The proposal for a price cap on high-cost, short-term credit in the UK highlights the regulatory risks for non-standard lenders, Fitch Ratings says. It signals the potential for stricter rules in the UK that are closer to other countries in Europe and the US, as increased regulation extends from banks to shadow banking and consumer lending. Larger alternative lenders typically have flexibility in their business models to adapt to the changes. But if they cannot adapt to new regulatory requirements and changing market dynamics, this may be a negative rating driver.

Yesterday's consultation paper on the introduction of a price cap for high-cost, short-term credit (HCSTC) specifically excludes home collected credit, so has limited implications for UK's Provident Financial, although it has an online proposition that probably falls under the HCSTC definition. UK regulatory investigations into high-cost credit have been frequent in the past, although have not resulted in any material requirements for Provident's home collected credit and sub-prime credit card business.

But we believe regulatory scrutiny is likely to increase following the transfer of responsibility for consumer credit regulation to the Financial Conduct Authority in April 2014. Further investigations by the FCA may affect Provident's operations. For example, the FCA will start a comprehensive credit card market study in autumn 2014 that may have implications for Vanquis Bank, Provident's credit card unit.

High-cost credit investigations are common in many European countries. International Personal Finance, a home credit business, operates with rate caps in Poland, Slovakia, Hungary and Bulgaria. Regulation is evolving in Poland with proposals to restrict non-interest charges, which may require IPF to adjust its product structure. IPF was subject to a fine from the Polish Office of Consumer Protection and Competition in December 2013, related to the way it calculated its APRs and the total cost of credit, which the company appealed. While the fine was a small sum, it highlighted the risks from continued regulatory scrutiny of the consumer credit sector.

In the US, alternative lenders (eg, payday, pawn) are subject to regulation across all levels of the government including rules related to fair lending and the maximum interest rates that they can charge. Lenders are also subject to regulatory oversight from the Consumer Financial Protection Bureau (CFPB). Similar to the investigations in Europe, the CFPB included in its spring 2014 agenda potential rulemaking actions for payday loans and deposit advance products. Although the nature and extent of the rules are unknown, we expect any new rules are likely to have an adverse impact on the industry.

Larger, well-diversified firms will be better positioned to respond to regulatory changes than their smaller peers. We believe that any new rules will not reduce the credit needs of the underserved and unbanked population in the US. Therefore, we expect that some companies will adapt and innovate to find solutions to serve these customers while also generating acceptable risk-adjusted returns.