Tuesday, 28 June 2011

Taking action on legal loan sharking

Legal loan sharks are here and they are ripping off ordinary people. Wonga.com charges 4500% interest on some its loans.

With this in mind the Co-operative Party have led the campaign for a New Clause in the Finance Bill (below) to help contain the problem. The article that follows highluights the horiffic nature and proliferation of this lending.

I would urge any constituent in Hyndburn or Rossendale in financial difficulty to stay away form theswe organisations and use Credit Unions. The credit union covering Hyndburn can be found on the upper balcony of the Market Hall.

New Clause: High-Cost Credit Lending, Finance Bill No.3, 2010/11

The Government shall lay before Parliament a review of all taxation measures contained in this Act that are applicable to those judged by the financial services authority (or its successor body) to engage in high cost credit lending. This review shall consider the following matters:

a) The nature of the high cost credit market and the proliferation of lending practices which are detrimental to consumers and or competition in the provision of credit to consumers;

b) The impact that taxation could have on the provision of high cost credit in the UK which is detrimental to consumers and or competition in the provision of credit to consumers;

c) Whether changes to taxation could discourage lending in a manner which is detrimental to consumers and or undermines competition in the provision of credit to consumers;

d) Other measures relevant to the high-cost credit lending sector that may prevent consumer detriment.

Whether payday loans, hire purchase agreements or doorstep lending, the high interest rates and penalties they charge are hitting families in every constituency and are completely legal. These so called legal loan sharks are rapidly expanding their operations in the UK, taking advantage of the lack of regulation and growing demand for finance as more and more families struggle to make ends meet. In February parliament voted for action on this - yet five months on, the Government has done nothing to take this forward.

Treasury Ministers agree this lending is problematic to consumers but refuse to intervene in the market to provide British consumers with the protection others across the world receive from these companies. New Clause “High Cost Credit Lending”, tabled to the Finance Bill, gives MPs the opportunity to direct them to an alternative course of action. It will be debated on Tuesday 28 June and if passed would require the Government to review whether taxation could be used to deter problem lending in this market or what other regulatory action could be effective. It has the support of MPs, policymakers, debt experts, campaigners and members of the public who are deeply concerned that the Government’s current approach of doing nothing to regulate these firms is feeding a growing crisis of personal debt for families across the country. This brief sets out the background to this debate.


What would this New Clause do? Preventing consumer detriment

In previous debates on legal loan sharking, Government ministers have acknowledged that the high-cost credit sector is structured in such a way as to cause problems for consumers. Mark Hoban MP said in the Finance Bill Committee on 9 June:

“There is no disagreement between the two sides of the House about the issues raised by the hon. Lady. I, too, am concerned about high-cost credit. Although I represent a relatively affluent constituency, the main street in Fareham has similar shops that offer payday loans. Companies such as Provident are active there, and I do not think any part of the country is untouched by some of these issues. We recognise the impact that very high levels of debt can have on people’s day-to-day lives, especially for the lowest paid and most vulnerable.”

Government ministers also voted in favour of the backbench business motion on 3 February this year which declared:

“That this House notes with alarm recent evidence showing a fourfold increase in the use of payday lending since the beginning of the recession and that high cost credit lenders advanced approximately £7.5 billion to low and middle income consumers in 2008 alone...; considers that without action these factors could worsen family debt, poverty and financial difficulties to the detriment of the economic recovery; therefore calls upon the Government to introduce measures to increase access to affordable credit; urges regulators to consider putting in place a range of caps on prices in areas of the market in unsecured lending which are non price-competitive, likely to cause detriment to consumers or where there is evidence of irresponsible practice...”

Despite this, five months on they refuse to contemplate any form of intervention in the high-cost credit market. Voting for this new clause would compel them to do more than wait for the market to improve but to act to protect consumers in Britain in the same way which citizens in most other countries enjoy.

Why the Finance Bill?

The Finance Bill is being used to tackle “problem drinking” by raising taxes on high-strength alcoholic drinks. On 17 May in the Finance Bill Committee, Justine Greening said:

“We can see that such a measure will have a disproportionate impact on tackling problem drinking, because the change in taxation will make it less attractive for producers to make such strong product.”

