Tag Archives: legal loan sharks

It’s Time to Wake Up to Britain’s Looming Personal Debt Crisis

This piece was originally posted in the Daily Mail on the second of January 2015.

Today you’ll hear groans from payday loan companies as a cap is introduced on the cost of credit. Britain’s legal loan sharks claim they have cleaned up their act. The Government say they are getting tough with these firms. Mainstream lenders champion their responsible behaviour in contrast. Yet still the public drowns in bills, with little respite in sight. It’s time to wake up to our looming national personal debt crisis.

This week research was published, to little comment, showing our personal debt has doubled in the last year. We are now so accustomed to borrowing for everyday items such as food, rent and travel that news of the gaping hole in family finances makes our shoulders simply shrug.

It is an inconvenient truth that for many years it has mattered more to short term economic gain to encourage easy access to credit, than endure the long term pain required to tackle our spending habits. With estimates that nine million are already in over their heads, and possible interest rate rises on the way, Britain can no longer afford to ignore the consequences for our economy and our country. Much of this debt is on credit cards. Six months ago the average credit card balance was £1,700 – it’s now nearly £3,000.

Families aren’t just juggling cards to cover basic costs. They also now owe twice as much on personal loans. Amounts outstanding to payday lenders have more than tripled. With low wages and erratic inflation, credit has become an inevitable necessity. R3, the insolvency professionals, claim the average indebted British adult owes the equivalent of three months’ salary. Every single day we pay out £163m alone on interest repayments on debt – the equivalent of paying for 5,000 nurses. Little wonder one in five of us expects to struggle more financially in 2015 than 2014.

Given the level of personal debt Britain has and its impact – not just on our economy but our family lives too – this should be a top political priority. Yet the Government’s deafening silence shows how this willingness to take on debt can be seen by some as an opportunity. Office of Budget Responsibility figures predict new borrowing will take total household debt to £2.6trillion by the end of the decade, but our incomes will rise by only £266billion. Without action, the gap between what we earn and what we owe will reach a record high by 2020.

For George Osborne’s plans for reducing public debt, this rising private debt is crucial to stimulating our sluggish economy. Without such consumer spending our recovery is at risk; with it our personal finances will become even more hazardous. Either way, we will all pay the price of the Chancellor’s choices.

Today’s cap on credit must be lowered to have real bite. That the cap is £1 below what legal loan sharks currently charge, and also allows companies to make money from default payments, means it will do little to tackle their predatory behaviour. Many legal loan sharks are already ahead of these rules, offering products designed to evade the cap all together but still squeeze people trying to make ends meet. But payday lenders are just one component of Britain’s credit industry that benefits from encouraging unsustainable levels of debt. Banks, credit and store card companies cannot claim the moral high ground as to who is feeding our unhealthy credit habits.

For too long irresponsible lending has gone unchallenged, with the highest rates and anti-competitive practices often targeted at the poorest borrowers. In this unfair market many borrow to stay solvent, only to find themselves trapped in a debt they will likely never escape.

Today’s cap is at best the start, not the solution, to giving British consumers the protection they need to be able to make ends meet. Reform of our banks must be matched with reform of our consumer credit industry.

We need to tackle those who exploit families on the tightest budgets and extend access to affordable alternatives. Without making overhauling our national credit habits a priority Britain won’t just be broke in 2015. It will perpetually be in the red, struggling to ever get back into black.

Cap on Credit Just the Start of the Battle to Fight Britain’s Personal Debt Crisis Warns MP

As the Financial Conduct Authority’s cap on high cost credit comes into force against a backdrop of ever increasing personal debt Labour’s Shadow Competition and Consumer Affairs Minister, Stella Creasy MP, warns:

“Almost a third of us say we had to borrow to get through the festive period, and 1 in 10 of us plan to get a payday loan to cover these costs. These are families already struggling with making ends meet, facing difficult bills for food, housing, travel and utilities. Given personal debt has doubled in Britain in the last year, challenging the practices in the consumer credit industry which makes these debts unsustainable is crucial to helping Brits who will start the year in the red not the black.

“Yet the cap on credit coming into force today is just £1 lower than current rates legal loan sharks charge, and still encourages companies to push people into debt by allowing them to profit from default charges.  Little wonder despite intense scrutiny many of these firms can still make nearly three quarters of a million pounds a week from British customers. And it’s not just the payday loan firms using the financial pressure Britons face to make money, with evidence credit card companies and banks are also profiting too.

