Debt Management - Business, Innovation and Skills Committee Contents

3  Payday Loans

32.  Payday loans are designed to be short-term loans for unexpected expenditure to tie people over until pay day. As we have already highlighted, payday loans have been one of the main subjects of concern in evidence to us.

33.  Figures from Consumer Focus indicate that the payday loans market increased from 0.3 million borrowers in 2006 to 1.2 million in 2009 to 1.9 million in 2010.[46] The concern is that as the market grows so will the problems associated with it.[47] Citizens Advice give advice to 2 million people a year and they have found that of those people the number who have payday loans has gone up fourfold in the last couple of years. The Consumer Credit Counselling Service (CCCS) told us that, of the 400,000 people a year it advises, one in eight now had a payday loan.[48] Ms Elson from Money Advice Trust said:

We started collecting data on payday loans a year ago when they started to become an issue; we were getting 200 calls a month then, and it is over 1,000 calls a month now.[49]

34.  The OFT described a similar picture of complaints:

Alongside this growth [in the number of payday lending companies], we have seen an increase in reported consumer harm, particularly over the last 12 months. The overall level of complaints to the Financial Ombudsman Service about payday lending is low, relative to some other products, but increasing. We understand that 81 complaints cases were completed or closed between January and November 2011. This is an increase of 72% over the same period last year, and the rate of increase in complaints upheld is 171%. In addition to this, since 1st January 2011, there remain 180 open complaints about the sector. By way of comparison, completed or closed cases about the home credit sector are decreasing (by 26% this year) with a 50% decrease in the number of complaints upheld. Complaints to Consumer Direct have shown a greater increase, from 700 complaints in 2010 to 1535 complaints in the first eleven months of 2011. We are seeing similar patterns in complaints passed to us by debt advice agencies.[50]

35.  These experiences were also backed up by a recent report by R3, the trade body of the insolvency service, which worryingly found that:

  • 3.5 million British adults were considering taking out a payday loan over the next six months;
  • Of those sampled who took out a payday loan, 60% regretted the decision and 48% believed the loan has made their financial situation worse; and
  • Only 13% believed their payday loan had a positive impact on their finances.[51]

Who uses payday loans?

36.  Dr Gathergood, an economist at the University of Nottingham, defined the market as being used by two types of people:

i.  people who have had a financial shock and need money quickly to address that, who intend to repay, will be in a position to repay and need the money now, a payday loan can act as a high cost but effective form of insurance; and

ii.  people who lack control in their expenditures and might take out debt in order to purchase something they want at short notice without an ability to repay, a payday loan is an opportunity for them to be a victim of their own behaviour.

37.  Dr Gathergood suggested that payday lenders were keen to associate themselves with the former group, who need short-term credit to meet a specific need. However he cautioned that by providing such loans payday lenders were "opening themselves up to a client base who might be more impulsive and make poor use of credit".[52]

38.  When they came before us, payday loan companies explained why they believed their client base was widening. Caroline Walton, of Dollar Financial representing the Moneyshop, noted that increasing numbers of people were using payday loans "as an alternative to going into unauthorised overdraft", and that an increased awareness of this alternative form of lending was directing people away from "borrowing long-term higher values or borrowing in the unauthorised overdraft arena".[53] Ms Walton went on to assert that:

People are seeing a real, viable choice between the alternatives that they have had and what they could get today from a payday lender, so I would not suggest that desperate times have driven people to a payday lender. Incomes that are being constrained, people on pay freezes, overtime being cut and fluctuating pay packets mean that people have made an alternative choice.[54]


39.  Martin Lewis of argued that the absence of regulation over payday loans was a key factor in the expansion of activity in this sector, and that the United Kingdom was "the only wild west for payday lenders" and "a crock of gold at the end of the rainbow for payday lenders who have been shut down all over the world and have been regulated".[55] He went on to assert that "this is a massive growing problem that is only going to get worse unless there is some form of radical and quick intervention".[56]

