Payday lenders are the current target of regulators. The cap being introduced in January will force nearly all of these firms out of business, claims the FCA. Continue reading
The letters threatened legal action, but the law firms were false. In some cases Wonga added fees for the letters to customers’ accounts, according to the BBC.
The customers affected (45,000 of them) will each receive £50 for distress (a piddling amount, surely?) plus any legal fees they have encountered. The regulator in this case is the Financial Conduct Authority (FCA); they cannot however fine Wonga because the offences happened before they started regulating payday loans companies.
Richard Lloyd, executive director of consumer group Which?, said: “It is right the FCA is taking a tougher line on irresponsible lending and it does not get much more irresponsible than this.
“It is a shocking new low for the payday industry that is already dogged by bad practice and Wonga deserves to have the book thrown at it.”
Tougher line? £50 each? I imagine the people at Wonga are laughing.
Wonga is not the only lender to do this. Back in my debt-crisis days, I received a letter from a non-existent firm of solicitors. I was only alerted to the fact when I noticed that the initials of the firm were identical to those of the bank that was chasing me for the debt. It’s sharp practice and could cause considerable distress, because most people have a healthy respect for the law. And that’s how it should be. So to use that fact in this way is pretty despicable. £50 each, eh?
There is an existing Code of Practice from the Office of Fair Trading (OFT) regarding harassment of debtors, although it is often ignored. I’ve blogged about it more than once; for details click HERE.
WANT TO KNOW MORE?
For the BBC News item, click HERE.
For the OFT Code of Practice regarding harassment of debtors, click HERE.
Everyone’s heard of Wonga; but how many people know where their nearest credit union is?
“Jumping the Shark”, a new report by the Institute for Public Policy Research (IPPR) says ministers should provide a capital injection to support the credit union sector.
Published today, the document calls for a £450 million levy on the UK’s £180 billion consumer credit industry (“That’s 0.25%: doesn’t sound too draconian” – Ed.) to create a new generation of not-for-profit affordable lenders based on credit unions, with enough capital to compete with the established payday lenders.
Archbishop of Canterbury Justin Welby previously said he wanted to “compete Wonga out of business”, saying that the credit union sector should be expanded to provide an ethical and affordable alternative. And now the Church of Scotland has come out with the same message. According to Kate Devlin writing in the Herald Scotland today, ‘the Kirk’ supports the IPPR’s call for an expansion financed by a windfall levy.
[Credit Unions are much more widespread in Scotland, where 1 in 20 Scots are members of a credit union. Almost all Scots are currently eligible to join a credit union.]
These not-for-profit lenders could be partnered with church parishes, said the Church of Scotland. Alternatively they could be hosted in Post Office branches.
Providing UK credit unions with £450m of capital could help them support over one and a half million loans. The “new generation of lenders” should charge a maximum of 3% interest a month, or 42.6% APR, the IPPR recommends. This would allow customers to pay just £3 to borrow £100 for one month. A similar loan with Wonga, whose APR is 5853%, currently costs more than £30.
The IPPR also says the expanded network of affordable lenders should cap the maximum loan at £250 (the average size of current payday loans), limit customers to one loan at a time and stop lenders “rolling over” loans.
Mat Lawrence, IPPR Research Fellow, said of the recent economic good news: “A return to rising living standards will reduce households’ reliance on debt, but it will not eliminate their need for it. The payday lending industry has grown in large part because of a gap in the credit market that mainstream banks are unwilling to fill.
“Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit.
“Britain needs an initial capital injection to expand the provision of affordable credit. We need a strategy for spreading capital, building the assets of communities, and engaging citizens in forms of local democratic finance in which power and control resides with them, rather than with government agencies or unaccountable financial institutions.”
WANT TO KNOW MORE?
To download a copy of “Jumping the Shark” – the report from the Institute for Public Policy Research (IPPR), click HERE:
For the article from The Herald Scotland, click HERE:
To find a credit union near you, click HERE.
Miquita Oliver? A week ago I’d never heard of her. Now I am a big fan, a supporter, an advocate.
Hers is not a name you would expect to see on a 70-year-old bloke’s blog. She’s in her late twenties and was formerly ‘the face of music TV’ on Channel 4.
