Sunday, 30 March 2008

Stop the Payday Loans Scandal - MP's to lodge concerns

David Drew, M.P, will tomorrow lay down an Early Day Motion supporting Debt on our Doorstep's call for an investigation into the Payday lending industry in the U.K. The move follows the excellent response from supporters to our own petition on the Number 10 website, which obtained 460 signatures in just over two weeks.

Obtaining the support of MP's is now a vital part of this campaign, and we ask that all supporters write to their own M.P requesting that they put their name to the motion. We will provide a standard means of doing this from this website in the next few days.

In the meantime, a briefing on the Payday lending industry has been prepared, as below.

Payday Lending in the UK: Background Note

1.1 Pay day loans are provided to people in employment, with bank accounts, and operate by the lender accepting a post dated cheque (usually of £100) from the customer which is dated to the forthcoming pay day. A cash advance is then made of between £71 and £85, depending on the lender’s terms (see table below for details of lenders in this market). The difference between the amount of the advance and the £100 is the fee charged by the lender. Multiple cheques are accepted at the same time, with lenders offering up to a £750 - £800 to new customers. So, for example, a new customer would provide 8 cheques to the lender, each of £100, and receive a cash advance of £640 (the difference of £160 being the fees charged that will be collected by the lender on the customer’s pay day). APR’s on the agreements are typically in the region of 1200%, although one lender states that they can rise as high as 9899% .

1.2 Customers are given the option to ‘roll over’ the cheques if they cannot afford to have them cashed against their accounts when the pay day comes around. To do this, the customer must pay another set of fees direct to the lender at the same rates as the initial agreement. So, in our example, the £800 liability could be deferred for another month by the customer paying a further £160 in fees. Rolling over loans is particularly problematic as no amount is being paid off the original liability. For example, after just 5 months of paying £160 per month in fees (total of £800), the original liability of £800 would still be outstanding in full.

1.3 The table on the following page details the main brands and companies involved in the provision of Payday loans in the U.K, and the main terms and conditions of their loans.

1.4 Some, but not all, lenders restrict the amount of times that loans can be rolled over in this way, and have policies in place that require at least some payment off the capital amount to be made once a loan has been rolled over more than two or three times. However, there are no details given as to the amount of payment that is required to be made towards the capital in order for further rolling over to take place, so debts can still be rolled over many times prior to being cleared.

1.5 Lenders frequently advertise the fact that no credit checks are required and that money is available quickly. No assessment appears to be made of a customer’s ability to repay. Application forms do not generally ask for any details concerning expenditure or outstanding debts of borrowers. It is likely therefore that these loans would fall foul of any reasonable definition of ‘irresponsible lending’ – a term included in the Consumer Credit Act 2006 that the OFT must consider when licensing credit providers from 6th April 2008.

1.6 There is an absence of published information concerning the size of payday lending operations in the U.K. However, the expansion of Moneyshop stores over the past 12 months, the entry into the UK of QuickQuid in the third quarter of 2007, U.S takeover of Month End Money and the significant increase in internet sites and financial brokers offering payday loans over the past 12 months indicates that the sector is growing rapidly.

1.7 Dollar Financial, owners of the Moneyshop brand, report that their U.K. business realized growth of 71.7% in 2007 and that U.K. loan originations increased by 55.3% or $34.5 million in that year. They have 221 company operated stores in the UK, and a further 193 operated under franchise, which is approximately 25% of all payday lending outlets in the UK . 2007 third quarter accounts indicate that approximately £16 million is put out on loan each month in the UK. We estimate that a customer base of approximately 150,000 - 200,000 people would include what be required to sustain this. Assuming that the outlets of competitor lenders have similar reach, then this would suggest a market of approximately 600,000 - 800,000 people although recent developments including the increased availability of payday loans on the internet may mean that this is a conservative figure.

