Relief for payday loan customers as costs are capped

‘Today’s crackdown on the payday lending market comes not a moment too soon’

A cap on the cost of payday loans has come into effect. Payday loan rates will now be capped at 0.8% per day of the amount borrowed, and no-one will have to pay back more than twice the amount they borrowed.

The Financial Conduct Authority (FCA) said those unable to repay should be prevented from taking out such loans.

Payday loan customers will see the fees and interest they pay capped from today amid moves to stop such debts spiralling out of control.

The new rules mean that people using payday lenders and other short-term credit providers will see the cost of their borrowing fall – and those who cannot afford to repay their debt on time will never pay back more in charges than the sum they initially wanted to borrow.

For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.

The Financial Conduct Authority (FCA), which oversees the industry, said the move will lower costs for most borrowers and ensure that charges are proportionate to the size and duration of the loan.

Default fees for borrowers who fail to repay on time will be capped at £15 under the measures, which are the latest in a string of clampdowns on the much-criticized sector.

The new rules mean that, for example, if someone borrows £100 for 30 days and pays back on time, they will not be charged more than £24. Someone who borrows £100 but struggles to repay their debt will never pay back more than £200, including fees and charges.

Short-term lenders said the caps will lead to fewer people getting loans from a smaller group of lenders. They said that initially at least, the cost of a payday loan will generally be at or near the cap.

Stricter rules for credit brokers are also being applied from today. Concerns have been raised that consumers have often mistaken credit brokers for lenders.Royal Bank of Scotland (RBS) recently highlighted a case involving someone looking for a £100 loan who ended up being charged £700 because their details were passed to 10 different middlemen firms.

The FCA has previously seen evidence of fees being taken by credit brokers without informed consent and under hidden or misleading terms and conditions. Under the new rules, a firm will not be able to request a consumer’s bank details or take a payment without their explicit consent first.

Martin Wheatley, chief executive of the FCA, said the payday loan cap will make the cost of a loan cheaper for most consumers.

He said: “Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control – no consumer will ever owe more than double the original loan amount.”

Consumer group Which? said its 2014 research found that an average of 880,000 households took out a payday loan each month.

It’s ‘Clear Up Credit” campaign said the regulator should look to make it easier for people to compare the cost of different types of debt, including unauthorised overdrafts and credit cards.

Which? executive director Richard Lloyd, said: “Today’s crackdown on the payday lending market comes not a moment too soon. Lenders must now start competing on price and treating their customers fairly.

“The regulator has clearly shown it’s prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review. It’s now time to turn the spotlight on unfair practices in the wider credit market.

“We want to see an end to excessive fees that also make it hard to compare different loans, including those charged for unauthorised overdrafts and credit cards.”

The payday loans industry has undergone a series of shake-ups since coming under the regulation of the FCA last April.

The Office of Fair Trading, FCA’s predecessor body, expressed concerns that some payday firms appeared to base their business models around people who could not afford to pay back their loans on time, meaning the cost of the debt ballooned as they were forced to ‘roll it over’ – and extra fees and charges were added on top.

After coming under the FCA’s supervision, payday lenders were banned from rolling over a loan more than twice and and they can only now make two unsuccessful attempts to claw money back out of a borrowers’ account.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents short-term lenders, said: ” This is the start of a new era for short-term lenders who are operating in an entirely new lending landscape under the FCA.

“We expect to see fewer people getting loans from fewer lenders and the loans on offer will evolve but will fully comply with the cap.

“The commercial reality is that the days of the single-payment loan are largely over – payday loans are being replaced by higher value loans over extended periods.

“Initially, prices of loans will be at or near the cap. In time we may see risk-based pricing, but innovation could be stifled by the threat of the regulator as lenders seek FCA authorisation.”

The FCA said the reforms needed time to bed down before their effect was assessed but that it would be monitoring the situation carefully. The reforms will be reviewed in two years.

Bid to cut presence of payday lenders in communities

The face of Scotland’s high streets changed markedly during the recent recession – as household names like Woolworth’s, Jessop’s and HMV disappeared units often lay empty for months. Some were replaced by pound shops or charity shops but the other notable feature was the growing presence of the payday lenders on our shopping streets – and the Scottish Government is now making moves to limit their numbers.

Tighter regulations and stricter planning procedures will help limit the numbers of new payday lenders on Scotland’s high streets, Local Government Minister Derek Mackay announced on Friday.

The measures which are designed to minimise the presence of payday lenders in communities are set out in a new 12 point Scottish Government action plan.

The plan is a result of Scotland’s first Payday Lending Summit earlier this year and based on feedback from local authorities, advice services, welfare organisations and credit unions who attended.

