Consultation: High Cost Short Term Credit Price Cap Proposals Date: 1 September 2014 Contact: Holly MacLennan Our (PID) reference number: PD20010

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1 Consultation: High Cost Short Term Credit Price Cap Proposals Date: 1 September 2014 Contact: Holly MacLennan Our (PID) reference number: PD

2 Introduction The General Consumer Council for Northern Ireland (the Consumer Council) is an independent consumer organisation, working to bring about change to benefit Northern Ireland (NI) consumers. Our aim is to make the consumer voice heard and make it count. We have a statutory remit to promote and safeguard the interests of consumers and have specific functions in relation to energy, water, transport and food. These include considering consumer complaints and enquiries, carrying out research and educating and informing consumers. In addition, from April 2014, we have taken on responsibility for representing consumers in respect of postal services in NI. The Consumer Council is also a designated body for the purposes of supercomplaints, which means that we can refer any consumer affairs goods and services issue to the Competition and Markets Authority, where we feel that the market may be harming consumers best interests. In addition, we have super-complainant status for financial services, with powers to bring supercomplaints on financial matters to the Financial Conduct Authority (FCA). In taking forward our broad statutory remit we are informed by and representative of consumers in NI. We work to bring about change to benefit consumers by making their voice heard and making it count. To represent consumers in the best way we can, we listen to them and produce robust evidence to put their priorities at the heart of all we do.

3 The Consumer Council welcomes the opportunity to respond to this consultation. There are certain technical and regulatory elements within the consultation that would be better answered by financial services bodies, and so we will not focus on these issues. Introduction of a price cap Currently it can be extremely difficult for consumers to compare offers across different short-term high-cost lenders due to differing fee structures. There is a need for greater transparency of pricing, and for lenders to be able to explain terms such as APR, and illustrate clearly to the consumer the effect this has on the cost of the loan through the use of worked examples. It is essential that not only the upfront cost of the loan is reflected in the examples, but also the possible cost of rolling over the loan for another month, the costs associated with repaying the loan late, and other scenarios in which additional fees or charges might apply. The implementation of a price cap should go towards helping the market work better for those that find themselves having to use payday loans in two key ways: The fixed default charge of 15 across the board will help simplify the market, and allow costs to be more easily comparable. The 100 per cent price cap means that consumers will never pay back in total more than twice what they originally borrowed. This is an improvement on the current system where costs can quickly spiral out

4 of control, with total amounts owed ending up as much as 5 times the original amount borrowed. 1 We welcome the work that the FCA has undertaken already in this market, including the limiting of the number of rollovers, and the use of Continuous Payment Authorities (CPAs). However, in order to provide effective protection to consumers, a price cap needs to be implemented and would need to be considered alongside a range of other potential measures, including a limit on the number or overall amount of loans which can be taken out or owed at one time; a mandatory affordability check and the guaranteed provision of a repayment plan based on affordability if the borrower faces problems repaying their loan. It is vital that the FCA continues to monitor the payday loan industry, and be quick to respond to consumer detriment a price cap cannot be a stand-alone measure. It is essential that flexibility is maintained to ensure that vulnerable consumers are not harmed if the price cap does not work as intended. Information on the total loan cost should also be provided in a clear and transparent way to consumers from the outset. Recent figures from the Financial Ombudsman Service (FOS) suggest that many consumers find it difficult to distinguish between actual payday lenders and credit broking websites, with complaints more than doubling in the past year 2. In many of the cases FOS investigated, no loan was provided and consumers were charged a high fee which was deducted from their bank account, often multiple times. This is one further aspect of the payday loan industry which highlights the need for the sector to urgently improve its business practices. 1 Citizens Advice Northern Ireland Payday Lending Issues Paper January

