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Payday firms defend lending checks
Wonga made a film showing the positive experience of the "silent majority" of its customers, ahead of a session in the House of Commons when MPs will question payday loan companies
Payday lenders insisted their affordability checks are similar to those used by credit card companies as they were grilled by MPs on their boasts of being able to make cash available to borrowers within minutes.
Representatives from Wonga, QuickQuid and Mr Lender as well as trade bodies were questioned about their business practices when they appeared before the Commons Business, Innovation and Skills Select Committee.
The industry faces a clampdown by regulators after charities accused lenders' behaviour of being out of control.
A recent investigation by the Office of Fair Trading (OFT) found that some firms' business models appear to be based around people who cannot afford to pay their loans back on time, meaning they are forced to roll them over and the original cost balloons.
Asked about advertising stating that lenders can send cash within five or 10 minutes, Andy Lapointe, UK public affairs manager at QuickQuid, said: "That's from approval."
He said the process of credit checking could actually take several hours, adding: "The five minutes is indicating the time that they're approved. "
Russell Hamblin-Boone, chief executive of short-term lending trade body the Consumer Finance Association (CFA), said: "When you're transferring money electronically you can do that very quickly.
"If you applied for a credit card, the application process would be as long as if you were applying for a short-term loan.
"The difference would be that you'd have to wait a few weeks for your credit card to come through as opposed to lenders who are able to transfer money directly."
Henry Raine, head of regulatory and public affairs at Wonga, said that around one in 33 (3%) customers take loans out for at least 60 days, meaning interest needs to be frozen.
He said: "Wonga's business is aiming to lend to people who can pay us back, that's how we make money.
"The vast majority of people pay us back on time. We freeze interest after 60 days and 25% of people pay us back early."
Mr Raine said around 3% of loans, equating to around 40,000 of Wonga's 1.25 million customers, go to the 60-day period.
He said Wonga's record compares favourably with the rest of the loan industry, including credit card companies and banks.
Mr Raine said: "We do everything we can to lessen the effect of bad debt."
Asked if he thought Wonga's charges are extortionate, he said: "No, of course we don't accept that... With Wonga the first thing you see on the website is the amount it's going to cost you. You choose how much to borrow, and for how long.
"The product is actually used moderately by most people."
Mr Raine said Wonga's average loan is for £174 borrowed over 17 days and people are given reminders, including texts to tell them when the loan is due for repayment and telephone numbers to contact if they are having financial difficulty.
The committee hearing pre-empts the transferral of regulatory powers in the consumer credit market from the OFT to the Financial Conduct Authority (FCA). The new body, which came into being in April, has promised to strengthen protection for consumers.
To do so, it has been equipped with the power to impose unlimited fines and compel businesses to give people their money back when they have lost out due to poor treatment.
New curbs proposed by the body last month will force lenders to place "risk warnings'' on their promotions and advertising, urging consumers to "think'' before taking out a payday loan.
New curbs proposed by the FCA will force lenders to place "risk warnings" on their promotions and advertising, urging consumers to "think" before taking on a payday loan. The watchdog has powers to ban adverts if it thinks they are misleading.
Lenders will be allowed to roll over a loan only twice and they will be able to make only two unsuccessful attempts to claw money back out of someone's bank account under the proposed new rules, which are intended to come into force next year.
The whole industry is under investigation by the Competition Commission, which will produce a report next year.
MoneySavingExpert.com founder Martin Lewis told the committee: "Do we really need them (payday lenders)? I think we'd all be a lot better off without them and maybe it's worth the sacrifice for the few small number of people who actually do find them rather convenient.
"If you take 100 people who get payday loans, I would suspect 99% of them would find a cheaper and better alternative doing something else or not doing them. So the problem is they're used by far too many people and they are not fit for the purpose that they are used for."
Peter Tutton, head of policy at the debt charity StepChange, said he had seen "explosive" growth in the number of people seeking help with payday loans, on top of other debts.
Mr Tutton said: "It's not just about the growth of the market... the number of people we're seeing with payday loan debts has grown eight-fold, so we're seeing a much bigger growth in problems than just the growth of the market.