40.  However, the Minister did not recognise this description of the sector and pointed out that the OFT regulated the sector under the Consumer Credit Acts.[57] John Lamidy from the Consumer Finance Association (CFA), one of the trade associations representing payday lenders, also argued that payday lending was regulated "in exactly the same way as all other consumer credit lending" and included requirements for companies to "provide the pre-contract information, the right of withdrawal and all the things that everybody else has to do".[58]

41.  As was discussed earlier, the OFT currently has responsibility for the payday loans market in respect of issuing credit licences and in monitoring compliance with its guidance on responsible lending. However, adherence to that guidance is seen by consumer organisations as an area of concern. Consumer Focus told us that "firms do not obey the rules such as they are" and thought this was partly because payday lenders now had too big a share of the high cost credit market to supervise.[59]

42.  Citizens Advice agreed and highlighted the main areas of non-compliance as being in the use of rollovers, credit checking and the handling of debt. It concluded that payday lenders were "not all in full compliance with regulatory guidance on handling customers in financial difficulty".[60]

43.  When questioned the OFT highlighted its two key areas of concern with payday lenders. The first was around transparency and in particular the need for consumers to understand properly, the products they are buying:

It is not a market in which consumers shop around a lot, and we are keen to be sure that they understand what they are buying, what they are getting, what the terms are—that they can compare the cost of products, particularly the total cost of credit.

The second issue was related to credit checking as well as the consumer's understanding of whether the loan was affordable:

We are concerned about whether, in those quick turnarounds in particular, consumers are being given adequate explanation of what they are getting and whether the lender is assessing the affordability of the credit that is being granted and whether it will push the consumer into unaffordable levels of credit.[61]

44.  We were pleased to hear that the OFT will be carrying out a compliance review of payday loan companies early in this year. In view of the rapid proliferation of payday loan companies, the Government will need to act swiftly to counter any evidence of non-compliance reported in the OFT's review.

Rolling over loans

45.  A key concern with payday loans is the way in which they are used. Citizens Advice argued that while they were intended to be short-term, small-value borrowing to get a borrower to the end of the month, the reality was that providers were "rolling over loans and people never get to pay them back".[62] R3's research found that a third of those who took out a payday loan could not pay it off, so had to get another one.[63] Citizens Advice also highlighted that consumers were using the loans to pay off other debts.[64] Joanna Elson from Money Advice Trust agreed with this assessment:

There is a process where you can roll over the loan for a short period of time. Every time you roll it over, of course, you have an additional charge. That is where people get unstuck. They do not realise that, very quickly, they are into a big spiral. If they use it for the purpose that perhaps it was intended, which is a stop-gap, once, that is fine. If that is not understood, and it is used in the way that many people are now using it, it can definitely exacerbate things.[65]

46.  Consumer Focus explained that rolling over or taking out a loan five times, represented "a long-term credit facility" and therefore was not a suitable service to buy from a payday provider. Its research pointed to the fact that the average number of loans that consumers have in the payday loan market was 3.2 and that urgent action was needed to avoid this figure from getting worse.[66]

47.  The rolling over of loans was also recognised by commercial debt management companies. They found that payday loans were exacerbating the debt problem because borrowers were using them in the short term to pay off debts rather than dealing with the root causes of their debt problems. This resulted in consumers getting into more debt before seeking help. Chris Davis, representing MoneyPlus Group, said that his company was now seeing a greater proportion of consumers who had "gone to a payday lender and perhaps rolled over and then gone to another payday lender".[67] John Fairhurst from Payplan also saw this as a serious concern. He told us that Payplan had seen cases where clients had "an excess of 20 payday loans" and that they had been using payday loans as "a way of managing [their] deficit budget".[68]

48.  The evidence we heard has left us in no doubt that the Government must act to limit the rolling over of loans in its review of this sector.


49.  Various consumer groups have been campaigning for a cap on the total cost of credit to prevent payday loans from spiralling out of control especially through rollovers. Martin Lewis argued:

If I were doing this, I would put a total cost cap on. I would talk to the decent players out there about what the total cost cap should be. I would make them portray total cost, which includes all possible fees, which they do not do right now.

