UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 866-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

THE EFFECTIVENESS OF CONSUMER CREDIT REGULATION

WEDNESDAY 16 JANUARY 2013

MARK HANNAM, HENRY RAINE and DAVID REES

Evidence heard in Public

Questions 1 - 253

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 16 January 2013

Members present:

Margaret Hodge (Chair)

Stephen Barclay

Guto Bebb

Jackie Doyle-Price

Meg Hillier

Mr Stewart Jackson

Fiona Mactaggart

Austin Mitchell

Nick Smith

Ian Swales

Justin Tomlinson

Amyas Morse, Comptroller and Auditor General, Gabrielle Cohen, Assistant Auditor General and Alex Scharaschkin, Director, National Audit Office and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

report by the comptroller and auditor general

Regulating Consumer Credit (HC 685)

Examination of Witnesses

Witnesses: Mark Hannam, Chair, Fair Finance, Henry Raine, Head of Regulatory and Public Affairs, Wonga and David Rees, Director, Legal Affairs, Provident Financial, gave evidence.

Q1 Chair: Welcome. Thank you very much for agreeing to come. The easiest way of handling this, because you are all rather different animals, is to try and focus the questions on one at a time, which might be a bit frustrating for the rest of you, so come in if you want-certainly you, Mr Rees. I am going to start with Mr Raine, but if you feel there are things that we put to Mr Raine that are more industry-wide, you might want to contribute. The same goes for you, Mr Hannam. Yours is a very different perspective as well. I will start with Wonga. Can you start by explaining your business model?

Henry Raine: Thank you very much for asking me to come along. I will try to be brief. The idea behind Wonga started in 2007. The idea was simply that the consumer finance market in the UK was not serving the customer well. At that time, the products available were not clear in terms of how much you wanted to borrow and for how long. They were untransparent and quite often difficult to access.

The people behind the company and the investors passionately believed that the internet offered a lot of opportunities to do things differently. What they set up turned out to be something that has been remarkably successful. I can talk about that and the challenges it brings for us. In essence, they said to people. "You can choose to borrow exactly how much you want for how long. It is your choice. You control it"-obviously within terms of a timeline and amounts. "We will be transparent with you and up front about how much the product costs. There won’t be any hidden costs and you can access the product whenever you want." To support that, they built from scratch their own risk assessment system using the credit reference agency and public data so that they could make the best lending decisions.

Q2 Chair: "They" is you.

Henry Raine: "They" is we. When I say "they", they were the founders. I was not there yet. I cannot claim credit for much of it. I joined two years ago. Apologies. Alongside that, we also looked at how to do deal with customers, because what we were building and has been built was a sustainable business. We were not trying to build a business where we lent to customers, took the money from them, charged them default fees and never saw them again. The structure of the product is that we make money when people pay us back on time. To assist that-

Q3 Chair: The business model depends on people paying you back on time.

Henry Raine: That is right, and we turn down some two thirds of applicants.

Q4 Fiona Mactaggart: But don’t you make your money on repeat loans? Don’t you make much more money when someone has a repeat loan and a further repeat loan? I am confused, because that seems to be where the very high percentage of your income comes from.

Henry Raine: Just to be clear, people paying us back on time does not only mean that people are paying us back on the first loan. It means we credit-check them again and people can have another loan with us when they have repaid.

Q5 Chair: So they do not pay you back on time. You roll over the loan.

Henry Raine: No, we don’t. In terms of roll-overs-if I can just briefly explain, because this is an interesting area-when we started we did not offer any extensions or roll-overs at all. If you came to Wonga and you borrowed £70 for 10 days, we would send you a reminder three days before and one day before you owed us the money. If you could not pay us, obviously we would agree a plan with you. There would be a default charge and we would try and contact you. If on the other hand, as happened in the early days, because a lot of people who borrow from Wonga are sole traders-people running the sorts of businesses where they need short-term cash flow-you told us, "Actually, I can’t pay you back on day 10, because the money I was expecting is not there; I can pay you back on day 14," we did not have a procedure for dealing with that. We did not have any flexibility.

So in response to customer demand we decided we would let people extend the loan, but under very, very strict circumstances, and this is one of the large differences between us and the traditional payday lenders.

Q6 Chair: Can I ask you some questions? Otherwise this can go on. You say that you are transparent. Do your customers know that your APR is 4,214%?

Henry Raine: If I could talk about the APR-

Q7 Chair: Yes or no.

Henry Raine: Yes, it’s on the website.

Q8 Chair: No, do they know when they approach you?

Henry Raine: Of course, yes. I would like to talk about APR if there is a moment, but certainly upfront, prominently on our website on the homepage are two things. One is how much it is actually going to cost you in pounds and pence, which is obviously one of the unique features of Wonga, and the other is, as required by law, a totally relevant APR figure.

Q9 Chair: Do you tell them in the advertisements?

Henry Raine: Well, some of the advertisements that we do are brand advertisements. The only way that you can get a Wonga loan is, of course, by going to the website. The first thing that you see when you go on the Wonga website-if anyone has an iPad, we could demonstrate it-is exactly how much it is going to cost you for how long, and what the APR is, so I think it is totally transparent, unlike many others.

Q10 Fiona Mactaggart: But is there not research showing that people do not really understand these percentage figures? Isn’t that part of the problem?

Henry Raine: I am sorry to interrupt, but of course-that is why we show the total cost of credit. Indeed, the BIS Committee, which looked at this area, recommended that the APR is the wrong measure. This is not a Wonga point particularly, but the problem with APR, which is a European requirement, is that of course that it assumes that you are borrowing for a year, which you are not with Wonga, and it assumes the interest is compounded. The worst of it is that for the representative example you have to choose your 51st example, so the shorter the amount you show-16 days is our representative example-the more the APR looks. It is the wrong measure, and I think everyone agrees with that.

Q11 Fiona Mactaggart: How many of your 16-day loans are paid back within 16 days?

Henry Raine: The vast majority of people pay us back on time.

Q12 Fiona Mactaggart: What proportion?

Henry Raine: About 86% pay us back on time; 24% pay us back early. One of the things about Wonga is that because we charge a daily rate, you can pay back early at any time, and you only pay for the money you have used.

