It is indisputable that everybody needs access to credit, but it has always seemed perverse to me that the people who can least afford it pay the most and therefore need the most protection, because they are the most likely to be vulnerable to exaggerated claims and to be in need of a very quick solution to the immediate need for cash.
Payday loans are not always the illogical choice, despite the rate of interest. If someone’s washing machine breaks with two weeks to go until their payday and they know they will have an overtime payment in their next pay packet, it makes sense for them to shop around and buy another washer for £200 with a short-term loan—at a total cost of £267—than to go to BrightHouse, pay £600 for the same product, have a mandatory five-year guarantee for £400 and pay it back over five years at about 30% interest, which would result in a total cost of about £1,500. But—and it is a big but—although such loans provide a service, they cause detriment to tens of thousands of people each year and their providers have been, and still are, guilty of bad practices that cause much concern.
The Office of Fair Trading report highlighted bad practice by the vast majority of the industry and warned a number of them that either they clean up their act voluntarily or action would be taken, and they have been referred to the Competition Commission. I am pleased that some have had their licences revoked, but I hope that stricter enforcement will continue until the Financial Conduct Authority takes over in 2014. That transfer of responsibility gives us a golden opportunity to clean up the market and protect vulnerable consumers, but what are the payday lenders suggesting? A voluntary code of conduct devised by the industry.
There are two things wrong with that. First, it is voluntary. It is not even a requirement to be a member of a trade body. If consumers do not even research the cost of paying back a loan, they certainly do not research whether their lender is a member of a trade body—that is if they are aware of who the lender is, a point I will return to later. Secondly, the code has been devised by the industry and I am not totally convinced that it will put protection before profit. Statutory regulation and a constant review of the market are absolutely necessary.
I will outline the main issues that I think are causing problems. The market is ever changing and new practices emerge almost daily, so we need a flexible regulator. The first and most important issue—it is probably more important than headline-grabbing high interest rates—is the continuous payment authority. People who do not know what this is are not alone, because the banks, let alone the consumers, do not know, either. What it means is that the loan company can access someone’s bank account at any time, for any amount of money, as many times as it wishes. It is not just a blank cheque; it is a continuing, unending number of blank cheques. A constituent of mine had her account debited four times just before Christmas. Her account was cleared completely, leaving her with no money for Christmas, and she only became aware of this when she tried to pay for her Christmas food shopping and could not. It is clear in all the guidance that the customer should be able to cancel the CPA with either the lender or the bank, but Citizens Advice has numerous examples of the banks telling people that it cannot be cancelled by the customer because it is different from a standing order, and of the lender preventing people from cancelling.
Another practice I have recently become aware of—I am looking into this at the moment, because I heard about it only two days ago—is that of companies asking for a borrower’s online bank account details, including their PIN number and password, which makes the matter even more problematic. The lender can see when the individual is paid and when the rent and bills go out and take advantage of the gap, plunging the borrower into even more serious debt.
The other major problem with the continuous payment authority is that it reduces the incentive to perform a thorough and proper affordability check. After all, if a lender has unlimited access to someone’s bank account, why bother too much about checking whether they can afford it? The lender can dip into their bank account at any time, for any amount. Continuous payment authority has been described to me as the one thing that the payday lenders really want to keep. On that basis—as I used to say when disciplining my daughter—it is probably the one thing they should not have.
There is an issue with the industry writing its own code. Wonga has given 10 commitments and I have evidence—I do not have time to give it—that demonstrates how its code needs to be thoroughly examined. Even given the three extensions and the 60-day interest at 1% of the principal under commitments 6 and 7 of the code, the total repayment amount for a loan of £200 would be £588. That is a cause for concern.
Too many people delay the evil day when they have to sit down and face the difficult fact that they cannot afford their outgoings. As a result, they use payday lenders, because it is hard to admit to family or anyone that they cannot afford to keep going.