Bev Budsworth, MD of The Debt Advisor has been invited to be a panellist at Westminster Business Forum which is looking at The Future of Consumer Credit – competition, regulation and consumer protection to be held at Glaziers Hall, London on Tuesday, 2 June 2015.
Bev is one of three panellists which include Peter Tutton, head of policy at StepChange Debt Charity and Juliana Francis, senior ombudsman, Financial Ombudsman Service. The forum is chaired by Rt Hon the Lord Whitty, former chair of Consumer Focus.
The panel have been tasked with provoking debate and commenting on the latest trends in consumer borrowing and how debt management companies and not-for-profit debt advice bodies can more effectively respond to the changing needs of consumers. The panel is also looking at the effect of the cap on payday lenders and investigating whether there is evidence that borrowers are resorting to alternative credit providers such as pawnbrokers and illegal money lenders and what more can be done to protect the consumer and tackle indebtedness.
Bev shares her research and thoughts on the topics to be covered.
PAY DAY SECTOR IS HIT VERY HARD
The payday loan sector has been hit very hard. Many would way deservedly so. A genuine lack of care for the consumer will continue to lead to the demise of many operators.
The exponential growth in the payday loan industry was stoked in certain quarters by, unsavoury practices by the generators feeding the bigger engines. The generators used ‘ping trees’, business-in-a-box models sold on a franchise basis, which offered payday and guarantor loans alongside debt solutions as well as life policies, utility switching etc. Poor, unsuspecting applicants would find their details bounced around, finding themselves labelled ‘payday loan declines’. The stops along the way could include unsecured loan brokers charging hefty fees for a loan that would never materialise, the use of premium rate numbers and ultimately being harangued by call centre operatives trying to monetise payday loan declines with offers of debt solutions, PPI claims, utility switching etc.
For those individuals lucky enough to get a payday loan, many got sucked into a spiral of multiple roll overs of loans and finding themselves unable to repay these escalating debts, having no choice but to take out additional payday loans to help pay back the original loans. It was not uncommon to find debtors owing many thousands of pounds to as many as between eight and 13 payday loan companies.
The abuse of the continuing payment authority played havoc with people’s budgets. Collection methods were questionable and included seriously scary calls, letters from ‘pretend’ solicitors or bailiff practices.
PAYDAY LOAN COMPANIES CLEAN UP THEIR ACT
The payday loan sector however, has today evolved into a much more compliant industry. The Debt Advisor’s experience is that there has been some great improvement in payday lenders’ approach to customers going through a financial hardship. Regulation around continuous payment authority (CPA) has helped debtors significantly as they are no longer suffering the consequences of unauthorised payments being taken from their accounts, meaning they can rely on their budgeting.
The practice by many payday lenders of refusing to have any dealings with debt management companies (DMCs) has markedly improved. The major problems we see with some of the smaller lenders are the lack of resource and many payday lenders are not communicating with DMCs over the phone; simply stating that it is their policy not to provide verbal balances and/or acceptances. This delays progress of some complicated plans.
Also, offers used to be rejected; interest and charges continued and clients’ debts continued to increase. I am pleased to say that this has substantially changed in the past year. Payday lenders are paying more regard to debtors’ individual circumstances; we see offers accepted; interest and charges being stopped and creditor contact reduced. However, there still appears to be a lack of resource with some lenders.
Another positive is that we are seeing more payday lenders handing the recovery and collection process over to competent third parties, such as Credit Resource Solutions, for example. ‘Mr Lender’ handed collection on hardship accounts to Credit Resource Solutions who have adequate resources and the ‘right’ approach to treating customers fairly.
We have also seen with certain lenders who have exited the market that loans have been written off. For example, Wonga has offered redress to many of our customers with on average £450 being written off.
The clean-up of the industry has also resulted in payday lenders carrying out more careful assessments of potential customer’s ability to repay. This will undoubtedly limit lending to the more financially secure customers and is likely to leave many thousands of customers unable to access legal short-term credit.
WHERE DO DECLINED PAYDAY CUSTOMERS TURN TO FOR MONEY?
According to a report earlier this year in The Telegraph, Policis, an independent consultancy specialising in evidence-based policy development both in the UK and internationally, warned the Financial Conduct Authority (FCA) that the UK is now facing very similar conditions to those which gave rise to a major and highly damaging illegal lending market in the US.
Policis additionally warned the FCA group that the window of opportunity to prevent a black credit market was small, and would require immediate action from the regulator.
The Consumer Finance Association (CFA), which represents some of the best-known payday lenders, has also warned about the caps that were implemented in January 2015:
- Interest charges capped at 0.8% per day on the loan amount
- a £15 cap on default charges; and
- the total cap on the cost of the loan must not exceed 100% of the original loan amount
The CFA said that these caps would drive many payday lenders out of business. It estimates that only four players will remain in the market; three online lenders and one high street chain. “We will inevitably see fewer people getting fewer loans from fewer lenders,” said Russell Hamblin-Boone, chief executive of the CFA.
However, according to FCA modelling, the majority of the 70,000 people who will no longer have access to payday loans will make do without getting a loan; others would borrow from family or an employer and only 2% would go to a loan shark.
StepChange Debt Charity has been reported in the Guardian on the 22 April 2015 stating that it believes that the commonly-held belief that those who cannot access payday loans simply need a different type of credit is misguided. It argues that for those already in financial difficulties, any form of additional borrowing (especially one where the repayments relative to income are so high) is liable to make a bad situation worse.