The preventative measures also include the introduction of a new Financial Health Service which will serve as a one-stop-shop for money advice services, and there is an emphasis on promoting credit unions.

Launching the plan on a visit to the Glasgow Central Citizens Advice Bureau, Mr Mackay said:

“This action plan reinforces our commitment to addressing the problems associated with payday lending and sets out a number of actions that we will undertake across a range of policy areas.

“Payday loan companies are not only blighting our high streets but they are exposing people to financial credit they just cannot afford.

“Bringing the industry together at the Payday Lending Summit was a real opportunity to share ideas and discuss ways of reducing the problem of payday lenders in town centres.

“I won’t pretend that this action plan will solve the problem overnight but it’s a step in the right direction. Through legislation we will remove some of the exemptions from planning control on premises that sell pay day loans. This will allow planning authorities to implement policies addressing future clustering and over-provision of such activities. The planning proposals also include similar changes regarding controls on betting shops.

“We’re making conditions tougher for payday lenders by excluding them from small business bonus schemes and working with the Financial Conduct Authority to tighten up regulations.”

Mr Mackay continued: “We’re taking steps to tackle the issue of problem debt through legislation such as the Bankruptcy and Debt Advice (Scotland) Act, but raising awareness of alternative ways of accessing credit is key. By showing people payday lenders are not the only option we can lessen the demand for the service.

“Our new Financial Health Service website will bring together different strands and sources of information and advice, so that anybody with a concern or an issue to do with debt or borrowing can find, in one place, the help and assistance that they need.

“With our limited powers we are doing what we can, but with independence we could do so much more to act quickly to offer protection to consumers.

“Whilst we welcome the tougher FCA regulatory regime and the consultation on a cap, the UK Government have been slow to act. We have been calling for a cap on the cost of pay day loans since 2012. In an independent Scotland we can act more quickly to protect Scottish consumers, and introduce policies and measures that reflect the needs of people living in Scotland.

“Tackling the increasing numbers of payday lending businesses will not only stop more people being driven into poverty, but will help give our town centres a sense of identity and be more attractive places for people to live, work and visit.”

There are an estimated 180 to 200 payday lenders on Scotland’s high streets.

Case Study

Stewart*, 46, owed £18,000 in unsecured debts, and tried various fee-charging debt management companies before contacting StepChange Debt Charity.

Stewart said: “Although I was working full-time, I found myself relying on credit cards to pay for things like bills and food shopping.

“When my cards were maxed out, I was refused more credit by my bank and offered no help.

“I felt like I had nowhere else to go, which is when I turned to payday loans and I ended up relying on them to get me through.”

Stewart was able to take out three payday loans despite already having significant debts.

He also noticed a dramatic rise in nuisance calls, texts and emails offering further loans and debt management services.

Owing £18,000 in unsecured debts, Stewart tried various fee-charging debt management companies – who he says charged administrative fees and kept important information hidden – before contacting StepChange Debt Charity.

He is now repaying his debts through a Debt Management Plan, and says he would never be tempted to take out another loan following his bad experiences.

Stewart continued: “I can remember waking up in the mornings and thinking this is going to be a struggle. I’m really happy now, and going back to that is not something I could even think about.”

* Case study name changed to protect identity.

Susan McPhee, Head of Policy and Public Affairs at Citizens Advice Scotland gave a presentation on the problems CAB clients have at the summit in April. She said:

“There has been a proliferation of payday loan shops throughout our communities so we welcome moves to restrict them though the planning process. Accessing loans through a payday lender seems easy when so many shops are on our high streets and lenders bombard us with adverts for credit. But paying back such loans is not always easy and it is often the poor practices of payday lenders that cause problems to occur for people who can easily get into difficulty making their repayments.

“Citizens Advice Bureaux in Scotland are dealing with over 100 cases involving payday loans every week and our research shows that a fifth of people access such loans through high street shops.

“It is often poor practices by payday lenders that cause problems which is why CAS has campaigned for several years now to tackle to the unfair practices of payday lenders and make sure the people of Scotland know that their local CAB can give them advice and help if they do get into difficulty.”

Anyone who needs debt advice can get free, confidential help from their local CAB or from our helpline on 0808 800 9060.

Sharon Bell of StepChange also presented at the Payday Lending Summit. She said:

“This Scottish Government action plan is welcome – anything that better protects consumers from these loans and their potentially damaging repercussions is good news.

“We see too many people falling back on such high cost credit in order to either cope with existing debt problems, or just to make ends meet, often to damaging effect. Taking on this type of borrowing is not a solution to financial difficulty, and instead these people need better protection from the pressures of debt.

