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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1649-ii
House of COMMONS
TAKEN BEFORE the
Business, Innovation and Skills Committee
Tuesday 29 November 2011
Peter Crook, John Lamidey, Caroline Walton, Mark Lyonette and Des Milligan
John Fairhurst, Richard Wharton, Melanie Taylor, Chris Davis and Andrew Smith
Evidence heard in Public Questions 57 - 140
USE OF THE TRANSCRIPT
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Taken before the Business, Innovation and Skills Committee
on Tuesday 29 November 2011
Mr Adrian Bailey (Chair)
Mr Brian Binley
Mr David Ward
Examination of Witnesses
Witnesses: Peter Crook, Chief Executive, Provident Financial Plc, John Lamidey MBE, Chief Executive Officer, Consumer Finance Association, Caroline Walton, Corporate Affairs Director, Dollar Financial UK Ltd, Mark Lyonette, Chief Executive, Association of British Credit Unions Ltd, and Des Milligan, Chief Executive, National Pawnbrokers Association, gave evidence.
Q57 Chair : Good morning. Thanks very much for agreeing to come before the Committee. We are not actually scheduled to start until 10.45, but because the Government brought forward the timing of the autumn statement we are on a very constrained timetable this morning. So I am going to ask you to just go through the preliminaries before 10.45, and then we will start the questions at 10.45. Do not feel that you all have to comment on every question. If you wish to disagree on something, that is helpful and please do. If there is something you feel you need to add to any responses given earlier, again feel free to do so, but I do not need everybody repeating the same points. Could you introduce yourselves for voice transcription purposes? We will start with you, Des.
Des Milligan: I am Des Milligan, Chief Executive of the National Pawnbrokers Association.
Mark Lyonette: I am Mark Lyonette, Chief Executive of ABCUL, the Association of British Credit Unions.
Caroline Walton: I am Caroline Walton, Corporate Affairs Director for Dollar Financial UK Ltd.
John Lamidey: I am John Lamidey; I am the CEO of the Consumer Finance Association.
Peter Crook: I am Peter Crook, Chief Executive of Provident Financial Plc.
Q58 Chair : Thanks very much. We will not actually start the questions until the allotted time. If at the end of our session there are any questions we have not had time to ask, we will put them in written form to you and would welcome your written response. Similarly, if there are any answers that you would wish to give to questions that we have not asked, equally feel free to submit those in written form.
I shall start with a very general question. If one of you answers, others can comment if they wish to add to it, but do not feel obliged to. First of all, who are your customers? Why do people use your services as opposed to mainstream financial institutions such as banks? I will start with Des.
Des Milligan: Our customers come from all walks of life. Historically, pawnbroking customers were relatively poor, C2s and Ds, but more recently that is changing, probably because the banks are not lending as much. Now there are As, Bs and C1s, so all sectors of society are now going to pawnbrokers. The reason they tend to go to pawnbrokers rather than banks is that they tend to fear banks, and they do not trust them. What they like about the pawnbroker is that it is very transparent, clear, fast and friendly for them.
Q59 Chair : It is an interesting cultural change when pawnbrokers are considered far more respectable than banks.
Des Milligan: Absolutely.
Q60 Chair : Anybody wish to add to that? Peter Crook.
Peter Crook: Thanks, Chairman. Provident Financial is primarily a home credit lender. I think home credit is unique in how it works. Firstly, the loans are all underwritten face to face, and thereafter collections are made weekly at the customer’s home. The price we charge is fixed, so the amount a home credit customer owes can never go up. It is quite different from many other lending products in that respect. When I look at why people use our services and which people use our services, they tend to be families on low incomes. Usually it is the female of the household, typically in a family of three or four, typically in work. If you look behind why they use us, there are three or four things that are really important to them.
Firstly, the application process is not too onerous, and it is face to face, so it is human; the customers can understand features of the product and they have the chance to talk somebody. Secondly, they appreciate the ongoing relationship that they have with the company; there is face-to-face contact every week, which makes them comfortable. Thirdly, and very importantly, they worry about what might happen when they miss a payment. With home-collected credit, there are no other penalties or charges, so if they do miss a payment they know we are forgiving and there is no extra burden. Primarily they like the transparency of the pricing. They understand where they are, what the weekly rate they have to pay is, and the fact that no other interest or fees are going to be added.
Q61 Chair : Just a quick supplementary. The fact that you are flexible and considerate in terms of non-payment, is that not abused?
Peter Crook: No, I do not believe it is. I think customers really value the fact that they can miss a payment, because from time to time they will have bumps in the road; their income may be lower one week, their expenses may be higher one week. Ours is very much a weekly product because that is how these customers tend to manage their finances. They budget on a weekly basis, so if they can miss one week without being hit with a penalty charge or with extra interest, that is a feature that they tell us they really value.
Q62 Chair : What is your default rate?
Peter Crook: We lose between £25 and £30 of every £100 of borrowing, so clearly it is higher than a mainstream lender.
Q63 Chair : That is higher. And what sort of percentage of borrowers would that be?
Peter Crook: It is a fairly similar percentage, as the vast majority of loans we offer are in the £200 to £500 range, so we do not get a small number of borrowers creating a large debt charge.
Q64 Chair : I think you have covered some aspects of my next question, but what are the characteristics of the products you offer to consumers that differentiate you from others? John, can you start? I would be grateful if you could make your answers very pithy.
John Lamidey: Yes. CFA represents lenders who offer very small short-term loans, often called payday loans. Our customers come from across the age range, across the income range, but they are characterised by the fact that they have to have a bank account, they have to have a job-94% of our customers come from a household with at least one full-time worker-and they have to have disposable income. There is no significant crossover between our customers and the home credit customers, or indeed the customers of credit unions, which we will probably hear about in a minute.
Q65 Chair : Thank you. Caroline?
Caroline Walton: Just for the benefit of everyone, Dollar Financial is not a trading name. Dollar Financial UK has several trading names. We are also owned by Dollar Financial Corp, which is a Security and Exchange Commission publicly listed company in the US. Here in the UK we trade under the names of The Money Shop, Payday UK, Merchant Cash Express, and we also have high-end pawnbrokers-Suttons & Robertsons in London and Duncanson & Edwards in Scotland-so we have a range of different brands. In The Money Shop, which some may recognise from their constituencies, we have a range of products ranging from foreign currency, money transmission, pawnbroking, buying of gold, third-party cheque cashing and payday lending, which you have heard a little bit about from John.
The average customer who comes in for the payday loan is around 35; the average income is around £18,000, which is typical of the industry. All customers who come in for a payday loan have a bank account, so they are not financially excluded people, and they all have regular incomes in order to get the loan. The average loan will be less than £300.
I think the reason we differ from the mainstream is that the mainstream are not offering this kind of small value short-term loan. We hear quite a lot from our customers that they are struggling to get short-term small value loans from their banks. The other alternative for them is unauthorised overdraft, where fees are significantly higher than they are paying for the payday loan.
Q66 Chair : Mark, do you wish to chip in?
M ark Lyonette: Sure. I represent the credit union sector. There are something like 400 credit unions in Britain-England, Scotland and Wales-serving about 900,000 people now. Membership growth is reasonably healthy at 15% a year. Who are our customers? Well, it is quite a wide range, but the vast majority of our members are on low or indeed very low income through to about average income. We have what we used to call industrial credit unions, where people are on much higher incomes, above average incomes, but the sector predominantly serves low and very low income people.
Des Milligan: Can I just explain the characteristics of pawnbroking, because I think most people have heard of pawnbroking but might not actually know how it works? Customers go to the pawnbroker usually with jewellery; gold or diamonds are predominantly the things that are pawned. They get a cash loan after showing ID and various other issues, but very quickly-within normally 15 or 20 minutes. However, because they are borrowing money against assets that they already own, pawnbroking is really very different from other types of lending. If you think about it, you could just sell the items if you wanted to, because the pawnbroking loan is only a fraction, normally 10% or 15%, of the value of the jewellery that they have brought.
We never get people into debt, and because of that customers are incredibly satisfied. We commissioned some research from the Personal Finance Research Unit at the University of Bristol, which I saw the other day is the same research company that BIS are using now, so they are very good. They interviewed 500 pawnbroking customers, and 95% of them said they were either satisfied or very satisfied with the service.
Q67 Mr Binley: I come from a family who, a very long time ago, used the Provi regularly, normally to buy school uniforms and stuff like that, which was a sizeable expenditure for our household. I was concerned to hear you talk about a 30% default. Is that so, or did I misunderstand you?
