A Preventable Crisis: How to stop a surge of illegal money lending

By Matthew Greenwood, Acting Head of Debt, Centre for Social Justice.

A Preventable Crisis: How to stop a surge of illegal money lending

21st March 2022

Matthew GreenwoodAs the cost-of-living crisis bites, more families will find they have no choice but to borrow to cover both emergency and everyday costs. And illegal money lenders – known commonly as loan sharks – are all too well aware of the desperation felt among those on the very lowest incomes. But we have an opportunity to put a stop to this before the crisis hits.

Hidden debt, although elusive, is a real problem facing our nation. The CSJ’s new report, Swimming with Sharks: Tackling illegal money lending in England, estimates that up to one million people in England are borrowing from an illegal money lender today – that is, someone who lends money for profit without a licence from the Financial Conduct Authority.

The first major study in a decade, we’ve used the largest sample of confirmed victims to date as well as interviews with victims of illegal money lending to understand where illegal lending takes place, its typical forms today, and the route taken by individuals to the most dangerous forms of indebtedness.

Illegal lending takes place across England and there is no part of our country that is free from this scourge. Since 2011, the Illegal Money Lending Team England have arrested 730 loan sharks across the nation who continue to stalk deprived estates and their local neighbourhoods advancing money to vulnerable victims whom they then exploit.

And yet the nature of illegal money lending is changing. We have been struck by evidence that illegal lenders are increasingly using the fast evolving social media landscape to reach a wider pool of potential subjects. This allows them to intimidate their victims 24 hours a day.

Victims of illegal money lending are among some of the most vulnerable people in our society, blighted by multiple layers of disadvantage, including low incomes, unemployment, poor health and existing debts to legal creditors. Indeed, almost two thirds of victims (62 per cent) in 2021 had an income of below £20,000 a year.

Struggling to make ends meet, victims overwhelmingly borrow to meet their cost of living. 45 per cent say that they borrow to cover everyday costs, including council tax, gas and electricity bills, and other common items, such as pushchairs and school uniforms. Where victims attempt to borrow from legal sources first, and two in five say that they do so, they are overwhelmingly rejected – 80 per cent of those who attempt to borrow from legal sources are declined.

With nowhere else to go, victims turn to a ‘friend’. We have found that over half of victims say they consider their lender a friend when they first borrow. Often, that friend is not at all who they seem, exploiting their victim via psychological manipulation and, in some cases, violence for repayment. That repayment rarely resembles the amount borrowed.

As the cost-of-living crisis sets in, we can expect more vulnerable people to fall foul of exploitative loan sharks. That is why we must head off this crisis before it gets worse. With the Government providing welcome recent commitments to address economic crime in our country, the time is now to renew the fight against illegal lenders.

We propose a three-pronged attack: clamping down on illegal lenders, protecting the most vulnerable and, crucially, providing the alternative. As it stands, illegal lenders do not receive sentences proportionate to the crime that they commit (falling well below that of fraud), and additional resources should be released by HM Treasury to enable the Illegal Money Lending Team to combat the changing face of the problem.

To protect those most at risk, we must stretch every sinew to bring hidden debt to the surface: including through a national awareness campaign and updated guidance for debt advisers, housing associations, Jobcentre work coaches and the police.

But we must also do more to address low levels of financial resilience – and provide a safe alternative to borrowers in need. Fair4All Finance estimates that there are 11 million people in the UK who need help accessing cheaper credit. Revolutionising credit unions and promoting a growth-focused environment for alternative finance institutions by relaxing regulations is essential to providing affordable credit. The excellent Help to Save scheme introduced by the Economic Secretary to the Treasury, John Glen MP, must be better promoted to help people build a lasting defence against the weather of income shocks.

The cost-of-living crisis will not affect everyone equally. And we must act now to protect those at its sharpest edges. For thousands in our communities are swimming with sharks.

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