“StepChange is calling on policymakers to consider the idea of ‘breathing space’ – a break from interest, charges and enforcement, where debts can be repaid over an agreed period – so debtors in difficulty don’t have to keep borrowing to service borrowing.

“We also need a better short term credit market, where banks, credit unions and employers play a role in providing more responsible sources of loans and we hope the UK Government will do more to promote such schemes.”

StepChange Debt Charity Scotland offers free and impartial debt advice and solutions through its freephone helpline (0800 138 1111) and online (www.stepchange.org).

Local free, independent debt advice is available at Granton Information Centre on West Granton Road, telephone 551 2459 or 552 0458.

Government set to act on pay day lenders

The Westminster government is to introduce legislation to cap the cost of payday loans. In a move that’s likely to be welcomed by campaigners, the Treasury says there is “growing evidence” in support of the move.

The cap will be included in the Banking Reform Bill, which is currently going through Parliament, and the level of the cap will be decided by the new regulator the Financial Conduct Authority (FCA).

Chancellor George Osborne told the BBC there will be controls on charges – things like arrangement and penalty fees – as well as on interest rates. “It will not just be an interest rate cap, you’ve got to cap the overall cost of credit,” he said.

Although the level of the cap is yet to be determined, the announcement will be welcomed by opposition and campaign groups who have been urging the government to take action against some pay-day lenders’ practices: eye-watering interest rates and hidden charges which hit the poorest hardest and drive desperate people deeper into debt.

Just last week, Citizens Advice Scotland claimed that many payday lenders in Scotland are breaking the promises they made last year to clean up their act. According to CAS research, lenders continued to break ‘most of the pledges in their own code.’

The main points were:

less than half of payday lenders in Scotland are telling people that loans should not be used for long-term financial problems;
only 1 in 3 are checking peoples’ financial background before giving them a loan;
only 14% of customers felt the lender was sympathetic when they got into difficulties repaying the loan; and
only a third of lenders are warning their customers about the dangers of roll-over loans.

CAS Chief Executive Margaret Lynch said: “When the payday lenders published this voluntary code last year we made clear we would be watching them like a hawk to make sure they kept to their word. Because there’s no point making promises if you don’t live up to them.

“Our survey results – together with the experience of other clients we see every day in the CAB – show very clearly that this Code of Conduct Is being ignored repeatedly.

“Across Scotland, CAB advisers are currently seeing over 100 cases every week of people who are in crisis debt to a payday lender. That’s a third higher than this time last year. Our evidence is that many lenders are operating in ways that result in people getting into debts they can’t handle.

“So the Payday Lenders have had their chance to clean up the industry, and they have failed. It’s time now for the regulators to step in and do it properly.”

Choose Credit Unions as Christmas closes in

People across Scotland are being urged to consider credit unions as an ethical and affordable alternative to payday loans. The Scottish Government’s ‘12 Days of Debtmas’ campaign is aimed at people who may get into financial trouble in the run-up to Christmas by using high interest, short-term credit.

Over 350,000 people across Scotland are members of credit unions; co-operatives that are owned and managed by the people who use them. Members are encouraged to save monthly, even if it is only small sums. They can borrow at competitively priced rates and in some cases, in a short timescale.

First Minister Alex Salmond recently announced plans to protect consumers pledging payday lenders would be subject to tougher regulation in an independent Scotland.

Speaking at Grampian Credit Union, Enterprise Minister Fergus Ewing said:

“The Scottish Government is very concerned about the growth of payday lending and the impact that high interest borrowing, especially in the run up to Christmas, has on people in Scotland.

“This campaign raises awareness of credit unions and also promotes their affordable lending solutions to people in the lead up to Christmas, and after the festive period, when bills start to arrive.

“People across Scotland can join credit unions and not just for hard pressed communities – all sorts of people could use credit unions to save and to take out loans at manageable interest rates.

“You can join a credit union and in some cases, borrow money in a short timescale. It costs significantly less to borrow money from a credit union than taking out a payday loan and you receive much more support in managing your finances.

“I welcome the changes that have been made at UK level but I continue to press for firmer action. To protect consumers, payday lenders would be subject to tougher regulation in an independent Scotland.”

Scotland’s main faith groups, consumer groups and debt charities have all welcomed the campaign.

Margaret Lynch, Chief Executive of Citizens Advice Scotland said: “Payday Loans are one of the main issues that we see today in the CAB service. Across Scotland our advisers are currently seeing over 100 cases every week of people who are having problems with a payday loan. That’s an increase of a third in such cases since this time last year.

