May 21, 2013

Kevin Paterson is managing director of Source Insurance



It is a truism that people will behave as badly as you let them.  If you doubt that sentiment, just take a look at the seemingly inexorable rise of bile that is the payday lending sector in the UK.  

Behind the ads with their cute geriatric marionettes, satisfied “customers”, footballer’s wife spokesmodels and folksy regional branch staff, lies a barely regulated sector whose speed of growth represents an overwhelmingly negative trend in our society. 

Our lack of proper regulation allows these firms to make huge profits at the expense of vulnerable borrowers.  Operating in the financial equivalent of the Wild West, we are letting them exploit consumers, who have few financial choices to start with, by not only giving them enough 2000% APR rope to hang themselves, but also using questionable business practices to tighten the noose.

The charge of irresponsible lending has long been levelled at this modern day lynch mob from almost every quarter except the regulatory authorities, however it now looks like the Office of Fair Trading is at last taking some action.

Their review found deep-rooted and systemic failings throughout the lifecycle of pay day loans.  They criticised almost every aspect of the business model, citing an over-arching problem of irresponsible lending across the sector.

The OFT has now indicated that it wants to refer the pay day loan market to the Competition Commission, who have more power to address the problems in the market and establish more effective long term solutions… and it’s about time.

It’s hard to understand why it has taken the authorities so long to react to a situation that has been widely recognised as a problem by even the most casual observers in this country.

The numbers game

Let me paint a picture.  This is a £2bn industry in the UK today, these lenders make unsecured loans for typically up to £500 (some go up to £1500) to just about anyone as there are virtually no checks for terms between 2 days and 30 days, at the end of which they want their money back plus a hefty chunk of interest.  The lowest rate charged in my recent personal experience was over 2,000% APR and the highest – a whopping 4,200% APR.

Research by the OFT showed that the average income of someone taking out a pay day loan was £18,000 with one in ten below £11,000pa and the vast majority between 18-30 years of age.

A personal perspective

I was recently unlucky enough to have direct experience of dealing with one of these parasites whilst trying to sort out the financial mess a young relative of mine had managed to get into.   The experience left me with a really bad taste as well as a staggering disbelief that in a country that prides itself on gold-plated regulation, these firms are seemingly allowed to get away with virtually criminal practices with impunity.

From my own experience these companies operate on the very fringes of legality with aggressive and morally questionable tactics. Bombarding late borrowers with emails or calls, all with attaching penalty charges, threats of court action and bailiffs are also sadly too common. They prey on people who are vulnerable with the lure of a small loan till pay day, they select their TV advertising slots very carefully so as to target the exact demographic and then make the process very quick and simple with glossy easy to use web sites, the modern day equivalent of the back street loan shark. All of this simply encourages these people to get further and further into debt as many can’t afford to pay back the whole loan without leaving a big whole in their budget and so the cycle starts all over again and they get trapped. Punitive fines and charges rack up at a frightening rate.

I found the help available from these firms varied massively, at one end a repayment schedule was agreed and interest ceased to roll up whereas at the other end a repayment schedule whilst agreed had £300 of additional charges added to the loan for the privilege.

These lenders typically operate through the customers debit card which means that the agreement cannot be cancelled and the lender is free to raid the account of the customer to get their money back.

Most operate almost exclusively by email, I suspect to keep costs down and probably to prevent people from turning up on the doorstep and cause a scene.  I also found that they were extremely poor at responding to formal mail.  This led to an attempt to contact them by telephone, in the course of which I was surprised to be connected to a US based call centre via a non-geographic number usually charged at 40p per min or more.  You can be sure they will make the call last longer than it needs to.

In retrospect, the American connection shouldn’t have been a surprise.  A number of US states have outlawed these types of firms, and that has been instrumental in them transferring their cancerous practice to the UK – operating in the regulatory vacuum that is the Consumer Credit Act.

This lack of strong regulation, in conjunction with the decline into recession in the UK in recent years, has been viewed by US based pay day lenders as huge investment opportunity… like a gold rush town without a sheriff.  

Hopefully that won’t be the case for long if we follow the lead set by the US, Canada and Australia.

Payday lending regulation in other countries

In the US, payday lenders have been a cause for concern for many years, with the practice banned in 13 states and tightly regulated in 37 more, with a cap on the APR of 36% for military personnel and their families. This latter point might strike you as odd but not when you consider that many of these companies sprung up around military bases targeting the younger age group with regular guaranteed income and an underlying fear of doing anything that might bring them to the notice of their superiors.

In Australia two of the largest states have imposed a 48% APR cap and Canada has gone a step further by making any APR above 60% illegal anywhere in the country.  

Meanwhile in the UK these firms have for too long simply been accepted as a legitimate way of the void left by the banks being filled – and arguably – an unavoidable consequence of the demise of the sub-prime sector. 

Well in my opinion, they are not legitimate.  As we have seen in the experience of the US, Canada and Australia, extortionate interest rates are not an inevitable outcome of short term lending if the political will is there to muzzle the sharks. 

The UK simply needs much tighter regulation.  Hopefully the review carried out by the OFT will start the process to do just that, and inform the argument on how far regulation should go.   

The Government has confirmed that responsibility for the sector will pass to the FCA by April 2014, and in preparation for this, the FSA has issued a Consultation Paper on how the FCA might regulate the Payday Loans sector.

So, if you too have an opinion on this, why not add to the debate?  You can use the FCA’s online response form by clicking here.



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