Fair4All Finance: Externalities arising from use of high cost credit in the UK

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Pro Bono Economics’ literature review for non-profit organisation Fair4All Finance identified the evidence gaps that need to be filled in order to determine the societal costs associated with high cost credit (HCC).

Fair4AllFinance exists to improve the financial resilience of people in vulnerable circumstances by increasing access to fair, affordable and appropriate products and services. Their initial focus is on addressing the problem of access to affordable credit by providing support and funding for the affordable credit market.

Pro Bono Economics was commissioned to review the literature on the negative externalities (costs imposed on wider society) caused by the use of HCC and determine if and how estimates of the economic costs can be approximated.

These negative externalities include higher demand on public health services such as GPs, hospital admissions, NHS mental health programmes and other agencies. Other wider impacts are likely to be found in other areas of social policy, such as: loss of housing, crime, education, foodbanks.

At this stage, it has not proved possible to construct an economic model to estimate the externalities associated with HCC, due to the lack of evidence on such externalities. In particular, robust estimates for the impact of HCC on individuals is lacking. While there is an abundance of evidence on related issues such as ‘problem debt’, the externalities cannot be directly applied to HCC because of differing socioeconomic contexts.

Pro Bono Economics identified two key steps to remedy the evidence gap, which needs to be filled before an economic model of societal costs can be constructed: 1) Creating a theory of change to help map out where existing research can be used or where there is a need for new research, and 2) Quantifying the impacts of HCC through a standardised user questionnaire for repeated use by organisations across the sector.