5 We are very concerned by the evidence of irresponsible lending too many consumers seem to be given loans they cannot afford, and when they cannot repay they are encouraged to extend the loan, causing financial difficulties to spiral out of control. The Northern Ireland Trading Standards Service carried out research throughout NI in 2012, visiting 29 different premises that offered payday loans. In almost a third of the visits, the payday lender indicated they would not carry out a credit reference check on the borrower, and half of the premises indicated that they would still be willing to lend 100 even if a borrower failed a credit check. In one case the payday lender agreed to provide a loan within 24 seconds. Alongside clearer information, stringent affordability checks from lenders and the roll out of industry-wide real-time data sharing are key developments needed to protect consumers. Currently we understand that lenders update information about the credit they grant on a monthly basis, meaning it can take up to a month before a payday loan appears on a person's credit record enabling them to take out multiple loans at once which can have a detrimental effect on finances. With debt advisers reporting that they have seen clients in NI with as much as 10 payday loans at any one time 3, it is clear that urgent action needs to be taken to prevent this cycle of debt. The FCA s statistics show the average payday loan borrower takes out an average of six loans a year, showing that they are being used primarily for reoccurring expenditure, rather than a one-off emergency. This is backed up by a Which? study last year where they found that around a third of users of 3 CAB issues paper for the NI Assembly on Payday lending, 2012

6 payday loans and unauthorised overdrafts use the money borrowed to pay for essentials, including regular household bills and emergencies 4. At present there are 17 million adults in the UK who run out of money before payday 5. For some, a payday loan can be a suitable option for fast credit when it is able to be paid back in full, and on time. For others however, it can leave them trapped in a cycle of debt borrowing to pay off essential bills, and repeating the process the following month, with interest growing every day. Research in the USA (where price caps have been in place in many states for years) has shown that the damage caused by such repetitive use of payday loans outweighs the benefits of easy access 6. We therefore appreciate the balance that has to be struck between allowing access to this type of credit, and protecting the vulnerable who would be considerably better off had they not accessed a payday loan. This can be tackled with some of the measures the FCA has already looked at, such as clearer risk warnings, and tougher affordability checks. With recent research showing that one in six families are covering essential costs with payday loans or unauthorised overdrafts 7, there needs to be a robust and multi-organisational approach to dealing with highcost credit, and the potential ramifications. There is however a very real concern that consumers who now no longer meet the tougher criteria for Payday loans could fall victim to illegal lenders. The FCA acknowledges that gaining accurate statistics on illegal lending is difficult, given its underground nature and the threat of intimidation and violence 4 Which? Credit Britain, Making Lending Work for Consumers, MAS, The financial Capability of the UK, London: MAS, Finance and Economics Discussion Series, Federal Reserve Board, Washington, D.C., Payday Lending Issues Paper, Populus polled 6,300 people for Which?, results published in July 2014

7 posed to borrowers. The illegal lending market in NI is particularly unique, as it is linked with perceived paramilitary activity. 8 It is worrying to note that we currently have no way of judging how large the scale of such lending is; the Trading Standards Service has recorded only two cases of illegal lending in Northern Ireland, 9 whereas a tracking survey by the Irish League of Credit Unions found 6 per cent of Northern Irish consumers had borrowed in this way. 10 A price cap therefore needs to be taken in hand with a range of other methods, to ensure that more people do not fall into the hands of illegal lenders. These methods include: Access to Affordable credit The Consumer Council believes that changes in regulation to make payday loans more difficult to access need to be undertaken together with policy initiatives to help consumers manage their finance. The FCA s qualitative research found that the key reason for consumers taking out payday loans is because they cannot access other forms of credit 11. Encouraging products that are less costly and more suitable than payday loans will reduce financial pressures on consumers, while continuing to provide access to much needed credit. 8 Expensive Lending in NI, a discussion paper, Advice NI & NICVA Ibid from an interview with Belfast Trading Standards 10 Irish League of Credit Unions Briefing Paper for the Committee for Enterprise, Trade & Investment, FCA Consumer Credit Research:Payday Loans, Logbook Loans and Debt Management Services, 2014