Peter Crook: That is correct, Mr Binley. We write off probably 25% to 30% of the loans.
Q68 Mr Binley: Your write-up to cover that default must be 40% or 50% on your other loans.
Peter Crook: We price for the risk that we take.
Q69 Mr Binley: I understand that, but is that the case? Just so I understand, is your write-up 40% to 50%?
Peter Crook: Yes, we charge an all-in price that reflects the risks that we take and the costs-
Q70 Mr Binley: No, that is not the question I asked. Is your write-up 40% to 50% to cover that 30%?
Peter Crook: Yes, in effect it is.
Mr Binley: It is. Thank you.
Q71 Katy Clark: What does that mean as an interest rate? What would your interest rate be?
Peter Crook: If you borrow £100 from us you are going to repay £3.50 per week over 52 weeks, so that is a total of £182. The APR on that loan is 272%. From our perspective, and I think from most of our customers’ perspective, and as you heard indeed last week from witnesses such as Martin Lewis, the APR is really not a very good measure for the costs of short-term credit. It is not something our customers particularly understand.
I think one of the biggest issues is that products like ours include all the charges; there are no extra fees, interest or add-ons, so everything is in the APR. Many other forms of borrowing do not include all charges in the APR, such as bank overdraft lending, for example. So I think it is quite difficult to compare APRs across different credit products because in many cases the APR does not include all the costs of borrowing. Our customers tend to look for the total cost of the credit and what the weekly repayments are.
Q72 Mr Binley: I am concerned about debt spirals, because at the rate we are talking about, that can add to it sizeably for a family. I am concerned about the checks and balances you might put in place, because it seems to me that you need to weed some of your customers out, quite frankly.
Peter Crook: Let me-
Mr Binley: Let me ask the question first. What measures do you take to ensure that people are not borrowing money who should not be and are in no position to pay it back? That seems particularly relevant following the question that I posed before.
Peter Crook: Yes, thank you. Firstly, to deal with the point on debt spirals, if a customer borrows on a home credit loan, the amount they owe cannot go up as we do not add extra fees or charges. So the amount they owe at the outset cannot change; it will not increase. If a customer misses a payment, in effect we will come back over a further week at the end of the loan. We do not roll over loans and add further charges, so I do not believe home credit contributes to so-called debt spiral.
In terms of your question on how we underwrite loans, we think about the three Cs. We look at character, capacity and condition, and our loans are underwritten face to face. Our agent will assess whether they believe the customer’s intent to repay is good, and indeed whether there are any other issues-alcohol, drugs, mental capacity-that would preclude us from serving a customer. That assessment is carried out face to face in a customer’s home, so as you can imagine, if you are in somebody’s front room you will get a pretty good feel for whether they are of a character that is going to or will want to repay.
In terms of capacity, we are looking at the household budget, so we are looking at the money coming into the household, and how safe, secure and persistent the income streams are. We are usually lending to the lady of the house, but generally we are looking at multiple streams of income coming into the household, usually from the man in the house as well, in order to fund the repayments, and we are looking at the household bills. Our agents can take a forward-looking view, so they can factor in potential increases in fuel bills and so on.
Finally in terms of conditions, we are looking at what other obligations a customer has and how well they are looking after them. So to be honest, it is a pretty sharp assessment of the customer’s circumstances, as it is done face to face and in a forward-looking way.
Q73 Mr Ward: You are obviously dealing with what could be deemed high-risk clients. In your case, Des, you just keep the gold or jewellery if there is a default. What procedures are used within the industry to deal with this 30%? Presumably you do not just announce that you are going to write it off. What is the practice in the industry in terms of trying to recoup? Do you pass the debts on?
Peter Crook: In Providence’s case, David, obviously we are calling on the customer face to face, so we generally have the ability to diagnose what the problem is. If it is a temporary problem, we will not take a payment for a period of time or we will take part payment until the customer’s circumstances improve. If there is no prospect within a reasonable time scale of that customer bringing their account up to date, it is written off.
Q74 Mr Ward: No court action?
Peter Crook: We go to court in very rare circumstances. It is not usually cost-effective to pursue very small debts through the courts. The only reason we go to court typically is because a customer has more than adequate income and assets to pay but has decided not to. If I looked at how many people have gone to court out of our 1.8 million customers this year, it is about 250 for the first nine months.
Mr Ward: 1.8 million. That is a lot.
Chair : Can I bring in Paul Blomfield? I shall come back to you, Brian.
Q75 Paul Blomfield: You say you do not roll over debt, but how many repeat loans do you have? What percentage of your customers take out a further loan?
Peter Crook: Quite a lot of our business is repeat business.
Q76 Paul Blomfield: How much? Could you quantify that?
Peter Crook: It is probably about 80%. I think that reflects the nature of why people use our credit. They tend to dip in and out of using credit from people like us when the household budget does not balance. That could be at particular points in time when white goods or brown goods need renewing or replacing, or at seasonal times of the year when customers need a bit of extra cash.
Q77 Paul Blomfield: So although you are not rolling over debt, you have customers who are carrying large levels of credit year on year on year.
Peter Crook: We have very few customers who are always on the books. It is around 10%.
Q78 Paul Blomfield: I thought you said 80% repeat.
Peter Crook: A lot of people come back to us, but that is usually when they have finished a loan or are about to finish a loan.
Q79 Chair : Going back to Brian’s first question about debt spirals and preventive measures, would other witnesses quickly summarise what they do in those areas?
Caroline Walton: When customers are coming into the Money Shop store, for example, to take out a payday loan, they have to go through an assessment. They have to bring in a bank statement and a payslip, and they fill out a questionnaire. We also do an Experian check on all new payday customers. We go through a detailed explanation with the customer about their ability to repay that loan. Right at the outset there is quite a lot of face-to-face assessment that goes with the customer’s new transaction, as well as the credit scoring that happens, to try to avoid those situations of people taking on loans that they cannot afford.
Mark Lyonette: It may be worth adding that as credit unions we try very hard to be responsible lenders; obviously we do not want people not to be able to repay, both from their perspective and from the credit union’s perspective. I think it is worth pointing out to the Committee a couple of things we have been lobbying for and raising for some time in terms, for example, of the paucity of information in credit reference agencies, particularly the further down the income scale you go. Government itself needs to consider whether it contributes more data on debt to those agencies. Things like that are very helpful for people, such as showing a good credit record in terms of continuing to pay the rent to the housing association. All those things would be really quite helpful to make sure that we are not indebting people who cannot afford to repay. So there is another part of this around helping the industry to make better decisions, which certainly the credit unions would be very keen on.
Des Milligan: If I can make a small addition to Mr Ward’s point; at the end of a pawnbroking loan the gold is sold. That is true. Happily most people in fact redeem-between 80% and 90% redeem. If it is sold, though-if it has to be sold at the end of the day-any surplus goes back to the customer; the pawnbroker does not keep it. Incidentally, by law he has to get what is called true market value for the item, so he is charged with getting a very good price for the customer.
Chair : That is interesting. Can I come back to you, Brian?
Q80 Mr Binley: I spoke to your conference about three years ago, so I declare that interest, and I am really quite supportive of the Provi, quite frankly.
Peter Crook: Thank you.
Q81 Mr Binley: But we needed to get those facts out; I think they are important, and they make the point that you are actually responsible actually. I want to put this to Mr Lamidey particularly, because I think it hits as much with him as anybody: how do you make sure your customer understands what they are signing for when they take out a loan or when they take out credit?
John Lamidey: Payday lending is regulated in exactly the same way as all other consumer credit lending. There is no difference. We are required to provide the precontract information, the right of withdrawal and all the things that everybody else has to do. We have the huge advantage, of course, that our product is probably one of the simplest you could ever find. You borrow a sum of money, a couple of hundred pounds, and you contract to pay that money back with the charges on a particular day. There is very little to misunderstand. There are no hidden charges. Any extra charges that could occur have to be made clear up front, because that is what the regulations require. So we do not think there is any danger at all of our customers not understanding the product, unlike for example a credit card. On my credit card four different rates could be applied, depending where I got the money from. With our loans, it is very, very simple.
Q82 Mr Binley: But many of the customers who get into serious debt have, as a part of their debt loading, relationships of the kind that you have just mentioned.
John Lamidey: They may well have, yes.
Q83 Mr Binley: Let me finish my question. I am simply explaining the situation before I get there. I repeat: what steps above and beyond regulatory requirements do your members take to ensure that people are not overloaded? It is all very well to say that they know exactly what they are doing. We know that many people at all levels of society, in an acquisitive society, in fact think they will get by without really deeply considering the concerns, and that is why they get into trouble, so I wonder how you go the extra mile.