“We are spending £163 million in interest alone on our personal loans– the equivalent of over 5,000 qualified nurses for a year. Payday lending is a symptom of these problems, not their only cause. That is why the next Labour government is determined to reform our consumer credit industry- abolishing fee charging debt management plans, providing more affordable credit through credit unions and regulating the advertising for payday lenders and their presence of on our high streets.

“With the Money Advice Service warning that nine million of us are in danger of going under with Britain’s personal debt habit we cannot afford to ignore these practices. The FCA’s New Year’s Resolutions must be to get to grips with problem debt now holding back our country.”

Ends.

Notes:

1.     R3, the association of business recovery professionals, report in their December 2014 Debt Snapshot that 57% of all people in work struggle to make it to payday while 27% of us are planning to get through Christmas by borrowing.

2.     As a consequence 8% of British adults say they are likely to take out a payday loan in the next six months.

3.     Stepchange debt charity saw a 42% rise in payday loan cases this year with 13,000 more payday loan borrowers seeking help in the first half of 2014 compared with the same period in 2013 –http://www.stepchange.org/Mediacentre/Pressreleases/paydayloanproblemsonrise.aspx

4.     The Financial Services Ombudsman received double the number of complaints about payday lenders in 2013-14 than in the year before and found against lenders in two-thirds of case:http://www.financial-ombudsman.org.uk/news/updates/2014-payday-loan-debt.html

5.     A cap of 0.8% per day means companies can charge £24 per £100 borrowed.  In its market study the OFT found the average cost of providing credit to be £25 per £100 meaning many firms were offering it at much lower costs. This is only in cases where people pay back their loans on time. Charges can be as much as double the initial loan if people fall behind.

6.     Having reviewed the potential effect of the cap on competition in the industry the Competition and Markets Authority found: “Our view is that scope for substantive price (and non-price) competition within the constraints of the proposed price cap would remain” p.98 https://assets.digital.cabinet-office.gov.uk/media/5435a640ed915d1336000005/Payday_lending_PDR_and_appendices.pdf

FCA Lets Sharks Off the Hook as Cost Cap Set Too High Warns MP

Responding to today’s announcement of the level set for a cap on high cost credit agreements by the Financial Conduct Authority Labour’s Shadow Competition and Consumer Affairs Minister, Stella Creasy MP, said:

Today’s news will be welcomed as an early Christmas present for Britain’s legal loan-sharks. This cap is just £1 lower than their current charges. This is an industry where some firms are making nearly three quarters of a million pounds a week from British customers- such a high cap will do little to tackle these rip off charges.

We’ve warned regulators this cap needs to be much lower to really change the behaviour of these companies, but today’s announcement shows they are still not listening.  Other countries are much stronger at taking on lenders. Borrowers in countries like Japan, Australia, Canada and parts of America all have better protection from being preyed on by these companies, showing what can be done to end legal loan-sharking.

This year debt charities and the financial watchdog have reported rises in cases involving payday loans causing problems for consumers, showing just how toxic this industry is for many. Today’s announcement means yet again these sharks have slipped through the net.

We have already seen many of these lenders try to evade capture by changing the names and nature of their product. Two years is too long for consumers to find out they are still being ripped off in this market. The FCA must commit to reviewing the level of the cap and what it covers within a year to ensure it reaches a more effective level.”

Notes:

1. Stepchange debt charity saw a 42% rise in payday loan cases this year with 13,000 more payday loan borrowers seeking help in the first half of 2014 compared with the same period in 2013 – http://www.stepchange.org/Mediacentre/Pressreleases/paydayloanproblemsonrise.aspx

2. The Financial Services Ombudsman received double the number of complaints about payday lenders in 2013-14 than in the year before and found against lenders in two-thirds of case: http://www.financial-ombudsman.org.uk/news/updates/2014-payday-loan-debt.html

3. A cap of 0.8% per day means companies can charge £24 per £100 borrowed.  In its market study the OFT found the average cost of providing credit to be £25 per £100 meaning many firms were offering it at much lower costs.