1.8 The advertising of payday loans on many websites is often deliberately vague and fails to provide essential information, such as the APRs, and the impacts of rolling over loans on these. In some case advertising may breach the relevant regulations. For example, the website for Quicksilver payday loans, a brand of MEM Consumer Finance Ltd., contains the following statement:

“Payday loan companies are required to calculate the APR% for their customers even though the measure is inappropriate for 30 day (i.e. very short term) cash advances. We’ll calculate it when you go through the application process…”

MEM Consumer Finance Limited also launched a TV advert in December 2007, which is running throughout 2008, under the brand name Payday Now!. This fails to mention the APR of loans at all.

Main Payday Lenders in the UK - Terms and Company Information

The Moneyshop £9.99 on first cheque of £100 only – APR of 260.2%. Usual rates, and anything other than the first cheque, are charged at £14.99 and advances made of £85.01, which would bring APR’s up to approx 1,000% Owned by Dollar Financial, US company expanding in the U.K. Has over 250 stores in the UK now and in the quarter to 31st December 2007 recorded lending growth of 55.3%. The company lends approximately £2.5 million per month

Month End Money,also trading as Payday Now!, PayDay UK, Payday Store, Quicksilver Payday Loans £25 per £100 borrowed. Will lend up to £750 to new customers. APR – 1355%. The Quicksilver website states that full roll overs allowed for two months, then some element of capital repayment required in addition to the roll over fee (amount of capital to be repaid not specified). Owned by MEM Consumer Finance Limited which was acquired by US company CompuCredit in 2007 - unfortunately Compucredit’s accounts do not break down by country, so it is not possible to determine the size of the UK operation. The company has launched a TV ad in December 2007 which is running throughout 2008

Payday Express,, £20 on each £100 borrowed. APR 1286.1% (based on 31 day month). Will lend up to £800 to new customers. Money available over the internet and paid into bank accounts within 2 days or same day (for which an additional £15 fee is charged) After 3 loans, customers can apply for an increase in the limit. Owned by Express Finance (Bromley) Ltd – Turnover of roughly £1 million per annum. Family owned firm.

Albemarle & Bond. Payday loans available up to £600. No information on website concerning charges – available from within their pawnbroking stores. A national pawn broking company with 75 outlets that has expanded into pay day lending. Company income from payday lending has increased from £0.05 million in 1996 to over £3.6 million in 2006.

Chequebook Loans. £20 on each £100 borrowed – APR 1286%. Company based in Luton, offering payday loans over the internet. Private limited company. Exempted from last accounts requirements on basis of small size. Next accounts due in April 2008.

Payday Advance UK. £29 on each £100 borrowed – no APR figure given on the website. Limits of up to £1000 for new customers. Company registered in Malta. Member of Consumer Credit Association UK.

QuickQuid. £25 - £50 charge on each £100 lent. (APR generally 1,576.5%) Website also states that typical rates range from 1351.7% to 9889.3% A subsidiary of CashNetUSA and Cash America Intl.. Only operates on the internet for UK customers – a service started in the third quarter of 2007. No figures yet available concerning take-up. Next financials released on 24th April 2008

Tuesday, 25 March 2008

Today's Times: Debt charities cast a wary eye on waters as loan sharks circle

Christine Seib , The Times 25th March 2008

Doorstep lenders and loan sharks are moving into the space left by Britain's high street banks, whose tightening credit terms are leaving millions of people without access to mainstream finance.

Debt campaigners have seen hordes of clients forced to borrow at extortionate interest rates because they have had their credit cards cut off or have been refused loans as the country's biggest banks react to the global liquidity crisis.

Banks have scrapped 125 per cent mortgages, increased the minimum deposit needed for first-time mortgages and reduced credit card limits as the banks' own borrowing costs rocketed in response to a worldwide collapse in interbank lending.

Last month Egg, the online lender, cancelled the credit cards of more than 160,000 customers. Many lenders, including Nationwide, Britain's biggest building society, are charging higher rates for borrowers who do not have a 25 per cent deposit.

At the same time, Provident Financial, the country's most prominent doorstep lender, has predicted a booming 2008. The lender said this month that the number of people who fell into the “non-standard” category of borrowers had grown to about ten million.