John Lamidey: Firstly, there are two different delivery methods. You have heard from Caroline the delivery method from high street stores. We also have a delivery method online, so people can apply for a loan and contract for it online.
There are four specialist businesses operating in the UK that provide data and indeed identification verification to payday lenders. One of the difficulties we have had with the mainstream credit reference agencies is that they were built up on mainstream lending and their data is normally only refreshed once a month. That is not good enough for us, because the whole length of the loan may only be a month. We have specific businesses that are offering close to real-time data on people’s other commitments, so we are able to check with them.
I have to say that with online applications we turn down about nine in 10 applicants. We have a very high turndown rate because of the checks we undertake to make sure that people are creditworthy and the loans are affordable for them.
Q84 Mr Binley: Good God, you are worse than banks at the moment.
John Lamidey: In what sense are we worse than banks?
Q85 Mr Binley: If you are turning down like that. Could I go on to my next question, Mr Chairman? Thank you. I want to talk particularly about payday loans, which is a growing business. I think the number has gone up from 1.2 billion in 2009 to 1.9 billion in 2010. That is a massive sector increase. We have heard that the number of people with unmanageable debt has increased. My guess is-you might correct me-that payday loans are related to the rather more desperate end of the borrowing sector. Can I ask if you think there is a correlation between those figures, and am I right in thinking that more and more people are turning to payday loans because the world is becoming a more difficult place for them?
Caroline Walton: There is quite a bit of evidence to suggest that those on the lowest incomes are not actually using payday but are using revolving credit, in terms of credit cards and overdraft facilities, and they are increasing, obviously, as times are becoming difficult. What we find is the payday loan being used as an alternative to going into unauthorised overdraft, and I believe that what we have seen is an increase in payday lending because there is more awareness of this alternative form of lending. For many years people have been subjected either to borrowing long-term higher values or to borrowing in the unauthorised overdraft arena.
It does not really matter whether you get bad publicity about payday lending because awareness of it has increased. People are seeing a real, viable choice between the alternatives that they have had and what they could get today from a payday lender, so I would not suggest that desperate times have driven people to a payday lender. Incomes that are being constrained, people on pay freezes, overtime being cut and fluctuating pay packets mean that people have made an alternative choice.
Q86 Mr Ward: The Government has responded to a number of consultations, and features of that are protections for the consumer but also improved debt advice. I just want reflections on the Government’s response to the reviews that have been carried out.
Peter Crook: In overall terms, Mr Ward, we welcome the approach the Government is taking. I do not think it is the Government’s role to say whether products are good or bad; I was pleased to see that in the Minister’s statement. I think it is the Government’s role to make sure that consumers are protected, which means that they can make informed choices, the products they use are simple and transparent, and when things go wrong they are treated appropriately and fairly.
Q87 Mr Ward: On debt advice, obviously there is a need to provide protection for people and transparency and information. But how far should it just be left to the market, in your view?
Caroline Walton: For debt advice?
Mr Ward: The whole issue of consumer credit.
Caroline Walton: I think certainly we should be, and we are, engaged in directing people to free debt advice if they find themselves in any financial difficulty. Certainly Dollar Financial trading organisations refer people to free debt advice, such as the CCCS, Citizens Advice, etc. We should continue to play a key part in doing that.
Q88 Mr Ward: So if someone approached you for a loan, and the purpose of the loan was really the fact that they were in debt, what would your reaction be?
Caroline Walton: We would refer them to debt management or for debt advice. For example, Dollar Financial have a relationship with Credit Action. We have leaflets in store that can direct people to Credit Action or the CCCS if they are in financial difficulty.
Q89 Mr Ward: So it would be part of your diagnosis of the situation to advise them to seek debt management advice?
Caroline Walton: Yes.
Q90 Chair : Do you have any arrangements with debt management companies?
Caroline Walton: We work with debt management companies offering free debt management, or indeed the payday loan debt management companies. We work with them on an electronic basis, which speeds the whole process up. So, yes, we do.
Q91 Chair : Do you receive any commission?
Caroline Walton: No, we do not.
Q92 Rebecca Harris: This is another question to Dollar Financial. We were told last week that the United Kingdom is a "crock of gold at the end of the rainbow for payday lenders who have been shut down all over the world and have been regulated". Would you like to comment on the veracity or otherwise of that?
Caroline Walton: From Martin Lewis, I understand.
Rebecca Harris: Yes.
Caroline Walton: If we go back a little and look at the alternatives for the consumer, this was and is still a market that is relatively immature. There was nowhere for the consumer to go for that short-term loan, or for the small value loan, so it was a market that was not being serviced. What has happened is that others from other countries have seen an opportunity, and indeed it was not just American firms that came in; UK businesses were also developing payday lending here in the UK. But there was a market opportunity.
It is a bit unfair to assume that it is as easy as finding a crock of gold, because a lot of work goes into the customer service that we offer. Customers come to the Money Shop store, for example, through recommendation, and if you do not provide a good service, you will go out of business. There is also a lot of regulation that has to be followed, which is why we are working with the CFA with Government on a code of practice because we take it very seriously, being responsible lenders. It is not the easy pickings of "it’s a crock of gold". A lot of effort goes into it.
Q93 Rebecca Harris: What about the accusation that payday lenders have been shut down all over the world?
Caroline Walton: Certainly in the US there have been rate caps, which have meant that payday lending has been closed down in certain states. That is not to think that there is an opportunity to do it here when there was not an opportunity in the States, because there are other states in the US where, talking with the businesses, rate caps have been introduced, and the rate caps have been able to sustain some payday lending. Businesses from the States may have arrived here thinking that there is no regulation, but what we are looking at is regulation within the payday industry and an enhanced code of practice, which will drive out anybody who sees it as an opportunity to carry out unregulated payday lending.
Chair : Can I bring in Paul Blomfield before I come back to you?
Q94 Paul Blomfield: In what I am sure you would describe as a more mature market in the US, why do you think so many states have chosen to regulate where they have that experience of the sector?
Caroline Walton: I think it has been a bit of a misunderstanding of the consumer, and a rather rash and prompt response to the view that a rate cap would solve the issue and what would happen, bringing down the cost of a payday loan, when in actual fact the rate cap drove out the payday and in some cases made it far less competitive. Because unless you were mature and you had a good book and all the infrastructure in place it would be very difficult.
Q95 Rebecca Harris: This is both to you and the CFA. How do you respond to accusations that you have not been complying with your obligations on responsible lending? We heard some of that last week.
John Lamidey: I have to say as a trade association that I have never had a case referred to me that demonstrates that. I find there are a lot of assertions about the industry and about what we do. When I try and get hold of a tiny piece of evidence it is elusive. We have, for example, the normal consumer credit complaint system, which takes consumers through eventually to the Financial Ombudsman Service. We have so few complaints going through to the Financial Ombudsman that we have not actually got enough to have our own category in the Ombudsman’s report. When you see the Ombudsman Service report coming out every three months with thousands of complaints about various parts of financial services, you will not even find a category for payday because we have fewer than 60 in a three-to-six-month period. So I am at a loss to understand where the evidence is. We run a payday loan forum where I have Government Departments, consumer groups and other trade associations, where these sorts of things could be brought up. They have not been, so I have very little evidence to go on.
Q96 Rebecca Harris: Do you want to add to that?
Caroline Walton: Certainly this lack of responsible lending is not something that I am familiar with. We take it incredibly seriously. We have 2,500 people employed here in the UK, and we go through extensive training with all the frontline staff to make sure that everything that we have put into place is followed. We go through the responsible lending guidelines to make sure that we are fully compliant. We follow the Consumer Credit Act and the directive that came in this year in February. A lot of time and effort is placed into making sure that we are responsible lenders. In addition, as a trade association who were founder members of the Consumer Finance Association, we are working very hard on enhancing that with the code of practice.
Q97 Ann McKechin: We heard in the evidence that there are many hundreds of organisations and companies now working in the high-cost credit market. The Government has stated that it would prefer to remedy problems by self-regulation. Could I ask the panel what the consumer credit industry can do to improve and regulate itself, and what would your response be to a code of practice? How would that actually work when we have a large number of players in the market?
