Claims that tighter regulations for payday lenders are pushing desperate people into the arms of illegal lenders have been slammed as “dishonest”.
The Consumer Finance Association, which is paid to promote the interests of high-cost credit companies, published a report suggesting "that borrowers are being excluded from credit and concerns are growing for how they are filling the gap in their finances".
But debt campaigners and charities hit back at the report. "There is no evidence that illegal loan sharking is on the rise and it is dishonest to pretend otherwise," said Carl Packman, author of a book on payday loans. "The CFA would rather have less attention on their members, it is more profitable for them that way. But we shouldn't stand for it. Protecting consumers by tackling loan sharks and regulating payday lenders should not be mutually exclusive."
The City Watchdog was forced to act to curb the excesses of payday lenders after they were caught preying on vulnerable people by using childish puppets and misleading advertising to encourage them to take on debt they could never afford to repay. The short-term lenders were found to add unnecessary charges and excessive interest on loans to push people into a desperate spiral of inescapable debt.
The regulator found that lenders relied on penalty charges and constantly rolled over loans for their profits; in other words they were only really interested in customers who wouldn’t be able to repay their loans on time.
Unscrupulous lenders forced borrowers to sign continuous payment authorities, which gave the lenders the right to raid their victims’ bank accounts almost at will. In some of the worst excesses of the industry lenders emptied people’s bank accounts on payday so that they were forced to take out a new expensive loan just to be able to pay their bills or eat.
After a long-running campaign by MPs and debt charities, the Financial Conduct Authority introduced new regulations last year in an attempt to get control of payday lenders.
The rules capped fees and high interest charged by lenders and banned them from rolling over a loan more than twice. They also cut back the use of continuous payment authorities so lenders can now only make two unsuccessful attempts to claw money out of a borrower's account.
The CFA fought the rules and warned that they would force borrowers into backstreet lenders. The payday lenders’ marketing body has repeated the claims in its new report, but there seems scant evidence to back it up.
Russell Hamblin-Boone of the CFA also claimed that payday lenders are leaving mainstream lenders behind in the way they “pioneering technology”.
He said: “Technology is changing the way we live and our 'instant society' demands quick decisions, simple products and convenient ways to borrow small sums for short periods of time.
"Critics of innovation that refuse to embrace the change by trying to hold back the tide could find themselves swept away by modern life."
That view was criticised by Guy Shone of ExplainTheMarket."The truth about payday lenders is clear for people to see," he said. "Many are shifting quickly into similar products like high price credit cards. They are stepping up TV adverts - while at the same time claiming unprompted demand for more payday loans. They claim customers demand payday loans because they are 'busy' and have 'alternative lifestyles'. The truth is they are usual just normal people under pressure and with limited choices."
Debt charities said payday lenders are still not doing enough to help people in debt. Peter Tutton, head of policy at StepChange said the proportion of the charity’s clients with payday loans among their problem debts has fallen by a third, from 24 per cent a year ago to 16 per cent now, mainly because of the impact of regulation.
“The important and necessary steps taken by the Financial Conduct Authority are starting to clean up problems in the payday loan market but we are concerned about the affordability and sustainability of some of this lending,” he said.
“We need alternatives to high cost credit that will help people get through financial difficulty.”
Gillian Guy, chief executive of Citizens Advice agreed, saying: “High-cost credit is not the answer to financial difficulties. There is a need for more responsive short-term credit options from high street banks. But it is also crucial that banks and creditors direct people towards free debt and money advice, especially when borrowing is not a suitable option for them.”