At seventeen, Miquita was earning so much money she didn’t know how to handle it. She ended up bankrupt over an unpaid tax bill.
Now she’s a campaigner on the paydays loans issue. She’d not alone; many financial journalists have been consistently outspoken on the subject, as has the Archbishop of Canterbury. But the TV programme she fronted on Monday was the most powerful message I’ve seen about the insidious power of the now-substantial payday loan industry.
Why? Because she’s young and it’s her age-group that the companies target; because she’s a great communicator; because she’s had money troubles herself and displayed great empathy with those who were getting sucked into the vicious circle of debt. And because she went out and about interviewing lots of young people who were tempted by the loans as a way to instant parties; and showed us the moving stories of those who had been driven to attempted and actual suicide because of the ballooning debts. Impressive stuff.
WANT TO KNOW MORE?
To watch the programme on the BBC’s iPlayer, click HERE.
(it’s available only until just before 10 pm on Tues 10 Dec)
Yesterday’s big story on the personal finance front was the Government’s announcement about capping payday loans.
My first reaction was to look up Simon Read of the Independent, because he’s been a leading campaigner for regulation of the payday loans sector.
His article, in yesterday’s issue of the paper, reports on what was being said by the politicians; some predictable sparring there. I was more interested in Simon Read’s own overview of how effective these measures would be, so I went straight to his summary at the end. No apologies for reproducing it here.
Q&A: What should be done?
Q: Will a cap on the loans help people avoid falling into debt problems?
A: No. The key issues surround the widespread lack of responsible lending.
Q: How could payday lenders be more responsible?
A: One option would be to introduce compulsory affordability checks. Lenders often make greater profits from rolling over loans than from the original deal.
Q: How should they be stopped?
A: The regulators have already announced plans to cut back the number of rollovers allowed and the number of times lenders can try and recover their cash from people’s bank accounts. But their advertising also needs to be restricted.
Payday loan providers have attracted column inches from many writers, including yours truly. Now these firms have been summoned to a “summit” hosted by Government ministers.
Will concrete action follow?
Here’s a précis of a story in the Independent today.
Payday lending: adverts to face ban?
Payday lending advertising could be banned, under hard-hitting new rules being considered by the new City Watchdog the FCA.
The high-cost credit industry (that’s a new term to me) also faces a crackdown on the number of times they can rollover loans; and they may be forced to introduce time-lags, so borrowers don’t end up choosing a lender on the basis of how quickly it can get the cash.
This emerged from a Westminster summit yesterday. Consumer Minister Jo Swinson, who hosted the summit, said there is a need to control the number of loans borrowers are allowed to take out. She intimated that lenders could be forced to set up a central register of borrowers to cut the practice of multiple loans. One borrower reportedly had 34 different loans at the same time.
Ministers were told of far-reaching proposals that could ban daytime adverts on television that target the unwaged and vulnerable people. However the FCA’s Martin Wheatley didn’t rule out a blanket ban on lenders. “That power will be available to us,” he said.
Delroy Corinaldi of debt charity Step Change called for all payday loan advertising to carry a health warning that includes information about the risks of using high-cost credit. “In particular, companies must be clear that loans need to be realistic and affordable and are not a way to deal with long-term financial problems,” he said.
Citizens Advice’s Gillian Guy was keen to see new action on advertising. “Payday lenders need to be clear about who they are targeting. We see daytime television adverts with glamorous celebrity endorsements, targeted at the unemployed and those on low incomes.”
The FCA also announced at the summit that a consultation will be launched in September to decide its approach to controlling payday lenders.
However Richard Lloyd of Which? said: “Positive noises about tough new rules have come out of the summit … but these must now be backed up with more concrete actions than we’ve seen today.”
DO YOU WANT TO KNOW MORE?
Here’s the full story from The Independent.
Here’s my last post on this issue.
Payday lender Wonga has increased its APR by 1600%! It was already eye-wateringly high; it’s now 5853%, according to The Guardian.
That’s prompted lots of media attention and calls for increased regulation. No surprise there.
Simon Read has campaigned extensively on this. In his recent piece in The Independent , he says we don’t need to ban payday loans, just ensure that anyone taking one out should have chosen to do so, rather than “being flogged a deal they can’t afford.”