As a concept, if you borrow £100, you should never have to pay back more than £150. That is roughly how I would do it; I would base it on cost. Do not take the £50 as my limit—that is conceptual. That would incorporate any number of rollovers, which would be effectively a ban on the number of rollovers going on.

However, he warned that there also needed to be a way of preventing consumers who had reached their limit with one lender and were unable to pay it off—then going on to another lender to borrow to pay off their first loan thus creating a "personal rollover".[69] Consumer Focus said that consumers were already "borrowing from here, there and everywhere, [...] robbing Peter to pay Paul."[70]

50.  Despite a large number of responses to the Government's consumer credit review calling for a cap on the total credit that could be charged, the Government said that there was a lack of hard evidence about the impact that the proposal would have. It has therefore commissioned the University of Bristol to carry out research into this area. The Government highlighted that other research had shown that price controls, such as a limit on APR, could restrict availability of legal credit to low income consumers and push them to loan sharks.[71]

51.  However, there is already positive research available for the Government on the total cost of credit cap. A report by the Centre for Responsible Credit highlighted the situation in Ontario, Canada where there is a cap of $21 per $100. The Ontarian Government carried out huge amounts of research before putting this into place—through the Maximum Total Cost of Borrowing Advisory Board. It consulted with industry, social, poverty, consumer and financial groups and other experts. It also considered the experience of other jurisdictions with a payday lending marketplace including the review of materials on payday lending across Canada, in the United States and overseas. In addition, the Board commissioned its own research from Ernst & Young.[72]

52.  We do not see the need for Government to commission research, with all the associated costs, from the University of Bristol on the capping of total credit costs given the amount of evidence and research available on the Canadian and US market. If Government continues to believe that new research is necessary, it will need to set out which specific areas lack existing data.


53.  The OFT has described credit and affordability checking as a key part of being a responsible lender and stated that companies which did not carry out appropriate affordability assessments were falling foul of its guidance.[73] Despite this clear view, a number of our witnesses asserted that not carrying out credit and affordability checks was a regular practice of payday lenders. Consumer Focus claimed that some of the payday loans companies were even advertising that there would not be a credit check for loans. As well as not carrying out credit checks payday lenders were also not registering their loans. Sarah Brooks, representing Consumer Focus, said that non-recording was "fairly commonplace practice among the payday loan market".[74]

54.  Martin Lewis agreed that credit checking was a problem with payday providers and argued that given the fact that there were only three main companies which operated credit checking—Call Credit, Equifax and Experian—it was not very difficult for regulators to check which companies were not recording loans.[75] Consumer Credit Counselling Service (CCCS) informed us that the data coming into its social policy team raised questions "about the level of credit checking that goes on" and why individuals who were struggling to repay their debts were still able to get payday loans.[76]

55.  The Consumer Financing Association (CFA), one of the trade associations representing payday lenders, argued that a factor in non-reporting by payday loan providers was that the current credit reference agencies were unable to capture the payday sector of the market because "they were built up on mainstream lending and their data is normally only refreshed once a month. That is not good enough for us, because the whole length of the loan may only be a month".[77]

56.  Some American states have a real-time central database where payday lenders are required to enter the details of all loans they provide within their state into a database, and to check a borrower's status on the database prior to granting a loan. This allows for a limitation on the number of payday loans that can be obtained at any one time to be enforced, and prevents borrowers from taking out loans from multiple providers at the same time.[78] Veritec, an American firm which had been working in the payday loans market in the USA for over a decade argued that such a database enabled regulators in USA to effectively enforce regulation of payday lending by providing real time intelligence that delivered an accurate and up-to-date view on market data and lender/borrower behaviour.[79] This is a key factor missing from the UK credit reference agencies as the CFA explained it was only updated monthly.

57.  There is a general lack of data in the payday loans industry in the UK. The OFT said that they did not routinely collect data on the payday loans market.[80] The Centre for Responsible Credit's recommendation from October 2010 that the payday lending industry should provide independent academic researchers with access to payday customer data to help understand the industry[81] had been ignored.[82] This has meant that the UK's understanding of the sector lags significantly behind the USA and Canada and the UK has to rely on information from abroad.[83] However, we note that the Government has recently asked the OFT to start collecting data.[84]

58.   It is clear that credit checking is a key factor in ensuring appropriate lending to consumers. We are therefore deeply concerned with the evidence that payday providers are not recording all of their transactions. Examples of credit databases that do capture payday lending are available in other countries and we recommend that the Government require industry to introduce similar models in the UK as a matter of urgency.