“We back the Government’s statement today, and are keen to spread the message to consumers about the dangers of high-interest loans. To people who might be considering taking out a loan we say: Be very careful about what lender you use. Payday loans might seem convenient today, but they can lead you deep into debt.

“Shop around for a better deal. There are other lenders, like Credit Unions, with loans that are easier to repay. In particular, if you are already in debt to a payday lender, avoid roll-over loans with the same lender.”

Frank McKillop, Policy & Relations Manager (Scotland), Association of British Credit Unions Limited said: “People across Scotland from all walks of life join credit unions to take control of their finances – saving for future expenses, borrowing responsibly at affordable rates, and accessing other financial products from ethical local providers.

“We hope this campaign will attract many more people to join a credit union and take a responsible approach to their finances, rather than being drawn to the sort of short term fix which often makes money problems worse.”

John Deighan, Catholic Parliamentary Officer said: “The effects of high interest loans on the poorest in society is devastating. Usury has been condemned throughout the ages for oppressing the poor through unreasonable and irresponsible lending.

“Yet our society is effectively permitting the practise supported by slick television and media commercials. It is right that political action seeks to highlight alternatives and ensure reasonable access to credit without the crippling interest rates that so many are enduring.”

The ‘12 Days of Debtmas’ radio and online campaign begins today.

You can find your nearest Credit Union by checking the ‘credit union finder’ at the following link: www.12daysofdebtmas.com

CAS urges fight back against unscrupulous lenders

The Citizens Advice service has launched a month-long campaign encouraging payday loan customers to fight back against unscrupulous lenders.

Three in four payday borrowers who got advice from the Citizens Advice consumer service had been treated unfairly by their lender and could have grounds for an official complaint to the Financial Ombudsman Service, says the national charity.

Citizens Advice’s in-depth analysis of 665 payday loan cases reported to its consumer service between 1 January and 30 June 2013, finds that at least 76% could have grounds for an official complaint to the Financial Ombudsman, including:

1 in 5 were possible cases of fraud – where a person was chased for a loan they hadn’t taken out.
More than a third involved issues with continuous payment authorities including money that was not authorised to be taken.
12% involved harassment whereby lenders pester people with phone calls and text messages rather than accept affordable repayment offers.
1 in 10 were about lenders’ unfair treatment of people in financial difficulties.

Latest figures from Citizens Advice Scotland’s (CAS) on-going payday loans survey show that lenders are frequently acting in breach of the Good Practice Charter, put in place last November. Scottish CAB advisers dealt with over 1,200 cases related to Payday Loans from April to June this year, and clients are frequently reporting breaches – see case studies below.

Citizens Advice Scotland and Citizens Advice England and Wales launched a month-long campaign across the UK on Monday, urging payday loan customers not to let predatory lenders get away with treating them unfairly.

Consumers who are finding it difficult to raise their payday loan problem with their lender can contact the Financial Ombudsman who will help them through the complaint process. There were 160 complaints made to the Financial Ombudsman between April and June this year about payday loans, with 72% upheld in favour of the consumer.

If a complaint is upheld by the Financial Ombudsman – and the consumer has lost out as a result – the lender can be ordered to put things right. Consumers could get a refund on loan repayments, interest or default charges or compensation for any inconvenience caused.

Citizens Advice Scotland Chief Executive Margaret Lynch said:

“Across Scotland our bureaux are seeing clients whose payday loan debts have spiraled out of control. We’re seeing hardship and misery caused across the country. Our clients feel powerless but they’re not. This campaign is all about showing them that it is possible to fight back. We want to show people who have taken out payday loans how to identify when their lender has treated them unfairly, and how to do something about it. Citizens advice bureaux can help you negotiate a fair repayment plan and complain to the Financial Ombudsman service. It might even be that the Ombudsman feels you’re entitled to a refund for an unauthorised payment or compensation for unfair treatment.’

As part of the campaign Citizens Advice has launched a new online animation to help people get on top of their payday loan problems. It explains that payday lenders aren’t allowed to take money from your bank account without you knowing, nor should they put pressure on to borrow more money or contact you at all hours of the day. Citizens Advice Scotland is also taking to Twitter with the hashtag #paydaywatch as bureaux from across the country tweet about payday loan cases they are helping with.