Q13 Chair: Can you answer me something else, which is to do with why I asked you about your business model? Looking at your accounts I can see that in 2011, you wrote off £76.8 million, which is 41% of your £185 million revenues. It was a fourfold increase on your bad debt from 2010, is that correct?

Henry Raine: Well, the business had grown enormously. If I can talk about provisions for bad debts, very simply, the way that traditionally they are measured is that you look at the amount of lending you have done, which in that year was £707 million of loans, and you say what the write-off was, which was £77 million. Actually, for reasons that are boring and to do with IFRS, it was £66 million.

Q14 Chair: Okay. It is on revenues. I was taking debt in relation to your revenue, rather than to the amount you lent. What I do not understand is how, with that level of bad debt, your profits went up. They were £12.4 million in 2010 and £45.8 million in 2011. Explain that to me.

Henry Raine: Well, there was a vast amount more lending done. The business has grown very significantly. One of the things about these businesses is that a huge amount of investment is required to start the business and to grow to a certain level. With regard to the provisioning, the level of provisioning is slightly above that for credit cards and bank unauthorised overdrafts.

Q15 Chair: It was simply size of business growth?

Henry Raine: It is a combination of size and doing things better. It is the investment that we have made in systems, which we continue to make. We do not pay dividends out of this business at all; we reinvest the money in improving it.

Q16 Chair: You do not pay dividends.

Henry Raine: No.

Chair: Okay. Fiona asked you a question about the roll-over of loans. My understanding is that your average roll-over is three.

Henry Raine: Sorry, if I could correct that, you can never do more than three roll-overs with Wonga. One in 11-

Q17 Chair: The average is three.

Henry Raine: No, less than one in 11 customers ever extends a Wonga loan once.

Q18 Chair: Presumably, you make more money if somebody rolls over their loan.

Henry Raine: Not necessarily, no. We make the most money if we can get the money back and relend it, frankly. We are trying to build a sustainable customer base, so people who have to roll over their loan are, by definition, people who may look like they are more in difficulty. We credit check everyone before we let them roll over or extend.

Q19 Chair: How do you credit check them?

Henry Raine: We return data to the major credit reference agencies. I don’t know if people are familiar with Experian and Callcredit. We buy vast amounts of data from them, and we work very closely with them. They have all sorts of data. We also buy lots of public data, and we return all the data. One of the challenges for Wonga is that when we are looking at someone’s credit history to decide whether to lend to them, a number of other borrowers will not have returned the data on those borrowings. One of the problems we have and one of the things that we are very keen on doing-the NAO Report identifies it-is making it clear that everyone should use the main credit reference agencies and return data in real time. It is simply not in our interests and means we get it wrong. When we get it wrong, that is a bad result for us.

Q20 Fiona Mactaggart: Are you saying that this is a failure of regulation, that the regulators are not able to ensure that everybody returns this information to credit reference agencies? That is what we are looking at today.

Henry Raine: The NAO Report has a number of recommendations about things that should be improved, which I can go into and all of which I agree with. It is a difficult area, but it has been done in other sectors. The credit reference agencies traditionally are looking at longer term products, so they are geared up for monthly reporting, but what is clear about the growth of Wonga and other short-term products is that there has to be a better system for everyone paying for and returning data.

Q21 Chair: If I take out £300 and I pay it back in 14 days-

Henry Raine: It’s 16.

Q22 Chair: Fifteen days. On that £300, I pay you back what?

Henry Raine: My maths is not good enough, but the average loan at Wonga is £175 for 16 days and I think that comes to about £36 of interest. You can do it on the sliders.

Q23 Chair: If I roll it over three times, what do I pay back?

Henry Raine: We don’t have people who roll it over three times.

Q24 Chair: You said you did.

Henry Raine: Very few. It depends how you extend. Bear in mind that at Wonga, you first pay back the interest and the fees that you have thus far incurred. Secondly, with the traditional product you can extend it for one day or four days.

Q25 Chair: If I borrow on average £176 and pay it back in 14 or 15 days, you said it would cost me £36 extra. If I roll that £176 over three times, which is the maximum you allow, how much would I pay back?

Henry Raine: I am not trying to be obtuse, but it depends how long you rolled it over for.

Q26 Chair: Over the same period three times.

Henry Raine: Effectively it would another 48% of interest. It is 1% flat.

Q27 Chair: Cumulative or compound?

Henry Raine: Compound.

Q28 Chair: It would be about £140 or £150.

Henry Raine: That, of course, is why it very rarely happens.

Q29 Chair: It does not happen very rarely in the industry.

Henry Raine: I agree, but obviously we do something rather different.

Q30 Chair: How many of the people you give loans to are dependent on benefits?

Henry Raine: When I last looked at the statistics, fewer than 2% of people were on benefits. Those benefits are widely defined. There will be some people who are on benefits as well as on income. We have looked at whether we should lend to people on benefits; there is a specific question on the dropdown menu. The view we take is that we have a higher cut-off for them on the scorecard. The vast majority of Wonga loans are at the low end of the range. Bearing in mind that you can take up to £400, the vast majority of loans are between £100 and £250. It is perfectly possible that someone on benefits could borrow from Wonga, provided they have been credit checked like everyone else and that they have some sustainable income, and depending on the amount they want, but it is a very small proportion of our base.

Q31 Justin Tomlinson: I want to cover six sections briefly, using your experience of what has happened. You have touched on some of them. The first is APR. I have tried asking Treasury Ministers and staff to calculate APR and everybody comes back with a different answer. You said that European regulation means that you have to display APR in huge writing. I checked your website yesterday, so I can vouch for that. In an ideal world, would it be helpful if regulation said that a total cost had to be displayed in cash terms?

Henry Raine: I think that would be remarkable assistance. I am struck by the fact that Lord Borrie, who I instructed many years ago and who knows much more about this than I do, had an amendment in the House of Lords recently to effectively make that a requirement. If customers for any financial services product could see how much it cost in pounds and pence, that would be helpful.

Q32 Justin Tomlinson: You display in cash terms, but do all of your competitors display in cash terms?

