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Payday lending–high profits and debt collection practices

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

Two recent interesting events occurred in the regulation of payday lending in the  UK. First, the provisional findings of the Competition and Markets Authority (formerly Competition Commission) investigation  into payday lending.  The Authority’s research provides a wealth of carefully documented  data on the industry and users of payday loans; that they are more likely to be male, in full-time work, younger than the general population, often using the loans for living expenses and as a response to an unexpected change in income.  They are not the poorest consumers with median incomes of £16,500. The average consumer takes out 6 loans a year with repeat business accounting for 80 percent of new loans. The industry is dominated by three large lenders, Cash Euronet and Dollar Financial (both US owned) and Wonga.

A central conclusion of the Authority  is that because of  competition failures  lenders have been making supranormal returns : the average return on capital of the major lenders being ‘high and in some cases exceptional’.  The provisional remedies proposed include :  a trusted comparison website, improving consumer awareness of additional charges, helping consumers to assess their own creditworthiness, periodic statements of the cost of borrowing, and measures to increase the transparency of lead generators.  The Competition Authority  has been here before.  After  its investigation of home lending  it proposed a not dissimilar set of remedies to make the market work better.  These remedies  had a very modest impact on the market. The report is therefore disappointing in its response.

The second is the revelation  that  the payday lender Wonga between 2008 and 2010 was sending  debt collection letters from fictitious law firms threatening further legal action if the overdue loan was not repaid.  As the  Financial Conduct Authority (which succeeded to the investigation initiated the OFT)  notes ‘this practice was adopted with a view to maximizing Wonga’s collections by unfairly increasing pressure on customers. Charges were added to customer accounts before and/or after these letters were sent out’.  This practice appears to be  a  breach of the Consumer Protection from Unfair Trading Regulations in relation to consumers, licensing rules for credit companies,  and more generally section 40 of the Administration of Justice Act 1970. The  Financial Conduct Authority (FCA ) required  Wonga to establish a consumer redress scheme overseen by an independent entity under section 166 of the Financial Services and Markets Act 2000.The expected compensation is over £2million to approximately 45,000 customers.

The practice of using misleading letterheads to unfairly threaten debtors is not new. Section 40 of the Administration of Justice Act 1970 was enacted because of extensive evidence presented to the Payne Committee on the Enforcement of Judgment Debts of the use of misleading techniques  at that time such as the ‘blue frightener’—debt collection letters written to resemble court documents. The Wonga case demonstrates that we cannot assume that companies learn from the past or will comply with widely known legislation unless strong regulation exists to ensure that the ground rules of a fair marketplace exists.

With the growth of inequality  payday lending is an example of the extent to which individuals trying hard to make ends meet–some  of whom may be part of  the new precariat –borrow money at high cost  from  high income investors or savers. Borrowing can help to smooth consumption needs but this form of lending is problematic if it is compensating on a continuing basis  for insecure and stagnating incomes. Payday loans are a symptom of broader economic problems associated with an economy of unequals driven by private debt.  Effective regulation of the industry should therefore be only one part of both analysis of the role of  consumer credit institutions in contemporary society and  measures to reduce inequality.

 

 

 

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