How do we ensure that? Anyone contemplating such a risky step should get good and impartial advice about their options; and should take a little time before deciding, instead of being rushed into a decision. However, these loans are by definition emergency loans: the borrower either has, or thinks they have, no alternative and no time.
I would never recommend payday loans; but banning them or capping rates would remove, or at least limit, a finance source that for some borrowers and some situations might be the only alternative. More and better advice is probably the answer.
DO YOU WANT TO KNOW MORE?
See some of my previous blog posts on this thorny subject:
According to the Financial Ombudsman Service (FOS), even higher earners are falling foul of payday lenders nowadays.
Martin James of the FOS – quoted by Holly Thomas in the Sunday Times on 2 June – said that “in some cases, lenders (that’s both payday lenders and mortgage providers – Ed.) were found to be unsympathetic with borrowers on higher earnings, assuming they were not in financial difficulty because of the high value of their homes. Many asset-rich people are cash-poor.”
In cases of payday lenders “assuming they were not in financial difficulty”, that sounds like a good excuse. But I don’t imagine too many people would seek funds from a payday lender unless they were in financial difficulty, even if it were only a temporary cashflow problem. And the lenders must know that.
Holly Thomas’s article continues with advice from a variety of impartial experts on how to clear debts:
- Don’t prolong the situation.
- Consider downsizing your home if it’s feasible. (That of course assumes you can sell in today’s market.)
- Ask your lender to vary the terms of the loan; e.g. to extend a mortgage term, or even switching to interest-only. (but the latter only for a period – Ed.)
- Negotiate a debt management plan with the help of one of the free advice services. (National Debtline, Citizens Advice or StepChange)
WANT TO KNOW MORE?
For the full Sunday Times article (but note there is a paywall), click HERE.
In my last post I referred to an upcoming interview on BBC Radio 4’s “The World This Weekend” with Muhammad Yunus, the Bangladeshi economist and Nobel Laureate.
35 years ago he more or less invented microfinance (or microcredit or microloans, whatever you want to call the idea). The occasion: Yunus’ brainchild Grameen Bank (the name means “Village Bank”) was about to open its first UK branch, inGlasgow.
Since then I’ve heard the interview – several times, thanks to the BBC’s wonderful iPlayer – and I am just as much a fan of Yunus as I was.
Grameen Bank’s model
Grameen’s loans are for small amounts; they are short-term and unsecured; they tend to be to poorer, “non-creditworthy” people. In the early days especially, in many cases they were to self-employed women, to get loan sharks off their backs. However, some critics have said that Grameen also charged high interest rates; and two years ago some microfinance lenders (not Grameen) were shut down by the authorities in the Indian state of Andhra Pradesh.
So naturally I thought I needed to test my opinion. In the past I’ve been critical of the UK’s growing “Payday Loans” industry with its very high interest rates; many financial journalists have urged the Government to outlaw them, especially Simon Read in the Independent. So … was microfinance just a payday loan with the added credibility of a Nobel Laureate / economics professor? Was this just the acceptable face of payday loans?
In my view; it’s not the same thing at all. The interview, and what I’ve read since around the subject, has confirmed me in the view. Although Grameen has not existed in the UK up to now, we do have credit unions, which are comparable in many ways.
Soundbite time …
Here are some soundbites that give a flavour but I urge you to listen to the BBC piece in full.
Shaun Ley (Presenter, “The World This Weekend”): “A crisis has gripped capitalism … here’s Muhammad Yunus, one of the world’s leading economists.”
“Grameen encourages small entrepreneurialism”
Professor Pamela Gillies (Principal and Vice-Chancellor, Glasgow Caledonian University; and Prof. Yunus’s host here): “this reminds me of self-help groups I’ve seen in Dundee.”
Vox pop, asked about the possibility of bad debts: “if I owe money to several people including a credit union… I feel part of the credit union, so I’d pay them first.”
US author David Roodman: “the microfinance model appeals to both left and right, despite limited objective evidence that it transforms lives.”
Yunus: “If the microfinance industry grows too fast, you can get a bubble, as happened in Andhra Pradesh.”
