Simon Read: Who'll replace the payday lenders that ran away? The angels of finance, or the sharks?
Simon Read is Personal Finance Editor at The Independent. He edits the Saturday Your Money section and writes the Daily Money column and Wednesday’s Midweek Money section in i newspaper. He also writes for the news and business pages of the Independent and i newspaper and is a regular money commentator on TV station London Live. He has won numerous awards including Consumer Finance Journalist of the Year.
Saturday 24 May 2014
Following last week's news that the 451-branch Cheque Centre has in effect been forced to scrap payday loans by new Financial Conduct Authority rules, there are further encouraging noises from the City watchdog about the high-cost credit sector.
Figures released this week by the FCA revealed that around 70 firms have not applied for permission to continue offering quick credit to customers under the strict new regulation regime introduced on 1 April.
Adding them to the 30 that have lost their lending licences since the start of last year, that means around 100 of the UK's 210 payday lenders have stopped offering the service in the past 18 months.
My view is that the figures are cause for celebration as it seems those lenders that can't make a decent profit under the regulator's tighter restrictions are being forced out of business. In other words, the potentially rogue operators on the fringes are rushing to close their doors.
But we shouldn't celebrate too soon, warns Russell Hamblin-Boone of the Consumer Finance Association, the main mouthpiece for payday lenders. He said: "We are already seeing many lenders leaving the market and I very much hope that in time we don't look back and regret that a legal industry that was popular with borrowers has been replaced by unregulated, illegal lenders. This is a clear case of 'be careful what you wish for'."
Could he be right or is it just scaremongering? We'll have to wait and see. But my attention has been drawn to a new breed of lender marketing itself as an alternative to payday lenders – while actually encouraging people to sign up for what could be equally expensive and unaffordable short-term credit.
ClearAccount labels itself as "The clear alternative to a payday loan". Its proposition doesn't seem very clear to me. It seems to be a way to avoid falling into overdraft – and being hit with bank fees. But instead you take a loan with the lender at an expensive £1 a day for £100. I envisage that anyone signing up for this "alternative" could simply be opening themselves up to another financial nightmare.
However, ClearAccount has asked us to point out that a set deadline of 40 days for paying off any loan and all interest is frozen after that point. It does not charge any other fees so debts cannot mount up.
Tess Pendle, of the new social enterprise My Home Finance, agrees. "ClearAccount's method of lending money to an individual automatically when their account goes below a certain level is not only a very expensive way for someone to manage their money, but it is also an irresponsible approach to people who will often be in a vulnerable position," she said.
"This new method of lending money is extremely worrying at a time when irresponsible lending is at an all-time high."
Her new venture offers something different again, she said. "Our aim is to help those who are financially excluded while lending responsibly to ensure that they can afford the repayments on their loan.
Her view is that responsible lending "can empower an individual by reducing their financial exclusion". Meanwhile, by giving them financial guidance and budgeting tips, "an individual can stop falling deeper into debt and poverty".
I know of one or two other new outfits ready to enter the market with what seems to be a more sustainable and fair business. I hope it's these that fill the void left by the armies of payday lenders that have shut down. I also hope that Mr Hamblin-Boone is wrong and the tougher rules don't prove an opportunity for heavy-handed, unscrupulous loan sharks to emerge blinking from their dark shadows into the homes of the vulnerable.
Meanwhile, Britain's biggest payday lender, Wonga, lost its chief this week. Niall Wass has quit after just six months in the hot seat. I'm not going to speculate on why as I'm too busy preparing my CV to send to the firm. It's time to clean the business up and I'm the man to do it. Do you think they'll accept me?
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