 

FCA Risks Legal Loan Sharks Slipping Through Their Net Says MP

Responding to the announcement by the Financial Conduct Authority of its proposed cap on payday loans and high cost credit, Stella Creasy MP, Labour’s Shadow Minister for Competition and Consumer Affairs said:

moneyshop1

Anyone who thinks today’s announcement is the end of legal loan sharking in Britain is in for a nasty shock. The cap proposed today by the FCA works out at only a pound less than the companies are currently charging, meaning its likely to have at best a limited impact on their lending behaviour. With the news there are almost 400 of these legal loan sharks in Britain, rather than the 240 the Government once claimed, getting this right is even more important.

Without further revision, this total cost cap of 100% of the borrowed amount will leav

e British consumers less well protected than their counterparts in Japan and most of Canada and the United States. Not everyone who takes out a payday loan gets into financial difficulties, but enough do due to the terms and structure of the loans, it is clear the business model is not fair. If the level of the cap does not remove the incentive to do this it is meaningless.  That’s why The FCA should and could go much further in providing the protection consumers in Britain need from the vicious cycle of debt these loans all too often create.

Indeed, many payday lenders are already trying to evade even this measure – but whether changing the nature or length of their loans to avoid the regulators they are still doing the same damage. The Financial Conduct Authority must commit to continually reviewing and reducing this cap and as well as ensuring it covers the whole of the industry to make sure none of these legal loan sharks slip through their net.”

Notes

1.    Setting a cap on credit at 0.8% per day works out to be £24 per £100 on a 30 day loan. In its report in 2012, the Office of Fair trading found the average cost to be £25 per £100. This will allow for £24 in initial interest plus a £15 default fee and a remaining £61 in default interest in roll-over fees. This cap still leaves British consumers less well protected than their counterparts in Japan and most of Canada and the United States.

2.    Many payday lenders are altering the terms of the loans they offer in an apparent attempt to circumvent definitions of short term credit, moving from 1000s % APR over a matter of weeks to 100s% over 6 months or longer or offering to top up loans rather than offer a new loan each time.

3.    The FCA have said that they will review the cap in two years’ time, but as we have seen, these legal loan sharks can do tremendous amounts of damage to people and communities in that time. A regular review with industry, debt charities and consumer groups will ensure that if the cap isn’t working, these problems are identified and corrected as soon as possible

4.    Today’s announcement shows that if the political will was there this cap could be introduced before the end of this year not next. Labour has been calling for the cap to be introduced earlier to take in the Christmas 2014 period as a time when people are far more likely to get into debt or seek to cover purchases with a payday loan. Labour has called for these reforms in place by October 2014 but time and again the Government and the FCA have ignored this proposal.

The Fight Against Legal Loan Sharks is far from over say Labour as Competition Watchdog Shows Harm Caused by Payday Loans

Responding to the interim report on the Payday Lending Market by the Competition and Markets Authority, Stella Creasy MP, Shadow Minister for Competition and Consumer Affairs said:

“Today’s report confirms what many of us have feared for so long- the payday lending industry is ripping off British consumers. Over the course of their term of office many have tried to warn the Government of the anti-competitive and damaging practices of the payday lending market but they just wouldn’t listen, claiming it was the nature of the market. Well now we know that the opposite is true- this research confirms people are overpaying for this kind of credit because prices are distorted. That 80% of customers have to take out more loans within a year reflects just how the industry is helping to keep people in debt as a result.

“Letting legal loan sharks get away with this means Brits are losing out to the tune of £45m a year. The belated Government u-turn on capping the cost of credit is welcome, but it has come too late to prevent the personal debt crisis these companies are feeding on that we now see unfolding across Britain.

“Improving access to alternative credit like credit unions and social finance is vital, but ultimately this report highlights why – with 9 million people in the UK overindebted and interest rate rises on the horizon- Britain cannot afford complacency when it comes to helping people make ends meet. The Government must push the Financial Conduct Authority to act quicker to bring these companies to account, addressing not just the cost of a loan but how decisions to loan are made and their attempts to avoid regulation by lengthening the timeframe of a loan.

“They must also recognise payday lenders are not the only legal loan sharks preying on the British public- the problems with log book loans and debt management companies show we need a complete overhaul of consumer credit in this country so that we halt the spiral of debt so many find themselves caught in as a result of borrowing in this way.”