The Financial Services Authority estimates that up to seven million people had difficulty gaining mainstream credit, and Citizens Advice reported last week that mortgage arrears problems had shot up by 35 per cent in the first two months of 2008, compared with the same period last year. Citizens Advice bureaux said that they had dealt with 215,000 new debt problems in January and February.

Doorstep lending, which usually involves small loans on interest rates of 100 per cent or more, with payments collected each week by a local agent, is legitimate, but debt charities fear that unauthorised lenders are also capitalising on the increased number of people who have found their usual lines of credit diminished or cut off.

Faisel Rahman, managing director of Fair Finance, a non-profit sub-prime lender based in East London, said: “It's a race. We can forge a new way of lending but we can assume that our competition will also move in.”

Neil Cooper, of Debt on our Doorstep, which campaigns to end high charges for sub-prime lending, said: “I'm sure unauthorised lenders will see an opportunity there, but the biggest risk is the sub-prime lenders who already have their infrastructure set up. People will be forced to go to them for very expensive loans because they can't get credit elsewhere.”

Keith Tondeur, president of Credit Action, a charity that offers budgeting education, said that many of the people who were turning to sub-prime lenders had previously been good customers of the high street banks. “People who've been able to borrow at will are now unable to do so,” he said. “This comes at the same time as rising food and fuel prices and declining asset values — it's not a pretty picture.

“There's a great core of people who've been borrowing happily for 20 years and all of a sudden that's no longer available to them.”

Case study

Luis García, 38, who asked The Times not to use his real name for fear of reprisals, repaid more than £15,000 over five years after borrowing £3,000 from a loan shark in Britain.

Unable to get a standard bank loan, the Colombian borrowed the cash in 1999 to set up a new life in the UK, but, with repayments of £450 a month, was unable to pay off the principal.

“I was paying 15 per cent on my loan, but if I couldn't pay the full £450 and gave him only £300 one month, the other £150 went on to my loan and I paid 15 per cent on that as well.”

When his lender, also from Colombia, threatened the life of Mr García's family in his home country unless he kept up the huge repayments, Mr García turned to Fair Finance.

He said that he cried with joy when the non-profit sub-prime lender offered him sufficient credit to pay off the loan shark.

Monday, 24 March 2008

Why aren't Americans spending? What would Friedman say now?

The Bush administration's plan to get Americans to spend their way out of the economic doldrums appears to have hit problems, according to a survey of US householders conducted for CNN/ Opinion research Corp.

Only last month, the U.S congress voted through a $170 billion package to boost the economy, with $120 billion of this set to be put straight into consumers pockets in the form of tax rebates, with payments of $600 to most individual taxpayers who earn less than $75,000, and $1,200 for married taxpayers filing joint returns who together earn less than $150,000. There is also a $300-per-child tax credit.

But a survey pulished today reveals that only one in five U.S consumers are planning to spend the money. Instead 41% of those surveyed plan to use their rebates to pay off bills, and 32% will put the money in savings. A further 3% said they will donate the extra money to charity.

The survey indicates that only $24 billion of the $120 billion being handed out will actually contribute to stimulating the U.S economy.

The results are ironic, given the long standing commitment of the U.S to monetarist economics. Monetarism's rise dates back to the 1970's when nations were grappling with the failure of Keynesian economics to stimulate domestic demand in the face of the oil crisis, and inflation and unemployment were both rising.

One of the key theoretical explanations for Keynesian economics failure was contained in Milton Friedman's 'Permanent Income Hypothesis' first published in the 1950's. This stated that, rather than modify their consumption patterns in line with temporary increases or decreases in income, people would use credit to smooth out these fluctuations over their lifetime and attempt to maintain a constant level of consumption. Short term attempts to boost the economy - for example increased welfare payments or tax rebates - Friedman argued, would be largely ineffectual. Only changes in household's long term expectations would have an impact.

