Yesterday’s OFT report on the performance of “PayDay Loans” companies was, let’s be frank, damning. OFT Paper 1481 gives most of the lenders in this market a tiny window of twelve weeks to demonstrate compliance in five key areas. These are,
- Making sure borrowers are aware of the full costs of the loan, rather than simply advertising emphasising speed and accessibility of funds
- Conducting adequate affordability assessments of new customers and of customers who need to roll-over loans
- Acting with a greater degree of forbearance with customers who run into financial difficulties
- Restricting firms from using aggressive debt collection tactics
- Improving internal procedures, particularly in area of customer complaints
The OFT is already investigating some firms beyond these general requirements and the threat is to remove the banking licences of those firms that cannot demonstrate they meet the standards the OFT require of them. In theory, some firms could be shut down by the end of June, if not earlier.
It’s worth beginning a discussion of the ethics of this sector by making a case for PayDay lending. In principle, PayDay lenders can serve a useful purpose in providing small, short-term loans to help tide someone over an immediate financial difficulty. Take the example of someone who needs £100 to tide them over for a week or so, but who is right up to the limit on their bank overdraft. Going to a payday lender (let’s use FridayFriday as an example – they brand themselves as “ethical”) would incur a cost of £25 for borrowing the £100, plus an administration fee of £4.95 – that’s a little under £30. Now look at what one of the high street banks charges for unauthorised overdrafts – you’re looking at fees for multiple transactions taking your balance below the overdraft limit in the region of £40 / £50, and these fees may be taken from your account at a time not of your choosing leading to further solvency problems. In this scenario the PayDay Lender is a cheaper alternative, and as long as you pay back the loan on time has provided a useful financial service.
Of course, the key factor in this is paying on time. The OFT research indicates that the PayDay Lenders make a substantial portion of their profits from customers who fail to pay on time. When this happens they can incur late payment charges and extra interest costs as the loan is refinanced for another month. The other problem at this point is that it is very difficult for the borrower to now look elsewhere to move the loan – other PayDay Lenders are less likely to take over the debt and, like it or not, high street banks are averse to dealing with customers who are already in the sub-prime market. This means that defaulting customers often end up with debts that are many significantly higher then the original sums borrowed and have little opportunity to deal with the situation adequately.
So are PayDay Lenders caught between a rock and a hard-place? It’s not wrong to make money from providing a useful service, but it seems that far too often the big firms are landing themselves in trouble by the negative reputational effects of what happens to those who cannot service the debt they have run up. If that’s so, then does the OFT Report offer a window of opportunity for these firms to improve their working practices and in doing so their perception as ethical financial operators? While the Christian understanding of Usury has been transformed since the sixteenth century after Calvin (though Luther began the change of thinking in this area) began to argue that lending at interest was not in itself sinful, there is still a sense that charging for borrowing to those who need the money just to feed themselves is a practice of dubious moral practice. However, if the PayDay Loans Companies can be transformed to act as responsible lenders, might they then become agents of good rather than evil?