59.  In addition we further recommend that payday lenders be required by law to record all loan transactions on such a database so that consumers' credit histories can be accurately monitored. We further recommend that the Government explores how this mechanism can be used to limit the practice of switching between payday loan companies and the subsequent rolling over of loans.


60.  The Centre for Responsible Credit (CFRC) recently published a report on the international experience of regulation for payday loans[85] highlighting the example of Florida. In 2001, Florida implemented new regulations on payday lending that stipulated a maximum loan sum of $500, limited transaction fees to $10 (in effect a cap on the total cost of credit), banned rolling over, restricted loan terms to a maximum of 31 days, and imposed a cooling-off period of 24 hours between loans. In addition, Florida maintains a real-time database of all loans.

61.  This example was highlighted during the backbench debate on 1 December 2011. Yvonne Fovargue MP said that:

Evidence from Florida shows that capping the total amount that people can take out in any one period—for example, $500 in a year—improves their ability to pay back that loan. We asked whether that sent people into the hands of illegal lenders, but we were told that the average amount that people take out in loans in Florida is $388, which is quite a bit below the $500 limit. People do not max out their loans, which may mean that they do not go anywhere else.[86]

Nic Dakin MP also highlighted the success of the Florida model:

Interestingly, by 2009, 6.8 million loans had been authorised in Florida, and not a single loan was extended beyond the contract period. More than 90% paid back their loan within 30 days and more than 70% repaid on the contract end day. Consumer complaints of mis-selling dropped significantly, as did overall indebtedness, and not one borrower was indebted by more than $500 at any given time.[87]

62.  The evidence from Florida also suggests that regulation and capping of credit does not lead to the closing down of the payday loans industry; thereby restricting access to credit and pushing people to illegal lenders as suggested by the OFT as being a risk. In fact since the regulations were introduced Dollar Financial—represented in the UK by the Moneyshop—bought into the Florida market acquiring 23 stores in 2006 and a further 82 in 2007. The company even described the regulatory environment as 'favourable'. And yet at the same time its UK representative, Caroline Walton, who met us, only mentioned the negatives of regulation "certainly in the US there have been rate caps, which have meant that payday lending has been closed down in certain states".[88] She went on to suggest that regulation would be "a rather rash" response and that rather than solving problems with the payday industry it would drive out payday lenders and make "it far less competitive".[89]

63.  The CFRC highlighted research on Florida by the University of Massachusetts which indicated that despite regulation the payday loans industry was "flourishing" and growing rapidly in terms of the number of customers and number of transactions.[90] CRFC conclude that:

This evidence flatly contradicts the arguments that caps on the total cost of credit or other restrictions, such as in respect of the number of rollovers allowed will result in a contraction of payday loan availability.[91]

64.  We recommend that the Government studies the Florida example to see what lessons can be learned for the UK market on successful regulating of the payday loans market.

Use of continuous payment authority

65.  A continuous payment authority is similar to direct debit because payments are taken from an account which is linked to a credit or debit card and the company has control over how much is debited and when. However, the difference is that a continuous payment authority is not covered by any bank guarantee and can only be cancelled directly with the business that holds the authority. Consumer Focus told us that payday lenders which use continuous payment authorities can "keep dipping in" to a customer's bank account even when they are experiencing difficulties in repaying the loan.[92]

66.  Vivienne Dews Executive Director, Credit Group, OFT said that a distinction needed to be made between acceptable and unacceptable use of a continuous payment authority:

If a continuous payment authority is used correctly simply as a means of making the agreed repayments, we do not have an issue with that. We do have an issue if it is used improperly to take money at times when it has not been agreed and without proper authority. We draw quite a distinction between proper use of it and improper use of it. [93]