Henry Raine: As far as I am aware, not all of them do. The good thing is that we have now agreed a charter with Business, Innovation and Skills whereby one of the requirements for the short-term sector is that they have to display that.

Q33 Justin Tomlinson: In fairness, would you also extend that to all forms of lending? For example, an unauthorised overdraft has the equivalent of 80,000% APR.

Henry Raine: Absolutely. According to the BBC, the unauthorised overdraft has 800,000% APR.

Q34 Justin Tomlinson: So, No. 1 on the regulation would be everything in cash terms. Secondly, the credit checking is incredibly important. How many of your competitors, would you say, do credit checking?

Henry Raine: Obviously, I am not speaking for them but it varies enormously. I think that some advertise that they do not do credit checking-on some products they say that-and there are great differences. Provident Financial has a very different model, which is also valid, involving going into people’s homes. In terms of online, I think it is very patchy, and the other problem is that the data are often not returned. It is key for us lenders to understand if someone has taken out a loan the day before.

Q35 Justin Tomlinson: You have talked about the-let us say-success rate of people repaying. Do you then say that your competitors who do not credit check would have a lower success rate of people repaying within the time?

Henry Raine: We believe that we have industry-leading arrears. I think the other thing that happens is that they would use roll-overs far more than we do, so, effectively, the loan becomes extended.

Q36 Justin Tomlinson: I met the Money Shop, which does not do credit checking in the way you do but asks people to bring in bank statements. I know of people who are not very good with money but know how to cheat the system. In effect, they have two bank accounts, arrive with one bank account in good order, secure the loan and keep away the other one. Money Shop’s defence to me is that it cannot afford to do credit checking. What does it cost to credit check a consumer?

Henry Raine: Obviously, the scale of the credit checking you do has cost implications, but it could cost some pounds per loan to do the sort of credit checking that we do.

Q37 Justin Tomlinson: So a couple of pounds rather than-

Henry Raine: In the smaller pounds, yes.

Q38 Justin Tomlinson: Again, regulation-wise, all the lenders should do full credit checking, and it should be on a centrally shared database.

Henry Raine: We would very much support that. It should also be accessible to banks and other financial services businesses, because it is important for us to see long-term commitments as well.

Q39 Justin Tomlinson: Is the margin so tight for your competitors that they cannot afford to do that £2 credit check?

Henry Raine: I honestly cannot comment on that; it would be unfair.

Q40 Chair: Maybe Mr Rees can?

David Rees: We are a completely different model.

Chair: Okay. I do not think it is that different.

Q41 Justin Tomlinson: Am I right in thinking that you can only get a Wonga loan online, so there are no door-to-door sales?

Henry Raine: That is right.

Q42 Chair: Do you talk to any of your customers?

Henry Raine: That is a very helpful question. We are trying to build an online financial community, and building products. We have 177,000 followers on Facebook, who we talk to all the time, and we have a website called openwonga, where we have testimonials from real customers-their videos, etc. We spend a lot of time with customers and trialling products with them, so very much so.

Q43 Justin Tomlinson: We talked about roll-overs a little bit already. You say that you freeze everything at three roll-overs, so you cannot go further than that. Is that industry standard?

Henry Raine: I think it has not been. My understanding is that, as a result of the work we have been doing, more and more companies are now moving in that direction. The charter certainly incorporates a restriction on roll-overs.

Q44 Justin Tomlinson: So, on the regulation front, you would push for a limit to roll-overs?

Henry Raine: Absolutely, yes.

Q45 Justin Tomlinson: Explain the recovery and what happens. I have got to three roll-overs and failed to pay, what happens now?

Henry Raine: Throughout the process, we are contacting the customer, as I say, for two reasons. First, we make the money when the customer pays us back. Chasing them into debt is not helpful for us or for them, so we would have been interacting with them. We send them frequent reminders. If they cannot pay us back, they will have contacted us-they can either go online or telephone-and we will agree a plan with them. We are not perfect at that, and there are also some customers who will not contact you-some customers who are in financial difficulty. If all else fails and we cannot get the money, we freeze interest after 60 days. If for some reason we have tried to contact you, we do not send people around to your home or anything like that, but if all else fails, rather than having a spiralling balance, we freeze interest after 60 days. That, I think, is now widespread-it is another of the charter recommendations.

Q46 Nick Smith: You freeze it after 60 days?

Henry Raine: Yes.

Q47 Jackie Doyle-Price: So the APR figure is completely misleading then, if you freeze it after 60 days?

Henry Raine: That is right. Unfortunately, and I am not an expert-so for some reason I do not understand-you have to calculate the APR as a year, even assuming that.

Q48 Meg Hillier: Can you give an illustrative example of what that would actually mean for a constituent of mine in cash terms, if they come and take a payday loan out but cannot pay it back, 60 days later? I know you cannot give exact figures.

Henry Raine: First, we have turned down two thirds of applications, but if someone takes out a loan from Wonga and cannot pay us back, our system has not worked perfectly either. That is the first thing that we say. It is not perfect, so we make mistakes. We try our best not to lend to people who cannot pay us back. That is why we do all the credit checking and turn down two thirds. Let us say that something has happened to them. We will be contacting them throughout the period-not aggressively. We have their mobile phone as part of the application process and their e-mail, and we will be contacting them in advance of the due date to say, "Don’t forget, you borrowed money from Wonga 16 days ago"-most people can remember that, because it is a fairly short-term commitment-"You have agreed to pay us on this date. If you are having difficulties, please contact us."

We also take from them their debit card, which enables us to use continuous payment authority, so there is another way of collecting the money. But if they contact us by any means, either by the basic means of telephone, e-mail or SMS and tell us that they are having financial difficulty, we then get them to fill in a very simple form online immediately and freeze all interest.

Q49 Meg Hillier: Do they have to contact you for that interest to be frozen?

Henry Raine: If, on the due date, they cannot pay us, we also contact them. If either of us gets hold of the other, yes the interest is always frozen.

Q50 Meg Hillier: What I am driving at is that a lot of my constituents will sit on a parking ticket for a very long time. People put things aside and ignore them, even with a loan they took out 10 days ago. Unless they contact you to say that they want a repayment deal, you do not freeze until 60 days?

