Weekly Blog by Philip King, CEO of the ICM - 'Catching the bus'

It's been a busy news week. I was interviewed on Jeff Randall Live on Sky News on Monday evening about the government's proposals to cap the cost of Payday Lending.  A bit like buses though, news stories of interest tend to come in twos and threes, and I had a view on the three main news stories the programme was covering.

Firstly, the Lawrence Tomlinson report containing allegations that RBS had pushed healthy small and medium-sized businesses into administration to strip their assets and then buy them back cheaply to make a profit.  As the MP Mark Garnier said in his interview: "I'm not a lawyer, but these allegations, if true, look a lot like fraud to me." How many credit professionals are looking back at bad debts incurred where they thought their decision to supply had been reasonable based on their assessment of customer risk only to be caught with a bad debt when the customer went in to insolvency and wondering if the allegations might be true?  Apart from the obvious impact on the businesses forced into insolvency, what might the wider impact on their suppliers and the economy be?

Secondly, the government was selling £900m of student loans to a debt management consortium for £160m. The loans had been taken out by students who started courses between 1990 and 1998.  Part of the reaction to the news was that debt collection companies would act irresponsibly and aggressively in recovering debts that have so far not been collected.  The Student Loans company doesn't have the best record in managing its loan book and particularly the older elements of the portfolio.  We're told the terms and conditions of the loans are not going to be changed as a result of the sale and, if engaging third parties increases the recovery of funds to the public purse, then I'm all for it.  Perhaps the debt collection companies will just apply good credit management principles and collect money that is overdue from people who can - and should - be repaying it.

Thirdly, the Chancellor's announcement that government will impose a duty on the FCA to cap the cost of payday lending.  Setting on one side the suggestion that the announcement is one of political expediency, there are bigger questions to be answered. How will the cap level be determined?  The quoting of the Australian model with its cap of 4% per month seems to overlook the 20% arrangement fee that can be charged, and the punitive penalties for late payment that can be applied.  And the last thing we want is for the cap to make short-term lenders flee the market forcing borrowers to use loan sharks instead.

I'm not averse to the principle of restricting overt profiteering that can exploit the most vulnerable but let's not forget that payday lenders aren't the only guilty parties here.  As I said to Jeff Randall, I went online and looked at what £100 payday loan for a month would cost.  I'd have to pay back £137.15. If I took an unauthorised overdraft on my current account with a High Street bank the cost would be £5 per day, capped at £95 in a month.  On another current account I looked at, the cap would be £150, and both of these accounts would also charge transaction fees on top.  On this comparison, charges of £37.15 sound a snip!

Equally big issues with payday lenders are the opportunity for borrowers to take out multiple loans with multiple lenders, the availability of repeated roll-overs, and - as I've said in this blog before - the failure of lenders to carry out adequate affordability checks ahead of granting loans.

Back to my buses analogy, I guess next week will be devoid of any significant news and we'll be back to following the exploits of celebrities and their social lives!

 

Weekly Blog by Philip King, CEO of the ICM - 'Neither borrower nor a lender be?'

I was in Basel earlier this week for the ICTF Conference. It's always a good opportunity to catch up with credit professionals from around Europe and beyond, and great to hear some of the issues being faced and how they're being addressed.

 

Flights and travel gave me the opportunity to read the FCA's recently published consultation: 'Detailed proposals for the FCA regime for consumer credit'. We'll be providing the opportunity for members to submit comments through our November ‘In Brief’, and I won't go into any detail on the 193 pages, nor the 387 pages of the Appendices here. I do though want to make just one comment about the FCA's stated intention to focus on the Payday Loans sector.

 

I've written several blogs over recent months arguing that the OFT should, in its final year, take action over the absence of evidence that affordability tests are being adequately carried out by payday lenders. I've consistently asserted that this is the key failure of the market and should be addressed with vigour. It should, after all, be the determinant in all credit decisions regardless of sector, size or nature.

I've given up hoping that the OFT is going to take any serious action on this in its final days but I was encouraged to read these words in the consultation: "Our proposals.........are based on the principle that money should only be lent to a consumer if the consumer has the ability to repay and in a sustainable way." And in his foreword, FCA Chief Executive Martin Wheatley says: "The OFT affordability guidance is good, but the OFT’s own research shows too few firms implement it. We will put it into our rules and guidance, and enforce this."

 

Martin's last two words are the most important - let's hold the FCA to account and ensure it delivers.