David Fisher, Director of the Credit Group at the OFT confirmed that the OFT was aware of concerns about the misuse of the continuous payment authority, in particular:

Creditors dipping into your bank account, sometimes many times in the day, and taking out sums of money that they may not have agreed with you and at times that you might not have agreed.[94]

Vivienne Dews, defined this as an 'unacceptable practice' which was made clear by the OFT Debt Collection Guidance. However, she also informed us that the 'definition' of 'unacceptable' had been challenged by the industry, and as a result the OFT would be launching a short consultation on the continuous payment authorities.[95]

67.  Whilst we recognise that although the use of continuous payment authority is legal in the payday loans market its use must be carefully monitored. We welcome the OFT's consultation on this matter and recommend that clear rules be put in place to outlaw companies accessing funds without prior agreement. We further recommend that the Government make clear to payday loan companies that if they do not demonstrate a commitment to moving away from the continuous payment authority as the method for receiving payments, the new regulator will be asked to address this matter as a priority.

Consumer credit code of practice

68.  The Governments' response to its consultation on consumer credit made clear that its priority for reform was through 'self regulation'. Building on that approach, the Minister told us:

We are now engaged in intensive discussions with the four associations who represent over 90% of the payday lending market to see whether or not through codes of practice we can have significantly enhanced consumer protection. I have written to the associations and I intend to meet them. I am making a very clear signal to them that some of the practices that I think you are referring to, whether it is the rollover, the continuous authority, irresponsible advertising or a need for greater transparency, all need to be addressed in codes of practice.[96]

69.  However, problems with how the consumer credit industry could self regulate have been highlighted to us. Professor Iain Ramsay from the University of Kent warned:

The balance of self regulation versus regulation clearly depends a lot on the context; I am not so confident in an area like payday loans how exactly self regulation would work. Who would enforce it? Would it apply only to companies that had signed up to the code of practice? Would it be enforceable by the Financial Ombudsman Service in terms of a norm of fairness? There is the danger that self regulatory codes actually make the law more opaque because you have to look at the statute, look at the regulations then look at the code of practice, so it is not necessarily the case that it simplifies the regulatory landscape.[97]

70.  It should be noted that there is already a code of practice for the industry. Following publication of Consumer Focus' Report: Keeping the Plates Spinning, the industry established a forum to draw up a Code of Practice. A Lending Code for Small Cash Advances was launched by the Consumer Finance Association in July 2011. However, Consumer Focus argued that while some progress had been made which would be helpful for consumers, "it did not address key issues for the protection of vulnerable consumers which our research had identified".[98] It went on to argue that:

The willingness of industry to work on self regulation is strong but it is doubtful that the measures we would like to see put in place will be achieved by any voluntary code. We consider that consumers are only likely to get the full level of protection they need from regulatory measures to both limit the number of loans/rollovers and to oblige the industry to undertake appropriate credit checking activities.[99]

71.  When we asked a representative from the payday loans industry, John Lamidey of the Consumer Finance Association (CFA), what sanctions there were against any payday lender who did not adhere to a code he stated that the current version of its code of practice did not include "compliance monitoring or a method of dealing with members who do not comply" but that the latest revision would "have annual compliance monitoring and a complaints handling system enshrined in that".[100]

72.  In Canada the payday industry has established a code of conduct which goes far further than the UK's current version. The Canadian code amongst other things prohibits the rolling over of loans and the issuing of multiple loans at the same time. Interestingly, Dollar Financial—the largest payday operator in Canada and the largest store front payday operator in the UK through the Moneyshop—is signed up to the Canadian code[101], which supports that it would be possible for a similarly strict code to operate in the UK.

73.  For self regulation to be effective it has to include transparent and enforceable sanctions. We understand that more vigorous codes of practice are under development by the industry. The Government must ensure that self regulation can deliver the necessary enforcement sanctions and demonstrate that they are sufficient to protect consumer interests. Therefore, we recommend that the Government provide us with an update on the development of the codes of practice by the end of 2012. If it cannot be demonstrated that self regulation can deliver the necessary protections then the Government will need to intervene with statutory regulation.

