Friday, January 09, 2009

Time to reform the Consumer Credit Act?

Iain Dale has posted about a report that has been released by Grant Shapps called "Payday for Loan Sharks" which details home credit company charging interest rates from 100% APR to 10,000% APR.

I think it's worth taking a step back here for a second and clarifying something, these people are not loan sharks. Loan sharks break your legs when you don't pay. These people are bastards, absolute bastards in fact, but they are operating within the law.

For me personally, none of what Grant Shapps has revealed is new news really. I've been living in South-East London in the poorest postal districts of the country for the past decade and doorstep lending with insane interest rates but within the Consumer Credit Act laws has grown at a massive pace.

The only way to resolve these sort of issues really is to implement some sort wholesale reform of the Consumer Credit Act. That might mean implementing a moving ceiling interest rate on consumer credit agreement that tracks the base rate of the Bank of England.

This might seem like terribly left wing of me and anti-market, but as it stands currently there is nothing that legally stops these companies operating like this. High interest rates for those with poor credit history are a reality of course because of risk, but likewise, crucifying someone financially with an APR of 1000% is just nuts.

There needs to be a balance struck really that allows companies to operate with higher rates of interests for those with poor credit, but also doesn't impact on the market for that business too much. This sort of thing might only need to be temporary if it was coupled with greater education of personal finance in schools.

Clearly you should not legislate for stupid people, however, there is a problem of exploding personal debt in the UK, and at the bottom end it is happening because the CCA provides the scope for legal money lending to the poorest in society on these sort of scales. Perhaps therefore some sort of legal ceiling caps should be implemented with a sunset clause to allow for pesonal finance education to filter through the system?

Update: I should say that I do believe that a private agreement with a money lender is a private agreement. The problem in these cases is often that the person borrowing doesn't really understand what they are doing. The tactic of saying "buy/borrow this and it will only cost you £8.99 a week" makes things sound so cheap when really they're not. Perhaps trading standards changes as well to stop stupidly expensive credit being quite so opaque?


Gasman said...

2 problems. Firstly, if there is a cap then there will be people it is no longer economic to lend to, cue complaints about people being denied credit.
Secondly, I haven't seen the details of this report, but in the past similar reports have shown massive interest rates like this. On closer inspection it's a small loan for a matter of days with a few pounds as a charge, which translates into a huge equivalent APR. I'm sure there are some rip-off merchants, and a lack of competition from what Iain says, but I think a competition investigation might be better

dizzy said...

I can only speak from experience of what I have seen in SE London. Legal doorstep lender charges 200% APR on a loan of say £200 over a period of 12 months. That sort of thing.

I agree there is a competition issue, and I also see the point about a loan of say £200 over a period of two weeks that see you paying back £250 equates to an APR that is through the roof.

Some of the problems though are when you start researching these companies in consumer credit forums. They use some pretty low tactics without quite getting to the leg breaking stage.

Perhaps there may be scope for changes to the CCA that cover these short term lending outfits?

CROWN said...

These loans are short term and the APR gives a wonky figure, however the charges are still pretty high compared to the amount.

for example you borrow £85 for 1 month and pay back £100. APR is 578%, but only costs you £15 to do.

There is a need for charity based organisations to step in here and lend money short term to those in need.

Matthew Cain said...

In my experience Trading Standards are very under-resourced and often too local to be able to launch the big investigations necessary to target the most egregious offenders.

DavidNcl said...

It is left wing and anti market.

Laws and regulation won't stop money lending just as they do not stop the heroin trade. All the laws do is criminalise people while driving market behaviours underground and into a zone where gangsters use violence as a tool of trade.

Guthrum said...

There should be no limit on any rates people can borrow at, as long as desperate people, and that what is happening here they are desperate, can have the loan repayments set as fixed monthly amounts which are easily understandable, easy recourse to the Law via a Magistrate if some of these 'lending institutions' start ripping people off and using intimidation of any kind. I am assisting somebody at present who despite having a fixed agreement to pay, is being subject to threatening phone calls, letters, test messages. This 'institution' has just been bailed out by you and me and the sum we are talking about is £89

Letters From A Tory said...