By the same principle, the Treasury could tackle “problem lending” by penalising companies that fail to meet certain standards of provision of consumer credit.

How the high-cost credit market causes consumer detriment

1. The high-cost credit market makes use of the fact that its customers lack access to other forms of mainstream credit. A quarter of the customers of high-cost credit companies cannot access any other form of credit. As consumers, therefore, they do not have the power to shop around for other forms of credit that are more acceptable to them and more manageable to pay back. Furthermore, customers who borrow regularly from these firms cannot build up a credit track record to enable them to show mainstream lenders who offer lower rates that they can be trusted.

2. High-cost credit companies have fixed costs, so they make more money by repeatedly lending to people. This means their business strategy is geared towards encouraging repeat borrowing, and the “rolling over” of loans. For example, 29% of payday loans are refinanced, with the average being at least two occasions. 15% of doorstep loans are also refinanced before the end of their term. Each time a loan is “rolled over”, interest can be charged on the interest accrued as well as the initial amount lent. Companies also engage in aggressive marketing campaigns to encourage repeated borrowing, often offering consumers the opportunity to extend their loans throughout the term. There is strong anecdotal evidence of companies lending consumers more money than they can afford to pay back in a month to ensure that they have to roll over their loan. As many in the industry refuse to release detailed information on their customer base it is impossible to ascertain how widespread this practice is at present.

3. The rates charged by high-cost companies often do not reflect any economic rate due to a lack of competition in the market or regulation to either drive down costs or set a ceiling. This means rates for the same kinds of products vary. For example, pay-day loans can go from 4,500% with Wonga to 2,500% with Uncle Buck, or 1,200% with Payday UK or 1,700% with Kwik Cash.
4. There is a lack of competition within sections of the market meaning consumers cannot shop around. Within the home credit market, one company Provident owns 60% of the market.

5. Both the Office of Fair Trading and Consumer Focus have shown that those who use high-cost products are often not influenced by considerations of price, as ease and speed of access are a greater determinant of choice. Thus more information on costs is unlikely to help consumers who cannot borrow from mainstream lenders.

Would this clause act to cap interest rates – and isn't that a bad idea?

Looking at how taxes could be applied to these companies could offer a range of ways of encouraging them to lend to consumers in a way which isn't detrimental. For example, it could help introduce an effective cap on the cost of credit by applying corporation tax in such a way as to discourage firms from making profit on repeat lending to the customers who get stuck borrowing repeatedly from these firms.

There is evidence that caps on interest rates can be counterproductive and circumvented if not applied in a way that reflects the national credit market - that's why this review is vital to make sure that the intervention made is effective in ensuring that they work as they have in other countries to ensure consumers are still able to borrow but at more affordable rates. Indeed, EU research shows that interest rate caps have in some cases led to less illegal lending too, as consumers are better able to manage their borrowing requirements without turning to informal sources of credit. Using taxes to introduce an effective cap on the total costs of credit, rather than interest rates alone, would make it harder for lenders to avoid these costs by charging exorbitant admin fees or product fees in addition to interest rates on loans.