The use of APR

74.  The standard way in which the cost of a payday loan is measured is by using the annual percentage rate (APR). This measurement and the way that it is calculated is set by the Consumer Credit Act 1974. As the OFT explains on its website:

The APR must be included in credit agreements and pre-contract information. A typical APR must be included in most credit advertisements. This is intended to help consumers to compare the cost of different credit deals.

The APR is based on the total charge for credit (TCC) which includes interest and other charges which affect the cost of borrowing - even if they are not payable under the credit agreement itself. The APR is an annualised rate reflecting the timing of such charges, as well as the rates and amounts.[102]

75.  Both sides of the high cost credit argument agree that using the APR as the price comparator is not ideal for payday loans. It is believed that although companies have to advertise the APR of a payday loan the customer is far more interested in the actual cost.

76.  The consumer money expert Martin Lewis, gave us the following example of the difference between the perception generated by quoting APRs and 'real' money costs might have for short term loans:

I think first of all, to go back to basics, one of the great problems is the APR percentages that companies are asked to produce are a farcical nonsense when it comes to short-term borrowing. I always use this example, [...] If we were in a pub and you said, "Lend me £20", and I said, "I will give you £20 but buy me a pint next week," and the pint cost £3, that is—I will not test you—143,000% APR. That is the problem with APR regulation on short-term borrowing because £3 on £20, over a week, if you compound it over a year becomes 143,000%.

The first problem here is that these lenders are advertising 5,000%. It means nothing and it is not putting people off. There is no price competition in this market, because if there were then nobody would do it. The current idea of comparison sites, which is a plan, is relatively weak; it is not about price. What we first of all would do is incorporate total cost. This should all be about cost; get rid of rates—rates are nonsense. Companies should have to dictate the cost of the loan, and there should be a limit on the total cost of any individual transaction, which includes rollovers[103]

I think total cost, based on a number of examples, is a good idea. There are ways to formulate this within the industry. That is the way it has to go on short-term lending. It has to be: if you borrow £100 over two weeks, you will repay this amount. That is what we need to be telling people. How would you compare if you were doing it yourself? You would ask yourself that question. If I borrow £100, and I pay it back in two weeks, how much would it cost me? If I pay it back in another two weeks later, how much will it cost me? It is the simple and bleeding obvious answer, if I am honest.[104]

77.  Caroline Walton, representing the payday lender The Moneyshop agreed:

The customer actually sees it in terms of pounds and pence, and they make that comparison with others in the same sector in terms of pounds and pence. Also, when they talk in terms of the difference between a payday and an unauthorised overdraft, they have no APR to compare with, so again, they see it in terms of how much they have had to pay at the bank as opposed to paying for a payday loan. I think measuring it in terms of the cost in pounds as opposed to a percentage APR would be very beneficial.[105]

78.  When we questioned the Minister he said that while there were "no direct plans" to introduce new measures he acknowledged that the APR measurement was "often not be the most informative measure of the cost of credit".[106]

79.  We recommend that APR should no longer be used to measure and compare the cost of payday loans. Instead, the total cost of the loan should be made clear; for example if £100 is borrowed and £150 is paid back including interest and fees then this total amount is the figure that should be advertised. It also should include how much it costs if paid back a week late, 2 weeks late and so on, so consumers are clear of the reality and penalties of late payment.

Credit Unions and the Post Office

80.  Credit Unions in Britain are small, co-operative financial institutions. There are currently approximately 400 credit unions in the UK serving about 900,000 people.[107] The Credit Union Act 1979 sets down the Credit Union operating principles in law:

  • The promotion of thrift among members;
  • The creation of sources of credit for the benefit of members at a fair and reasonable rate of interest;
  • The use and control of their members' savings for their mutual benefit; and
  • The training and education of members' in the wise use of money and in the management of their financial affairs.[108]

81.  In the past decade, British credit unions have trebled their membership and assets have expanded four-fold. The Association of British Credit Unions Ltd (ABCUL) informed us that the sector has made over half a million loans in the last four or five years, all in the £200 to £400 area.[109]