Henry Raine: No. The parking payment is an interesting example. I discovered recently that bailiffs are sent in to collect parking tickets, which is something we would never do. We do our best to contact them as well. We text them. You have to be slightly careful because you do not want to bombard people, particularly people who are having financial difficulties. We would contact them as well in a sensible way, saying, "You are obviously having trouble paying your loan. Please contact us to discuss a plan." Most people do that, but not everyone does. Sixty days was just put in there for those people-some of whom are "won’t pays"; not all of them are "can’t pays"; some of them can’t pay-so that they would not have a spiralling balance.

Q51 Meg Hillier: I just need to come in on the continuous payment authority as well. When do you kick that in? It is not in detail in the Report. When you decide on a direct debit, and you try and cancel it, but you cannot because you can get the bank to reinstate it.

Henry Raine: If I may, I will spend a couple of minutes on it because it is quite complicated. The OFT are here. They are the experts on it. Continuous payment authority is not a direct debit. It is a similar process. It is the same for gym subscriptions and membership magazine subscriptions. You give your debit card. In Wonga’s terms, when you go online during the process, you are told that you have to have a bank account, and we will take the money off your debit card. We explain that throughout the process. In the reminder three days before and a day before, we also remind you of that. One of the problems with continuous payment authority is that a lot of people were not telling the customer that they had signed up to this. It was buried in the small print. It gives us the right to take the card, to take the money, but clearly it has to be used responsibly. We welcome the new guidelines around that and how it can be used responsibly.

Q52 Chair: What does that mean?

Henry Raine: Prior notification to the customer. If there were financial difficulty, you have a period of "cool down". You regularly try to contact the customer. The issue here is-it is an interesting issue-that for the online sector it is one of the easiest ways both for the customer and for the lender to recover. It is the reason why most online lenders do not use lots of debt collection agencies and bailiffs, and do not default customers. One of the difficulties for people defaulting is that obviously it affects their credit rating. So continuous payment authority is used for gym memberships and other subscriptions.

Q53 Meg Hillier: I have a story that the BBC reported back in September about some banks. It was about refusing to cancel payments to payday loan firms, despite their legal obligation to do so. There is definitely confusion out there. You say that you welcome the new regulations, but how do your customers react to this? I bet a lot of them do not know that they are going have you going in and getting it. You do not go in and get the whole amount, do you?

Henry Raine: They are told up front, throughout the process.

Q54 Meg Hillier: Do you think genuinely that people understand what that means?

Henry Raine: Oh yes. It is very clear.

Q55 Justin Tomlinson: What about your competitors?

Henry Raine: I can only speak for Wonga. I cannot speak for the payday sector.

The other thing that has been complicated is that, for a bank, it is very hard for it to cancel one of these authorities because I do not think that they have the systems. Again, the OFT will be able to say better. We have now agreed with the OFT that a customer can contact us, i.e. the lender, and cancel it. It was very difficult for the banks to be able to cancel a continuous payment authority. They are looking at millions of transactions. It is a banking point. It is not a Wonga point.

Q56 Justin Tomlinson: On the payment things, you would support that going into regulation.

Henry Raine: Yes.

Q57 Justin Tomlinson: When I was testing your website yesterday, I found the up-front costs very transparent and easy to find. You had a lot of small print-but not in small print-to say what would happen if you got behind. It did not tell me in cash terms what that might cost me. Would you welcome that as an extra regulation? You do not currently do it, but it would mean basically that you said, "You have got to the 60 days. You borrowed £100. This is what the worst-case scenario is."

Henry Raine: That would be sensible. We charge one default fee of £20. That is very clear, if you go into how it works on the site.

Q58 Justin Tomlinson: That was clear, because obviously you then have the other 30 or 60 days’ worth of interest. In theory, to me a good piece of regulation would also say that.

Henry Raine: We could give some examples. It is more difficult in Wonga’s case because people are buying on a daily basis. For the traditional payday products and 30-day products, it would be very easy to see. Our average borrowing is 16 days, but anything that makes it clearer for the customer.

Q59 Justin Tomlinson: There is a lot in the report about how relatively easy it is to get a licence in terms of about £1,000.

Q60 Nick Smith: To go back to your last point, I am just trying to understand a bit more about this "interest will continue for 60 days after someone has not paid back their loan." I know that it is stopping after 60 days, but 60 days is still a long time for daily interest. Have you an average amount for the debt that people build up for that 60 days, on which interest is still being charged?

Henry Raine: Very few people end up paying 60 days’ interest at Wonga. There is a business reason for us, and a customer reason for them. For a customer, not only is it clearly a disaster, but for Wonga it means that we will never get our money back. If someone is unable to pay back, there is no point in keeping going. We have chosen 60 days as a final stop to encourage people to reach negotiation with us.

Do not forget, if you reach negotiation with us, we have people on payment plans paying £1 a month, £5 a month. All that stops. We freeze interest at that point. We needed some sort of carrot so that people make a sensible arrangement.

Q61 Nick Smith: You say that it is not very many. How many people last year went up to the 60-day limit?

Henry Raine: I do not know. I can certainly find out and tell the Committee. I do not have that figure.

Q62 Chair: That will be your 12%.

Henry Raine: No. I said that 85% pay back on time. The vast majority pay back over the 60-day period.

Q63 Chair: How many is that? I do not know how many customers-or loans-you have.

Henry Raine: We have done round about 6 million loans.

Q64 Chair: So 85% of 6 million-15% of 6 million-is a lot.

Q65 Nick Smith: Nearly a million people have had a 60-day limit?

Henry Raine: No. The Chair was asking me about the number of loans. Just over a million customers.

Q66 Chair: So 15% of 6 million loans is a million. One million loans are not paid back on time? That is a lot.

Henry Raine: In terms of the financial services industry as a whole, our rates are obviously competitive with all other products, like credit cards and bank overdrafts.

Q67 Nick Smith: Can you give us the detail about the number of people who go up to the 60-day limit?

Q68 Chair: It is a million.

Henry Raine: We are talking about the number of loans. We have around a million customers, 1.2 million customers. I will give you the details.