John Lamidey: Can I try to address that? These ideas have been floating around for a while; the idea of a universal code of practice that covers all consumer credit, or certainly unsecured consumer credit with different strands for the different general product types, has been floated. There has not been a lot of support for it, I have to say. To have a code of practice just for those in what is termed the high-cost credit industry would be quite difficult, because, as I hope we have shown you today, we are very different sectors of the market. We do not have any crossover with home credit; we are completely different types of lending. We do not have any crossover with credit unions, and I do not know whether we do with pawnbroking. But to have a code or practice that tries to have universal standards above the level of legislation would be quite difficult. The Consumer Credit Act has been revised three times in the last decade and I was involved with all of it. I do not think there is a lack of regulation. We do have interesting practices in some areas.
Q98 Ann McKechin: With great respect, the Consumer Credit Act came about before the payday loan market in our high streets actually ever arose. So would you not agree it is outdated?
John Lamidey: I totally accept that but no, I do not think it is outdated, because what we have done with consumer credit is to regulate the lending process rather than trying to regulate products. As soon as you try to regulate an individual product you have to define it, and when you define it somebody produces a product just outside your definition.
Consumer credit regulation regulates how you do your lending, whatever sort of product you are giving. A lot of the reviews have been quite recent. The Consumer Credit Directive was passed in 2008 and came into UK law in 2010 or the beginning of 2011. So these things have been taken into account. I sat on working groups with BIS on those regulations, so I do not think anything has been overlooked in terms of the regulation. But your question was about codes of practice. We have a code of practice, which we launched this summer. We are working on that with BIS right now to enhance it.
Q99 Ann McKechin: This is for your association members.
John Lamidey: Correct.
Q100 Ann McKechin: The fact is that there are different sorts of trade associations running around in the high-cost credit market. You have stated, John, that you think it would be very difficult to have a common code, so how is that market going to be monitored, and how are people going to understand when sanctions are applied? What level of transparency can people then expect?
John Lamidey: What the Department for Business is trying to achieve at the moment is that those trade associations that have payday lenders as members all incorporate in our codes of practice the same standards that will apply to payday; and you are entirely right, there are actually four trading associations that have payday companies as members. That is the Department’s attempt, and we are co-operating entirely with that.
We are very keen on regulation, but you must not discount market forces. A lot of these businesses are quite new and a lot of them are quite small, and with the Government’s overall regulatory reform agenda and the potential for new regulation in the fairly new future, you may well find that the market does contract or coalesce, and you will have fewer businesses because the standards that are required will remove anybody on the fringes.
Q101 Ann McKechin: Does the panel think it is sufficient that if you have £500 in your hand you can apply for a licence from the OFT to set up as a payday loan company and-bar basic checks on your criminal record-that is it? Does anyone actually think that is really an adequate standard for entry?
John Lamidey: That was the standard that was reached when they reviewed the Consumer Credit Act and came up with the Consumer Credit Act 2006. The allegation before that was that it was too easy to get a licence. The other point of view on that is if everybody has a licence you can take action against them. If they do not have a licence you cannot. So the licensing regime was entirely reviewed. It was changed and the OFT were given more powers. You can still get a licence, of course you can, but then you are subject to regulatory control. I personally think that is a really good idea.
Q102 Ann McKechin: Does anybody on the panel have a view about £500 being an adequate sum for inspection and regime?
Des Milligan: I have a view. John is absolutely right. It is not just a question of the OFT checking whether you are honest or not. These days you have to prove that you actually understand the lending business that you are in. There are CRP1 forms to complete and various other things. They quite often do spot-checks and interview people who are applying, and we work closely with the OFT, and obviously our members, to ensure that they actually do know what they are doing and are going to be compliant.
Mark Lyonette: One of our problems with the OFT, and this is not necessarily a comment on any individual at all, is that new bad practices spring up all the time and whether they have the resource and ability to always spot them is questionable. For example, one of the things our members have been saying for a while is that there was a big growth in credit brokers promising credit and referring people to credit unions when they had no prospect of getting a loan at all, but charging people for that privilege. We are pleased that in the Government announcement that is now going to be changed; once a lender says, "We have no relationship with you as a credit broker", the credit broker is no longer, in the guidance, going to be allowed to refer people to credit. But it is very frustrating because these little things keep appearing. New things appear and I am not always sure there is enough resource and perhaps enthusiasm to deal with some of them quickly enough.
Q103 Ann McKechin: Okay. John, can I ask you, with your own practices and within your own trading association, why do you think that Wonga, which is one of the larger payday lenders, is not a member but many others are? And how do you advertise when you have actually imposed sanctions against any of your members who have failed to comply with your own standards?
John Lamidey: I will deal with Wonga first. I am not totally sure about this, but I have a suspicion that Wonga joined a trade association before we even existed. We were only formed in October 2008. They have chosen to join the Finance & Leasing Association, a large, prestigious trading association. I know of no reason why they would not choose to join us, but they already belong to a trade association.
In terms of sanctions, our code of practice was only launched this summer. In the current version we do not have compliance monitoring or a method of dealing with members who do not comply, because I have only a very small number of members and they were the ones who wrote the code of practice, which reflects their practices. I have not got too much of a problem with that. But in the revision that we are doing now we intend to have annual compliance monitoring and a complaints handling system enshrined in that, so we are working towards that. But I have to emphasise that we are not a trade association that has been around for ever; we have only been around for three years, and we are working on this because, as you have deduced, it is an industry that is developing.
Q104 Katy Clark: Peter Crook has already said that he does not think APR is necessarily the best indicator when looking at these kinds of issues. Could the panel say what they think the best way of having price comparators for short-term credit would be in this sector so that the consumer is able to understand the deals before them, and compare them and shop for the best deals?
Mark Lyonette: I think from our point of view we have long advocated some sort of total cost of credit where it is pounds per 100 borrowed-something quite tangible. I think we would agree with many of the criticisms of APR for anything under an annual loan, so I think something needs to be done there. I understand the Government committed to doing some further research on that, and we would certainly welcome it.
Des Milligan: We would just like clarity. We argued for years, I have to say, with both BIS and the OFT because we wanted to add to the agreements that customers were getting into with pawnbroking, how much it would cost them per month to borrow some money. So if I borrow £100 today, how much is it going to cost me each month that the loan will be standing? And believe it or not, it was illegal for us to include that information in the agreement until February of this year. Luckily, common sense prevailed and we can do it now, so we do. So we would strongly advocate a very simple, "How much is it going to cost me, either per month or possibly per day, to have this debt?" People understand that. They are very good money managers actually, customers who go to pawnbrokers. They are quite savvy, believe it or not, because they have to be. But they do want to know how much the loan is going to cost them.
They are not interested in APRs; it is a concept that is way beyond them, and as we just heard, irrelevant for loans that on average are three and a half months. The maximum a loan could ever be is seven months. In fact the median value is only £90, so we are talking about pretty small amounts of money for pretty short amounts of time. People just want to know how much it is that they owe; that is it.
Caroline Walton: I have to agree with both Des and Mark here. The customer actually sees it in terms of pounds and pence, and they make that comparison with others in the same sector in terms of pounds and pence. Also, when they talk in terms of the difference between a payday and an unauthorised overdraft, they have no APR to compare with, so again, they see it in terms of how much they have had to pay at the bank as opposed to paying for a payday loan. I think measuring it in terms of the cost in pounds as opposed to a percentage APR would be very beneficial.
Peter Crook: It is perhaps worth mentioning in respect of home-collected credit that there is a price comparison website, lenderscompared.org.uk. The way those price comparisons are presented to the consumer is very much through the total charge for credit and the weekly repayments as well as the APR.
Q105 Katy Clark: Have you got suggestions about how the costs of high-cost consumer credit could be reduced for customers? If you are against the capping of interest rates, how else could you cap the total cost of credit? Is that something that could be looked at?
John Lamidey: Could I have a go at that one? I think the absolute key here is competition, because, as has been discovered, capping a charge does not make the loan cheaper; it simply makes it unavailable. All you are doing is reducing choice for consumers, and you are reducing competition because another product has gone from the market. It does seem to me that competition is the driver for this, and one of the things we find with payday lending is that there are, at the moment, quite a large number of businesses, both big and small, in the market. There are people starting to offer some quite interesting deals. One that was severely castigated-not one of my members-in the press recently was offering a 0% payday loan for eight days, and the media said this was terrible. But nevertheless, competition is there and that will-back to my previous comment about market forces-drive this probably much quicker than regulation ever will.
Q106 Katy Clark: If there was going to be a cap, do you think an actual cash cap, rather than a percentage cap, would work better?