"As well as that we're seeing more people with multiple payday loan debts, and the size of their payday loan debts are getting bigger. So the average payday loan debt for a StepChange client is now £1,600 and their average income is £1,200.
"The problem is irresponsible lending and ineffective affordability checking.
"Is the payday lending industry taking advantage of people who are struggling in financial difficulty? Our evidence suggests that they are.
"In a sense people are in a hole, and a payday loan is helping them dig that hole deeper."
Mr Lewis said: "The problem we have here is that there is a desert of regulation. And when you have a desert of regulation and when it's so easy to get a licence to do this and to set up a one man band to do it, then the slippage towards loan sharks is not that far away.
"Now of course what we're not talking here is the big high-budget advertising companies, who you've probably just taken evidence from, who have their own raft of problems, but we're talking about the one man band lack of regulation.
"We have been given a glass of water in the form of what the FCA is doing next April. It should be welcomed, but it is a glass of water, not an oasis. We need a lot more."
Asked if there should be restrictions on advertising by payday lenders, Citizens Advice chief executive Gillian Guy said: "To be honest it reminds me of the old days of cigarette advertising where it was all very sexy and a good thing to be doing, and we didn't worry about health warnings.
"There's no health warnings on these adverts. There's nothing about the dangers that they could present, or indeed that they are not the solution to all things and there might be some other way out of a debt situation rather than more debt."
Mr Lewis added: "I think we are in danger of grooming a new generation towards this type of borrowing. And if you think we've got problems now you wait until 10 years' time.
"Grooming is the right term. We're talking about a market that didn't exist five years ago, and you've had people in arguing that this is how people like to use it. They've created the demand, they've created the operational structure, and now they're saying it's what people want. It's deliberately contrived and controlled."
He said new data from MoneySavingExpert.com found more than one in three people with youngsters under 10 said their children had repeated payday loan ad slogans, with 14% saying that when they had refused their under-10 something, they had been "nagged" to get a payday loan to pay for it.
"We have normalised this. This niche lending of last resort has been normalised to a mainstream form of credit by the use of advertising."
Consumer minister Jo Swinson said that despite payday lenders toughening voluntary codes of practice, firms have failed to "get their own house in order" by not complying.
She said of the voluntary code: "I certainly think that it was not taken seriously as it should have been, because the customer experience backed up that it wasn't properly being delivered."
Explaining why payday lenders have been referred for a full-blown investigation by the Competition Commission, David Fisher, senior director of consumer credit at the OFT, told the committee that the whole industry was found not to be up to scratch.
He said: "We found non-compliance across all payday lenders. That is not what you would expect to see in a properly working market. That was the big trigger that there was something wrong.
"We were concerned about the lack of transparency. Do consumers actually understand what they're getting into with a payday loan? Does the consumer understand the implications of a rollover, does the consumer understand what a continuous payment authority (a recurring payment method used by payday lenders) is?
"We were concerned about low price sensitivity. These people compete on speed and convenience. They do not compete on price. We were concerned about barriers to switching from one lender to another and high concentration, so we estimate that the three leading payday lenders account for about 70% of the market."
Mr Fisher said the OFT was concerned about how the law was being interpreted and applied by lenders.
He said: "You have a broad range of business practices, some of which, they're not illegal but they are highly undesirable."
Lesley Titcomb, chief operating officer at the FCA, was asked what she thought of the idea of banning payday loans altogether for people who already have one.
She said: "Certainly multiple loans are a problem. It's difficult to see how a second or third loan to somebody who's already having trouble repaying the first is really lending to someone who can afford to repay."
Ms Titcomb promised "strong supervision" by the FCA to make sure payday firms do not try to get round its planned crackdown by "repackaging" old debts as new loans.
She said research has shown that when people are watching payday loan advertising: "They are not thinking about their ability to repay in the longer term. They are just thinking about the here and now."
Speculating on why payday lenders advertise between programmes aimed at children, she said: "I imagine there are two reasons - o ne is that mothers will be watching with their children, and the other ... is pressure from the children on the parents."