For neo-liberal administrations like those of Thatcher and Reagan, Friedman's theory - and other life cycle theories of credit that followed it in the 1960's - provided the theoretical justification for policies that deregulated credit markets, promoted home ownership, and boosted demand. Expanding credit markets meant not having to resort to the old Keynesian mechanisms of state spending, but instead relying on individual households to borrow and spend. The consequent surge in house values shifted household expectations sufficiently to encourage a cycle of increasing indebtedness and, for limited periods, economic growth.

It also provided a good basis on which to reduce traditional welfare provision throughout this period under slogans of "self-reliance", and "individual responsibility". In this sense, credit was the tool of choice for those administrations looking for a mechanism to undermine the welfare state.

But this cannot last forever. Just as this process resulted in mass repossessions in the UK in the late 1980's, so it must come to an end this time around also. At some point, as the economists Godley & Izurieta pointed out in 2003, (Coasting on the Lending Bubble Both in the U.K and U.S. Paper presented at the Annual Meeting of the Society of Business Economists, London, June 25th, 2003) household expectations begin to flatten out - they balance their debt burdens against a prognosis for the economy more broadly. Once this happens, spending slows and the cycle begins to reverse. Consumers repay debts or save rather than spend, demand slows, and asset values including house prices fall.

The evidence from the US survey indicates that consumer expectations have now been firmly realigned downwards. According to Friedman's theory, tax breaks are not going to be enough to save the US economy now.

What might help? Firstly, if Friedman's theory is right then measures must be taken that will help manage household expectations for the longer term. Short term measures are unlikely to be successful. Instead, emphasis should be placed on preventing house prices from collapsing further - putting in solid protections against repossession would be a good start.

Secondly, there has to be both liquidity of credit, and responsibility in its provision - this means ways must be found to continue to lend to households that require re-financing, but that this must be done in ways that help households in the longer term rather than simply seek to profiteer on their desperate positions. Rescue loan funds, that genuinely work with consumers to provide sustainable long term solutions would be useful. Given that so much central bank funding is now flowing into private banks, some insistence that this be used to assist households in difficulty doesn't appear to be too much to ask.

For the longer term, there needs to be a reassessment of the regulatory framework governing credit provision and a debate involving government, consumers, and the industry to determine accepted principles of responsible lending and the required rules to ensure this.

Thursday, 13 March 2008

Two years after the Competition Commission - Provident's business is booming

In our joint statement on the credit crunch, published with the European Coalition for Responsible Credit in October last year, we drew attention to the risk that, as mainstream lenders struggled with liquidity, they would start to restrict access to credit and leave more and more people at the mercy of high cost lenders such as those engaged in Payday lending and Home Credit.

Unfortunately, a recent article in the Scotsman confirms this view. 2 million people are now forced to obtain credit from doorstep lender Provident, and in their own words they accept that they benefit from restrictions on lending in the mainstream market. The associated problem, of course, is that this lack of competition from mainstream lenders means that Provident can also get away with charging sky high rates.

The credit crunch also means that many of the Competition Commission recommendations will be of little, or no effect. For example, the Commission's attempts to encourage data sharing - so that home credit borrowers could build up an improved credit score and apply for mainstream credit at cheaper rates - appear very flimsy when mainstream lenders are restricting access to all but those with the very cleanest of credit scores. Policy makers have so far been pre-occupied with the impacts of the crunch on mortgage rates - perhaps now they should start to think about the impacts on child poverty instead.

----------- Article from The Scotsman 5th March 2008 -------------------

2 million pay 100% interest on doorstep


A RECORD two million Britons have borrowed money at interest rates of up to 100 per cent from Britain's biggest doorstep lender after being refused credit by high- street banks, it was revealed yesterday.

Provident Financial, which sells small loans door-to-door, said profits were up 11 per cent to £115 million. Since last year's meltdown in the US subprime mortgage market, British mainstream banks have introduced stricter rules on who they will lend to, boosting business for doorstep lenders.

