconnected from their electricity in the middle of winter, more kids going hungry, more people struggling to pay bills. And the impact of that really hasn't been thought of by either side of politics at the moment. It is going to be a catastrophe.”

In the FCA’s 2020 Financial Lives survey, 23 per cent of people who used high-cost credit in the previous 12 months were going through a divorce or separation and 19 per cent had lost their job or had a reduction in hours.

Dr Gardner is calling for affordable borrowing to be made legally available for those who need short-term loans to plug the gaps in their everyday expenses, not just to those who can afford it – taking guidance from countries such as Australia. An understanding of the impact that high-cost credit has on people with mental health difficulties or gambling addictions is also vital, along with regulation around those issues.

Dr Gardner said: “There’s been a lot of engagement from geography and social policy for a while, but lawyers in Britain have really not been interested in high-cost credit before. We should be looking at it through a legal lens and thinking, how can the State respond? The law can only do so much in this area because it really is an inherently political issue – we need the political will to deal with these issues on top of law reform.

“The bottom line is we have to reduce poverty. We have to ensure everyone has access to a safety net when they have unexpected financial difficulties. And they don't have to turn to high-cost credit loans to bridge that gap.”

• The Future of High-Cost Credit: Rethinking Payday Lending by Dr Jodi Gardner is published by Hart Publishing, an imprint of Bloomsbury.

Published 17/8/2022

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