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GLCScottishParliamentarybriefing

noteonpaydaylendinginScotland

CONTENTS1. RecommendedactioninScotland

2. Howmuchdoesapaydayloancost?3. GLCcasestudies4. WhyhasthepaydayloanmarketgrowninScotlandandtheUK?

5. Whatdopeopleusepaydayloansfor?6. Criticismofpaydaylenders

1.RecommendedactioninScotland

GovanLawCentre(GLC)believesthattheUKpaydayloanmarketispredatory,

usury,dysfunctionalandimmoral.ManystatesintheUSAandcountriesaround

theworldimposehardinterestrateandchargescapsonpaydayloans.TheUKusedtohaveinterestratecontrolsuntilthe1970s.

TherecentlyenactedFinancialServicesAct20121containsapowerforthenew

FinancialConductAuthority(theFCA;whichwilltakeoverconductregulationofUKfinancialservicesfromAprilthisyear)tocapthecostsofcredit.

GovanLawCentrebelievesthatakeypartofthesolutiontothedysfunctionanddetrimentalUKpaydayloanmarketisfortheFCAtoimposeahard

costofcreditcaponpaydayloans.Thereisalreadysignificantindustry

oppositiontothispowerbeingdeployed,andthereforeitisimportantfortheScottishParliamenttotakearobustviewonthisissue,andmakeits

concernsknowntotheFCA.

However,weneedamultifacetedsolutiontothechallengespresentedby

exploitativepaydaylending.Partoftheproblemisthatsomeconsumerscannotgainaccesstoshort-termcredit.Accesstosmallamountsofshort-termcreditis

vitalformanypeopleinourcredit-basedeconomy.

GovanLawCentrebelievesthattheScottishGovernmentandScottish

Parliamenthaveanumberofpowerfulleversattheirdisposal,which

shouldbedeployedtotacklethescourgeofpaydaylendinginScotland:

InvestmentinScottishcreditunionstoenablethemtoofferequivalentproductstopaydayloansonafairandaffordablerateof

interest.HMTreasuryiscurrentlyconsultingonraisingthe2%permonthinterestcaponcreditunions,andwesupportanincreaseto

enablecreditunionstoofferafaireralternativetopaydayloansinScotland.2

1http://www.legislation.gov.uk/ukpga/2012/21/contents/enacted 2http://www.hm-treasury.gov.uk/consult_creditunion_cap.htm

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ImprovingourdebtreliefremediessothatScotsentrappedinacycleofdysfunctionalpaydayloaninterestandchargescanbe

untangledswiftlyandfairlyGovanLawCentrehasproposedaFast

TrackorenhancedDebtArrangementSchemeforthispurpose.3ThiscouldbedonequicklybyScottishstatutoryinstrumentunder

existinglegislativepowers.

Educationisakeypartofthesolution,andwebelievetheScottishGovernmentshoulddeployresourcestomountaneducational

campaigntohelpScotsavoidthepitfallsofpaydayloans.Sucha

campaigncouldbetiedintoawarenessraisingofalternativeformsofshort-termcredit(e.g.throughcreditunionproducts)andthe

availabilityofenhancedformsofdebtrelief.

Wewouldconcludebynotingthatifnoactionistakenonthese

issuesinScotland,thentheconsumerdetrimentcausedbypaydayloanswillescalatefromApril2013withtheintroductionofthe

bedroomtax.ScottishtenantsfacedwithevictionfromtheeffectofUKGovernmentunder-occupancychargestohousingbenefitwill

turntopaydayloans,whichwillexacerbatetheirproblems.Govan

LawCentrehasadvocatedanoevictionforbedroomtaxarrearspolicy,withbedroomtaxarrearsbeingtreatedasanordinarydebt.

ThiscouldbeachievedbyaminoramendmenttotheHousing(Scotland)Act2001.4

2.Howmuchdoesapaydayloancost?

Theaveragepaydaylenderchargesbetween25to42toborrow100for30days;howeverpaydaylendersimposeadditionalrolloverchargesandavariety

ofadministrationchargeswhichcancompoundthedebt;theequivalentAPRofpaydayloanscanequateto4,214%.Manyconsumersrolloverortakeout

multiplepaydayloans.InGovanLawCentresexperiencethemoreapersonborrows,theharderitwillbetogetoutofthespiralofindebtednessthatpayday

loanscanquicklycreate.