I agree that there is a clear case for stepping in when people are being taken advantage of by some selective 'withholding' of important information when it comes to loans, be they mortgages or credit cards.

I'm not one for government intervention at the best of times, but if companies don't play with a full deck then the customer can easily be taken advantage of.

dizzy said...

I would sya that you have to ask yourself the question though. Do we have a problem with personal debt and lending? The answer is surely yes, and the in these cases the people doing the borrowing are people who have bugger all anyway.

So when the borrow and then perhaps default they come to the state again and cost the state money as a result which is also something that you want to avoid where possible.

"Laws and regulation won't stop money lending"

Didn't suggest for one minute that it would.What I am saying is that currently the Consumer Credit Act allows for money lending on this scale and perhaps there is scope in reforming it that strikes a balance that still allows the "poor credit lenders" to operate competitively against each other still.

As I said above, it sounds lefty, but there was a reason I suggested that perhaps a sunset clause should exist on possible variable ceiling cap rates that move with base rates.

Lord Snooty said...

Just for a change, I agree with you completely, Dizzy. These people are bastards, pure and simple, exploiting desperate people for their own profit and existing legislation is not up to scratch. Those who try to defend this - "it's a private agreement", "it's the market" - merely highlight the depravity of free-market extremists (a bigger danger to the world currently than any other kind of extremist). More support for community-based credit unions would be helpful too.

Anonymous said...

With doorstep lending, the cash is brought to the door - obviously - and then someone calls each week to collect the repayments. That has to be paid for. Loans are made to people who cannot borrow anywhere else - so the default rate can be as much as a third of all loans. So the headline interest rate does not reflect the real profitability of doorstep lending, which is not that great.

dizzy said...

"Those who try to defend this - "it's a private agreement", "it's the market" - merely highlight the depravity of free-market extremists"

But I have defended it thus. I've just said that temporary measures should be taken to bring such lending to a halt as people start to learn more simply to tackle the insane rise of personal debt that has been brought about by the economic maladminstration of the past ten years of Labour government. Those measures however should be got rid of through use of sunset clauses.

[free marketeers are] a bigger danger to the world currently than any other kind of extremist

Ideologically driven bollocks. Suggest you go and read up on Islamism.

Blue Eyes said...

I agree that the "result" of these money-lenders is pretty nasty but I don't think it's so much a flaw in the legislation as a flaw in the way that the contracts are enforced by the courts. There is a principle in contract law where for a contract to be enforceable both sides must (at the time of agreeing the contract) be at "consensus" as to what the contract aims to achieve. If one party doesn't really understand what will happen then I would argue that the contract is not valid. That would suggest to me that the lenders aren't being transparent enough. As earlier commenters have said, I would say the way round this without interfering with the normal functioning of a free society would be to force the lender to outline exactly, in words of one syllable, what payments are due and when and how much the total repayment will be when interest is added. That way even vulnerable people can make an informed decision. Likewise perhaps debt charities et al should be more proactive about letting potentially vulnerable people know about the alternatives to doorstep lenders.

I don't think banning particular interest rates will work and in principle it seems wrong to do so. But regulation could improve the transparency of the whole situation.

Lord Snooty said...

"Ideologically driven bollocks. Suggest you go and read up on Islamism."

The 'threat' from 'Islamism' has been grotesquely exaggerated, not least by charlatans like Blair. Whereas the appalling damage that neo-liberal free-market economics is doing to the world is almost entirely ignored. Around 20000 people die every day directly because of poverty. That's the equivalent of about 7 times the death tally of 9/11 every single day. Why? Because free-market economics creates and widens inequalities to a sickening extent. Depravity is the only word for it.

dizzy said...

It's not neo-liberal free markets that create death from poverty, it is socialist protectionism such as the Common Agricultrual Policy and NAFTA whih create trading areas that ensure developing countries can never compete on an even footing because of tarrifs.

dizzy said...

Of course Snooty, if you feel that you must adhere to a pseudo-scientific theory of material history and inequality that is entirely your choice.

Blue Eyes said...

Poverty is not "caused" by anything but is a result of a lack of economic activity. Do you think Britain is rich by magic or oppression? Liberal economic policy has lifted millions of people out of poverty in Asia in the last thirty years - in Thailand, China, India, etc.. Africa is poor because of poor government, not because there isn't enough of it.