Q69 Justin Tomlinson: To explain the worst-case scenario, you make it clear on the website that you will black mark them should they ultimately just refuse to pay.

Henry Raine: Yes. We are very clear on the website about the nature of the product and also that, if they default finally, we will return that information to the credit authority.

Q70 Justin Tomlinson: Going on to my point about the licensing, for about £1,000 you can set up a licence. In theory, Jackie and I could set up a rival company. The Report seems to indicate that, if we act unscrupulously, we could delay and delay, and carry on trading unscrupulously for about two years. Have you seen much evidence of that? Is it something that needs to be toughened up under new regulation?

Henry Raine: It is certainly a challenge. I cannot speak for the OFT. But it is ridiculous that companies like Barclays, for example, are paying £1,000 for a licence or Wonga, when it started. In terms of penalties, there is clearly a balance between shutting people down who are acting unscrupulously and having a sense of natural justice, in that if there were an issue with the OFT, there should be some kind of process.

Q71 Justin Tomlinson: I am the chair of the financial education group. Would you say that customers are generally not well equipped to make informed decisions-that is, they cannot calculate APR?

Henry Raine: Yes. One of the things that I have found is that because we show the cost in pounds and pence, Wonga customers really understand that. On the question of financial education, I cannot calculate an APR.

Q72 Justin Tomlinson: Finally, the Money Advice Service has a £54 million budget. Honestly, has it helped?

Henry Raine: My own view is that a lot of money has been put into financial education, with not necessarily a great deal being gained from it.

Q73 Ian Swales: I will be brief because Justin has asked a lot of the questions I wanted to ask. This conversation reminds me of the fact that I was once told that only 10% of people understand percentages, which is an interesting thing to remember. Listening to this 30-day, 60-day thing, I am not clear, so can we just be absolutely clear about this? You said you can borrow up to 30 days on your website. Yes? Correct me if I am wrong.

Henry Raine: Yes.

Ian Swales: You can roll that over three times.

Henry Raine: Not for 30 days, but for any length you like, so you could roll it over for five days.

Ian Swales: Just suppose I borrow for 30 days. I can roll that over three times?

Henry Raine: In theory, yes, having been credit-checked.

Ian Swales: Which would take me to four months, approximately?

Henry Raine: Yes.

Q74 Ian Swales: When does the 60 days kick in? Is that after the four months?

Henry Raine: If you defaulted at the end of that period, assuming we could not reach an agreement with you.

Q75 Ian Swales: So my loan would be compounding for four months. I wrote down that you said it was frozen for 60 days.

Henry Raine: I’m sorry, no-frozen after 60 days.

Ian Swales: Is that 60 days after the four months?

Henry Raine: After the default. If you were the 0.01% of customers who extends their loan three times, and you extended it for three terms of 30 days, which people don’t tend to extend it for, and then you did not pay and you did not contact us, or we could not contact you for 60 days, yes, but that is highly theoretical.

Q76 Ian Swales: So, in theory, the interest could be compounding for six months?

Henry Raine: In theory, it could.

Q77 Ian Swales: In theory, okay. That is what I wanted to be clear about. My other question was simply, do you, in common with many financial organisations, sell your bad debts at the end? When you have given up, do you sell them to another party?

Henry Raine: We have not traditionally done that, but we are now looking at doing that. We will do a small trial of that. The only people we will sell to-I think we have just reached an agreement with one party-are the people who collect debts across the regulated sector.

Q78 Ian Swales: That was the point I was going to make. If you do sell debts-you do not at the moment, but you intend to-you will ensure that it is to a properly regulated organisation. Some of the worst stories we hear-all MPs hear these stories-are not necessarily about companies like yours, but about companies that might be feeding off companies like yours, because they buy debts at 10p or 5p in the pound and then get very aggressive about trying to get their money back.

Henry Raine: Absolutely. Just to be clear on that, we have been negotiating with a company that is regulated. Those are still our customers, and any action that company takes has to come through us, for the simple reason that if they mistreat our customers, it will soon become apparent.

Q79 Ian Swales: This is a very important point. Are you looking to use agencies but still work via Wonga? Is that what you are saying?

Henry Raine: No. They are Wonga customers, so they will be notified that the debt has been sold, but we have various provisions in the agreement that we can supervise how companies go about things and what they do.

Q80 Ian Swales: This is a really important area of regulation. I certainly have constituents who borrowed money from company X, but are now being severely harassed by company Y, which they had no previous had dealings with, but which has bought the debts from the original company. Are you saying that, in this example, company Y would have direct access to your customers, or are you saying that they would still have to work through you, as your agents?

Henry Raine: We would introduce them to our customers, so the first contact would come from Wonga, but we would also supervise what they are doing. I think the issue you raise is very important. There clearly needs to be tight regulation around debt collection. Some of the people in this industry sell debts very early, and they sell them for quite a lot of money. What we are looking at here is a situation, bluntly, where, given the size of our balance sheet, we have to look at alternatives. The continuous payment authority means that we will have to look at it as well.

Ian Swales: If you wrote off-I cannot remember the figure the Chair gave. Was it £77 million?

Q81 Chair: I was just trying to work it out: £77 million, and your average loan is £130-

Henry Raine: No, the average first-time loan is £175. Across the portfolio, the average is 257.

Q82 Chair: You did not tell us that. How many loans are you writing off?

Q83 Ian Swales: That is 300,000 loans.

Q84 Chair: That is a lot of loans. That is a lot of people. So they then sell on.

Henry Raine: We are not selling on those loans.

Q85 Ian Swales: No so far. They are looking at it. So you wrote off £77 million.

Henry Raine: As against the £700 million lent.

Ian Swales: So, over 10%. That is a pretty high number. I can understand why the people running Wonga are now looking at whether they can sell the debts to the secondary market: for 10p in the pound, it would be a large return back to Wonga, being 10% of what you write off. Are you under any limitations in terms of regulations? Is there any anything-other than your reputation- that, for example, prevents you from selling these debts to just any organisation?

Henry Raine: Yes. Basically, we would have to sell them to a regulated collections agency.