This new clause asks for a review which would look not only at taxation but other measures to improve the way in which this market works for British consumers. It could also identify if a cap on the total cost of credit could be more effective if introduced using other regulatory measures. It therefore challenges ministers to offer credible and detailed proposals for tackling the problems inherent in the high-cost credit sector, should it be found that taxation measures are unsuitable.
Don’t we just need more credit unions to provide an affordable alternative?
Expanding access to affordable credit is vital, but will not address the growing levels of personal debt in UK society as families struggle to make ends meet. Indeed, the Financial Inclusion Taskforce stated in 2008 that it would take ten years for credit unions to fill the demand for affordable credit, and that was before the recession hit. According to FSA figures, credit union membership is growing by around 8% a year, but the payday lending industry alone is three times as big as it was two years ago. The total value of the high-cost credit sector is estimated at £8.5bn, dwarfing the value of the credit union movement. In Ireland, 50% of the population are members of a credit union, whilst in America and Canada, the figure is around 40%. In Australia and New Zealand it is around 25%, but it is closer to 2% in the UK. Despite that, at least 86% of people are eligible to join a credit union in England, Scotland and Wales on the basis of where they live. Changing this and ensuring credit unions can provide a viable alternative to legal loan sharking in all areas of the country will take many years.
What happens elsewhere?
Across Europe and North America, restrictions are in place to prevent lenders from exploiting vulnerable consumers. In Belgium, interest rate restrictions vary according to the amount and the type of the loan. In France, the maximum charge for a loan is calculated as 133% of the average APR, while in Estonia that figure rises to 300%. Germany employs a complex system which caps the cost of credit at 200% of average APR depending on credit type and term. In Slovenia the cap rises to as much as 453% for a two-month loan. Meanwhile in the US – where the payday lending industry originated – each state has a different system to regulate high-cost credit, with some banning the practice altogether, others banning the practice of rolling over loans, and still others employing a range of different capping mechanisms.
Background information - Why high-cost credit is a growing problem
The UK now has one of the highest levels of personal debt in the world – in April last year, people in Britain owed over £1,460bn in private debt . Borrowing money is sometimes essential, whether to enable a person to pay for training courses, start a business or to buy a house. However, there is a point at which borrowing can become unmanageable for individuals, especially if the terms of any loan are high-cost or if the interest rates charged start to rise.

In their recent research into the issue, PricewaterhouseCoopers notes “a growing proportion of consumers face the shock of being denied credit from mainstream lenders, giving rise to a large increase in the ‘underbanked’ population” . Approximately 5-7 million people in Britain are denied credit either because they do not have a bank account, or because they have no credit history. In recent years, personal insolvency in the UK has reached record highs. The latest figures show that, on average, in each constituency there are over 160 personal insolvencies a year - a dramatic increase from the beginning of the decade . Industry estimates suggest that there are around 500,000 people currently in a Debt Management Plan and independent research shows that there are also around 600,000 people who say that they have contacted their creditors for help as a result of struggling with their debts. A further 960,000 are struggling with their debts but not seeking help.

The current signs are that personal debt is on the rise, with the number of people saying they have taken on more debt over the last few months rising by 7% since July last year, and the number of people saying they are likely to exceed their overdraft limit more than doubling in the same period . Over half of people are now concerned about the amount of debt they owe. A staggering 46% of people now say they frequently struggle to make it to payday, up by 8% since Christmas. And the number of people who say they are likely to use an unauthorised overdraft this month has nearly doubled since July last year, from 900,000 to 1.6 million.

Since the start of the recession, mainstream lenders such as high-street banks have been much less willing to lend money. This leaves more and more people with only the option of high-cost credit such as payday, doorstep and hire purchase lenders. Home credit is now used by around three million people in Britain, and a further two million people take out payday loans. In 2009, the payday lending industry was worth over £1.2bn, more than three and a half times larger than in 2006 , and figures for 2010 obtained by freedom of information from BIS show that this figure has now risen to £1.9bn. Between April and May this year there was a 58% rise in people applying for a payday loan via moneysupermarket.com . The use of this growing market is associated with debt problems, vulnerability and socioeconomic deprivation. Of the 46% of people who struggle to make it to payday, 10% of them say it’s because of taking out high-cost credit . One in ten UK payday customers have incomes of less than £11,100 per year and 46% have incomes of less than £15,500 a year . Some 11% of lone parent households use "non-mainstream” (ie payday, home credit or pawnbroking) loans, compared to 3% of households overall .

These lenders are seeking to grow their businesses aggressively – Dollar Financial, a US-based lender which owns The Money Shop in the UK, has expanded from just one store in the UK in 1992, which dealt primarily with cheque cashing, to 273 stores and 64 franchises across the UK by 2009. Now it plans to quadruple the number of stores it operates on Britain’s high street, and the OFT has recently green-lighted its $195m takeover of Payday UK, a large online lender. Meanwhile Wonga.com has secured an additional £73m of funding in order to expand its operations, and Provident Financial, Britain’s largest home credit lender, has seen its share price rise by 16.6% since the Comprehensive Spending Review. BrightHouse, which provides hire purchase or rent-to-buy agreements, has recently announced plans to nearly treble the number of stores it operates.