John Lamidey: You cannot separate the two. The interesting thing is that our detractors have certainly always talked about a cap on the annual percentage rate. That has now changed to a cap on the total charge for credit. The irony is that in the way the regulations are written, that total charge for credit is what you use to calculate the APR, so a cap on total charge for credit is no different from a cap on the APR. This has been demonstrated in a lot of research, some in the United States where there have been interest rate caps for a while, and I have to repeat it: you do not make the loans cheaper. Only competition will do that, not just simply saying, "You cannot charge more than a certain amount", because that will drive people out of business.
Q107 Mr Ward: The Government sees credit unions playing an increasing role in providing consumer credit, which presumably you approve of. But is there a possibility that it will lose some of its uniqueness. In my experience that is very much a local form of finance, often locally controlled. As it grows bigger and bigger, is there any danger that it will lose that unique characteristic?
Mark Lyonette: I do not think so, David. We are very supportive of the work the Government has done. For Members who are perhaps not aware, the sector has made something over half a million loans in the last four or five years, all in the £200 to £400 area. At the time I think people were very sceptical about whether the sector would be able to do that so effectively. I think it is that good experience that has minded the Government to pursue whether there could be an expansion and a modernisation of the sector.
We absolutely recognise that we need better channels, for want of a technical term, to be more accessible and available, and hence why we are so interested in the potential partnership with the Post Office as well. We also recognise that in those half million loans we have probably had an impact on the home credit market in areas where the credit unions have been most successful. We are probably a lot less able to compete with the high-tech, payday-lending Wonga model because even at the prices it charges, it is only that price because of quite sophisticated automation and credit scoring behind the scenes. That is not something, of course, that our sector has been able to invest in or been able to deliver. So we recognise the role of innovation and development otherwise we will not get that way.
It was interesting listening to Caroline. I should say that about 90 million people use credit unions in the States. They angsted for a long time over whether they should offer an alternative to the payday lending product. In the end, a number of them did at a much lower cost with the same features-for example, eight days, ten days or the end of the month. But actually they made themselves a requirement, because it is not the first loan that is ever the problem. As Caroline said, from an economic point of view, that could be rationally the best way to get £100 or £200 for that period of time compared to banking overdrafts. However, whether you can afford that is quite different from whether it is the cheapest way of doing it. If people are still in it two or three months later it is really a budgeting question, if people are spending more than they are earning, so the real solution is around addressing the budgeting side. The credit unions have linked in that process, so if they have somebody who has rolled over a payday loan, albeit a much cheaper loan, they absolutely do some work with them to say, "Look, you have to balance this out. This is not good for you."
Q108 Mr Ward: Do you restrict loans to your own savers?
Mark Lyonette: Credit unions historically would have tended to lend as a multiple of how much you had saved over 13 weeks, six months or whatever. That is a lot less common now. It is still there, and sometimes credit unions will use it to manage risk. Much more commonly, unions feel able to work out whether somebody can repay a loan and the chances of that on day one, so many credit unions do not make that plan.
Q109 Mr Ward: It used to be a requirement, did it not?
Mark Lyonette: Not a legal requirement, no. It was more of a policy than a regulatory or legal requirement. In the days when credit unions did not have access to credit data it was felt to be a way you could manage the risk. In effect you were limiting your liability, weren’t you? If somebody had £100 and you lent them £300, then at least some of the money is offset.
Q110 Mr Ward: Do you and the others feel that when people approach you for loans they should be made aware of credit unions? Do you see that as part of your responsibility at all, or is that Mark’s job?
Mark Lyonette: We have suggested, and I believe one of your witnesses last week was talking about this, that in the same way that there is an obligation in the debt management industry to make people aware that there might be cheaper or free alternatives available, it might be something that is worth thinking of in this area. You would not be able to recommend any particular institution; it would be more like a wealth warning where you actually suggest that there might be cheaper ways to do this.
Peter Crook: It is perhaps worth mentioning that on the lenderscompared.org price comparison website that I mentioned earlier, credit unions are listed. Anybody looking for a home credit loan will see relevant credit union offers from unions that have chosen to use the site, alongside what the home credit providers offer.
Q111 Mr Ward: This question is to all of you. Going back to something I was trying to get at earlier on, you no doubt see yourselves as, and no doubt you are, standing between what can be the quite desperate needs of some desperate people in desperate circumstances and the loan sharks of this world. So you are the acceptable face of high-risk, short-term loans. These are risky clients who have a very high default rate. The difference between yourselves and the loan sharks is possibly extortionate rates, but also the methods of collection. How do you go about that? You obviously cannot be seen as a soft touch otherwise you would have an even higher level of defaults. How do you manage that balance?
Caroline Walton: Certainly with the payday customer you have to have some regular contact during the loan period. The face to face certainly helps with the store-to be able to talk through the repayment methods etc.-but we will also make contact with the customer before the loan is due to be paid to remind them of the repayment process. That helps the particular customer in their budgeting and planning. If the customer has not paid their loan then obviously there is a process of trying to encourage them to start making some form of repayment, whatever it might be, just to keep them in the cycle of paying against their outstanding loan.
Mark Lyonette: Compared to our colleagues here, we are the only people who are deposit takers, so from our point of view we are also interested in the saving side of the balance sheet. I have always been astonished, since I first got involved in credit unions, that when you talk to people who have had their lives changed by joining the credit union, they tell you that it is often not the credit that is so important. If we lend somebody £300 compared to a higher-cost lender we are probably saving them £150 in credit costs on that one loan, so it is quite a significant saving if you do it several times a year. But it is what they do with the £150 they save, which is what the credit unions will often tell you is important. Yes, people have lots of other things they need to spend money on to survive each week, but if you can encourage them to put even just a little bit aside, even if we are talking £1 or £2 a week on the low level, it is that kind of small scale savings habit that often redresses the balance of credit and debt and saving.
There are two ways of paying for things, aren’t there? It gives people a confidence; it is a bit of an emergency buffer, but it is also importantly that people feel more in control. Credit never makes anybody any richer, does it? Accumulating assets, even at a small scale, is what makes us wealthy and gives us more confidence. So there is a part about savings.
Another thing features in all of this. Caroline has talked about the link between banks and overdrafts, which are certainly not regulated in the same way as these other products. You have to think about transactional products as well. If one of the reasons people dip into using a loan at the end of the month is because they have actually just found they need to, then in some cases-I am taking my colleague’s point that generally at the low end people are good money managers-it might be around their use of transactional products as well. It is notable in the UK that because of our free in-credit banking model we do not have banks that offer budgeting and bill payment accounts because it would actually destroy the model.
I am trying to link that there are some other things to think about apart from credit regulation when you look at people’s use of credit. Savings are one thing, and the use of transactional products and the availability of different kinds of transactional products are also part of the picture.
Des Milligan: Just so that the record is clear, with the pawnbroking agreement, obviously the pawnbroker does not have to pursue the customer for any outstanding debt, so that is very easy. I would add one final thing, which is if you needed to borrow £100 and went to a friend to borrow £100 for a month, and you said, "Right, I tell you what, at the end of the month I will buy you a couple of pints to pay for it," that is probably going to cost you more than going to a pawnbroker.
Mr Ward: It will in London.
Q112 Katy Clark: Credit unions set up in parts of my constituency following the collapse of Farepak five years ago. And as you will know, those people still have not got any money back because they are considered unsecured creditors. The kinds of mechanism that a lot of people use-paying up for something, paying so much per week or per month-do not seem to be regulated. Is that something that you have experience of?
Mark Lyonette: Yes, we gave evidence to the Farepak investigation. That was an absolute tragedy. They were people who were generally not widely known to exist really in Whitehall, but were people who were doing the right thing, saving for Christmas rather than getting themselves into a right state by January. In their mind they had every reason to think that what they were doing was protected. It is quite a theoretical distinction, isn’t it? What is a deposit and what is actually a payment in advance? I think the Government has done what it has done so far around that. It certainly spurred a trend in new kinds of Christmas savings products. Both credit unions and other providers started to introduce products and encourage people to save for Christmas. But that would be a good example, Katy, of exactly the sort of thing I am saying. You cannot think about credit in isolation of what else we do with our money: whether we save instead of credit and whether we use transactional products are all part of that mix. While they come from different parts of Government, which is often one of the challenges-it is different Departments and different civil servants-you have to think of some of these things in the round.
Q113 Chair : Thank you. That concludes our questions. As I said earlier, if you feel there is anything further that you would like say, please submit it in writing. Thank you very much for your contribution; we will obviously be analysing it and making recommendations in due course.
