THE BLOG

A Drop in the Consumer Credit Ocean Can't Make a Tsunami of Debt

14/02/2013 12:08 GMT | Updated 14/02/2013 12:08 GMT

Everyone has a view about payday loans. In fact, I often say that 4% of the population have used payday loans but 96% have a strong opinion about them.

Negative stories abound of spiraling debt and eye watering interest rates. Apparently, taking out a payday loan can even ruin your chances of getting a mortgage.

Fed a fact-free diet of stories like that, there's little wonder the politicians and regulators are concerned about payday loans. Who wouldn't be?

In fact, we work closely with the government to raise standards and ensure consumers benefit from flexible access to short-term credit, wrapped in multiple layers of protection.

As part of that process, the industry is awaiting two key reports.

The first was commissioned by the Department for Business, Innovation and Skills and is being compiled by Bristol University's renowned Personal Finance Research Centre (PFRC). It is looking into the potential impact of capping the cost of credit. The second is a wide-ranging and thorough compliance review by the Office of Fair Trading into the practices used by the payday lending industry.

Both reports are widely anticipated and have huge potential influence over the future shape of the industry. The government has already anticipated the PFRC's report by including the powers to cap the cost of payday loans in the Financial Services Bill. They don't yet know if caps will be effective, but have given themselves the option to introduce them if the report says they will help to alleviate indebtedness.

The OFT's report looks at many different aspects of payday lending; from marketing and customer communication; to affordability assessments; to rollovers (allowing a customer to extend their loan beyond the agreed period); to debt collection practices.

In its interim report, which was released in November last year, the OFT implied that action would be taken against lenders operating in ways that are detrimental to consumers. If this is found to be the case, we would fully support the OFT in those actions.

Both reports are likely to have a profound impact on the Financial Conduct Authority (FCA), which takes over regulation of consumer credit from the OFT in April 2014.

What is not yet clear is whether the users of payday loans have been asked directly what they think. Nor has the relative size of the industry been taken into account. Of the total £156 billion consumer credit market, payday lending accounts for just 1.2% or £2 billion.

There is a great deal of speculation about payday loans being used by vulnerable consumers. But if needing credit makes you vulnerable then surely all credit products fall into this category - it certainly applies to credit cards, unauthorised overdrafts, store cards and mail order catalogue sales, all of which enable people to spend money they haven't got and run that debt on with minimum repayments for months or even years.

Of course, I recognise that some people's concern with payday loans is that many consumers have exhausted other lines of credit and are using payday loans as a last resort. But research shows this not to be the norm. In fact, customers are making an active choice towards payday loans. 85 per cent of customers have a credit card but only 31 per cent have maxed them out (Policis).

And satisfaction ratings are consistently high. 9 out of 10 customers tell us they are satisfied with their payday loan experience, and that's according to the largest ever survey of UK payday loan customers. Such satisfaction ratings in other business sectors would be greeted with high praise.

On top of this, the Financial Ombudsman Service received just 296 complaints about payday loans in 2011-12 compared to more than 14,000 about bank's current accounts and 19,000 about credit cards.

The industry's total lending is a drop in the ocean of consumer credit yet all society's multiple debt issues are attributed to small sum, short-term lending.

At a time when wages are falling in real terms; jobs are uncertain; the banks have been bailed out but are reluctant to lend and; credit cards don't just land on the doormat as readily as they used to; the focus on payday lenders seems out of proportion.

This is an industry that is maturing quickly and inevitably has some growing pains. Some lenders need bringing into line and I fully support that. Responsible payday lenders will continue to look for ways to raise standards and protect consumers through statutory regulation and the self-regulation we have voluntarily imposed on our members.

So I would question whether the attention leveled at short-term loans is justified. I would hope that the new regulator is strong enough to avoid the risk of regulating for the benefit of those who hold strong views, instead of regulating for the good of consumers who value the transparency, flexibility and convenience of short-term loans.