Because six lenders account for 90% of the home credit market (with one, Provident, accounting for 60%), there is little competition to drive interest rates down. Given this lack of competition, interest rates are artificially high. The APR for payday lenders often begins at 600% and can escalate to 2,500% or more. And home credit lenders, who make home visits in order to collect repayments for their short-term loans, can charge £82 in interest and collection charges for every £100 lent.

The Government has already committed to regulating excessive interest rates on credit cards and store cards because it argues it has a duty to protect all consumers from unfair lending practices. As there is least competition in the provision of unsecured lending, it is even more vital that the Government recognises the need to step in and regulate all aspects of this market. Without action it is possible that rising levels of personal debt could have a detrimental impact on the chances of a sustainable economic recovery in the UK.

What is high-cost credit?

Payday lenders
Payday lending is a form of credit whereby the borrower either gives the creditor a cheque or authorisation to make an automatic withdrawal from their bank account. This is used as security for a short-term loan to be repaid, typically, on their next payday. Payday lending is an established form of lending in the US, but is a relatively new entrant to the high-cost credit market.

Market example: Oakam has sixteen stores across London offering a range of financial products including payday loans, longer-term loans and emergency loans to people with poor credit ratings. An Oakam Bonus Loan, for instance, lets you borrow £200-£5,000, and comes with a range of APRs from 104.6% for a longer-term loan to 444.3% for a payday loan. Oakam states that all its staff must be able to speak another language aside from English, and regularly holds events to promote its services to newly arrived communities in London.

Home credit
Home credit is the provision of credit, typically small sum cash loans, the repayments for which are
collected in instalments (often weekly or fortnightly) by collectors who call for that purpose at the customer’s home.

Market example: Provident controls 60% of the market for home credit, and mostly offers small, short-term and unsecured cash loans of between £50 and £500 to those with poor credit ratings. Provident’s 11,000 “local agents” deliver the money directly to customers and then collect repayments every week. The company states that 70% of its customers are female. The typical APR on a Provident loan is 272.2%. So if you borrow £300, you have to pay back £10.50 per week for a year, which adds up to £546.


Hire purchase agreements
Hire purchase is a method of buying goods through making instalment payments over time. Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid.


Market example: BrightHouse is a furniture, electronic and white goods store which targets those who are on low incomes or have been refused credit, and offers the sale of goods on “hire purchase” terms. For instance, BrightHouse offers an ACER Gemstone Laptop (typical high street price: £599.00) for £896.25. The customer pays for the laptop over the course of two years, at £19.48 per week, and ends up paying £2,025.93 in total. BrightHouse has a particularly strict policy on late payments, and refuses to accept part-payments or early repayment. Should someone default on a week’s payment, the company imposes a penalty charge and also requires the following week’s or month’s payment, making it harder to “catch up”. So if your weekly payment is £25, the punishment for being just a day late would be a required payment of £58.10. Eight days late and it becomes £91.20.

Case studies
1. A 20-year-old man who earns just £200 a month was given a £300 loan by Wonga.com, to be paid back within a month. He’s currently trying to organise a repayment plan after inevitably failing to keep up with payments.
2. In 2009-10 a man in his 30s who earned £1,000 a month took out the following loans: four from Payday UK; seven from Payday Express; three from Lending Stream; 19 from Wonga; nine from Pounds Til Payday. None of these companies picked up on the fact the man was borrowing repeatedly from multiple lenders. The last loan which this man borrowed from Wonga amounted to over £800 to be paid back in 30 days despite the company being aware of his monthly salary.
3. A 21-year-old nursing student got into minor financial difficulties and sought to cover her debts by taking out payday loans. The size of her debt quadrupled within a year.


For more information, please contact Will Brett at will@workingforwalthamstow.org.uk or on 0207 219 6980 / 07979 696 265

UPDATE


A briefing has been circulated to MPs by the payday loans lobby regarding this evening’s New Clause 11 to the Finance Bill which makes the following assertions about the high cost credit industry and how it operates in the UK. You may therefore find the following responses to the points made of interest and I would of course be happy to send a more detailed briefing on these proposals to anyone interested in this issue.

