Read and debate it here

We will keep you updated in the coming months.

You can read more at http://nds.coi.gov.uk/content/Detail.aspx?ReleaseID=420472&NewsAreaID=2

Payday lenders have failed to clean up their act: Government must now intervene

The Code of Practice being launched today by payday lenders is a bitter disappointment and fails to address the poor practices evident in this sector of the high cost credit industry, according to the Centre for Responsible Credit .

CfRC research published last year found that the UK’s regulation of payday lending was much weaker than is the case in the US and Canada, where many states and provinces restrict the amount of loan size relative to the borrowers income and prevent lenders from continually rolling over loans – a practice which is lucrative for the lender but which often drives customers deep into debt and has been found to drive people into bankruptcy.

The payday lending industry was also criticised by the Office of Fair Trading in its High Cost Credit Review published over 12 months ago. At that time, the OFT maintained that the industry should be given a chance to „self-regulate‟ and encouraged it to establish a code of practice. However, the issues raised by the OFT in its review have not been addressed by the CFA code published today.

Commenting on the poor quality of the CFA Code, Damon Gibbons, Chief Executive at the Centre for Responsible Credit, said:

“This code has no real substance and does not address the problems with payday loans. The industry has shown itself incapable of self regulation, and Government and the OFT must now act by reviewing the business models of payday lenders to see if they are compatible with the principles of responsible lending, and capping the cost of credit to protect consumers from exploitation by this industry.”

There are many good arguments for the cap, which would prevent the usurious pricing practices that are in place at the moment, e.g. charging £85 for a loan of £100, for the sole reason that the banks won’t touch you. The Competition Commission in its inquiry to the home credit market has found that the cost is too high – but the measures it suggested to rectify this have not resulted in decreased lending costs.

Opponents to a cap bring some arguments forward that are in and of themselves logic – but there is not a lot of evidence to back these arguments up. Furthermore, they often confuse interest caps with price caps, two related, but different things. In this blog, I will briefly summarise the opposition’s views and set out why they are wrong.

Firstly though, a word on interest rate caps vs total cost of credit. Interest rate caps put a limit on the annual percentage rate that you can charge on loans, for example, a maximum of 20%. This is not a good measure, as APRs are confusing and not a good indicator of price. The longer the loan repayment terms, the lower the APR – but the higher the overall cost of credit, and vice versa. Also, interest rate caps can be circumvented as there is no clear agreement what costs should be included in their calculation – e.g. admin fees, early repayment fees and similar. Hence we are talking about a cap on the TOTAL COST OF CREDIT, a level which still has to be set, but would probably be somewhere between £25 and £35 per £100 lent. This is clear cost structure that people can understand and which is much harder to circumvent. This is what is currently proposed and opponents should be aware of this. Suggesting that Stella Creasy is proposing an interest rate cap is misleading and heats up an already charged debate.

But now for the arguments:

1. Caps on the cost of credit would drive people into the arms of illegal loan sharks. A logic argument, but albeit a hypothetical one. As I have pointed out in my report Doorstep Robbery, the research suggesting that there are high levels of illegal lending in countries with interest rate caps (note that this research was NOT about a cap on the total cost of credit  is flawed. Furthermore, a report for the European Commission on interest rate restrictions in European countries (opens as PDF) on has also found that there is no empirical evidence for this link.
2. A cap would put high cost lenders out of business. Again, a logic argument, but not one necessarily borne out by reality. The industry justify its charging of high prices with the high risk that they incur. However, payday and home credit lenders won’t share their pricing models, so we don’t know if their prices are actually justified by the risk. The aforementioned Competition Commission investigation is littered with blanked-out numbers in the name of protection of commercially sensitive information, so we simply don’t know if the high prices are really just down to the high risk profiles of customers, or if they are routinely overcharging their clients. Given the fact that companies keep on lending to the same people, it would suggest that clients do repay, and that their risk profile is actually not as high. Furthermore, companies like Provident Financial does operate in two countries with a form of price ceiling – namely Poland and Ireland. So, there is again no evidence that a price cap would necessarily result in the demise of the high cost lending sector
3. People like home credit. A form of high cost lending that is often singled out is doorstep lending where collectors will come and collect instalments from their clients home. The Joseph Rowntree Foundationconducted research in 1994 that shows that people liked this element of home credit as it requires them to be disciplined and have the money ready at a fixed date in time. The Competition Commission’s report also found high levels of satisfaction, and clients were aware that they were paying a high price. So, why try and stop something people like? Two reasons:
   1. Firstly, home credit is for many the last option, especially for those without bank accounts. If you have not got an alternative, then of course you will like the services offered by the one company that will deal with you. If there were an alternative, e.g. the increased provision of affordable lending that offers exactly the same services but minus the expensive doorstep collection, would people really baulk at dropping off their money at an office around their corner if it would save them around £50 per £100 borrowed? Somehow, I think not. The question is how important the home collection element really is, especially in those areas where affordable credit is available.
   2. Secondly, the research conducted is quite old now, especially the one by the JRF – things have changed in the meantime. Recent research by Human City* shows that debt is high on the list of problems among social housing tenants, and that would like to see social landlords offer them affordable credit options. This new evidence should be taken seriously as it suggests that people are falling out of favour with high cost credit. With the expansion of affordable credit provided by CDFIs and Credit Unions, people also have more options available to them, and it would be interesting to see the choices people make in areas where affordable credit is established.