Examination of Witnesses
Witnesses: John Fairhurst, Managing Director, Payplan, Richard Wharton, Director, General Secretary and co-founder, Debt Managers Standards Association, Melanie Taylor, Head of Corporate Relations, Gregory Pennington, Chris Davis, Chief Executive Officer, MoneyPlus Group, and Andrew Smith, Debt Resolution Forum, gave evidence.
Q114 Chair : You heard my opening comments. We are very much time-constrained by virtue of the fact that the Chancellor has brought forward the timing of the autumn statement, and I intend to finish by 12.20. Any questions that we would like to ask but have not been able to in that time we will put to you in writing, and we would be grateful for a response. Can you just introduce yourselves for voice transcription purposes, starting with Andrew Smith on the left?
Andrew Smith: I am Andrew Smith, I am from the Debt Resolution Forum. We are a trade association for fee-charging debt resolution companies.
Chris Davis: My name is Chris Davies, I am the CEO of MoneyPlus Group.
Melanie Taylor: My name is Melanie Taylor, I am Head of Corporate Relations for Gregory Pennington Ltd.
Richard Wharton: I am Richard Wharton, Director and General Secretary of Debt Managers Standards Association, or DEMSA.
John Fairhurst: I am John Fairhurst, Managing Director of Payplan, who are one of the free-to-consumer debt advice providers.
Chair : I will repeat my strictures to the previous panel. You will be asked some general questions. There is no need for everybody to comment unless you either wish to contradict or add significantly to what the previous speaker has said.
Q115 Paul Blomfield: Thank you, Chair. I wonder if you could briefly scope out the marketplace for us in terms of how demand for your services has increased in the last few years. And could you quantify the rise, if that is the case? Who are your main customers in terms of the demographic, and how has that changed in the current economic climate?
Andrew Smith: I would say that the market in general for debt resolution services at the moment is declining, not increasing, but not by much. If you look at personal insolvency statistics you will see that if you add bankruptcies and debt relief orders together they have pretty much plateaued over the last couple of years. It looks as if individual voluntary arrangements-IVAs-have reached a plateau of about 40,000 cases per year. I understand from market intelligence that it looks as if that will reduce by about 8% to 12% in the last quarter of this year.
A very, very significant factor is that large numbers of IVAs are now being done at very low levels of disposable income and debt, something that was not true a few years ago. It appears to us from the figures we get from members that IVAs at that level are cannibalising informal debt management plans, but they are still probably running at several hundred thousand a year. But as previous witnesses have told you, it is very difficult to get hold of that information. What is clear is that there appears to be an inverse relationship between jobseekers and joblessness and personal insolvency. As the number of jobseekers in the economy goes up, so personal insolvency goes down. At the same time you can see, from the amount of credit that people are taking, that a significant number of people are actually succeeding in paying down debt. They are not necessarily the group that have debt issues, but there is less debt in the economy.
We have an economy where a large vector in growth is consumer spending. What we now know is that the economy for personal debt has changed very, very significantly. Four and a half times as many people a year choose personal insolvency, use personal insolvency, than was the case in 2000. That is not going to go away. The insolvency figures are going to start to rise again, and the informal debt resolution figures I would reckon, about 18 months to two years after the banks start to lend. This is the bottom of the curve, not the top.
Q116 Paul Blomfield: Is Andrew’s assessment shared by everybody else? If anybody has a different view perhaps you could focus on that.
Richard Wharton: As far as the intelligence we get from our members is concerned, the market has certainly not increased, it is virtually static. It is not decreasing by much; I would agree with those comments on that basis.
Melanie Taylor: I think the only area where we are perhaps seeing a change is in the type of individual that is coming to us. We are actually seeing more professional working people seeking our services than there perhaps were 12 or 18 months ago.
Andrew Smith: I will add to that. My company clears debts. Demographic information over the last five years has not really changed much. We simply say there is one debt demographic; if you are a person who is in debt, the more you earn the more you owe. Other than that, it is what you would expect in terms of the proportion in each social grouping, gender and age. But as Melanie says, if anything it has shifted slightly towards the better off, people on average wages or above, but only slightly.
John Fairhurst: Just a brief point about the demographics. Our clients are typically homeowners in work, and that has been an increasing trend in recent years. That demographic is atypical of the one traditionally accessing face-to-face services, so the consumers we are talking about here tend to be people who would not traditionally use face-to-face advice services. They would use organisations like those represented here today.
Q117 Paul Blomfield: In terms of the marketplace, do you see any changes in the people presenting themselves, seeking support, as a result of high-cost loans?
Chris Davis: Can I come in? I would agree with all the comments made by the other members of the panel. Our figures are pretty static, but we are now seeing a greater proportion of consumers coming to us who have gone to a payday lender and perhaps rolled over and then gone to another payday lender, whereas if we look back at our figures a couple of years ago we would never have seen that mix. We are seeing a greater increase in people who have borrowed money from those sources.
Melanie Taylor: I think that is perhaps also causing people to delay the time that they take to seek advice, because it is almost like a bridge to an income shock or an income deficit. So although they are already heavily indebted, it is actually at that stage that they are going to get help; it is perhaps one, two or three months on from when you would expect.
Q118 Paul Blomfield: Do you think the delay means that during that process they are getting even more indebted, and the problems they present with are greater?
Melanie Taylor: We are seeing increasing charging for people who come to us at that point. But that said, we are finding that relationships have strengthened over recent times with those lenders and actually they are working very hard to recognise people in difficultly and to refund those charges.
John Fairhurst: And I think that is a very real concern. Our average client has a household deficit of around £800 a month at the time they call us for help. If they are bridging that gap using payday loans then it does significantly extend not just the time it takes to seek advice, but the time to repay debt. Although quite rare, we have had clients with an excess of 20 payday loans, people who have habitually used these loans as a way of managing that deficit budget. I welcome the comments made in the first session today about the steps being taken to address those issues, but it is the repeat users that cause the problems. It is access to credit for people who really should not be given credit.
Melanie Taylor: Yes, there is definitely a budgeting issue where you have somebody who is perhaps having difficulty managing their finances, but they are taking further borrowing almost to delay addressing that.
Q119 Paul Blomfield: Could I move to a different area? I am conscious of the time and the Chair is pressing us. Can I ask you how you build your business? How do you acquire new clients? Do you sit back and wait for people to approach you, or do you actively seek them out through cold calling or referrals?
Melanie Taylor: Around 15% of people would be referred to us by existing customers. We advertise on the internet, so we receive a large proportion through online advertising and promotion. From a Gregory Pennington point of view, we have actually been offering debt management services for almost 20 years so it is not something that is new to us or something that we are inexperienced in; comments have been made about new entrants to the market because of the financial difficulties people are experiencing.
Andrew Smith: Citizens Advice were under the impression that we cold-called as an industry, and we were included in a super-complaint earlier in the year. The OFT concluded, when they reported, that the industry does not cold-call for clients.
Richard Wharton: I was going to make the same point exactly with regard to the CAB super-complaint.
Melanie Taylor: Certainly for the reputable part of the industry I think it is fair to say that.
John Fairhurst: It is worth noting that we operate a different business model. Our funding is via fair share contributions rather than fees, therefore we do not have the advertising budgets. Almost all our business arrives as a result of a referral from a third party, the biggest single referral being the free-to-consumer advice sector, the face-to-face sector. Creditors are one of the major referrers of cases, as are trade unions, large employers and people like that. So there are two different models of client acquisition and two different models of funding our operation.
Q120 Chair : To all of you, what is the typical fee for a customer on a commercial debt management plan?
Richard Wharton: The typical fee would be an initial fee, which would usually be between one to two months’ cost of the initial disposable income, and then an ongoing management fee, usually of around 15% to 17.5% per month.
Melanie Taylor: In the case of Gregory Pennington, it would be an initial fee to establish the client and to negotiate with the creditors and work with the client on their budgeting. Then it would be an ongoing 15% monthly management fee for as long as the client chose to continue using those services.
Q121 Chair : Does anybody have a significant variation?
Andrew Smith: No, our numbers would be similar to those described by Richard.
Q122 Chair : I was going to come to Payplan next. How does the fair share model compare to that?
John Fairhurst: With the fair share model, 100% of the consumer’s repayments are passed on to creditors, and then those creditors who choose to support our work, which thankfully is most, will separately pay us an amount in support of that, a sort of fair share. That fair share is linked to the amount overall that we pay to that creditor, a sort of polluter pays principle.
In our written submission we estimate that this is a substantially cheaper way of providing debt advice. We estimate that overall consumers pay in the region of £250 million a year in fees, and that reduces repayments to creditors by £150 million when compared to a universal application of our fair share model, so it is a very different model.