Prof Gillies: “If this works in Glasgow it could work everywhere in the UK”
Shaun Ley: “Should we encourage people to take on debt?” Yunus: “We don’t encourage, but we say if you are stuck, we can help. Our loans are all for the purpose of income generation. Our aim is to facilitate.”
Ley: “What happened in the Indian state of Andhra Pradesh?” Yunus: “We have no intention of making money from microcredit. Others found this profit source attractive, got backers onboard through an IPO, and were aggressive in promoting loans. That was a derailment of the original idea. Making money out of poor people is not a new idea – that’s what loan sharks have been doing for years.”
Yunus (asked about the microfinance industry in general) “If I could concentrate on Grameen specifically; we are owned by our borrowers. Two thirds of the money we lend comes from our borrowers.”
In conclusion …
Yes, Prof. Yunus and Grameen Bank may well have come in for criticism. Anyone who challenges financial orthodoxies and massive vested interests for 35 years will attract opposition. But it’s fair to say that the West’s banking sector has not covered itself in glory recently. Thus anyone who tries to develop an alternative financial model, especially when they do it from what seems to me an altruistic motive, deserves respect and support.
I’ll certainly be following the progress of the UK’s first Grameen Bank branch with interest; but I’ll also be following other alternative finance sources that are already established in the UK, e.g. credit unions and peer-to-peer lenders such as Zopa.
Watch this space!
WANT TO KNOW MORE?
BBC interview with Muhammad Yunus; available only until Sunday 18 March 2012 at 12.59: http://www.bbc.co.uk/iplayer/console/b01d24ym (starts at 16 mins)
Grameen Bank: http://en.wikipedia.org/wiki/Grameen_Bank
Glasgow Caledonian University, Yunus visit: http://www.gcu.ac.uk/newsevents/news/article.php?id=40898&c=126
Daily Telegraph, Nick Stace, “Yunus resigns from Grameen Bank”: http://www.telegraph.co.uk/finance/personalfinance/offshorefinance/8511461/Muhammad-Yunus-resigns-from-Grameen-Bank.html
The Independent, Simon Read, “Time to crack down on payday loans”: http://www.independent.co.uk/money/spend-save/simon-read-time-to-crack-down-on-payday-loans-7547420.html
I appear to be stalking Simon Read of The Independent. If so, that’s because payday loans are again in the news and this is a story and a cause he has taken up and because he writes well on the subject.
The latest twist in the story: research by Shelter (a UK housing charity) reveals around seven million people are turning to credit to try to keep a roof over their heads.
A million use payday loans to cover rent or mortgage
In the past year alone, almost one in seven of those – i.e. just under one million people – have resorted to payday (i.e. emergency) loans to cover rent or mortgage payments.
The Independent has warned that payday lenders are cashing in on the struggles of millions who are unable to borrow from mainstream lenders and those companies charge interest rates of up to 5,000 per cent.
The impressive Campbell Robb, CEO of Shelter, said that this “… shows the extent to which millions of households across the country are desperately struggling to keep their home.
“Turning to short-term payday loans to help pay for the cost of housing is totally unsustainable. It can quickly lead to debts snowballing out of control and to eviction or repossession and ultimately homelessness.”
What’s the alternative?
I cannot disagree with anything that’s been said above. It’s a sad state of affairs and I’ve no doubt payday loan companies in general are cashing in on the misery, despite what was said by the boss of Wonga to Simon Read and which I reported in an earlier post. There have been calls for these firms to be outlawed. But for the people who feel they have no alternative, what will they do if that happens?
Anyone in debt crisis who consults an adviser at one of the debt charities – such Citizens Advice or National Debtline or CCCS, here in the UK – would probably be told to avoid payday loans. But I wonder how many of the million people mentioned in Shelter’s report have actually talked to such an adviser.
I know that these resources are stretched; and as the charities reply to some extent on grants from the public sector, they may well become even more stretched because of spending cutbacks.
Need for financial advice
I don’t know the full answer – and of course it’ll be different in every case – but wider access to free, impartial and high-quality financial advice must be part of it. What’s more, financial education has to have a higher priority than it does now.
WANT TO KNOW MORE?
For the Simon Read article (4 Jan) click here:
For information about my book “Back to the Black”, click here: