2.1.5 Credit unions to take on the payday lenders?
In the following video, Hugh Stickland, chief economist of Citizens Advice, talks about trends in enquiries seen from those who have got into difficulty with payday loans and whether the new rules of the Financial Conduct Authority (FCA) are helping consumers.
Payday lenders are an alternative source of credit that have emerged in recent years. Lately, their business practices have come under fire and attracted great interest in the media and with regulators.
They are criticised for charging extortionate rates of interest on short-term loans and for dubious lending practices. The lenders have had to field calls for tighter regulation, including better tests of affordability when assessing applications for loans.
The Archbishop of Canterbury, Justin Welby, has gone on record as wanting to help credit unions take on payday lenders and force them out of business. There are over 350 credit unions in the UK who collectively lend around £700 million – these are mutual organisations often linked to places of work or particular localities that lend money from pooled savings.
In 2013, the Office of Fair Trading (OFT), which was then the regulator of the payday lenders, contacted 50 of them to review their practices and to form a view about their suitability to remain in business. Subsequently many lenders have ceased, or are ceasing, operations and others have had their lending licences revoked.
Concerns remained, though, about:
- whether the lenders are conducting proper affordability checks on borrowers
- the misuse of ‘continuous payment authorities’ that give payday lenders access to the bank accounts of borrowers to recover money lent
- the excessive rollovers of loans, with the consequent build-up of interest charges and the growing likelihood that the debts will become unmanageable
- aggressive debt collection methods.
Responsibility for the regulation of consumer credit, like payday loans, passed from the OFT to the Financial Conduct Authority (FCA) in April 2014.
Having taken over regulation of the payday lenders the FCA wasted no time in tightening up the rules applying to their lending. This included tighter rules on affordability and the application of a 0.8 per cent per day cap on interest charged from January 2015. Additionally, no one now has to pay back more than twice the sum borrowed (i.e. the aggregate interest charge is capped at 100 per cent of the loan).
The roll-out of the new affordability checks was followed, in October 2014, by Wonga – one of the largest payday lenders – announcing that it was writing off £220 million of debt relating to 330,000 customers following the application of the new criteria. Another 45,000 of Wonga’s customers who are in arrears will not have to pay interest on their loans.
So should payday lenders be forced out of business? Should their business be redirected to the credit unions?
While credit unions represent a lower-cost alternative to borrowing, the scale of the funds they have available is insufficient to replace the lending being done by the payday lenders (over £2 billion). Additionally, credit unions generally take a little longer to approve loans and this may be prohibitive for customers needing immediate cash. The harsh reality is that without payday lenders, many of their would-be customers could fall into the hands of the ‘loan sharks’ – something the FCA recognises.
While certain of the practices of the payday lenders may be condemned, their very existence and proliferation in recent years highlight both the current problem of falling living standards for many families, and the underlying issue of financial exclusion from mainstream financial services for thousands of households in the UK.