1.    “Customers often choose payday loans because they are cheaper than unauthorised overdrafts.”
In fact, evidence from Consumer Focus[1]shows that many users of payday loans are unable to access mainstream credit such as overdrafts and therefore have little or no choice but to go to these companies: “In most cases, borrowers considered more mainstream solutions, such as overdrafts and credit cards, to be unavailable to them. This is either because they had already exhausted these products, and had credit cards and overdraft limits which were ‘maxed out’, or they had poor credit ratings as a result of past difficulties.” In total, 25% of home credit users and 23% of payday loan users have no other credit options[2].

PwC has found that as mainstream credit continues to dry up in the wake of the recession, more and more “unbanked” consumers are turning to high-cost options such as payday loans[3]. The argument that high-cost customers are making an empowered choice therefore does not hold, especially given the current lack of coverage offered by the credit union movement and other sources of social funding.

2.    “Our customers have choices. They are not ‘the poorest of the poor’ as some allege.  They have jobs, bank accounts and disposable incomes.”
The customer base of payday lenders and other high-cost companies is heavily weighted towards the lower end of the socioeconomic scale. Nearly half of households that use payday loans earn less than £15,499[4]. The UK’s largest debt charity, the Consumer Credit Counselling Service (CCCS), says that one in eight people who contacted the charity during the first half of 2010 for help with their unsecured debts were claiming Jobseeker’s Allowance,[5] and 11% of lone-parent households use "non-mainstream” (ie payday, home credit or pawnbroking) loans, compared to 3% of households overall[6].

3.       “Payday is not a cause of over-indebtedness or complaint.  Structural consumer debt is primarily caused by credit cards, overdrafts and longer term loans.  Payday loans attracted fewer than 60 complaints to the Financial Ombudsman Service in the 2nd half of 2010 compared to over 10,300 complaints about bank current accounts.”
There is a wealth of anecdotal evidence that people often lack the resources to seek redress from high-cost lenders. In any case, even if they do complain these lending models are completely legal despite the fact they regularly cause severe indebtedness. Of the 46% of people who struggle to make it to payday every month, 10% cite the debts they owe to high-cost lenders as the primary reason for their troubles.[7]

In addition, the relatively small number of Ombudsman complaints is related to the current disparity in size between the payday sector and the mainstream sector. But this is changing fast. The industry has grown exponentially in the last few years: it was worth £330m in 2006[8], £1.2bn in 2009[9] and £1.9bn in 2010[10]. The big players in the industry have announced major expansion plans for the near future. Dollar Financial, a US-based lender which owns The Money Shop in the UK, has expanded from just one store in the UK in 1992, which dealt primarily with cheque cashing, to 273 stores and 64 franchises across the UK by 2009. As a direct result of lack of regulation in the UK it now plans to quadruple the number of stores it operates on Britain’s high street, and the OFT has recently green-lighted its $195m takeover of Payday UK, a large online lender[11]. Meanwhile Wonga.com has secured an additional £73m of funding in order to expand its operations, and Provident Financial, Britain’s largest home credit lender, has seen its share price rise by 16.6% since the Comprehensive Spending Review. BrightHouse, which provides hire purchase or rent-to-buy agreements, has recently announced plans to nearly treble the number of stores it operates.

I hope you will support this amendment to the finance bill to show the industry that parliament is determined to ensure UK consumers have the same protections as consumers across the world where payday lending continues but the credit market is fairer and more affordable for all concerned.



[1] “Keeping the Plates Spinning”, Consumer Focus 2010
[2] Policis research for Friends Provident Foundation 2011
[3] “Precious Plastic”, PwC 2011
[4] IRN Research, quoted in Consumer Focus 2010
[6] YouGov / BIS, December 2010
[7] R3, June 2011
[8] IRN Research, 2006
[9] “Keeping the Plates Spinning”, Consumer Focus 2010
[10] Extracted from Datamonitor research commissioned by BIS, and FoI’d by Stella Creasy MP