Lord Snooty said...

You're right that things like the CAP have an appalling impact on poverty in developing countries (although I would hardly call it 'socialist'). But really they are methods by which the already-rich further bolster their trading power within global markets - the whole point of the EU, many would say. They are not the abnegation or denial of markets, just an example of how powerful players always use their advantages to screw over the weak even more effectively.

Lord Snooty said...

Poor government in Africa has exacerbated poverty there but it is hardly credible to describe it as the reason Africa is poor!

dizzy said...

Riiight.. so protectionism is not left wing. :rolleyes:

Scrap trade barriers and have free markets across the globe and the developing nations would be able to compete and be lifted from poverty. But that would be a depraved thing to do?!

dizzy said...

Africa is largely poor due to the fact that blocs like the EU and the US don;t trade with them on a free market basis, but i feel we are going off topic slightly here.

Lord Snooty said...

Why do we need to have markets that span across the globe? That's where the problems begin (partly). Globalization over the last 30 years has delivered more poverty and more inequality. I don't see that as a desirable round to go down.

dizzy said...

Anti-modernity.. nice.

Lord Snooty said...

Fair enough, this is drifting off your original topic, so I will make this my last ... but I do think there are important connections between poverty 'at home' and poverty in developing countries, both in terms of explanation and also policy implications. Bye!

Croydonian said...

Right. So when ground nut growers etc get access to new markets, they sell at a lower price to the new market than they would to existing clients

Lola said...

Dizzy, the report is bollocks - as it stands. If it was re-written to show how Brown's failed policies have created the opportunity for these high cost loans, it would make some sense.

The proposal to create 'national(-ised) advice centers is stupid. It is just such nationalised regulation and quango-ised advice that has created 90% of the problems in financial services. Spending another £50m on another quango that'll go the same way as all the others - into endemic producer capture and an ever expanding remit driven by regulation inflation - is bonkers.

The costs of setting up and running these small loans is high, but no higher than a large loan. The work required is the same. Which is why the apparent APRs are high. Therefore the APR's are not rates as such, they are fee charges. The retail banks charge just the same on penalty fees and achive just as eye watering APRs. (I've been on at them about that for years and years).

The report is right to highlight these issues but its analysis and recommnedations are totally and absolutely flawed.

I have worked in retail FS for over 20 years and have seen so much crap that you would not credit ('scuse joke) it. Mr Shapps should've talked to someone like me before he wrote this. A great opportunity to stick another knife into Brownanomics has been tragically missed.

Lola said...

Blue Eyes - you're dead right there. There are no 'causes of poverty' - it is the rest state. Much better to work out what 'causes wealth'.

Actually one thing is bound and certain to 'cause poverty' - socialism, aka bad policy by government. (And of course the failure of the rule of law and war).

Dan said...

These companies simply provide a service that the banks do not. No one forces anyone to borrow from these people. Yes their rates are high but so are the lending risks. I don't have a Selfridges store card anymore (thank god) but i worked out that a £75 pair of jeans I purcharsed on credit actually cost me £156 in loan and interest by the time i had paid it off. Whose fault? My own. Not 'the bastards' that gave me the card. The answer? Don't borrow money you haven't got.

Nick said...

I suspect the lending risks are quite low in practice. They aren't enough to justify the 1000% tag.

However, look at the costs in running a microcredit lending operation.

The cost of the administration for a microcredit loan isn't far different from loaning a grand or two.

If you insist on lots of paperwork, then the paperwork has costs. The costs of recovering money once lent is also high. I suspect you have to chase people a lot to get your loan back.

Spread over lots of people that's a high figure.

So, if you want to borrow 50 quid, and the costs are 40 quid just to make the loan, who's going to pay? The borrower.

Don't forget, admin charges are in the APR and can't be separated out.

So what's the solution?

My view, it has to be microcredit organisations.

Lola said...

Nick - the solution is to reduce the regulation of financial services. Or at the very least scrap the Brownian nationalisation lite version under which we now labour.

I work with it. It is Kafka-esque - to put it politely.

