The topic of payday lending was addressed by the Business Select Committee of the House of Commons in early November 2013. Lenders, consumer representatives and regulators were amongst those quizzed by the Committee.
Many politicians have criticised payday lenders in recent years, with Leader of the Opposition Ed Miliband (MP) making reference to Britain’s “Wonga economy”, in which people are drawn to these lenders as a result of rising costs of living.
Consumer groups told the session that complaints about lenders had actually risen since the introduction of the Good Practice Customer Charter in July 2013, leading Consumer Minister Jo Swinson (MP) to say that lenders had “failed to get their own house in order”. All lenders which are members of four trade associations are expected to comply with the requirements of the Charter.
Henry Raine, head of regulatory and legal affairs at Wonga, said that only 2-3% of his firm’s customers experienced debt problems after taking out a loan, and suggested that this compared favourably to the equivalent figure for credit card providers and banks.
The issue of rolling over loans was a key topic of the session. Only two rollovers will be permitted once the Financial Conduct Authority (FCA) commences regulation of payday lending in April 2014, and Russell Hamblin-Boone, chief executive of trade body the Consumer Finance Association, said that his members were already restricted to three rollovers per loan. Adam Freeman, chief executive of Mr Lender, suggested that it was sometimes in a customer’s interest to roll over a loan, but Richard Lloyd, of the consumer association Which?, countered by saying: “It is just not credible to say that lenders are acting responsibly to allow people to roll over their loans.” Mr Raine’s testimony suggested that some lenders obtained 50% of their profits from rollovers, but was at pains to stress that Wonga was not one of these. Martin Lewis, founder of the website Moneysavingexpert.com and a vocal critic of payday lending, urged the FCA to prevent lenders circumventing the rollover rules by granting another loan to pay off the original loan.
On the subject of loans allegedly being granted without adequate credit checks, Mr Hamblin-Boone said his members already carried out tougher credit checks than would be the case with a credit union loan. Some commentators have mooted credit unions as an alternative source of finance for consumers who are drawn to payday lenders.
Mr Lewis raised the issue of payday loan advertisements being shown on children’s television, and of advertisements making payday loans seem fun. “Our research shows that kids are being dazzled by catchy tunes and cute puppets,” he said.
It was also noted by the Committee that lenders had no systems in place for ensuring that borrowers did not take out multiple loans with different lenders within a short space of time.
The FCA will introduce a series of new requirements for lenders when it takes over as regulator. These include limits on rollovers and use of continuous payment authority, the need for risk warnings on promotional material and more rigorous affordability checks.
The sector has attracted a certain amount of scrutiny from existing consumer credit regulator the Office of Fair Trading (OFT), but some critics of payday lending have pointed out that the OFT has limited resources to supervise firms, and is sometimes reluctant to take enforcement action. Following a 2012 compliance review by the OFT, all 50 of the largest payday lenders were instructed to make changes to their business practices, and 19 of these 50 firms have already ceased lending activities.