In short, the potentially negative consequences of a price cap might be hypothetically logic, but are not borne out by empirical evidence.

There are many more points that I could discuss here, but a blog is too short to deal with them all at the same time – I hope to do so over the course of the summer. Two points to finish though:

Firstly, there is an absolute need to limit the availability of high cost credit as more and more households struggle to make ends meet and to service their debt. If people can’t afford repayment of their existing (and quite possibly cheaper) credit options, surely throwing extraordinarily expensive credit at them will only add fuel to the flames – it’s a short-term solution, but one that could quickly lead to a debt trap, and will hinder personal recovery.

Secondly, the continued insistence by opponents of price caps that it would especially be harmful to doorstep lenders and their clients is a curiously defeatist point of view. Is home collection really the best way to serve the poor? It is unacceptable in my view that the poorest have to pay the highest prices both from a moral as well as an economic perspective: high cost lending is not a social service to the poor, it’s the outcome of a deeply flawed credit and savings system in the UK that does nothing to help people out of poverty. A cap on credit costs is a first step in rebalancing this system.

*In the interest of transparency, this research was supported by Compass who are campaigning with Stella Creasy for the introduction of a price cap.

Veronika Blogs at http://verothiel.wordpress.com/

Taking on board these two important lessons I first targeted the campaign at one deprived area in Norwich. I set myself 2 locally achievable goals:

1. To get local money lenders to give debt advice before a loan is taken out
2. For local money lenders to support credit unions

Once I had my goals I tried to arrange a meeting with the branch manager of the local Money Shop, they refused to accept either of my requests. Following this I printed 600 letters to the surrounding area either side of the main road. The letters explained The Money Shop’s position as outlined in our meeting and included a survey asking for people who have used “legal loan sharks” to come forward with their stories. We also included a tear off slip which included the date, time, and location of a demonstration.

Following this the letters then found their way back to the manager who arranged another meeting with us. While he said he did not have the authority over what literature to display he did arrange a meeting between us and the Corporate Affairs Director.

We continued to canvass the area to conduct surveys and find people who would be willing to discuss their experiences with any high street or internet money lender. We had a great success with this and had many people tell us of their experiences however very few would talk to the press even anonymously.

After we had found 3 people with strong stories we then printed another 600 letters (as they are more effective than leaflets) in another area closer to other money lenders. Following this we then asked a public question to Norwich City Council whereby a detailed report (arranged previously) was given on how house hold income and rent arrears correlated with the location of high street money lenders. This information along with contact details of our case studies and details of the candidate in the area were passed on to a journalist from a local paper. The following day we were interviewed by the local newspaper. This then ran as a front page article.

Following this we then continued canvassing while trying to get further media attention contacting Future Radio and BBC Radio Norfolk where we received multiple appearances. We were then put in contact with a BBC Look East journalist who took up our story where it received a 2 minute slot on regional TV. This then featured on the BBC UK web page all in the run up to our meeting with The Money Shop, this applied considerable pressure.

In our meeting our goals were for The Money Shop to show literature on debt advice before a loan has been taken out and to support local Credit Unions. By the end of the meeting we had achieved more than we set out to. Not only did they agree to our requests which were local but they agreed to make them national policy which shows what a big change we are able to make with the media and more importantly the community on our side.

The key to this campaign was realising I could not achieve everything I wanted at a local level e.g. a cap on interest rates. I was however, able to set myself locally achievable goals which could be replicated nationally. Finally, the successful media strategy was based on the fact that we campaigned alongside the community and really involved the local people. It was their stories who made the media listen to our cause and we should not underestimate the power that ordinary people are able to wield when motivated to achieve change in their community.