Q123 Chair : You have touched on my next question. How much longer does it take to pay off debt for a person on a commercial debt management plan with fees as opposed to a free debt advice plan?
John Fairhurst: It is determined to an extent by the level of surplus income a person has, but a couple of years would be a common extension.
Melanie Taylor: I think it is also dependent upon how well the debt management provider actually works to negotiate refunds of interest and charges and how successful they are in being able to negotiate concessions and to stop future interest and charges being applied. Then I think how good the service is to actually work with that customer to help them with budgeting and hand-holding to get them through the financial position that they are in.
Andrew Smith: Also I think the total length of time that a debt management plan takes is less relevant than it might seem at first. I imagine that later somebody might ask us about the length of debt management plans and the reasons for failure. But the fact is that a significant number of debt management plans do not go to term, and a very significant proportion of those that go beyond the first couple of years do not go to term because the person actually gets into better circumstances and feels able to repay their loans properly. So it is not quite as simple as it might first seem.
Q124 Chair : I am not sure if that actually rebuts the point that was made by John Fairhurst. Would the figures that you gave us incorporate what has just been said?
John Fairhurst: This is the typically one or two years’ extension to the-
Chair : Yes, the length of time.
John Fairhurst: Yes, it depends. For people on very low surpluses it can be longer; for people on very high surpluses it can be shorter.
Melanie Taylor: I think it is also very much about the service that you offer to the customer and your ability to work with the lenders to make sure you get good concessions for them. Obviously if you are not providing a good service it does not really matter whether or not you are using a provider who does not charge you a fee, or charges it as a fair share to the creditor, or charges it to that individual customer. The customer is not going to continue to work on that debt management plan and continue to reduce the debts if the service is not providing for them.
Q125 Nadhim Zahawi: Mr Davis, you have been very silent. Can you tell us what your organisation charges, and answer some of the questions that your fellow panellists have answered?
Chris Davis: Yes. Again, we will charge a consumer the equivalent of two months of their disposable income.
Q126 Nadhim Zahawi: That is the up-front fee?
Chris Davis: It is the fee that we charge for all the work to put the plan in place. So we perhaps will speak to a consumer today. We will go through a very detailed income expenditure breakdown with the consumer. We will then correspond with the consumer. We will wait to get information back from them, we will process that, and it is only then that a contract will be entered into between ourselves and the consumer.
Q127 Nadhim Zahawi: What is that contract? What is the monthly charge beyond the two months of disposable income?
Chris Davis: We charge a very transparent monthly management fee.
Nadhim Zahawi: Of what?
Chris Davis: If a consumer pays up to £200, we will charge them £35. We are seeing on average at the moment that our consumers are paying about £165 per month. So in those circumstances we will charge a consumer £330 for all the work that we put into actually putting the plan into place. Going forward we will charge a monthly management fee in those circumstances of £35.
For that we will receive the payment from the consumer. We will distribute the payment to his or her creditors. We will negotiate with all the creditors to try and freeze interest and stop the late payment charges. So I think you see that there is a charge for the actual work that we do, but also what sits behind this is the added stress and pressure that the consumer is facing when they first contact us. We are seeing that our average consumer has seven debts. They may well be in arrears and in default with every single one of those creditors, so they will be getting letters, telephone calls, text messages and potentially visits. Our aim is to try and take the stress and pressure off the consumer’s shoulders, and I think it is very difficult to actually put a value on that.
When I have the time to listen to some of the calls, and we tape-record every single call to our building, I can hear the distress and the pressure that the consumers are facing. When they immediately find out that actually there is a solution to their problems if they choose to take our advice, you can feel and hear the stress lifted off their shoulders almost immediately.
Q128 Chair : Do any of you sell any other financial services to customers who come for debt advice?
Richard Wharton: As far as DEMSA members are concerned, some of them will provide some other services, some insurance-linked products or maybe some income protection policy. They will not provide loan products. DEMSA members do not offer loans or lending products to consumers, but they may provide some other service in the form of some insurance products.
Q129 Chair : Would they recommend a type of insurance product to somebody?
Richard Wharton: No, it would be on a non-recommended basis.
Andrew Smith: DRF members offer debt resolution products excluding loans. Some members help people to reduce household spending by looking at other areas of their spending, such as utilities etc, but that is all.
Chris Davis: We offer something called bill shrinker to the consumer. It is provided by a third party, and allows that company to look at what the consumer is spending on utilities. Again, we do not offer loans to any consumers.
Q130 Chair : Do you receive any commission on the bill shrinker?
Chris Davis: A very, very small amount from a third party.
Q131 Chair : How much would that be?
Chris Davis: It might be £1 or £2 per consumer.
Q132 Rebecca Harris: We have the Government’s response to the personal insolvency review. What are your views on that response in regard to the debt management advice?
Andrew Smith: There is potential for a huge opportunity to be missed, rather than looking at things such as people’s ability to understand debt; I think the excitement around financial education is really misplaced. Firstly, as I think you have already been told, most people who get into debt do so because something changes in their life. It can be good or bad. It can be redundancy or illness. It can be good: it can be having a child, which is something that often precipitates debt. But often it happens as a result of personal change and sometimes it happens because of economic change.
A lot of people can do something about their debt, and they are very well aware of what they have taken on. They took everything on knowing they could afford to repay. There is a group, however, that is amongst the poorest, the least well educated, the least likely to be employed, who have difficulty with this. But the financial education that you are currently thinking about will not help them at all. We are sending one in five of our school leavers out into the world functionally illiterate and functionally innumerate, and in that sense financial education would do nothing to improve their chances. They are a very big part. That one in five is a very big part of the people at the bottom of the debt heap, the most excluded about whom you cannot do much.
So put financial education to one side and look instead at the other opportunity you have, which is to create a debt resolution culture in this country that rewards people who actually do something about their debt. You have to look at what happens at the moment. You have bankruptcy and debt resolution orders. Debt resolution orders are "bankruptcy lite" for people who cannot afford anything else. Bankruptcy could become the procedure for people who are not prepared to do anything about their debt. You then have individual voluntary arrangements and debt management plans. One of the characteristics of the people who come to all of us for IVAs and debt management plans is they want to do the best they can to repay. They are going to spend a significant number of years working hard, putting all their disposable income into repaying what they owe. And at the end of that the banks treat them like funts-financial untouchables-and they should not. At that point what should happen is you acknowledge that somebody has spent a long period going without, repaying all they can afford, and you should put them back in a position to be part of the financial community. They do not need financial education because they have spent five years, 10 years, learning how to budget and repay their debt.
I think in England and Wales we should look at the Scottish Debt Arrangement Scheme, which is pretty close to being the finest informal scheme for dealing with debt. We should look at the thing that we nearly got a few years ago, the simple IVA, which would have been a lower-cost version. Within hours of the Insolvency Service announcing something that was going to be put through on a legislative reform order, somebody-we do not know who-raised an objection and it was decided that the simple IVA would not go ahead. If you create a see-saw and the man stays on one side of the see-saw whilst he is solvent and able to repay most of his debt, then he is in something that looks like a debt arrangement scheme or the protocol compliant debt management scheme that the Insolvency Service are currently investigating. If he pivots over to the point where he cannot pay his debts when he falls due, then he could rocket straight into a simple IVA, and you could bring debt forgiveness into the equation and understand that the guy would still be doing the best he could to repay his debt over five years.
If in that time the person became unemployed or ill, you could take the enforcement restriction order. I am dumbfounded that with the rise in unemployment at the moment, that piece of legislation, which is in the Tribunals, Courts and Enforcement Act has not been used; the opportunity to have a six-month stay on everything that you pay, principal and interest, whilst you suffer unemployment-I gather that the average period of unemployment in this country at the moment is about 90 days. So for over half the people that became unemployed, what they owed would not rise in that period and the creditors would only suffer a gap in their payments, not a gap in their balance sheets.
Q133 Chair : Could I ask for a point of clarification? You talked about a simple IVA. Could you explain how that is distinct from the IVAs we have?
Andrew Smith: Certainly. IVAs at the moment have to be voted in favour of by 75% of the creditors by value. The difference with the simple IVA is that was to be reduced to 50% by value, and a creditor not voting would have been deemed to be voting for the arrangement, so small creditors who currently tend not to vote would be included in that quarter. The simple IVA would probably have cannibalised around a third of the invisible non-regulated debt management plans that currently exist, and bring them into a visible regulated environment.
