Scale Up Affordable Credit subsidy Scheme

• The policy objective for this subsidy scheme is to preserve and scale up the provision of affordable credit – ensuring that the 12m people with unmet credit needs can access small-sum (typically <£1500), short-term (typically <12 months) unsecured lending which is appropriate to their needs, flexible and affordable.   
• The scheme involves the provision of finance via various forms of social investment (including loan and equity) and grants by Fair4All Finance into community finance providers and other social purpose lenders, to preserve and scale the provision of affordable credit to customers in vulnerable financial circumstances.

Further detail on the policy objective:

• The UK credit market is not working well for millions of people – with evidence that commercial lenders are not lending to a significant, and growing, number of people:
  • The non-prime market has contracted by more than 30% since 2019, and this contraction has pushed more people towards unregulated and illegal lending  
  • LEK Consulting estimate the financially under served population to be 16-17 million people (c30% of all adults), of whom 12 million were ‘serviceable’ commercially. However mainstream commercial lenders are not lending to this market. LEK estimate the value of ‘unmet but serviceable credit needs’ to be £2bn (source: LEK, 2023)
  • In 2017 one in 12 adults with household income under £15,000 borrowed from a friend or family member; by 2022 it was one in 6 (source: Fair4All Finance, 2024).  This also likely indicates a growth in demand for loans which are not being served by commercial lenders
• The public policy objective of the scheme is to scale up the provision of affordable credit and ensure that the 12m people with unmet credit needs can access small-sum, short-term unsecured lending which is appropriate to their needs, flexible and affordable
• The subsidies available under this scheme are a small fraction of the size of the current market and potential market
  • Current market: non-standard credit market estimated to be £13bn (source: LEK, 2023)
  • Potential market: current market plus non-standard credit needs which are unmet but serviceable estimated to be £15bn (source: LEK, 2023) 
  • The lending capital and commercial investment required to support the market growth is expected to be around £2bn (assuming average loan terms of 12 months)
  • The maximum subsidy available under this scheme will be £10m which represents only a fraction, 0.5%, of the identified required lending capital and other commercial investment.  As this is such a small proportion we have confidence that the subsidy scheme will not result in any market distortion

• Subject to meeting the following eligibility criteria and successful applications, community finance providers and other social purpose lenders serving customers in vulnerable financial circumstances will be eligible to receive subsidies under the scheme. A summary of the eligibility criteria is:
  • Recipients provide affordable credit – by which we typically mean short-term loans of up to £1,000 (occasionally a higher threshold may be considered dependent on customer group) to customers in vulnerable financial circumstances
  • Recipients have the ambition and potential to provide a significant scale of affordable credit
  • Recipients are purposeful about supporting customers in financially vulnerable circumstances fairly. This will include agreeing to abide by our Affordable Credit Code of Good Practice
  • Recipients predominantly serve customers in England
  • Recipients are viable organisations. By this we mean – the organisation is already lending and generating income from this lending, has a loan book of (usually) £2m minimum, has strong leadership and robust governance  
  • Any subsidy will take into account the recipient’s size
  • Recipient will be required to show that receipt of a Fair4All Finance subsidy under this scheme – whether through social investment, grant or other support – is necessary to support the scaling of their offer of affordable credit.  For investments, there must be protections in place to ensure there will be no undue private gain
  • Recipients will adhere to principles of engagement around reputational risk and in good faith seek to grow the overall market in providing fair, affordable and appropriate financial products and services

• Applications for subsidy will be made as part of our Affordable Credit scale up programme.  Fair4All Finance will conduct due diligence to evaluate the business model and establish whether the proposed social investment, grant funding or other financial support in principle meets the policy objective and is transformative, efficient and a good use of dormant asset funding.  The Fair4All Finance board (or delegated subcommittee) shall have the final decision.  For more information, please contact Holly Piper, Investment Director on Holly@fair4allfinance.org.uk
• Where Fair4All Finance determines this to be the case, it may then make a social investment into the Recipient, either in the form of a grant, debt, equity investment, guarantee or other financial instrument. The structure and terms of conditions of a subsidy may vary from case to case in order that Fair4All Finance may implement the funding in the least distortive and most effective manner.
  • Generally, Fair4All Finance will seek to make debt or equity investments on as close to market rates or bases as is possible, with no more than the degree of subsidy required in order to achieve Fair4All’s legitimate policy aims. All terms shall be negotiated on a commercial basis.
  • In some cases, a guarantee may be offered where this can leverage in significant additional investment on commercial terms, enabling significant scaling of affordable credit in an effective manner
  • In rare cases, where a near-commercial investment is not possible, Fair4All Finance may offer limited grants. Grants shall only be available to not-for-profit community finance providers and associated organisations
• Fair4All Finance may make co-investments (or match funding), where the leverage of the scheme funding will enable greater scale of affordable credit provision, and where Fair4All Finance’s financial support is necessary to achieve this  
• The subsidy will be calculated in line with the Subsidy Control Guidance, which provides in summary as:
  • For loans, the difference in finance costs as compared to market rate
  • For equity, the difference between the market value of the equity and our investment. Note that when investing in for-profit organisations we expect to make a fair return on equity (ie no subsidy provided in this case)
  • For grants, the amount of the grant
  • For other financial instruments, the difference in finance costs as compared to market rate

• With reference to section 2(2) of the Subsidy Control Act, the scheme shall provide subsidies via direct and contingent transfers of funds
• The maximum subsidy available under this scheme is £9,999,999
• Under this subsidy scheme, grants are expected to be rarely used, and in all cases under £250,000
• Under this subsidy scheme, loans and equity are expected to be in the region of £1-15m; however the differential in finance costs (which would be the amount of the subsidy given) is expected to be such that the total subsidy for any organisation would be no more than £1,000,000 over a three year period