Provident's home credit business, which employs almost 12,000 collection agents to make 80 million home visits a year, saw its customers increase by almost five per cent to a record 1.6 million last year.It has a large customer base in Scotland, where it provides credit to 227,086 people and has 1,772 agents. Peter Crook, the chief executive of Provident Financial, said:

"Current market conditions are favourable for us, as mainstream banks continue to tighten their lending criteria."

Wednesday, 12 March 2008

Government Launches Consultation on National Savings Gateway Scheme

In a welcome development, today's budget included an announcement that the Savings Gateway - a scheme whereby the Government adds to the savings of low income households - is to be rolled out nationally.
The scheme was originally proposed in 2001 and has been through extensive pilots which have tested qualifiying criteria and the level of Government contribution to the savings accounts. Today's announcement promises that the national scheme will be available from 2010 and is linked to a consultation exercise running between now and 4th June 2008.

The consultation document is available here:

Sunday, 9 March 2008

Fuel Poverty Measures Should Show the Way to Affordable Credit

A report in today's Observer (see below) highlights the need to force energy companies to introduce 'social tariffs' to ensure that low income households can access the energy services they need at prices they can afford. Efforts to encourage the industry to establish voluntary mechanisms to look after these consumers have failed, according to the National Energy Association and Npower. The result has been an horrendous increase in the level of fuel poverty -households are defined as being in fuel poverty where they spend more than 10% of their disposable income on fuel bills.

There are lessons here for those seeking to ensure access to financial services, and to affordable credit for people on low incomes. The Financial Inclusion Taskforce is behind the game. Whereas the Government has set binding targets for the energy industry to eliminate fuel poverty in England by 2010 and across the UK by 2016, no such ambition has been set out for the Financial Inclusion Taskforce or the financial services industry to establish access to affordable credit. In fact, even the term 'affordable credit' remains undefined by the Taskforce. Despite this lack of precision, a recent mapping exercise has been conducted by the Taskforce to establish those areas of Great Britain that have the least access to affordable credit. The results are confusing as they give no indication of the level of resources necessary to solve the problem of rip off credit provision to the poor. And there is no evidence of effective pressure being exerted by the Government or Taskforce on banks to meet even those gaps in provision that have been revealed. The Growth Fund for credit unions and third sector lenders of just £45 million being devoted to this purpose is woeful in its inadequacy.

Debt on our Doorstep's research last year into the debt burdens of low income households revealed that the poorest households are paying an average of 11- 12% of their incomes on unsecured debt repayments. Using the same definition of poverty as is used in relation to fuel, that puts somewhere approaching one fifth of the population, those in the lowest income quintile, in debt poverty. As Alistair Darling approaches his budget preparations, he would do well to set out some targets and mechanisms to deal with this including a responsibility for banks to deliver services to low income communities at affordable prices.

Energy companies should be appladed for recognising the need for Government intervention to force a level playing field in the industry and to secure services for low income consumers. Now is the time for banks to accept that the financial services market requires the same medicine.
Npower admits laws needed on fuel poverty
Tim Webb
The Observer,
Sunday March 9 2008

This article appeared in the Observer on Sunday March 09 2008 on p3 of the Business news & features section. It was last updated at 00:04 on March 09 2008.

RWE Npower has privately admitted that energy companies will only tackle fuel poverty effectively if the government forces them to do so.

The energy industry has been trying to resist moves to force companies to do more to help the soaring numbers of 'fuel poor' in this week's Budget. The government has set a legally binding target to end fuel poverty in England by 2010, and across most of the UK by 2016.

But in a letter to energy regulator Ofgem in September, Npower admitted that the government's approach to date, to encourage companies to offer more subsidised or 'social' tariffs to poorer households on a voluntary, as opposed to compulsory, basis would not work.

'At present, government is encouraging the delivery of a social action solution within a voluntary framework,' the company said in the letter. 'It is doubtful whether this is the most efficient approach and it is also seemingly inconsistent with a market framework.'

It went on: 'We believe that the interest of the fuel poor is best served by a mandatory social tariff and this is the only means by which the government's 2010 and 2016 objectives can be achieved. There is no obvious reason why these targets will be delivered within a competitive retail market.'