82.  As this growth has taken place, the role that credit unions can play—both in providing equitable financial services to the whole of their communities and providing diversity in the financial services sector—has been increasingly recognised by government and policy-makers. The Coalition's Programme for Government committed to promoting mutuals as part of a diverse financial services system. The Department for Work and Pensions is currently conducting a feasibility study, the outcome of which will determine whether and how an earmarked £73 million credit union modernisation and expansion fund will be invested in the credit union sector. In addition, the Government recently introduced a Legislative Reform Order to amend the Credit Unions Act 1979 intended to enable credit unions to reach out to more people.[110]

83.  Joanna Elson from the Money Advice Trust argued that credit unions were a very useful source of both affordable credit and simple savings. However, she acknowledged that this was not at the scale that would be needed to cope with complete demand across the UK. In that context, she welcomed the Department for Work and Pensions' work with the credit unions on modernising and growing the sector but, warned that "you cannot wait for that to happen before you sort out some of these other problems".[111]

84.  Professor Iain Ramsay of the University of Kent also noted that credit unions were "a tiny part of the UK market at the moment" and that whilst he was in favour of encouraging them to grow in terms of providing an alternative form of competition in the market he believed that "they can only be one part of the solution to high-cost credit."[112]

85.  Mark Lyonette, Chief Executive of ABCUL was also of the view that credit unions were not in the best position to compete with the "high-tech, payday-lending Wonga model" because they were not able to match the "sophisticated automation and credit scoring behind the scenes" which were deployed by those companies.[113] However he highlighted the situation in the United States where credit unions have now successfully entered the payday loan market:

I should say that about 90 million people use credit unions in the States. They angsted for a long time over whether they should offer an alternative to the payday lending product. In the end, a number of them did at a much lower cost with the same features—for example, eight days, ten days or the end of the month.[114]

86.  The Minister was encouraging on the role of the credit unions, in particular on the potential for them to work within the Post Office network. He highlighted the work currently being done by the Department for Work and Pensions on credit unions and the fund made available by Government to invest in the credit union sector over the spending review.[115] He was of the view that:

If you could access credit union payments over the Post Office network, and they were there and able to advertise credit union products, I think it would be the biggest shot in the arm imaginable for the credit union sector.[116]

87.  There was a suggestion that Credit Unions should be signposted from payday lenders so that people are aware that there is a lower cost alternative. ABCUL explained:

In the same way that there is an obligation in the debt management industry to make people aware that there might be cheaper or free alternatives available, it might be something that is worth thinking of in this area. You would not be able to recommend any particular institution; it would be more like a wealth warning where you actually suggest that there might be cheaper ways to do this.[117]

88.  Credit Unions have a valuable role to play in this market and their role needs to be highlighted by Government. We support the argument that the Post Office network has huge potential to work with the Credit Unions to provide short-term loans at a lower cost than commercial payday lenders. We recommend that the Government set out in its response, how it proposes to use Post Offices as a vehicle to expand the Credit Union market.

Social fund

89.  The current welfare system provides grants and interest-free loans from the discretionary part of the Social Fund to help people on low incomes with costs which are difficult for them to meet from their regular income; for example to buy school uniforms or to replace white goods. Grants and loans are currently administered by Jobcentre Plus. The budget for the discretionary Social Fund in 2011-12 was £732 million.[118]

90.  Under the Welfare Reform Bill, the discretionary Social Fund will be abolished in April 2013. Instead, in England, a new system of Local Welfare Assistance will be introduced, to be administered and provided by local authorities.

91.  Loans will be replaced by "payments on account". These will be recoverable payments intended to help towards meeting the expenses which are difficult to budget for out of normal benefit income or for which the claimant has been unable to save, or to deal with fluctuations in expenditure throughout the year, for example where children in the household who would normally have free school meals are on summer holidays.