 

 

Weekly Blog by Philip King, CEO of the ICM - 'Painting a grim picture of Payday lenders'

I've been inundated with government papers over the past few weeks such as the Insolvency Practitioners Fees Review, the Review of Pre-Pack Administrations, the Simpler Reporting proposals for Micro Businesses, the Money Advice Service proposals to improve the quality of Debt Advice, HMRC and DWP debt management strategies, the Treasury and FSA consultations on the transfer of consumer credit regulation from the OFT to the FCA, the proposed EU Data Protection changes, and a host more.  As a result, I've been a bit tardy in getting to read in detail the OFT's Payday Lending Compliance Review.  Its contents are shocking.

 

Let me make it clear from the outset that I am not in the 'outlaw all payday lenders' camp; I believe that such products have their place and when offered, and used, sensibly can be useful to a good many people.  But that doesn't excuse the findings in this review.  Among the highlights, or perhaps I should call them lowlights, the review reports that 28% of loans issued in 2011/12 were rolled over at least once, with at least a third of lenders actively promoting rollover at the point of sale and a number agreeing to rollover loans even after a borrower has missed a repayment.  By way of example, staff in two large high-street firms were told that rollovers were regarded as 'key profit drivers' and that staff were encouraged to promote them. In one case, this was even written into the training manual!

 

Equally worrying to me though is the absence of affordability checks.  Most lenders asserted that they undertook affordability assessments at the initial loan stage yet the vast majority were unable to provide satisfactory proof that they had applied such assessments in practice.  Only six of the 50 lenders visited were able to provide documentary evidence that they assessed consumers' likely disposable income as part of their affordability assessments.

 

The basic premise of credit management, whether the customer is a multi-national business, a small trader, or an individual, is to determine whether the customer is 'good' for the amount of credit being extended and whether it can afford to repay in accordance with the agreed terms. Furthermore, in the case of consumers, assessing creditworthiness is a requirement of the Consumer Credit Act and OFT guidelines.

I know the majority of the inspections were carried out before revised industry codes of practice and the sector-wide Good Practice Customer Charter came into force but the revelations of the report paint a wholly unacceptable picture.  The enforcement action already started and the 12 week deadline to address all areas of non-compliance is welcome, the proposed investigation by the Competition Commission makes sense, and the expectation that the FCA will take a more rigorous approach when it takes over consumer credit regulation next April is encouraging.

 

In the meantime I hope the OFT will live up to its promise that it will not gradually fade away but will continue to act vigorously in the period until it is replaced by the FCA.  A year is a long time in the consumer credit market.

 

I'll be welcoming a couple of guest blog writers over the next two weeks. Charles Wilson, Managing Director of Lovetts Solicitors, an ICM Fellow, and a member of our Technical Committee will be writing next week, and our own Debbie Tuckwood, ICM Director of Learning & Development, the week after.  I'll be decorating over Easter so will be looking forward to returning to normality thereafter!

 

 

Weekly Blog by Philip King, CEO of the ICM - 'Measure for measure'

The Government has this week published its response to the BIS Select Committee's report on Debt Management published in March and it makes interesting reading.  The original report contained 23 recommendations and the government responds to each one in turn. The document can be found here and what pleases me is the measured and proportionate nature of the responses.

 

The timetable for the planned review of the regulatory framework, including the transfer of regulatory powers from the OFT to the FCA, is set out with the final transfer expected to take place by April 2014.  Having a clear timetable and plan including expected consultation dates is helpful.  The more interesting aspects, however, relate to payday loans and debt management companies.

On payday loans, the Government refers to the work it has been carrying out with the four main trade associations representing over 90% of the payday loan market to improve consumer protection in their codes of practice.  These improvements together with the OFT’s review investigating levels of compliance with the Consumer Credit Act are, in my view, the right approach before any more stringent measures are considered.  Furthermore, the codes include measures to address the issues of rollover loans, affordability assessment, and continuous payment authority, and the Government has undertaken to review how best to include high-cost credit transactions in credit files.

In summary, close engagement with the trade associations to introduce enhanced consumer protections into their codes of practice and their commitment to publish a common industry-wide Good Practice Customer Charter setting out in a clear, concise and user-friendly format what customers of payday and other short-term loans should expect from their lender is positive and encouraging.  One can never condone poor practice but I believe payday loans have their place in certain circumstances and meet a particular need.

With regard to Debt Management companies, the Government is working with stakeholders to develop a Protocol of best practice for debt management plans which will cover transparency of fees and costs (particularly where they are upfront), misleading advertising, and safeguarding client accounts.  Again, in my view, working with the industry and trade bodies makes absolute sense before considering legislation and heavier regulation.

 
It's worth also noting that – in both cases – the approach being proposed will deliver faster results than would be achieved by the introduction of legislation.  Finally, as an aside, I have to mention again my particular soapbox that Debt Management Plans should be reported in the insolvency statistics so that the published numbers are a true representation of personal insolvency levels.