For good reason payday lending has been subject to considerable scrutiny, but there's another problem to solve: that of broker firms selling credit applications to the highest bidding lenders
For good reason payday lending has been subject to considerable scrutiny, but there’s another problem to solve: that of broker firms selling credit applications to the highest bidding lenders
There’s a truism that all governments should listen to, which has never been quite so apt as to when it applies to firms dealing in short term credit: regulators are always two steps behind the firms they are regulating. So while it is with much enthusiasm that I (regularly) talk about successive victories over the payday lending industry, I add caution by warning that with strong rhetoric by politicians usually comes business mastery.
In short, the scandals that rock the payday lending industry are not over, far from it; and we’ve plenty of international examples that suggest as much. An industry as embedded to keeping financially pressured people in more debt, as payday lending is, will always try and find different ways to keep the money coming in.
The next one, for my money, will be the existence of payday loan brokers. The difference between these firms, and payday lenders themselves, is key: one (payday lenders) provide the loans that consumers take out and pay back, while the other (brokers) bid the information of applicants that have used their services to lenders who will pay the highest price for them.
The potential for scandal is perhaps obvious: already the Financial Conduct Authority, who regulates the payday lending industry, has found that many brokerage firms do not tell consumers they are brokers. Owing to this, consumers are often left unaware that they are paying added fees on top of the already bloated prices that payday lenders will charge them.
While the regulator, to be fair to them for one moment, has signalled a desire to crack down on these firms, and their unruly practices, finding them out is extremely complicated. For a start many of these brokerage firms operate outside of the UK, often online, which adds an extra complication to an already under-researched “wild west”.
Citizens Advice has been ahead of the curve looking into the effects of credit brokerage. In January of this year the charity released figures showing that around 2 in 5 people who complained to them about brokers did so because of up-front fees. Of those, 58% were charged unexpected fees, while the other 42% were subject to deceptive practices including charging much higher fees than agreed.
Being disobedient sorts, it was found by Citizens Advice that broker firms passed on the details of around a fifth of those consumers who made a complaint to other firms; indeed the details of the poor are worth a lot of money.
More recent data, this time published by Citizens Advice Scotland, shows why without significant regulatory attention the problems caused by credit brokers for payday loan firms could get even worse. For example they found the following this week:
• In 2013/14, there were 254 credit broker cases from Scotland reported to the Citizens Advice Consumer Helpline: a 42% increase on 2012/13;
• 65 different credit brokers were named in the cases, although almost half of reported cases (121) involved just seven specific brokers;
• 71 credit broker cases involved personal details being passed on to numerous other brokers. In these cases, on average, more than four different brokers took fees costing the consumer an average of £264 with no guarantee of a loan;
• In 55 cases, a consumer was denied a refund despite asking for one within the 14 days allowed under law; and
• 4 out of 10 did not make it sufficiently clear to consumers that they were a broker service who did not offer direct loans.
Of an analysis of 280 cases involving credit brokers by the Citizens Advice Consumer Service, average fees taken by the firms was £264, with fees ranging anywhere from £40 at the lower end to £600 at the more extreme.
Where this became a major issue in the US, firms who would have been covered by rather strict small-dollar loan regulations, which regulated price as well as the practices of firms, were setting themselves up as credit repair organisations. According to the US-based Center for Responsible Lending, back in 2009:
“Under this scheme, payday lenders charge the maximum interest rate allowed on the underlying loan plus an additional “broker” fee, typically ranging from $20 to $25 per $100, resulting in loans with an effective annual percent interest (APR) in excess of 500%.”
While federal regulators carried out a major crackdown on payday lending firms in 2005, who back then in the US were attracting the sorts of controversy that has only just started to catch on here in the UK, credit broker firms started to rise in number, adding extra sums onto the debts of already hard-up people.
While many of the brokers in the UK are simply leeching and profiting from poverty by pretending to be the very firms lending money, not go-betweens making money by selling bids, they have until now enjoyed relatively little scrutiny, and that really must change.
By no means is it too much to ask that a price cap on the amount that a brokerage firm can charge be put in place, to save consumers from these leeches. Furthermore, the FCA should increase its efforts to ensure clarity on whether a firm is a broker or a lender.
Consumers themselves should review their relationship with brokerage firms and decide whether they think they have a case with the financial ombudsman (so far this year more than 10,000 people have contacted the Financial Ombudsman Service to complain about credit brokerage websites, more than double the number in the whole of 2013).
Loathe as I am to say it, scandals within the payday lending industry have not ended yet, particularly with those who entertain close relationships with these lecherous broker companies. We need to ensure it is no longer a hidden issue.
Carl Packman is a contributing editor to Left Foot Forward
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