I can guarantee, without even going near these alledged 'loan sharks' that a significant proportion of the loan arrangement costs will be down to excessive, regulation driven paperwork and reporting.

lauzjp said...

Having been a user of these type of loans - it's not that we're stupid and don't *know* that these loans work out expensive - it's just that when you are paid weekly or fortnightly - be it on benefit or a wage, it's the easiest thing to do when you don't have an overdraft / credit card & need to buy something more pricey than your meagre pennies will allow.

marksany said...

Dizzy, I don't think you are right. The state of Ohio is doing this, with the following result:

What your plan does is to ban loans with high interest rates. When you ban anything (drugs, prostitution, abortion) you don't stop it, you drive it underground and into the arms of organised crime.

The way to address this is to provide more affordable borrowing, which the state would have to do, since it probably is not commercially viable (banks would do it already if it was) This would leave the taxpayer picking up the bill and using the state's methods of debt collection (like council tax) since borrower's are unlikely to pay back if there is no sanction .

PeterH said...

The Competition Commission investgated doorstep lending recently and came to the conclusion that there was no case to answer for the high APR charge. Doorstep lending is very risky - defaults are very high and unfortunately the interest rate to all must reflect this. Also it is expensive to collect face to face. In other countries in Europe borrowers pay a separate collection charge as well as a lower interest rate. Provident Financial is the largest doorstep lender (50% of the market) and makes a respectable 30% ROE, but this will be high amongst its competitors as it has the benefits of scale that many other operators can't access. Unfortunately for those who can't access bank credit (an increasing number) the choice is loan sharks or doorstep. What is needed is an expansion of the credit union operations, but even they will come up against the default problem. The average doorstep borrower does not have a job or a house or any real assets and is likely to have an 'impaired credit history' ie they have already been a bad debt elsewhere. Therefore, high bad debts are a fact of life in this area and (as with all forms of lending) the good borrowers subsidise the bad ones.

TheFatBigot said...

The Consumer Credit Act does provide a degree of protection.

Under the original, 1974, Act the court had the power to re-write the agreement if the cost of credit was "grossly exorbitant" or "otherwise grossly contravenes ordinary principles of fair dealing".

Amendments made in 2006 replaced this wording with a right of the court to step in if the agreement operates unfairly against the borrower. The wording is very wide and is designed to allow intervention to prevent people being ripped-off.

For reasons given by others huge APRs on short term small loans often do not fall foul of the Act because they simply reflect the costs of making that type of loan.

Enforce the law too strictly in relation to very small loans and you just push the whole business underground with the result that charges are even higher and the risks to the borrower of default are physical as well as financial.

Anonymous said...

"The problem in these cases is often that the person borrowing doesn't really understand what they are doing"

Luckily, the billions and billions of taxpayers' money allocated to state-provided education has been well-spent, so there's absolutely no need to introduce illiberal, restrictive and unenforceable rules to protect the stupid.

Nick said...

"The problem in these cases is often that the person borrowing doesn't really understand what they are doing"

Just like Brown and Darling and the MFI budget - nothing to pay for 3 years.

Lord Allesley said...

LA believes that it should be against the law to lend to anyone who is on state benefits without the permission of the state.

Why if the taxpayer is paying someone should that person have the right to build up debt that the state will be expected to pay back.

This root would mean that door step lenders could continue, the borrower would however have to get sign off from the dole office. This would involve them explaining the reason for the loan."I want a new Plasma" would not be a good reason. it would also afford the opportunity to offer debt counseling and financial management advice, possibly directing individuals to credit unions.

By Lord Allesley standards this is very nanny state. However, due to the dire state of education and the welfare state in the country, we have acquired a group of people who are incapable of coming to rational decisions (no I do not mean the cabinet). They need to be managed to reduce the burden on the taxpayer.

It may also act as an encouragement for the lazy to get back into work as we close the mainstream economy to them.


Cinnamon said...

Re your update:

Math illiterate people (who are your main target here, and smart people won't ever touch those deals) find it easier to think in terms of what it costs them per week, in fact, it's probably the only way to get them to understand what they are doing.

What you really are looking for is a way around people's math illiteracy... and the solution is better math lessons.

More money is wasted on bad planning than is squandered on indulgences...!