The local statement issued reads:

Statement from The Money Shop for Marion Maxwell (End Legal Loan Sharking campaigner in Norwich)

18^th March 2011 – FINAL

“The Money Shop as a responsible lender and fully regulated by the Office of Fair Trading is pleased to support the local Norwich Credit Unions and believes that they provide a valuable service to those in their community.

“In addition The Money Shop has agreed with Marian Maxwell to provide its customers with information about the local Credit Unions and other financial management information in both Dereham Road and Castle Meadow stores.

“Whilst The Money Shop provides immediate short term cash for people with regular income with financial emergency needs and to avoid the high cost of unauthorised bank overdrafts, it also recognises that in communities such as those represented by Marian Maxwell working together can benefit all in highlighting the financial solutions available.”

London, May 2011 – Borrowers who have their Payday Loan application turned down by Payday Loan provider The Money Shop are to be given information on where they can receive free and independent debt advice.

It will display free debt advice brochures from money education charity Credit Action in its 360 branches across the UK from May.

As one of the most responsible, fair and transparent short-term lenders in the UK, The Money Shop sought the partnership with Credit Action as it realised some borrowers who have their loan application rejected may be in need of debt advice. It only lends to those with regular income and carefully analyses their existing borrowing before offering a loan.

It is hoped these jargon-free brochures will help those who do not secure a loan to access free and independent help and receive practical advice on all aspects of understanding and managing money.

Andrew Bryan, Marketing Director at The Money Shop, said of the initiative: “As a responsible, industry-leading provider, we understand those borrowers who have failed to meet our lending criteria may have debt worries. We provide a valued service to those who need short-term cash to help them with a sudden, unforeseen bill, but do not lend to those with serious debt problems. We hope this is one way to help these borrowers back on to their feet and hope other lenders will keep this in mind also.”

Keith Tondeur OBE, Founder and President of Credit Action said: “We are pleased that The Money Shop is taking steps to help customers who have had their application turned down, and who may need money management help or debt advice. In these difficult economic times we think this approach is much needed.”

The Money Shop’s customers are all in employment with an average salary of £22,000 and borrow £250 on average over a one-month period. The Money Shop is a founding member of the Consumer Finance Association, which works with members of the short-term lending industry to prevent their customers amassing long-term debt. It is also fully regulated by the Office of Fair Trading.

Church Action on Poverty is currently working with people who are trapped in poverty by their debts to high-cost lenders. We’ve organised a very productive series of roundtable meetings, where the lending companies meet with their customers and the Office of Fair Trading.

The latest meeting happened on 6 May 2011, and we are very excited that we’ve now begun the work of drafting a Code for Responsible Lending, which would ensure that vulnerable people are treated more fairly by lenders. We’ve also made a lot of progress towards a system for lenders to share customer histories, which would help people on low incomes to build up a credit history and move on to more affordable forms of credit.

Campaign success

For this process to deliver real change for people on low incomes, we need all the ledning companies to take part. Unfortunately, BrightHouse, one of the biggest high-cost lending companies, refused to come to the meetings.

BrightHouse demo

So we mobilised our campaigners! During April and May, supporters of Church Action on Poverty and Thrive went into overdrive. BrightHouse received hundreds of emails and phone calls, asking why they didn’t want to be a responsible lender. Their store in Stockton-on-Tees was picketed by campaigners wearing comedy costumes. When the story was featured in the press, we finally received a promise from BrightHouse’s boss, Leo McKee, that they will be coming to future roundtable meetings!

We want to say a big thankyou to all the campaigners who delivered this amazing result. Together we can make a difference, and Close the Gap between rich and poor.

Read more at http://is.gd/AGv1sY

Furthermore this is not isolated to just the most vulnerable, personal debt problems have begun to hit the middle classes with their levels of insolvencies doubling in the last year. Insolvencies will become endemic without radical reform.

This transferring of debt will hit families hard due to both funding cuts for child care amounting to £1,500 and a rise in VAT costing the average family £600 per year. This will inevitably lead to many people going into their bank overdrafts. Last year alone 5 million people were permanently over drawn and this figure is set to rise.

However these are the lucky people. Unfortunately many within our society do not even have the luxury of basic bank accounts and must pay vast amounts to borrow money from high cost lenders with interest rates of over 4000%.