GLC

Scottish Parliamentary briefing note on payday lending in Scotland

CONTENTS 1. Recommended action in Scotland 2. How much does a payday loan cost? 3. GLC case studies 4. Why has the payday loan market grown in Scotland and the UK? 5. What do people use payday loans for? 6. Criticism of payday lenders 1. Recommended action in Scotland Govan Law Centre (GLC) believes that the UK payday loan market is predatory, usury, dysfunctional and immoral. Many states in the USA and countries around the world impose hard interest rate and charges caps on payday loans. The UK used to have interest rate controls until the 1970s. The recently enacted Financial Services Act 20121 contains a power for the new Financial Conduct Authority (the FCA; which will take over conduct regulation of UK financial services from April this year) to cap the costs of credit. Govan Law Centre believes that a key part of the solution to the dysfunction and detrimental UK payday loan market is for the FCA to impose a hard cost of credit cap on payday loans. There is already significant industry opposition to this power being deployed, and therefore it is important for the Scottish Parliament to take a robust view on this issue, and make its concerns known to the FCA. However, we need a multifaceted solution to the challenges presented by exploitative payday lending. Part of the problem is that some consumers cannot gain access to short-term credit. Access to small amounts of short-term credit is vital for many people in our credit-based economy. Govan Law Centre believes that the Scottish Government and Scottish Parliament have a number of powerful levers at their disposal, which should be deployed to tackle the scourge of payday lending in Scotland: Investment in Scottish credit unions to enable them to offer equivalent products to payday loans on a fair and affordable rate of interest. HM Treasury is currently consulting on raising the 2% per month interest cap on credit unions, and we support an increase to enable credit unions to offer a fairer alternative to payday loans in Scotland.2 1 http://www.legislation.gov.uk/ukpga/2012/21/contents/enacted 2 http://www.hm-treasury.gov.uk/consult_creditunion_cap.htm 1

Improving our debt relief remedies so that Scots entrapped in a cycle of dysfunctional payday loan interest and charges can be untangled swiftly and fairly Govan Law Centre has proposed a Fast Track or enhanced Debt Arrangement Scheme for this purpose.3 This could be done quickly by Scottish statutory instrument under existing legislative powers. Education is a key part of the solution, and we believe the Scottish Government should deploy resources to mount an educational campaign to help Scots avoid the pitfalls of payday loans. Such a campaign could be tied in to awareness raising of alternative forms of short-term credit (e.g. through credit union products) and the availability of enhanced forms of debt relief. We would conclude by noting that if no action is taken on these issues in Scotland, then the consumer detriment caused by payday loans will escalate from April 2013 with the introduction of the bedroom tax. Scottish tenants faced with eviction from the effect of UK Government under-occupancy charges to housing benefit will turn to payday loans, which will exacerbate their problems. Govan Law Centre has advocated a no eviction for bedroom tax arrears policy, with bedroom tax arrears being treated as an ordinary debt. This could be achieved by a minor amendment to the Housing (Scotland) Act 2001.4

2. How much does a payday loan cost? The average payday lender charges between 25 to 42 to borrow 100 for 30 days; however payday lenders impose additional roll over charges and a variety of administration charges which can compound the debt; the equivalent APR of payday loans can equate to 4,214%. Many consumers roll over or take out multiple payday loans. In Govan Law Centres experience the more a person borrows, the harder it will be to get out of the spiral of indebtedness that payday loans can quickly create. 3. Govan Law Centre case studies A working single parent took out four payday loans in order to pay for the cost of a funeral. All four loans rolled over for more than 6 months and because each payday lender had a continuous payment authority she was left with insufficient funds each month to make ends meet. Our client was unable to pay her rent and was taken to court for eviction and was faced with homelessness and severe hardship because of the spiral of debt caused by payday loans. 3 http://govanlc.blogspot.co.uk/2012/09/new-fast-track-debt-arrangement-scheme.html 4 http://govanlc.blogspot.co.uk/2012/11/cross-party-agreement-to-consider-no.html 2

4. Why has the payday loan market grown in Scotland and the UK? Since the financial crisis and credit crunch, UK banks have reduced their supply of short-term consumer credit by 20%.5 Many consumers who would have traditionally dipped into an overdraft are now unable to do so. The number of unsecured personal loan providers dropped by 50% between 2009 and 2011, with a significant reduction in the number of credit card providers. It has become harder for some consumers to gain access to short term cash. Payday lending in the UK is growing at an exponential rate. For example, in 2007, Wonga made a loss of 1.9m, by 2010 it had turned a profit of 12.4m, and in 2011 its profit trebled to 45.8m with revenue of 185m. As at 2012 Wonga had made a total of 6 million payday loans in the UK.6 The payday lending market was worth 1.2bn in 2009/10, with 1% of the UK population having taken out a payday loan valued at 292 on average.7 What do people use payday loans for? A survey by Which? In 2011 revealed that most people use payday loans for bills, food, fuel and emergencies.8 69% of those interviewed who had taken out a payday loan regretted doing so.

A self-employed homeowner had cash-flow problems and used several payday loans to tide himself over. He incurred default and rollover charges, and quickly became entrapped in a monthly cycle of indebtedness. Spiraling payday loan charges led to direct debits being missed, with bank charges and missed direct debit charges being imposed, and the clients financial position mushroomed out of control, ultimately contributing to proceedings for mortgage repossession being commenced.

What are people spending payday loans on? Essentials: food and fuel Emergencies Regular bills Repay other debts Rent Holidays

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Criticism of payday lenders On 24 February 2012, the OFT announced that is investigation of payday lenders amid concerns from consumer groups and advice agencies about: 5 http://www.ft.com/cms/s/0/fc906960-2019-11e1-8462-00144feabdc0.html#axzz2JRVgeOQy http://www.bbc.co.uk/news/business-16002022 6 http://www.bbc.co.uk/news/business-19620560 7 www.parliament.uk/briefing-papers/SN06253.pdf 8 http://conversation.which.co.uk/money/payday-loans-lending-regret-debt-credit-cards/ 3

 misleading advertising; the lack of affordability checks; irresponsible rollover of loans; targeting vulnerable consumers; and unfair treatment of consumers in arrears and default In particular, the OFT is concerned that some lenders are aggressively pushing loans to people who clearly cannot afford to repay them. The OFT is also worried that lenders may be allowing customers debts to spiral by rolling them over. In November 2012, the OFT opened formal investigations into several payday lenders over aggressive debt collection practices.9 It wrote to all 240 payday lenders operating in the UK highlighting its emerging concerns over poor practices in the sector. These actions are set out in a progress report published as part of the OFT's compliance review of the payday lending sector. It highlights concerns about: the adequacy of checks made by some lenders on whether loans will be affordable for borrowers the proportion of loans that are not repaid on time the frequency with which some lenders roll over or refinance loans the lack of forbearance shown by some lenders when borrowers get into financial difficulty debt collection practices.

9 http://www.oft.gov.uk/news-and-updates/press/2012/110-12#.UQjPTjmKzww 4