Chris Davis: Rebecca, one of the things that disappointed me about the Government’s response was perhaps enforcement. There are two trade bodies represented here today, which has to be a good thing for the consumer. We are a member of DEMSA. I am very proud of that as a company. The OFT logo appears on all our correspondence, our website and my business cards. When I go to meetings I bang the desk about being a member of a trade organisation. There are lots of companies that sit outside the trade organisations, and one of the things that disappointed me was that perhaps the OFT should have more enforcement action to take against companies that are not providing the consumers with the best advice.
I am pretty confident that consumers who are members of the trade bodies that are represented today will get the best debt advice out there. I think it is a shame that that was not really beefed up more because we have tried to assist the OFT over the last couple of years. We have seen companies behaving in a particular way that causes me concern and damages my business, and damages our sector. That cannot be good for anybody.
Chair : You have partly anticipated Rebecca’s next question, but if I can just bring her back in.
Q134 Rebecca Harris: At the OFT investigation, I think 129 of 172 commercial debt management companies surveyed were not compliant with industry guidelines. I would like your views on that, all of you. How much do you think commercial debt management companies should be more tightly regulated, and how?
John Fairhurst: I think it was a great concern that so many firms were found wanting. DEMSA and DRF have made good efforts and are making progress in addressing some of those concerns. Fundamentally, one thing the OFT did identify in that compliance review is that these activities may distress purchasers. They do not shop around, they tend not to shop around on a particular price. They tend to look at the provider as someone who will give them good advice. They are not able to judge that themselves so the very highest standards should be applied here. And certainly our view is that trade body activities have been useful, but we need to go further. We need to have a truly vigorous, independent audit of debt management providers, not just to check they have been through all the processes and mentioned all the pros and cons, but to ensure that that advice is truly balanced. I do not think we are there yet.
Chris Davis: In some of the press releases that have come out, you can see the extra things that DEMSA have done, and I am sure Richard will comment on that. But I go back to my original point in the earlier question. Any person in any organisation that has a consumer credit licence who wants to operate in the field of debt management should be a member of a trade organisation; I would dearly like to see that, because that has to be in the best interest of consumers, but I am sure Richard will talk to you about the gains that DEMSA has made.
Richard Wharton: I think of the 129 the OFT found to be compliant, only one was a member of DEMSA. I stress that we are not here to defend the rogue operators in the market. We are here to speak for the reputable.
Q135 Chair : Did you say 129 were compliant?
Richard Wharton: Were non-compliant, I beg your pardon. We fully support the OFT’s debt management guidance revision, and we contributed to the consultation on providing the new revised guidance notes. In fact we suggested that they strengthen the guidance notes in particular areas, which I won’t go into in detail. As Chris has already said, we believe that the OFT should perhaps be given greater powers of enforcement. At the moment, if the Office of Fair Trading decide to put a minded to revoke notice on a consumer credit licence, it will take possibly 12 to 18 months for that to be finally sorted out with appeals, etc. And in that time the company can still trade. I think there perhaps should be a more immediate sanction that can be imposed.
Turning to John’s point about independent audits, all our members are independently audited every year, and we have a schedule of other monitoring of their compliance, which includes quarterly web sweeps and desktop analysis of all advertising, and a consumer satisfaction survey where we aim to sample 10% of the total consumer base held by our members; that is done on a monthly basis. We have mystery shopping: we employ independent mystery shoppers to shop at the companies. We have a complaints-handling procedure and we have a beefed-up compliance and disciplinary panel under the chairmanship of Sir Harry Ognall, a retired High Court judge.
The independent auditing that John mentioned is currently undertaken by an outside independent body, Compliance Services. To take over this project with immediate effect, we have engaged the services of the ICAEW, the Institute of Chartered Accountants in England and Wales. I think there is one area where I would perhaps agree further emphasis needs to be put, and that is actually the protection of clients’ account moneys held by companies. In DEMSA, we insist on a certificate from the company’s auditors every year to certify that the clients’ accounts have been handled in a proper manner. I think there should be more emphasis put by the OFT on that aspect. I think you all will have read in the papers recently about the organisation that actually took some clients’ money away.
Melanie Taylor: Could I just add to a point John made? I think you referred to distressed purchasers. Related to what Richard was saying about the DEMSA customer satisfaction surveys that are ongoing each month, Gregory Pennington’s satisfaction surveys actually came in at 86.8% from the customers rating the service either as good or excellent in the last quarter. So whilst obviously John makes a valid point about some of the less reputable providers, clearly these are customers that are valuing the service on an ongoing basis and actually feeling we are providing for them and meeting their expectations.
Q136 Chair : Right, okay. Can I just bring in Andrew Smith, who wanted to say something?
Andrew Smith: Thank you. I think the client account point is a very, very important one. DRF does not have the audit that DEMSA have, but I do not believe DEMSA’s audit is adequate. We are making representations to the OFT about that, because what you actually need to do is assess that movements in and out of the account are still leaving sufficient funds to meet disbursements that are necessary for the client. Certainly there have been two debt management-related insolvencies this year, Debt Doctor and Apex. In both cases, if a much more stringent audit of the client account had been in place those would have been spotted, and the very large amounts of money that have been lost by clients would not have been lost.
Melanie Taylor: An addition to that, to strengthen it further, would be a requirement for compulsory insurance to cover the funds that are in the accounts.
Chair : Can I now bring in Paul Blomfield. Some of the issues have been touched upon.
Q137 Paul Blomfield: Some have, and there are some I would like to pursue further through written evidence. But I would like to put John on the spot for a moment. Why are you not a member of either DEMSA or DRF?
John Fairhurst: My earlier comment was that I did not feel that the standards were sufficient to ensure consumers received truly balanced advice. They may level the same accusation at me because we are not regulated by any trade body, and neither are any of the other free providers.
Q138 Paul Blomfield: Can I push you on that, John? In what way not sufficient? What would you be looking for?
John Fairhurst: I do have a degree of sympathy with these organisations, but there is a clear fundamental example, in that the OFT require people to give advice that is in the best interests of their clients, yet the advice for consumers in a DMP seems consistently to be to pay fees, including high set-up fees for that DMP, rather than going to a free provider whose services are available for free. There may be some rational reasons why the fee-charging service is better, but I have not heard them. I think this puts fee-chargers in a very difficult position; because they are not able to access the fair share model, they are not able, in my view, to give advice that is truly balanced.
Melanie Taylor: Could I make a point on that, please? Gregory Pennington have access to a full range of debt solutions, whether or not that is the debt relief order, which we are able to offer ourselves through approved intermediaries, or debt management or IVAs, which are payable by the client. Again, across Payplan, they are payable by the client in those circumstances. For the enquiries we receive, all our advice is completely free, so it is only if a customer chooses to actually take a service and employ us to provide that service for them that they would incur a charge. Only around 9% of people actually take up a service with us. We also host Debt and You, which is a free-to-client site that allows them to do downloadable budgets, gives them tips on managing their own money and allows them to deal with lenders themselves where they want to be empowered to self-manage. Our approach is very much about being able to offer the right solution to the customer regardless, which is why we offer the full range. So I think suggesting that because you are charging for a service means that you are not going to be balanced in your offerings is inaccurate.
Q139 Paul Blomfield: Do you have any further reflections on that, John?
John Fairhurst: I disagree.
Q140 Chair : Andrew, did you try to make a comment?
Andrew Smith: Yes, very quickly, the new debt management guidance that will come into force next year is policy following fact. For companies that are members of trade associations, advice is very definitely given on the basis of the client’s need, and we monetise; we are able to take a fee, where it is appropriate that we offer a client a solution that we can charge for. The standards that DEMSA have already have OFT-code approval. DRF is well on the road towards achieving the first part of OFT code approval, and our standards have been written against the new guidance, which obviously DEMSA fulfil as well.
We have other requirements. For example, all our members must train their staff to the Certificate in Debt Resolution, which is 210 hours of study and three written exams, or to a similar standard. That is audited by our independent auditors. There are very high standards now in the members of the trade associations that are seeking to become trusted trade associations, and part of the self-regulatory system. We will certainly be inviting the non-fee chargers to play a part in DRF, and I hope that many of them will accept.
Chair : It is 12.20, and I intend to conclude proceedings at this point. However, we have half a dozen further questions that will be sent to you in written form, and we would appreciate your answers. Again, if there is any further information that you do not feel has been covered by questions, please send it in to us. Can I thank you very much for your contribution? I apologise that it has been abbreviated by the autumn statement. When we scheduled this session, we of course assumed that business would be carried out at the normal time.
Thank you for your attention.