Q86 Ian Swales: Can you be absolutely clear with the Committee? When you do that, in your plans, will that agency be contacting the customer on your behalf?

Henry Raine: As I explained, we will make the initial contact with the customer saying that we have sold the debt.

Q87 Ian Swales: And they can expect contact.

Henry Raine: Absolutely.

Q88 Jackie Doyle-Price: My concern is about firms operating in your sector that are not online businesses, but are occupying shops in some of our less salubrious high streets and have, frankly, very aggressive methods of finding customers. How many of your staff are remunerated with any kind of commission?

Henry Raine: We do not sell loans. No one does. To emphasise that point, the other issue, which is one of the things that the National Audit Office report covers, is lead generation. A number of other lenders buy a lot of leads from online lead generators, and that is a very difficult market to control. We do less than 1% of that-there are some perfectly reputable ones-but we do not operate on that basis at all.

Q89 Jackie Doyle-Price: You have given quite a good account about some of the more responsible practices that your firm actually shows. Do you think it would be good for the industry if there were more regulatory constraints on operators? You have a rigorous system of credit checking. If I were to buy an electric toaster, there would be product regulations as to how that should work. We could do the same for financial products, in terms of whether it is the right product for this particular customer in this instance. That would be good for the reputation of the industry and it would sort out the bad boys from the good ones. What would your reaction be to that proposition?

Henry Raine: We have always been, broadly speaking, in favour of regulation. When we started, we had our own charter where effectively we limited roll-overs and froze interest after 60 days. Those were not statutory requirements. The National Audit Office report highlights three or four areas: one is proper affordability and credit checking, which I think is vital; another is not encouraging extensions and limiting them; another is information sharing with credit agencies on data; and the last one is clearly explaining what penalty charges are and how they operate.

It is also important to say that we make mistakes at Wonga. We are here for a long-term business. The reason why people like me have joined is because it is a very different sort of business. We are far from perfect but, unfortunately, we often do get hoist with the petard of things we do not do. Regulation in that sense is a very positive thing.

Q90 Stephen Barclay: That is stretching it a little, isn’t it? The OFT has had to issue a number of warnings against Wonga. Surely that suggests compliance failures.

Henry Raine: They issued one against us in response to some letters that were written about three years ago before I or general counsel joined, and those were letters when we had some cause to believe people were fraudulent. We wrote to them saying that they had been fraudulent. That was clearly bad practice.

Q91 Stephen Barclay: That was a press release issued on 22 May last year.

Henry Raine: Yes, that is because the matter took two-and-a-half years to come to adjudication.

Q92 Stephen Barclay: Warning you not to behave in an aggressive or misleading way.

Q93 Henry Raine: Those letters were the ones I was talking about, and they happened in 2010, before any of us joined. We have also totally restructured.

Q94 Chair: Stephen raises a very valid issue. I have a whole lot of pressing cuttings about individuals who had money taken out of their bank account and had never taken out a loan from Wonga. You are painting yourself as more perfect than I see you, from what I have read about you. Fraud is a big issue. How are you tackling that? People come to you, you put money into one account. There seems to be a ridiculous lack of check. I come to you and say, "I want my £250." You put it into my account, but I give you the credit details of Justin, and you then take it out of his money when I do not pay it back.

Henry Raine: I will talk about fraud for a moment, because you have highlighted a significant problem. The online industry has a massive problem with fraud. It is not only a Wonga problem. We have been hit by a number of-

Q95 Chair: Why do you not check? How do you allow me to take out a loan and then say that you will take the money out of Justin’s account?

Henry Raine: We can only do that if there has been a total identity theft. Unfortunately, identity theft is very widespread in this country.

Q96 Chair: You are putting it into one bank account, and you are then taking it out of another.

Henry Raine: I do not want to go into too many details, but someone has stolen Justin’s identity, including his debit card.

Q97 Chair: There is a heck of a lot of it going on.

Henry Raine: 1% of all transactions online are subject to fraud.

Chair: We have to go and vote. We will come back to it.

Sitting suspended for a Division in the House.

On resuming-

Q98 Austin Mitchell: I was thinking that 4,200% is an absolutely horrendous rate of interest. I cannot see any way that it can be justified. How do you justify it?

Henry Raine: We don’t charge it. I agree it is terrible, but we do not charge it. It is a fictitious measure. We cannot justify it. We would not have a business if we charged 4,200%.

Chair: But you fix it; nobody else does.

Henry Raine: It is fixed by the European Community.

Chair: No, but you fix your charges, which gives you an APR. It is not someone coming out of the skies and fixing it for you.

Henry Raine: The question is, "How much do I pay when I borrow from Wonga?"

Q99 Chair: But how much do you charge?

Henry Raine: We charge 1% a day, plus a £5.50 transmission fee.

Q100 Chair: Right, that is what leads you to your 4,000%.

Henry Raine: Well, no. Even if we were to borrow from Wonga for a year-

Q101 Chair: Well, if you borrowed from a bank for a day-

Q102 Austin Mitchell: This is gobbledegook. These people are paying a very hefty rate of interest.

Henry Raine: But they are not paying 4,200%.

Austin Mitchell: They are paying a very hefty rate of interest.

Henry Raine: They are paying 1% a day.

Q103 Ian Swales: To build on what Austin says, no one customer pays that, but if you lend to one customer who pays back, and you lend to another customer on the same day, you have got your administration, but the £10 you started with on 1 January will go up by 4,200% by the end of the year, via maybe 20 loans.

Henry Raine: No. First, we do not compound interest-

Q104 Ian Swales: Well, you are compounding, because you get-

Henry Raine: No, the APR calculation assumes that interest is compounded every day, so the 1% becomes-

Q105 Ian Swales: But the £100 you lend on 1 January, when that is paid back it is a bigger number, and if you lend out that bigger number to a new customer or customers and repeat the process, then what APR means is that you have got £4,200 at the end of the year for your initial £100. That is what APR means. The fact that it is going through more than one customer through that period does not change the fact that that is what the business model is, surely.

Henry Raine: We can discuss the mathematics of it, but-

Q106 Ian Swales: You have got administration costs, obviously, I accept that-

Henry Raine: Very significant, yes.

