No one likes being told what to do! Whether it be not to exceed the speed limit, not to drink too much or regulation governing how to run a business.
If you ask many people involved in regulated businesses most of them would say that they would rather not be regulated at all. This is not just true in the finance sector but probably across many industries.
I would also suggest that those who are operating in a way that is either outside or close to the limits of the current regulation would often be the ones with the most opinions about this.
I have worked most of my life within regulated businesses, these have included Aviation, Claims Management and now the Short Term Loans industry. I was working in claims management at the point where regulation came into force for this industry so have both experience of the before and after. Before we discuss why the short terms loans markets should be regulated, I think we can draw a lot from this.
Prior to regulation anyone could set up as a claims management company. There was no requirement to have the skills to do the job, no standards that must be met and the protection for the consumer was left to the mercy of the standard UK legal instruments (E.g. Distance Selling Regulations, and standard consumer protections). While these regulations have their place, they are not detailed enough to afford adequate protection in specific industries.
The industry became swamped with claims management businesses, some did a very honest and professional job while others simply bound the customer into a legal contract, did a very shoddy job, and took their cut at the end. In the end there were only 2 groups who suffered. The consumers, as they had no way of knowing who was good and who were the cowboys, and the reputable and honest companies who could not compete with them. In addition to this the industry got a bad name, and like many things in life even the good players were tarred with the same brush.
After regulation the industry was cleaned up dramatically. The cost of regulation meant only those who were serious would pay, the regulation required ALL players to be open, reasonable and honest with the customers and the work had to be done in a professional way. In return for this the business benefited from a reduction in competition, would not suffer by ‘doing it right’ and would benefit from the industry losing its bad reputation.
The short term loans market is not dissimilar to claims management, except that the regulation has already been around for many years. For regulation to be effective it must:
- Protect the genuine customers
- Not allow those customers who are trying to defraud a place to hide behind
- Be enforced properly to create a fair playing field for those who do comply
Without regulation the it would be a mess, loan sharks would be rife, lending to people who couldn’t afford it, charging interest at rates that make the 2000% – 4000% on a payday loan look small, not making sure customers fully understand the product and then when they do not pay it would be debt collection with the aid of such mechanism as the baseball bat or broken limb persuasion. So while deregulation is a definite no, the next question is whether the current regulation is enough.
Payday loans companies have more than their fair share of critics. The media and politicians, even the Church has something negative to say about them.
While the Payday Loan (and we will include instalment loans in this definition) is an expensive product compared to a high street bank loans or mainstream credit cards, the people that take payday loans are unlikely to be able to access such credit. The rates have to be high to reflect the risk associated with these borrowers, otherwise the lenders would not be able to survive. For these customers the payday loan is a life saver.
The problem with Payday Loans is those lenders operating on the very edge of current regulation (or in some case just over the edge) and are causing the customer genuine detriment.
The biggest problem is unaffordable loans. There are many companies that will not complete adequate affordability checks and then force the customer into and endless stream of rollovers. For the lender this is great as they get month on month of interest and still claim the capital, whereas the borrower has no choice but to pay or go into debt.
So other than the rollovers, why would the lender make a loan that is unaffordable? Some lenders will work on the principle that if their debt collection action tough enough, then when you don’t pay they use heavy tactics to extract their money.
So how could regulation go wrong?
There are two ways that regulation can go wrong, and these are controllable by the regulators themselves. Firstly, the protection that needs to be given to genuine borrowers must be ring fenced so that it doesn’t afford unjustified protection to those who are trying to defraud. An example of this would be insisting that forbearance is given to the ‘won’t pays’ and not just the “can’t pays”.
The second is not enforcing each and every rule unilaterally. Whatever rule is in place must be enforced. Otherwise there is a risk that those who do immediately adhere 100% with the regulation will be at a disadvantage to those who don’t. Most people will accept restrictions and costs if the regulations require if they can see that everyone is in the same situation.
In conclusion the short term loans market MUST be regulated, and the regulations must be adequate to ensure that the customers are fully protected, but they must also allow lenders to recover funds from those deliberately avoiding the debt assure that they are enforced.
In April 2014 the Financial Conduct Authority will take over regulation of Consumer Credit, and long with this comes many new rules. Some will be good for the lenders and others may cause harm to their profits, but the proof of whether they are the right regulation will be if they facilitate the creation of better product that change the view that many have of Payday Loans.
About the author:
Simon Hatch is the co-founder and Director responsible for Compliance, Risk and IT, at True Blue Loans (www.trueblueloans.co.uk) a company offering instalment loans over 3, 6 or 9 months, with fixed repayments and no fees, just daily interest.