3http://govanlc.blogspot.co.uk/2012/09/new-fast-track-debt-arrangement-scheme.html 4http://govanlc.blogspot.co.uk/2012/11/cross-party-agreement-to-consider-no.html

3.GovanLawCentrecasestudies

Aworkingsingleparenttookoutfourpaydayloansinordertopayforthecostofafuneral.Allfourloansrolledoverformore

than6monthsandbecauseeachpaydaylenderhadacontinuouspaymentauthorityshewasleftwithinsufficientfundseach

monthtomakeendsmeet.Ourclientwasunabletopayherrent

andwastakentocourtforevictionandwasfacedwithhomelessnessandseverehardshipbecauseofthespiralofdebt

causedbypaydayloans.

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4.WhyhasthepaydayloanmarketgrowninScotlandandtheUK?

Sincethefinancialcrisisandcreditcrunch,UKbankshavereducedtheirsupplyofshort-termconsumercreditby20%.5Manyconsumerswhowouldhave

traditionallydippedintoanoverdraftarenowunabletodoso.Thenumberof

unsecuredpersonalloanprovidersdroppedby50%between2009and2011,withasignificantreductioninthenumberofcreditcardproviders.Ithasbecome

harderforsomeconsumerstogainaccesstoshorttermcash.

PaydaylendingintheUKisgrowingatanexponentialrate.Forexample,in2007,

Wongamadealossof1.9m,by2010ithadturnedaprofitof12.4m,andin2011itsprofittrebledto45.8mwithrevenueof185m.Asat2012Wongahad

madeatotalof6millionpaydayloansintheUK.6Thepaydaylendingmarketwasworth1.2bnin2009/10,with1%oftheUKpopulationhavingtakenouta

paydayloanvaluedat292onaverage.7

Whatdopeopleusepaydayloansfor?AsurveybyWhich?In2011revealedthatmostpeopleusepaydayloansforbills,

food,fuelandemergencies.869%ofthoseinterviewedwhohadtakenoutapaydayloanregretteddoingso.

What are people spending payday loans on? %Essentials: food and fuel 38Emergencies 34Regular bills 32Repay other debts 24

Rent 20Holidays 11

CriticismofpaydaylendersOn24February2012,theOFTannouncedthatisinvestigationofpaydaylenders

amidconcernsfromconsumergroupsandadviceagenciesabout:

5http://www.ft.com/cms/s/0/fc906960-2019-11e1-8462-00144feabdc0.html#axzz2JRVgeOQy http://www.bbc.co.uk/news/business-16002022 6http://www.bbc.co.uk/news/business-19620560 7www.parliament.uk/briefing-papers/SN06253.pdf8http://conversation.which.co.uk/money/payday-loans-lending-regret-debt-credit-cards/

Aself-employedhomeownerhadcash-flowproblemsandusedseveralpaydayloanstotidehimselfover.Heincurreddefaultand

rollovercharges,andquicklybecameentrappedinamonthlycycleofindebtedness.Spiralingpaydayloanchargesledtodirectdebits

beingmissed,withbankchargesandmisseddirectdebitcharges

beingimposed,andtheclientsfinancialpositionmushroomedoutofcontrol,ultimatelycontributingtoproceedingsformortgage

repossessionbeingcommenced.

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misleadingadvertising;

thelackofaffordabilitychecks; irresponsiblerolloverofloans;

targetingvulnerableconsumers;and unfairtreatmentofconsumersinarrearsanddefault

Inparticular,theOFTisconcernedthatsomelendersareaggressivelypushingloanstopeoplewhoclearlycannotaffordtorepaythem.TheOFTisalsoworried

thatlendersmaybeallowingcustomersdebtstospiralbyrollingthemover.

InNovember2012,theOFTopenedformalinvestigationsintoseveralpayday

lendersoveraggressivedebtcollectionpractices.9Itwrotetoall240paydaylendersoperatingintheUKhighlightingitsemergingconcernsoverpoor

practicesinthesector.Theseactionsaresetoutinaprogressreportpublished

aspartoftheOFT'scompliancereviewofthepaydaylendingsector.Ithighlightsconcernsabout:

theadequacyofchecksmadebysomelendersonwhetherloanswillbeaffordableforborrowers

theproportionofloansthatarenotrepaidontime

thefrequencywithwhichsomelendersrolloverorrefinanceloans

thelackofforbearanceshownbysomelenderswhenborrowersgetintofinancialdifficulty

debtcollectionpractices.

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