Payday predators

MP Stella Creasy has called them “legal loan sharks who are bleeding the country dry” but her campaign is unlikely to result in tighter regulation of payday lenders, says SHAYLA WALMSLEY.

Despite a long and vociferous campaign led by backbench MP Stella Creasy, so far the Government has shown itself disinclined to crack down on payday lenders. In his strongest statement to date, Consumer Affairs Minister Ed Davey in December expressed a desire to limit lenders’ access to their customers’ bank accounts, but he said he would prefer to engage the industry to improve its code of conduct.

Wonga – the most high-profile of payday lenders, largely as a result of its TV advertising campaign – has been quick to respond to the invitation to engage. Recently slated for telling students that it made more sense to borrow at 4,214 per cent than to take out a student loan, the firm nevertheless markets itself as a responsible lender, conducting thorough due diligence on potential customers and making “highly selective” lending decisions.

“It tends to be the worrying stories or instances of poor service that grab headlines, but we have provided more than three million loans since we launched and the vast majority of customers who use our service and then complete our regular surveys are extremely positive,” says Henry Raine, Head of Regulatory and Public affairs at Wonga.com, in written responses to questions.

It’s us or them
Wonga is the acceptable public face of an unpopular industry – or industries. Consumer Finance Association CEO John Lamidey says he’s irritated by campaigners’ failure to differentiate between home credit and short-term lending, when in fact “there is no crossover at all”. Most of the firm’s customers have access to alternatives, he says. (The one argument for payday lending is that it can be cheaper than credit card debt or an unauthorised overdraft in the very short term.)

Lamidey’s organisation represents eight of the nine large UK payday lenders. The ninth is Wonga.Although campaigners would not accept the distinction between non-bank short-term lenders, it’s an important one because it will determine exactly which businesses could face additional regulation. The contours of the £2 billion payday lending market are shifting, at one end, towards competition with banks and, at the other, towards unregulated providers – the pitbull and baseball-bat model.

Despite new entrants into the sector, Raine says Wonga is “now competing with the banks in many instances – and against traditional products such as overdrafts and credit cards”. Overall short-term lending has increased by 6 per cent since 2006, according to the Bank of England, while unsecured lending from banks and building societies has fallen by 21 per cent.
 
On the other hand, the lenders’ ultimate argument, and one Lamidey makes use of, is that over-regulation could make legitimate businesses like those of his members pull out of the regulated sector altogether – as he puts it, “to move outside the rules”. That would leave short-term lending to less regulated, and potentially less savoury, operators.

“Once you start creating an environment where people find it difficult to operate in the open market, you leave it to people who don’t want to be regulated at all,” he says.

Even if new regulation is unlikely, there is a regulatory shift. Up to now, regulation has focused on the lending process. But one of the new financial services sector regulatory structures, the Financial Conduct Authority, is specifically authorised to oversee the design of financial products.

For Lamidey (and not only him), the idea is alarming: “If you create an environment where people operate outside the regulatory regime, you take away consumers’ protection. You’ll get either avoidance or arbitrage. It’s a balance you have to get right between making compliance worthwhile and making it too difficult to comply,” he says.

Competition versus regulation
If the Government is pushing industry engagement as one response to the campaign against payday lenders, it has also identified competition from credit unions as an alternative to regulation.

Martin Groombridge, Managing Director of credit union HICCU, reckons credit unions could compete with payday lenders were it not for arbitrary restrictions placed on their ability to lend. He points out that the credit unions are the only financial services sector to have a cap put on their interest rates – in contrast to payday lenders, whose interest rates, he says, are not transparent. “There should be a cap across the board but at a higher level,” he says.

 “We don’t want special favours but we do want free access to the market and to be able to offer services in the same way as our competitors,” he says. “Annual rates on loans are capped at 26.8 per cent.”

 Another obstacle to credit unions’ ability to compete with payday lenders to date has been their geographical specificity. The UK’s 450-odd credit unions make up a relatively localised industry, with around £600m in assets under management. Under new rules announced this year, credit unions will be able to recruit members from outside their local area and pay interest on money deposited rather than paying dividends.

Competition is a slow process, though. In the meantime, Creasy’s campaign is gaining airtime – though probably not enough to break the Government’s resistance. Although the Government’s review of consumer credit is due at the end of February, Lamidey believes it unlikely there will be specific regulations for consumer credit. “The Government knows where it’s going,” he says.

Creasy’s original Consumer Credit (Regulation and Advice) Bill favoured limits on credit interest rates and charges, a levy on credit and debit card providers to finance debt advice services, and an increase in the powers of local authorities to restrict premises for consumer credit agencies. But if there were to be regulation, at most it would likely target transparency over interest rates, price caps and limits on the number of loans or rollovers.

Wonga was cagey about its view on further regulation, but Raine acknowledges that price caps are a possibility. “We continue to suggest ideas and engage with all interested parties about how this sector can operate better for consumers,” he says.

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