This weekend, the government was still considering how to address fuel poverty in the Budget. The companies are expected to escape a windfall tax if they contribute a 'voluntary' levy to help those struggling to pay their bills.

Energy companies currently spend just 0.11 per cent of their £24bn turnover on tackling fuel poverty on average. Spending varies: British Gas, owned by Centrica, spends 0.49 per cent of its turnover, while Scottish and Southern Energy and Npower spend just 0.07 per cent. Many of these supposedly cheaper tariffs are actually more expensive than the tariffs offered to other customers. For example, British Gas's social tariff for gas and electricity is on average £96 more expensive per year than for ordinary customers paying by direct debit.

At the end of last month, Energy Minister Malcolm Wicks reiterated to fuel poverty charity National Energy Action that the government would not introduce mandatory social tariffs.
Jenny Saunders, chief executive of National Energy Action, said: 'It would be preferable to have a legislative framework, rather than rely on the goodwill of companies for a one-off gesture. Some companies are doing their bit but to have a genuinely socially just energy market the government will have to intervene.'

Fuel poverty is defined as a household which spends more than a tenth of its income on heating and lighting.

UK Government confirms 'Greed & Fear' as causes of credit crunch:

Writing in 1998, Professor Susan Strange wrote that:

"“Greed and fear are the two human emotions most evident in the day-to-day behaviour of the international financial system today….Either dealers are drawn by greed to take too big risks with their own or, more often, with other peoples’ money; or they are overcome by fear that the risks they have taken will catch them out. In their rush to escape the consequences of greed, they may start…an avalanche of panic that carries away the innocent along with the guilty.” (Mad Money, pg. 139)

10 years later, the Treasury have confirmed this assessment - although they use less obvious language. Their current consultation on proposals to increase stability in the world of banking highlights the two causal factors of greed and fear in the language of the marketplace: with 'search for yield' as greed, and 'uncertainty' as fear.

The Treasury's current consultation on proposed measures to stabilise the financial services sector notes that:

"...the disruption in global financial markets in the second half of 2007 followed a prolonged period of macroeconomic and financial stability and low interest rates in the UK and globally. Historically low interest rates encouraged investors to ‘search for yield’ by investing in increasingly risky financial products without being fully compensated for the additional risks, leading to a general under-pricing of risk. Benign macroeconomic conditions and the search for yield also encouraged an erosion of credit risk assessment standards in some markets, most notably US sub-prime mortgages." (para 2.2)

and then at para 2.4:

"Although the US sub-prime mortgage market is small in relation to the global financial system, difficulties in valuing many of the residential mortgage-backed securities (RMBS) and uncertainty about where the risks associated with sub-prime mortgages had been distributed led to significant uncertainties about the losses and their impact on banks’ balance sheets."

However, rather than focusing on ensuring that lenders act responsibily in the first place, the proposals concentrate on allowing the Government, Bank of England and FSA to prop up banks that get into difficulty. Banks, it would appear, are now too big to fail - with the consequent moral hazard that means they will invariably take greater risks with other peoples' money in the future.

This is the wrong approach - act now to tighten the rules on responsibility in lending, and link the huge level of assistance currently being given to banks with additional requirements that they meet the needs of all communities in the U.K for affordable credit.

Thursday, 6 March 2008

Consultation on Administration Orders: Weakening Protection?

The Ministry of Justice is currently consulting on proposals to limit the types of debts that can be included in future Administration Orders as part of its wider review of assistance to people in debt problems, which will include the introduction of Enforcement Restriction Orders.

The consultation paper includes proposals to weaken the assistance available to debtors by excluding rent arrears, council tax, and magistrates fines arrears from future Administration Orders.

Debt on our Doorstep will be responding, and welcomes input from Money Advice Agencies and other community groups. The full consultation paper is available from:

The deadline for responses is 16th April and we would welcome comments from supporting agencies to inform our response by 31st March.