8 There is a need for more affordable credit options to become available for the most vulnerable of consumers, with scope for banks and social finance providers to provide innovative services to the financially excluded. Credit Union modernisation & expansion In a recent study, over 50 per cent of Credit Unions in NI said that high-cost, sub-prime credit providers were their main competitors. 13 per cent said these were illegal lenders or loan sharks. Credit unions serve around 34 per cent of the NI population, in comparison to just 2 per cent of the population in Britain. This shows that there is great scope for credit unions, and other stakeholders, to play a bigger role in serving low-income and financially excluded groups in NI. The fixed per cent APR that Credit Unions are limited to by law means that they can provide an affordable lifeline of credit for those who need to access a loan, and the emphasis on saving helps encourage financial capability and putting money aside for unforeseen expenditure. Access to affordable credit through credit unions has previously been discussed in a report carried out by NICVA research and Advice NI on behalf of the Centre for Economic Empowerment 12. The Ulster Federation of Credit Unions pointed out that credit unions are not equipped to compete with high cost short term lenders; in order to protect their members interests they encourage prudent lending. We would encourage the financial regulator, as well as the NI Executive, to consider taking a more active role in supporting credit unions to offer affordable credit options, particularly in NI where high a proportion of the public are members. 12 Expensive Lending in Northern Ireland A discussion paper

9 Responsible Advertising Recently four payday lenders have been forced to cancel their adverts, following investigation from the Advertising Standards Agency. Tackling consumer attitudes and improving awareness of the potential pitfalls of payday loans falls within a wide remit of organisations, and it will take a robust and multi-disciplinary approach to ensure that adverts are fair and responsible. Financial capability & education The level of financial capability amongst consumers is lower in Northern Ireland than elsewhere in the UK. Ensuring that everyone has access to a bank account, and therefore bank services; could help reduce reliance on illegal lending NI currently has the highest rate of unbanked individuals in the UK, with 11 per cent of consumers not having access to a current account. 13 It is concerning to note that 38 per cent of payday loan customers have experienced a bad credit rating in the past year. We found through our financial capability research that many consumers do not actively stay informed about financial matters that may affect them 14. In hand with better regulation, there would be a definite benefit in greater consumer education initiatives in this field to help people understand how credit scoring works and empower them to take responsibility for their credit rating. 13 Family Resources Survey NI, November A report on the findings from the Consumer Council Financial Capability Panels, October 2012

10 With debt advisers reporting that they have seen clients in NI with as much as 10 payday loans at any one time 15, it is clear that urgent action needs to be taken to help people out of this cycle of debt. The Consumer Council have published an education resource on Understanding Payday Loans. It is the first consumer education resource in the UK that will help consumers get to grips with how payday loans operate, the costs associated with this type of borrowing and the alternative forms of credit. Ultimately, improving the financial stability of households that rely on payday loans through financial literacy training, budgeting, and advice services are perhaps the best step forward to avoid spiralling debt cycles and high-cost borrowing. Through these services, households that formerly used short-term, high-cost financial services may no longer need these emergency financial products. Conclusion While we welcome the FCA s proposals to put a price-cap on the total cost of payday loans, we believe that this process must be undertaken alongside other measures to protect the most vulnerable and financially excluded consumers. Problem debt is a growing issue, but having access to quick finance is an essential part of everyday life for many people. It is important that this consumer need is balanced with responsible lending from high-cost short-term credit providers, and a cap on charges would help eliminate some of the heavy financial penalties involved with this type of lending. Unfortunately the recent review from FOS has uncovered widespread issues with the payday loan 15 CAB issues paper for the NI Assembly on Payday lending, 2012

11 industry, with repeated evidence of poor administration and a lack of care towards those struggling financially. A price cap should not be an alternative solution to helping vulnerable consumers in financial difficulty with affordable payment plans, and consumers should be made aware of their entitlement to have complaints independently reviewed. If a price cap does prove to be a positive solution to make the payday lending market work better for consumers, then the FCA could consider expanding this legislation to other forms of credit which are also proven to cause detriment, such as logbook loans and credit and store cards. It is important to stress that the FCA should be open to continually reviewing, updating and consulting on this cap if it is found not to be working as it should do in the interest of consumers. If you wish to discuss any aspect of this response in more detail please do not hesitate to contact Holly MacLennan on or via on holly.maclennan@consumercouncil.org.uk.

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