Q107 Ian Swales: But in terms of how the money compounds, that is what APR means.

Henry Raine: But we are only lending to people on a short-term basis, and we are lending a small amount of money.

Q108 Ian Swales: Exactly. And then you lend to the next person on a short-term basis and, as you keep lending to people on a short-term basis, then because of the way that the mathematics works, the £100 you start the year with is £4,200 at the end of the year. That is what APR means.

Henry Raine: But that is not what the customer is paying.

Q109 Ian Swales: No, because you are growing your business, you have more customers at the end of the year, but the total of what the customers are paying must be that-that is what APR means. Because the first customer has paid back interest, it becomes your capital to lend to the next person, and that is how it compounds.

Henry Raine: Subject to the charges and how much we have to pay.

Q110 Nick Smith: Mr Raine, would you recommend to any of your family that they borrow from Wonga?

Henry Raine: When I was a trainee solicitor, if I needed money on short-term basis, I would certainly have borrowed from Wonga. If you look at the customer base, a lot of people are borrowing from Wonga and 75% of them have access to other credit sources. One of the things we find is to do with the cost to people of using credit cards. There is a very interesting study to which the National Audit Office refers to in its paper, from the Friends Provident Foundation, that shows that, clearly, if you are able to use a credit card and repay it within the period, that is a very cheap form of borrowing, but the vast majority of people are effectively paying between £44 and £51 per £100 borrowed from a credit card, because they are making minimum payments.

Q111 Nick Smith: So you are saying that you might have borrowed from Wonga.

Henry Raine: Certainly, yes.

Q112 Nick Smith: Have any of your family borrowed from Wonga, as far as you know?

Henry Raine: My children are too young to borrow from Wonga, and my wife has not borrowed from Wonga, but certainly had this service been available when I was a younger person, I certainly would have looked at borrowing from it-for occasional use, I would not have lived my life on Wonga.

Q113 Meg Hillier: On that point on age, what is the age profile of your borrowers?

Henry Raine: I think about 60% are under 40, then there is a smaller percentage above 40. There are very few people over 50 but that, I think, is partly to do with the nature of the service-it is only available online and, obviously, it appeals to people who are used to transacting business and doing financial products online.

Q114 Austin Mitchell: If it is 1% a day or 4,200% on an APR basis, it is still a hefty rate of charging. Your customers, you say, have got bank accounts-you take a lien on the bank accounts-so why can they not borrow the money from the bank?

Henry Raine: To answer that two ways, Mr Mitchell, first of all, lending money short term is a risky business. The costs of lending someone £100 are very much the same as lending someone £5,000 or £10,000. That is why it is an expensive service, and it is an expensive service to get right. As to the banks, I am not here to answer for them, but I entirely agree that one of the reasons why our product has been successful is because the banks were not prepared to lend-they certainly were not prepared to lend competitively-and because the other problem with a lot of the products is that they are totally non-transparent. The reason Wonga has been so successful is that people see clearly, up front, how much it will cost them to borrow. A lot of our customers come from a background where they have had an unauthorised overdraft, which they have been bumped into, and it is extremely expensive. But you have to ask the banks why they do not-it is a larger problem about bank lending.

Q115 Austin Mitchell: The whole sector exists because the banks have not created an adequate system of short-term loans for customers. If they did that, you would not be in the market.

Henry Raine: I think we would have to compete, but we would be happy to compete with banks as well, absolutely. We welcome competition.

Q116 Austin Mitchell: Okay. The question usually asked about the whole sector is, should we not cap the interest rates that are charged? You say it is 1% a day, or 4,200% APR. Should what you charge be capped?

Henry Raine: My view on that, and Wonga’s view, is that we should look at a lot of the research that has been done on capping. Different people have different views on capping. We are a data-driven business. Bristol University are doing a major study into this very issue, which I think is due any day now. They will have looked across the sectors. Some people feel that capping could have inadvisable consequences. The last time the Government looked at it, they thought that. Our view is that we should look at the evidence and see what the Bristol research comes up with.

Q117 Austin Mitchell: You could live with a cap, although it would reduce your income.

Henry Raine: It is very difficult to talk about a cap without knowing how it would work and what it is. No one has identified that.

Q118 Chair: Other countries have a cap, so we have evidence from other countries.

Q119 Fiona Mactaggart: It is interesting to hear Wonga say-I think this is what you are saying-that you would not necessarily object to a cap on the costs of credit. Up until now, my impression has been that you have resisted that. One of my concerns is not just people having repeat loans from you, but actually borrowing from Wonga and borrowing from some guy down the road. We know that very often these borrowers are getting themselves into pickles and borrowing from each other to pay back other people’s loans. Do you know when someone is borrowing from other short-term moneylenders?

Henry Raine: Can I address both points? I was not saying that we would welcome or support a cap. I was saying that I think it is important, because we are an important part of the industry, that the pros and cons are researched properly to see what the answer is. That is why I support Bristol.

With regard to your second question, as I mentioned earlier, one of the biggest challenges-I think one of the other Members mentioned it-is the lack of reporting of other loans across the sector. As for what I think would be very effective in terms of regulation: price capping is an issue that the Government are looking at-we will see what they come up with and what the evidence is. Then there is proper returning of data by people across the sector, when anyone-not just us, but banks-credit-checks someone, they can see the extent of their borrowings in a real-time basis.

Q120 Meg Hillier: In preparation for today, I looked up my credit history and I could see everything that I have ever done. Historic things that are closed down are all there. What are you saying is not going to be there?

Henry Raine: I do not know whether you borrow from a number of short-term lenders.

Meg Hillier: I guess I don’t.

Henry Raine: That is the point. It is short term.

Q121 Meg Hillier: It is so quick, you mean. Because it is a 10-day loan-

Henry Raine: Also, some of the short-term lenders will-

Q122 Austin Mitchell: The justification for high charges or high interest rates given by other players in the sector is that this is high-risk lending. But you say that 85% of the people actually pay the loan back on time. It is not a terribly high risk.

Henry Raine: I think 15% of a large number is quite a high risk, and also it is very expensive. We offer everyone the opportunity to borrow exactly how much they want for how long. Thinking about the maths of that-

Q123 Austin Mitchell: The 15% is a failure on your part in the sense that they should not have had the loan in the first place.