The Debt Advisor believes that we need to see credit unions making access to funding more accessible via the use of technology. However, they must also lend sensibly as they are lending their members money. What is needed is more detailed study on what drives people to opt for short-term credit. There is no doubt that benefit cuts, particularly the so-called ‘bedroom tax’ has left many struggling to meet priority bills including rent, council tax and utilities. Achieving a living wage is vital – it is clear that flagging incomes have hit all sections of the community as proved by the increasing use of food banks which now appear in areas which would previously have been considered as impoverished for example, Clitheroe and Ormskirk in Lancashire.
ILLEGAL LOAN SHARKS
Tony Quigley, head of the Illegal Money Lending Team (IMLT) in England, revealed in January 2014 that across Britain, borrowers were paying at least £700m a year to predatory extortionists. The figure is equivalent to a third of the legal short-term payday loan market, which, at the time, the Office of Fair Trading estimated to be worth £2.2bn.
The £700m figure came from a report by Policis in 2010. Tony Quigley is quoted as saying: “This was a conservative estimate for the illegal loans market. It really is hideous what some of the loan sharks do to a community. It is just exploitation and profiteering of the worst kind. We believe we have stopped 25 suicides, from what victims have told us.”
Quigley admitted the scale of lending and payment were difficult to quantify: “It is criminality. We know it is constant and that the impact it has, not just on those borrowing, but it is all on the ghost economy, when no tax and no insurance are paid and it’s all cash.”
In many cases, there is no record of the transaction between a loan shark and a debtor. Lenders often punish borrowers, especially those who miss payments, with arbitrary increases on the amount owed.
Removing loan sharks from operating benefits the community as a whole with their debts being wiped out leaving them more money to spend on rent, utilities and household bills.
Threats to borrowers’ partners and children often proved the tipping point for people calling the authorities, Quigley said. In one case, a man who had taken out a loan for £250 paid back £90,000 over 17 years before finally contacting Quigley’s team. The lender was jailed for eight months.
In England, nearly all local authorities have now delegated their powers in this area to Birmingham City Council, which hosts Quigley’s team.
A 60-strong staff includes investigators, lawyers and victim support officers, who are funded through the National Trading Standards Board. All the teams runanonymous phone lines to encourage borrowers to report their persecutors. Quigley’s gets 50-60 a month.
HOW CAN THE DEBT SOLUTIONS INDUSTRY HELP?
The debt solutions industry needs to make sure that the advice given is totally appropriate and suitable. There are many thousands of people languishing in long-term debt management plans which feel comfortable due to the low monthly payments but their debts might not be cleared in their lifetime.
Regulation of the debt solution industry by the FCA has already ‘weeded’ out debt solution companies who have scant regard for the debtor’s financial outcome.
The more compliant debt solution businesses have substantially changed their practices and can now evidence that treating customers fairly is at the heart of their business. This includes ensuring that all clients undergo a very detailed assessment at the outset which doesn’t just look at income and expenditure but also their assets and personal circumstances. This must include a review of income and benefits and how income can be maximised. This suitability assessment needs to be revisited at least annually for customers on debt management plans to ensure that the plan remains appropriate but more frequently for more vulnerable customers.
We need to prove that proposed actions are completed. If a customer is put onto a debt management plan as a short-term solution, we need to provide evidence that their circumstances are revisited to see if an alternative plan is now appropriate.
Also customers should be given access to their credit report throughout the lifetime of a debt management plan and they need to be educated on how to understand their credit score. This will achieve a number of outcomes:
- Check that creditors are reporting correctly to the credit reference agencies (i.e. Experian, Equifax and Callcredit). When a person goes onto a protocol-compliant debt management plan, creditors should default their accounts as quickly as possible. Defaults should remain on a customer’s file for six years, however, delaying the reporting of this information can cause consumer detriment and sometimes customers can find themselves three years into a six or seven year repayment programme and creditors have still not issued the default notices. Some lenders continue to report the debt at an arrears status which means the agreement will not be aged off the credit file for decades.
- Check that creditors are correctly freezing interest and charges so that the customer’s debt is reducing in line with payments on the debt management programme.
- Also when debts are sold, creditors frequently change the status to a more detrimental status which does not reflect the efforts the debtor has made to reduce their debts through a managed plan.
Debt solutions practices seeking full authorisation by the FCA will have to prove that training of their staff is a high priority.
The Debt Resolution Forum (DRF) have developed a learning programme, The BTEC Advanced Certificate in Debt Resolution “Cert DR” which is divided into three modules covering:
- Module 1 – Overview of the UK financial services debt market, debt resolution and debt regulations
- Module 2 – Debt solutions in detail
- Module 3 – Evidencing advice, servicing and case studies in debt resolution
The Cert DR has been awarded the Money Advice Service quality framework for individuals. So far, 303 candidates have passed all the modules. All material has recently been updated. The DRF is developing a diploma for debt resolution which is likely to be ready to be rolled out in late 2015 or early 2016. A platform has been developed for continuing professional development (CPD) of staff which is aimed to be ready by 1 July 2015. Also there will be short courses on compliance with FCA regulation for senior management.
The DRF has invested many hundreds of hours in developing the training and the funds invested and to be invested will exceed £100,000.
The DRF would also like to see government support for the Debt Management Protocol (DMP) which was developed by The Insolvency Service. The protocol offers more security for customers than FCA regulation in terms of ensuring that creditors do not take action to obtain increased payments. The protocol could create a better non-statutory debt solution that does not require legislation and customers would have the comfort that protocol-compliant DMP providers would be audited every 12 months.