Justin Tomlinson MP and Robin Walker MP: How to protect vulnerable people who turn to payday lenders
Justin Tomlinson is the MP for the Swindon North and Robin Walker is the MP for Worcester
We have all watched TV when the adverts come on. Quick cash quid in your pocket now, just text, call, go online, money in minutes. 5853 per cent APR representative pops up in the small print at the end. Most baulk at the high APR, yet in the 2011/12 an estimated £8 million payday loans were taken out in the UK. Recent debate has painted these borrowers as financially excluded vulnerable people, lured into borrowing money that they cannot afford to pay back.
It is important to put payday lending in perspective. A recent Consumer Finance Association survey of payday loan customers found that they fall into three main ‘groups’. Young, technology-savvy people who borrow to cover short term emergency costs; middle aged parents who borrow to cover family costs; and those aged 45-50 who borrow to support their grown up children. In each group, over 75 per cent of borrowers are employed.
What the report does not show however, are the vulnerable borrowers within each group and those that do not fit the ‘model’. Yes, they may be the minority, but they are a vulnerable minority. and it is crucial that we ensure that they are protected. They do not go to payday lenders through choice, but because they are the lender of last resort.
- Displaying the costs of a loan in cash terms. It costs in the UK, on average, £25 to borrow £100, but one lender has it at £51. This is all hidden in the APR, and even Treasury Ministers have struggled to translate this into cash terms. We need to look at a change in the law to require all lenders, from banks to payday lenders, to display the real costs of their loans in cash terms so that consumers can make a simple informed decision.
- Roll Over Limit. Limit the number of roll-overs to three, preventing the debt from growing unmanageably.
- Real-Time Credit Checking. In 2012, the debt charity StepChange saw over 7000 people come to them for help who had five payday loans or more. Real-time credit checking is needed to prevent multiple loans being taken over a short period of time by those who cannot afford them.
- Restoring Credit Rating. This is key in ending the ‘lender of last resort’ trap that forces those with poor credit ratings to payday lenders. As consumers repay their short-term loans, they should have this recognised on their credit rating, helping open up access to alternative forms of credit.
- Independent Advice. We should not be judging those who take payday loans, or dismissing payday loans as universally bad. Instead we need to make sure that consumers can always make an informed decision in taking on credit, which is where face to face independent advice would be invaluable, perhaps funded through an increased licence cost, or industry levy. 91 per cent of consumers who get into financial difficulty believe they could have avoided doing so if they had known better. Financial education is therefore key too and it is good news for tomorrow’s consumers that Justin’s campaign has seen its inclusion on the new national curriculum.
- Mystery Shoppers. The report into Consumer Credit Regulation produced by the Public Accounts Committee found that the OFT were slow to respond to poor practice. Reliant on customer complaints, the OFT risks excluding the very vulnerable consumers it is there to protect. Mystery shoppers should be used to pro-actively identify and address poor practice and could play an important role in building up the evidence base for successful regulation
- Savings Culture. Many consumers choose payday loans in distress situations - job loss, bereavement, relationship break-up, poor health – and do so because they have no savings to call upon to cover unforeseen costs. Where possible we need to encourage a savings culture where consumers have savings set aside for unexpected events. Credit unions can play a vital role in this and in providing more affordable credit, two reasons why the Government has been right to support their growth
- Total Cost of Loan. Perhaps the most controversial proposal is a cap on the total cost of a loan, limiting the money a lender can make from its customers. The challenge is getting this cap right. Too low and you close down a market that some consumers rely on, driving them into the arms of illegal loan sharks. Too high and it is irrelevant. A potential suggestion would be to explore current high-street profit margins. For example, high street retailers such as M&S make a profit, with a mark up on their goods and services. Identifying these mark ups would be a good benchmark for the high street payday lenders.
We will be exploring all these options in greater depth with the aim of producing a report. We are keen to ensure that policy is evidence based rather than based on assumptions about the payday lending industry and to contribute to an informed debate about how we best protect the most vulnerable consumers in society.
Paul Blomfield is right to champion this campaign in Parliament, and we hope that the Government will look to utilise the skills, knowledge and experience of both MPs and supporting organisations to make sure when we do make changes, we make the right ones for the consumer. It is vital that we protect those who turn to payday lenders through lack of choice without excluding those who access high cost credit through conscious decision.