1 Introduction
1. A November 2011 report, produced by R3, the
insolvency trade body, found that 60% of individuals were worried
about their debt levels, the highest ever levels of concern over
debt.[1] That figure confirmed
to us the importance of our inquiry into debt management.
2. Our call for evidence was deliberately wide
in order to capture views on both consumer credit and debt advice.
The two issues are clearly related and Citizens Advice has highlighted
the importance of looking at both of these areas together. Poorly
regulated lending and collections practices can cause or contribute
to unmanageable debt problems. People struggling to manage their
debts can become vulnerable to unfair practices by firms offering
credit or debt management services as a way of dealing with debt
problems. This is why CAB money advisers often describe people
as falling into a 'cycle of debt' or a 'debt spiral'.[2]
3. The written evidence highlighted two particular
areas of concern: payday loans and commercial debt management
companies. This inquiry therefore focused on those two issues,
taking evidence from academics and consumer groups to identify
the problems with payday loans and commercial debt management
companies and then from representatives from across the high cost
credit sector and the commercial debt management companies themselves.
Finally we took evidence from the industry regulator (the Office
of Fair Trading), the new Government advice body (the Money Advice
Service) and Ed Davey MP, the Minister responsible for these matters
in the Department for Business, Innovation and Skills.
What is a pay day loan?
4. A payday loan is a short-term loan which provides
credit until 'payday' when it will, in theory, be paid back. Payday
loans can be applied for either in person at a specialised high
street store, for example the Money Shop, or online with companies
such as Wonga. The OFT has classified payday loans as high cost
credit alongside "pawn broking [...] other short-term loan
sums, home credit and rent-to-by credit".[3]
Payday loans are becoming a significant part of the high cost
credit sector and in its written evidence, the Department set
out the size of payday loans in relation to other types of high
cost credit:
| Breakdown of high cost credit market
|
| Home collected credit |
£4bn typical APR 3-400%
|
| Payday loans | £1-2bn (Approx) typical APR 2500%
|
| Pawnbroking | £1-2bn (Approx) typical APR 100%
|
| Bills of sale (Logbook loans)
| £30-£40m typical APR 4-500%
|
BIS submission Ev 56
Debt advice
5. While the provision of debt advice can have
a positive influence on individuals, commercial debt management
companies are categorised by the Office of Fair Trading (OFT)
as one of the 'high risk' industries it regulates.[4]
This is because debt management services are a 'distress' purchase;
consumers seeking debt management help tend to be over-indebted,
vulnerable and desperate for help. Research by the Money Advice
Trust has shown that consumers do not shop around for debt management
services.[5] Consumers
are potentially committing themselves to a debt solution which
can affect their lives for years. The risks if things go wrong
can be significant, potentially leaving consumers in a worse financial
position, which in some cases can include the loss of the consumers'
home.[6]
1 R3 'Personal Debt Snapshot: Zombie debtors emerge',
November 2011- p 03 Back
2
Ev 76 Back
3
OFT, High Cost Credit Final Report, June 2010 p 3 Back
4
Ev 140 Back
5
Ev 141 Back
6
Ev 141 Back
| 