Advice tips if you’re struggling to repay a payday loan:

Your payday lender should accept a repayment offer which is reasonable.
Don’t be pressurised to extend your loan – it will cost you more
It’s not ok for your lender to ring you during the night or more than once a day chasing you for money, or to contact your employer.
You should be able to get in contact with your payday lender.
If you are having these problems you can do something about it
- Make a complaint by filling in our simple checklist at www.adviceguide.org.uk
- Get advice from adviceguide.org.uk, from the Citizens Advice consumer service (08454 04 05 06 or 08454 04 05 05 for Welsh language line) or your local bureau
- Make a complaint about a payday loan direct to the Financial Ombudsman Service consumer helpline on 0300 123 9 123 or 0800 023 4567 or via email complaint.info@financial-ombudsman.org.uk

Advice tips if you are in financial difficulty and considering a payday loan:

Get help with your money troubles. Your local bureau can provide debt advice and help you sort out your finances. By making a few changes you may be able to avoid taking out a short-term loan.
It is important to consider all the other options available to you before taking out a payday loan as they are expensive and could make your money problems worse.
Pay day loans can be a costly way to deal with short term financial problems and are not suitable for long term money troubles.
A loan from a credit union is more affordable – check if there’s a credit union in your area.
If you have a bank account, you may be able to agree an overdraft. But be careful of going overdrawn without permission and make sure you understand any fees and charges.
If you are thinking about taking out a payday loan to pay off other debts, don’t. Instead, speak to the companies you owe money to and agree a repayment plan. You can get help with debts from www.adviceguide.org.uk or your local citizens advice bureau.

Credit Unions – a local alternative to payday loans

A couple of news items caught my attention last week. One was about the number of empty shops on high streets and in shopping centres across the country. The economy is still in the doldrums, and people are just not spending. Apparently one in five retail units currently lies empty. It’s not all doom and gloom, however – recessions and depressions bring business opportunities for some, and it’s boom time for pawnbrokers and ‘pay-day loan’ companies. It seems these enterprises are springing up all over the place – perhaps our only growth industry, even.

The other piece of news was the Westminster government’s crackdown on these very same companies – the top fifty have been ordered to get their house in order or face closure by the summer.

The Office of Fair Trading said that the £2 billion a year industry has got to clean up it’s act. OFT Chief Executive Clive Maxwell said: “We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers”.

He added: “Payday lenders are earning up to half their revenue not from ‘one-off’ loans, but from rolled-over or refinanced deals, where unexpected costs can rapidly mount up. This irresponsible lending is not confined to a few rogue payday lenders – it’s a problem across the sector. If we do not see rapid, significant improvements by the fifty lenders we inspected, they risk their licences being removed.”

For most, payday loans are something to avoid – everyone knows about the eye-watering interest rates being charged. Pay day loan companies often only quote what a loan will cost you in pounds and pennies, but take out a typical payday loan and you could find yourself being charged at a rate of anything between 1,600 % and 2,700%.

And that’s all the more shocking at a time when personal loans from ordinary high street banks have never been cheaper, available for as little as 9% APR – assuming, of course, that you can get one. But for those that can’t – an increasing number of desperate people –payday loans are the only option, the last resort. And these same people then often find themselves mired in a nightmare spiral of ever-growing debt, sometimes facing the distinct possibility of losing their homes – local advice organisation like Granton Information Centre have reported a significant increase of people tackling serious debt issues.

So a crackdown on payday loan companies – however welcome – won’t help the thousands of people who are currently tied in to horrific loan arrangements. What can they do?

Firstly, seek independent advice, from an organisation like Granton Information Centre or your local Citizens Advice Bureau. DON’T take on another loan to cover your last one.

And think about going a Credit Union. Credit Unions were set up to help people just like you, offering mutual and ethical savings and affordable loans. Credit Unions are regulated ‘Not for Profit’, Member-Owned (mutual), Financial Service Co-operatives and can best be described as organisations that encourage their members to save together and lend to each other responsibly. This allows these members the opportunity to gain greater control over their finances.

Community-based, community owned and community operated, two Credit Unions operate in the local area – North Edinburgh Credit Union in Wardieburn Drive and Capital Credit Union in Stockbridge.

Association of British Credit Unions Ltd (ABCUL) Chief Executive Mark Lyonette said last week: “Given the anecdotal evidence we hear from credit unions that help payday loan customers pick up the pieces, we are not surprised that the OFT has found evidence of such large scale poor practice in the payday lending industry.

“Loans repayable in full within a few weeks are rarely appropriate or affordable because this only stores up problems for later. If a loan is needed, spreading repayments over a few months will usually make more sense. Credit unions are a great source of affordable credit and many have helped people get out of the expensive habit of using payday loans. They can also help people to look at their finances and get into a savings habit so that they do not have to rely on a short-term loan next time they are short of money.”

North Edinburgh Credit Union’s Annual General Meeting

will be held on Thursday 21 March at 6pm at the NECU office on Wardieburn Drive.

Go along and support your local credit union