Notes:

Details of the Competition and Markets Authority’s Interim Findings can be found here: https://www.gov.uk/government/news/payday-borrowers-paying-the-price-for-lack-of-competition

 

Labour Slams Government Inaction as Regulator Highlights Dangers of Logbook Loans

Responding to customer research published today by the Financial Conduct Authority Stella Creasy MP, Shadow Minister for Competition and Consumer Affairs said:

“Less than a month ago, Labour proposed giving borrowers in Britain protection from Log book loans by outlawing the Bill of Sale Agreements which these companies use to take advantage of people in need of credit. We wanted to protect consumers against this type of legal loan sharking- but yet again the Government ignored our warnings and voted down this proposal.

“Time and again this Government has been too slow in recognising and reacting to dangerous practices in the consumer credit market. This research makes a damning case to show there’s more than one toxic type of company out there causing serious damage to the finances of families- those struggling with these loans will rightly be asking why the Government continues to fail to get a grip of these problems and not to listen to either us, the Citizens Advice Bureau or the customers of these companies themselves who are being exploited.”

 

Notes:

1.       The Financial Conduct Authority published research today, some of the main findings were that-

Consumers:

  • often have few alternative sources of large amounts of credit
  • do little or no shopping around
  • are often unclear about important loan aspects, e.g. the total cost of the loan,  additional charges and the fact that ownership of the vehicle transfers to the lender
  • say they are often subject to aggressive and threatening behaviour if they experience repayment difficulties
  • many experienced payment difficulties at some point, suggesting firms may not be carrying out adequate affordability checks.

Lenders:

  • have high APRs, typically 400% or more, plus additional fees and charges
  • appear to rarely carry out affordibility checks
  • online lenders mainly consider the value of the car when granting a loan rather than the individual’s ability to pay

http://www.fca.org.uk/news/fca-says-logbook-lenders-must-raise-standards

2.       At report stage of the Consumer Rights Bill Labour proposed a New Clause to limit the use of Bill of Sale to underwrite Logbook loans, provide modern consumer credit protection and protect third parties who buy cars in good faith. On 13 May 2014the Government MPs voted against the changes.

http://www.publications.parliament.uk/pa/cm201314/cmhansrd/cm140513/debtext/140513-0003.htm

3.       Since 1st April the Financial Conduct Authority took over regulation of the Consumer Credit Market including Log Book Loans

http://www.fca.org.uk/news/fca-takes-over-regulation-of-consumer-credit-firms

4.   A logbook loan is a form of credit where a legal document called a Bill of Sale is used to  secure a loan on a debtor’s vehicle. The lender retains legal ownership of the car for the life of the loan and the structure of the loan means that the lender can repossess the debtor’s vehicle without a court order. A lender is also able to take possession of the vehicle from a person who purchases the vehicle from the original debtor if there is an outstanding loan against it.

Labour calls on FCA to name the date on payday loan cost cap as Which? research reveals rip off fees

Responding to the findings of a Which? investigation into default fees charged by payday lenders Stella Creasy, Shadow Minister for Competition and Consumer Affairs said:

“Today’s figures from Which? show the extent of fees being charged in the payday loan market on top of their excessive interest rates. We know that trying to pay off one of these loans is the main reason young Brits are struggling to make it to the end of the month and little wonder given how expensive they can be.

This shows why Labour was right to demand a cap not just on interest rates but all the charges these companies can apply. Having secured the power for the Financial Conduct Authority from the Government to implement a total cost cap on payday loans, it’s clear this can’t come soon enough. It is time the FCA set out their timetable for this measure so we can protect borrowers and ensure Britain has a consumer credit market which works for everyone.” 

 

Summary of Which? investigation into default fees charged by payday lenders:

Payday Lender Fee charged for failing to repay the loan on the due date (£s)
Wonga.com 30
MoneyShop.tv 29
MyJar.com (a) 25
Speedydosh.com 25
247moneybox.com (b) 20
Minicredit.co.uk (c) 20
MrLender.com (d) 20
Quid24.com 20
Swiftmoney.co.uk (e) 20
Wagedayadvance.co.uk 20
Microlend.co.uk 15
Paydayexpress.co.uk 15
PaydayUK.co.uk 15
MyMate.co.uk 12
Quickquid.co.uk 12
Safeloans.co.uk (f) 12
Zebit.com (g) 12
 

More information about the campaign by Which? on payday loan fees can be found on their website: http://www.which.co.uk/campaigns/money-payday-loans-overdrafts/know-the-issue/