credit report UK from ExperianThis blog post is in response to the meeting held at the Parliament Select Committee rooms in early November 2013 relating to the proposed regulation of the payday loan and lending industry.

One of the questions that seemed to be asked in many different ways was;

  • What is the motivation of a payday lender or payday loan company?
  • Most business minds would expect that the motivation would be commercial as these companies are lenders that can only earn if they are lending!

This payday lending phenomenon has great synergies with the economic theory of supply and demand, whilst we accept scarcity as being the real fundamental economic problem, scarcity directly relates in this case to the lack of cash in the pocket of the general public. Given the current economic climate and couple that with current levels of personal debt and changes in personal circumstance for a great percentage of society since the so called “credit crunch”, we could possibly be hopeful enough to expect some concept of morality behind the motivation to lend by any lender or payday loan company.

However, Lewis Alexander Financial Management believes that the actual motivation is in line with the supply and demand theory relating to the main USP or unique selling proposition that exists for payday lending which is the element of “Quick Cash”; this is something that the high street banks are no longer giving out!

  • If one cares to look back over the last 10 years, payday lending in the UK is not new, it has just become main stream.

Lewis Alexander has worked with reputable payday lenders such as Payday UK or MEM consumer finance since 2004, the main well known payday organisations historical turnovers show a definite chronological alignment between banks slowing personal lending around 2008 and the payday loan market bursting into the product of the moment at the same time.

We believe that since 2008 the payday loan became the replacement for the personal overdraft, such as it has done in the United States over the last 15- 20 years, sometimes known also there as a wage day or pay roll advance.

As the payday loan became the overdraft “stand-in” this also benefited the high street banks balance sheets as all the overdrafts that were normally outstanding each month and never actually traded out of by the individual account holder would be no longer, thus creating a better position on paper for a bank. The banks had overdrafts outstanding to people who had no intention of buying property or borrowing on a personal loan basis. The overdraft was a “loss leader” that in the past did attract a great number of people to switch or open first time bank accounts that then went on to take out mortgages with that bank.

One thing that Martin Lewis kindly put over honestly was that the APR for payday loans are only high due to the short term nature of the loan, the shorter the repayment period the higher the APR will show. This has previously been blogged about by Lewis Alexander and we believed that with all lending to any vulnerable consumer, the only way you can make sure that the playing field is level in terms of what the consumer will understand is if you decide to make a compliance rule that the potential borrower can fully understand the total amount repaid which would highlight to most the cost of borrowing.

Where “Pounds to Pocket” have been clever is that the period of the loan can be stretched out over 12 months and possibly longer. This creates a lower APR that the consumer is now conditioned to hunting for on any advert! Is this actually misleading the vulnerable consumer on a mass scale?

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With regards to regulation “too many cooks spoil the broth” and this is so true when you look at who and all that are monitoring, questioning and actually responsible for licensing this sector of the finance industry.

Martin Lewis did not enjoy being branded or compared to an Entrepreneur but come on Martin, you did recently sell your website to the people that you affiliated with for click through commissions from visitors to your site, you also got some really good free press from TV networks over the years as the Money Saving Expert and drove traffic to your site to send on! But come on, how prominent was the warning of how your site earned its money, it was there but we had to delve into the depths to find it, for someone so above board and compliant it shows that the committee were not miles away with the “Entrepreneur” comment. However, we do like you Martin and agree with most of your public advice so good luck to you!

  • The limit of lending has to be based on affordability with a central unsecured lending reference point that is updated electronically in real time.

Peter Tutton from Stepchange Debt Solutions made a very fair point re lenders stopping the problem by allowing lenders to share data with reference agencies. However, this needs to be done as the payday loan is funded, Lewis Alexander believes that there should be a central payday loan and short term loan lending reference unit controlled by the FCA or a Governmental body that is updated electronically as the loan is funded. This would mean that if Mr Jones took out a payday loan at 1400 hrs on the 28th of a month, the next lender he applies to that very same afternoon would be privy to the info of his earlier loan and have to make an informed decision with regards to responsible lending. This would be based on the prospect still having enough available affordability to justify the funding of another loan that very same afternoon.

(By the way Peter, Is there any prominent trigger point compliance on your national TV Advert yet? Are you still advertising the same life changing debt solutions to vulnerable consumers that the rest of us menial fee charging operators are who have to adhere to trigger point compliance?)

A few points we want to add are as follows,

  • When we look at credit card companies minimum payments, are they also “never ending rollovers” similar to those that the payday loan industry is being reprimanded for? Are we going to limit the number of months a consumer can pay minimum payments on credit card, store card and catalogue repayments?
  • Statistics showed that approx 7 million people in the UK were expected to take out or consider borrowing by means of a payday loan in 2012/2013.
  • When the committee got onto the subject of advertising on daytime television and in particular during kids cartoons and programming, we did not feel that Martin Lewis got the point over.
  • Daytime TV or “Day Parts” are the most demanded TV advertising slots and this is the case for many reasons, the main reason being that daytime audiences offer advertisers a good selection of society and can be refined further by programming. Single mums and stay home mums usually have the TV on if the kids are at home and would usually have a kids program on and not Mastermind! Therefore the advertiser and advertising agency sees a genuine benefit in targeting the “mum” through the kids channel, we do not believe that any lender credible enough to be advertising on such a scale would ever actually want an under aged child to be brain washed with the ease of available credit. It would not have enough of an impact on lending volumes, the daytime TV and kids channels simply offer very affordable target marketing via a direct response from a call to action.
  • To avoid a CPA or automatic payment collection of a payday loan from your debit card, simply call your bank and ask for a replacement card, if the debit card number changes and the old card is terminated, the payday lender cannot always collect monies from your account.
  • Most consumers do not understand compliance, this is a massive problem as they make a rod for their own back and go basically with what they want to hear. The protection has to be put in at a higher level, a possible look out scheme that government could create on the consumers’ behalf. But one that looks out and monitors! As Brian Binley said “Constant policing is required”.
  • GCHQ could assist FCA on a global monitoring basis as most non compliant activity is done through websites and telephones!
  • A persons’ affordability today does not mean that they will be able to repay a loan or credit commitment dated at any time in the future, this is due to unforeseen changes in personal circumstance.
  • Payday loans are secured against the next payday; they are in fact secured loans marketed on an unsecured basis! CPA or continuous payment authority is a back up for security against obtaining the secured salary that may be over committed!
  • The committee wants a regulator that regulates, there is nothing wrong with that and it is quite strange they should ever be posed with such a requirement being MP’s themselves as surely they have the ability above everyone else to make this happen. But what about the small companies like Lewis Alexander who has been the “meat in the authority sandwich” for the past 5 years? What compensation do we get for not seeing a level playing field industry wide in regards to compliance?
  • Gillian Guy from the CAB most probably has the toughest job in the industry, this due to the CAB dealing with far more than just personal debt, the CAB is the best public outfit as most personal finance industry created problems are mopped up by the CAB teams!

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