92.  The Government says that the reasons for the change include the increase in the cost of loans and the need to focus discretionary payments on the most vulnerable people. The Government also believes that a discretionary system is likely to be more effective if it is administered locally and "linked to other support services" rather than being centrally administered.[119]

93.  Martin Lewis described what was happening to the social fund as "just horrendous"[120] and highlighted what he saw as serious problems with the Government's approach:

It is going to become discretionary for local councils going forward, and I do not see, with the budget cuts at the moment, that they are going to be offering them. What we used to do is have a state-funded social fund that was there to supply short-term lending for people in emergencies, and in the midst of the payday loan boom, we are taking it away. I do not get that.[121]

94.  However, the Minister said that the argument that the inability of the benefits system to deliver loans was driving people towards payday loans had not been raised with him. However, he undertook to "talk to DWP colleagues" about this matter.[122]

95.  We are concerned by anecdotal evidence which suggests that the removal of the Social Fund will push people towards payday and other high cost lenders. In its response to this Report, we will expect the Department to set out what meetings—at Ministerial and Official level—have already taken place on this issue; and to set out what joint plans Ministers from BIS and the DWP have put in place to ensure that the Social Fund and the proposed 'local welfare assistance' will protect the most vulnerable from payday and other high cost lenders or loan sharks.

46   Keeping the plates spinning-Perceptions of payday loans in Great Britain, Consumer Focus, August 2010 Back

47   Q 39 Back

48   Q 41 Back

49   Q 10 Back

50   Ev 142 Back

51   R3 'Personal Debt Snapshot: Zombie debtors emerge' November 2011 p 03 Back

52   Q 19 Back

53   Q 85 Back

54   Q 85 Back

55   Q 40 Back

56   Q 40 Back

57   Q 226 Back

58   Q 81 Back

59   Q 41 Back

60   Q 47 Back

61   Q 179 Back

62   Q 39 Back

63   R3 'Personal Debt Snapshot: Zombie debtors emerge' November 2011- p 03 Back

64   Q 40 Back

65   Q 17 Back

66   Q 17 Back

67   Q 117 Back

68   Q 118 Back

69   Q 43 Back

70   Q 45 Back

71   'Consumer credit and personal insolvency review: summary of responses on consumer credit and formal responses on personal insolvency', July 2011, chapter 6.3 p 26-27 Back

72   CFRC: How to regulate payday lending: learning from international best practice, December 2011 Back

73   Q 199 Back

74   Q 46 Back

75   Q 47 Back

76   Q 41 Back

77   Q 83 Back

78   CFRC: How to regulate payday lending: learning from international best practice, December 2011 Back

79   Ev 168 Back

80   Q 183 Back

81   "Payday lending in the UK: a review of the debate and policy options?, Gibbons, D., Malhotra, N., & Bulmore, R. (2010) Centre for Responsible Credit,. London Back

82   CFRC: How to regulate payday lending: learning from international best practice, December 2011 Back

83   CFRC: How to regulate payday lending: learning from international best practice, December 2011 Back

84   Qq 182 and 183 Back

85   CFRC: How to regulate payday lending: learning from international best practice, December 2011 Back

86   HC Deb, 1 December 2011, col 1157 Back

87   HC Deb, 1 December 2011, col 1165 Back

88   Q 93 Back

89   Q 94 Back

90   University of Massachusetts Report, July 2010 - 'Perspectives on payday loans: the evidence from Florida' para 1 Back

91   CFRC: How to regulate payday lending: learning from international best practice December 2011 Back

92   Q 41 Back

93   Q 203 Back

94   Q 199 Back

95   Q 199 Back

96   Q 231 Back

97   Q 25 Back

98   Ev 91 Back

99   Ev 91 Back

100   Q 103 Back

101   CFRC: How to regulate payday lending: learning from international best practice, December 2011 Back

102   The Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011 Back

103   Q 43 Back

104   Q 49 Back

105   Q 104 Back

106   Q 233 Back

107   Q 66 Back

108   Ev 66 Back

109   Q 107 Back

110   The Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011 Back

111   Q 35 Back

112   Q 35 Back

113   Q 107 Back

114   Q 107 Back

115   Q 240 Back

116   Qq240 and 241 Back

117   Q 110 Back

118   WMS, 31 March 2011, Social Fund Allocations Back

119   Impact Assessment, paras 4-6  Back

120   Q 52 Back

121   Q 52 Back

122   Q 288 Back

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Prepared 7 March 2012