Managing my financial journey
Managing my financial journey

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Managing my financial journey

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.

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Hugh, payday lenders have been much in the news in the last few years. And, I guess, people who've taken out a payday loan and have got into a problem will be many of the people who you've seen and had to deal with here at Citizens Advice.
Yes, absolutely. From the financial crash and the recession onwards, we saw a real spike in people coming to us with payday loan problems. And they were very, very serious problems as well - people being left with no money, the payday lender draining their bank account straightaway, harassment for payments - very aggressive debt collection practises. And, of course, the cost of the loan, as well, was monumental. We're talking APRs of well over 1,000 per cent - sometimes 3,000 per cent or so. So it left people high and dry without a hope and scared as well. It was really, really harrowing to see some of those cases.
Hugh, the FCA, as we know, has taken over regulation of the payday lenders. And I'm guessing that with their new regulations about interest charges and the way in which the payday lenders must go about their business must be reducing the number of inquiries which you're getting.
Well, let's start with the numbers because it tells a really compelling picture. Over the last year, we have seen roughly the numbers of people coming to us with payday loan issues half compared to the time before the FCA regulations and before the cap on the cost of interest. That's testament to the FCA regulations. We really support them. We think they're working well. We're still gathering evidence, and we will be presenting any further evidence that we find to the industry and the FCA to see if they do need to be tightened up. But so far, we think there's been a big improvement.
But I have to ask Hugh, is there a problem, in that, people who are now denied access to payday loans because of the new regulations, are just going to fall into the hands of unregulated lenders and then get into worse problems than they would have done in the first place?
This is precisely one of the things that we need to watch for. And that's what we're doing - working with people like the Illegal Money Lending Team in National Trading Standards. Now, at the moment, our evidence suggests that people are actually falling into arrears with things like their energy bill. So they would have taken a payday loan to pay their energy bill or perhaps their council tax. Now, in some ways that's quite difficult because these are now priority debts that the person is dealing with.
But in other ways, it's usually much more easy for us as an advice giver to deal with the energy company, or the water company, or the council tax department than it is to deal with a payday lender. And there's more forbearance, there's more understanding in that market. So it's something that we continually need to look at, continually need to watch. But so far we think this is better for consumers.
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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.


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