The Dawn of a New Age of Black Credit Markets

Lots of experts are suggesting that heavy regulation of the short-term lending sector will usher in a new advent of black credit markets in the UK. Whereas lots of people think that heavy regulation of short-term credit facilities will only really impact lending giants, what many are forgetting is that where prohibition enters, black markets begin. So, what are the true implications of heavy regulation of the short-term credit market in the UK?

Saw it coming

According to expert group Policis, the government was warned well in advance of implementing their program of short-term credit reforms that this was likely to lead to a surge of black market credit providers. Black market credit providers are sometimes called “loan sharks” because they trap people into borrowing large amounts and then use illegal methods to recover the money if the borrower defaults. There are many, many awful stories of people based in the UK who have fallen victim to loan sharks and some people report being physically assaulted or intimidated into making repayments to unregulated credit providers.

credit markets

The rationale goes that if the government makes it impossible for you to operate as a regulated enterprise, then it makes sense to “go underground”.

Family and friends – the answer?

Some suggest that heavy regulation of the short-term credit sector (such as fast loans provider Wonga) will increase the pressures that those experiencing cash flow problems will place on friends and relations who are better off. With many more limited options available to these people, experts have also suggested that the clampdown on short-term credit provision will force people to turn to food banks and could even contribute to a rise in cases of malnourished children on the streets of the UK. That is not to mention the financial misery that will be inflicted on those who have jobs in the short-term credit industry, with payday lenders like Wonga for example, as lenders are being forced to consider cutting jobs to meet compliance costs.

Pie in the sky regulation with no provision made for the implications

Some experts including think tank Policis have suggested that while regulation has been clearly thought out, the implications have not been so well thought out, and now attention needs to be paid to the new categories of people who would have qualified for short-term credit previously, but under new regulations – not any more. Some are suggesting that this category of people could be as high as 1-2 million, and this is based on the number of people in receipt of payday loans in the UK in 2014. It is not just the people in receipt of payday lending in climates of lighter regulation that are at risk. The regulation has also created a large portion of unemployed people who used to work in the short-term credit industry.

What can be done?

One thing that should be considered is an easing back of the regulation that payday lenders are subject to. Experts are suggesting that we should also aim to provide very poor people with alternative options to obtain basic goods, services and necessities.

What do you think?

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