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This response is to the Proposals for a price cap on high-cost short-term credit (CP14/10) on behalf of Fair Finance www.fairfinance.org.uk.
Fair Finance is a social business based in London. We offer a range of financial products and services designed to meet the needs of people who are financially excluded. We aim to revolutionize personal finance, starting with the people whom the mainstream providers have left behind.
We are committed to providing high quality products and service that are affordable and accessible. Wherever possible we work in partnership with other companies and agencies that share our goals.
Most of our customers are ignored by the mainstream financial services industry and exploited by the sub-prime financial services industry.
We welcome and note a number of positives within the proposal:
1. We are glad on the clarity regarding use of Continuous Payment Authority as this has been abused and poorly regulated for some time.
2. We are pleased that some of the less profitable and poorly performing payday lenders will leave the market.
3. We are very pleased that for the first time there will be some enforcement of checking affordability of borrowers before lending.
However, we have a number of concerns about the proposal. Many of these are linked to the Summary of Impacts, in Annex 1 on Cost Benefit Analysis. (p.61-63).
1. The profitability of the 3 biggest players (representing 53% of the market) will not be affected by the price caps. In fact the proposal suggests that it will create a market monopoly led ironically by Wonga. We cannot believe a monopoly like this will be good for customers.
2. The summary claims that on average, consumers who will no longer have access to short term credit will be better off. Then you say that there will be no longer term negative impacts on well-being or financial distress for those customers who would not have loans. This seems an odd statement.
You could say that on average there will be no negative impacts; but this average is going to cover a wide range. There are obviously going to be some people who would have benefitted from access who are now not going to have access; and some people who, once access is denied will turn to the illegal sector. The FCA should not pretend that these rules will not be very bad for some people.
3. We worry further about a known social impact of at least 10,000 people (although the data here is subjective and based on surveys) who are likely to use illegal moneylenders. While most of these are likely to be poor, vulnerable and those with few or no financial options; there is no suggested mitigating policy to counter this impact.
4. There seem some loopholes in the price cap proposal – instalment loans in the US, extended loans terms in certain US States and use of alternative lending systems to avoid rate caps in Australia are ways around the current set up.
5. There seems some ambiguity regarding roll over loans, which could be confused with top up lending or repeat lending to existing clients. While we support the principle of limiting harm to people in financial distress, the current wording limits lending organisations from serving existing clients with further services.
6. Over 40% of payday loans come via brokers and online lead generators whose practice is not affected by this proposal. This is a glaring omission of a part of the industry that misleads clients and is rife with customer abuse.
7. In its current form it seems clear that the benefits will be enjoyed by those people who use short term credit as a choice (i.e. have reasonable credit ratings but prefer Wonga to their bank overdraft) and the costs will be borne by those who have fewer or no choices. In other words, there is redistribution of social welfare from the poorest to those who are better off.
In summary this is bad for consumer choice and bad for those people who suffer the worst forms of financial exclusion. It is good for the major market players; and good for those with credit histories good enough for them to be users of short term credit by choice.
The High Cost Credit market requires better regulation, many current practices are poorly maintained and there are organisations in the sector that require censure.
We are keen for useful and positive regulation that ensures people have access to credit products from providers they can trust and will be treated fairly if they fall into trouble.
We recommend better enforcement of affordability checks, collection practices and default management should be the focus; alongside encouraging greater competition in the sector to promote better customer service.