Henry Raine: Not necessarily. People’s circumstances change. Other things can have happened. It may be that they had other credits we did not know about, because the system did not let us know about them. There are lots of reasons why-

Austin Mitchell: Do you have a profile of your average customer? I imagine it must be somebody on comparatively low earnings. You say they are not on benefits, or only a small proportion are on benefits, but their earnings must be low and their level of financial education must also be low, otherwise they would borrow elsewhere.

Henry Raine: That assumption is not borne out by our customer base.

Q124 Austin Mitchell: It might be a condescending assumption, but do you have a profile of your customers?

Henry Raine: I apologise. The average customer’s salary is around the £20,000 mark. We are slightly more skewed towards men than women in terms of the customer base. We surveyed 28,000 of our customers-a very large number-using Populus. These details are available on our website, and 75% of them tell us that they have access to other forms of credit. They all have to have bank accounts, debit cards and mobile phones; 25% say they have never used a payday loan before. They use Wonga for various purposes, largely either for short-term emergency needs or because going into unauthorised overdraft territory before has hit them. It is not the ill-educated.

One of the things we are most proud of, and the reason that it is not an ill-educated crowd, is that we are totally transparent. It is much easier for someone to fall foul of another type of lending, because they do not know how much it is going to cost them up front. We are totally transparent, and that is the essence of the product.

Q125 Chair: You are so transparent that you have had to withdraw two of your advertisements, haven’t you? You had to withdraw an advertisement that suggested that it would be better for students to borrow from you than to extend their student loan. That is true, isn’t it?

Henry Raine: It wasn’t an advertisement. It is certainly true that there was some copy from a rather over-zealous agency that said that, and as soon as we saw it-

Q126 Chair: It was an advertisement. You were told by the authorities that you had to withdraw it.

Henry Raine: No, we weren’t actually told by the authorities. We withdrew it voluntarily. It was clearly a wrong thing to do. As I said, we are not perfect.

Q127 Chair: And then you had to withdraw another advertisement.

Q128 Jackie Doyle-Price: That is regulated by the Advertising Standards Authority. It is not to do with consumer credit regulations. We are going off subject here quite substantially.

Q129 Chair: No. There was another advertisement that I think you were told you had to withdraw. It is just that you keep saying you are so transparent, so I am rather surprised that you get into a position of having to withdraw ads.

Henry Raine: If I could clarify, the first one was not an ad we had to withdraw. We chose to take it down, but it was certainly wrong.

Q130 Nick Smith: So you had used it to market your-

Henry Raine: No, we had not. It was part of a site that we were using.

Q131 Nick Smith: It was on a website.

Henry Raine: It was on a website-a secondary website.

Q132 Nick Smith: So it was an advert.

Henry Raine: It was an advert in a sense.

Q133 Nick Smith: It had been agreed with you internally at some point.

Henry Raine: It had been done by someone without authorisation.

Q134 Nick Smith: But it must have been authorised by you to go on your website, surely.

Henry Raine: It was not authorised. If I could briefly answer the ASA point-

Q135 Chair: I know. This is when it was said you had trivialised the use of pay loans-the ASA. This was in 2011.

Henry Raine: All I can say is that the vast range of successful British companies have had criticisms by the Advertising Standards Authority. We have had two minor criticisms, and we have also had two things upheld. Frankly, that is-

Q136 Mr Jackson: Can I get back on track? I would like to understand a bit about your business model before we move to the other witnesses. Obviously, reference has rightly been made by Mr Mitchell to the gap in the provision by banks, which is fine. Personally, I would prefer your business model to operate in lieu of loan sharks, cross-subsidising from nefarious activities such as drug dealing and preying on vulnerable people. It is important to make that point. I want to understand. You give the impression that you are reactive, in that it is internet-based. Do you prospect for more financially challenged socio-economic groups by leaflet drops using, say, Acorn and Mosaic?

Henry Raine: No, we do not do anything like that.

Q137 Mr Jackson: You don’t do that.

Henry Raine: Never.

Q138 Mr Jackson: That would be slightly ethically challenged.

Henry Raine: Indeed. I agree.

Q139 Mr Jackson: To try to drive people to the website by, say, going into the poorest part of south Yorkshire or the poorest part of south Wales, and then trying to drive traffic to your website. You don’t do anything like that.

Henry Raine: I agree. That is very helpful, because we have been accused wrongly of doing that.

Q140 Mr Jackson: Do you use any demographic profiling?

Henry Raine: No. We advertise. That’s what we do. We don’t target the advertising on people. We advertise, and our advertising is well known, but we don’t target people in that sense.

Q141 Mr Jackson: How up to date is that figure of £20,000 annual salary?

Henry Raine: I looked at it very recently, in the last few weeks.

Q142 Meg Hillier: You talked about typical borrowers. Do you have a breakdown of the geographical distribution of borrowers?

Henry Raine: We do. It is on our website. I apologise for not having it to hand, but I think 28% are from London and the south-east. They are mostly in inner cities, and pretty well spread across the United Kingdom, but more in London and the south-east.

Q143 Meg Hillier: Do you do an analysis of those postcodes? If you look at, for instance, bingo halls, and you give me some demographics, I could tell you whether or not a bingo hall is likely to be in that constituency. Can you do that similarly with analysis of postcodes of your lenders?

Henry Raine: What we use the analysis for is obviously the algorithm, which is continually improving itself, in terms of repayments-who has paid us back and how they paid us back. Clearly that is one of the things we feed into the system. If we have lent to someone at 12 Acacia Drive, Birmingham and they haven’t paid us back, and we have another attempted borrower from someone nearby with the same income, that may tell us something, but we don’t profile them in that sense.

Q144 Meg Hillier: I suppose the corollary of what Stewart Jackson was saying was that you are not analysing. I notice you have recently bought Newcastle United football club.

Henry Raine: No, we haven’t bought them. Sadly.

Q145 Meg Hillier: Sorry, sponsored them. Why?

Q146 Chair: You invested in them.

Henry Raine: The main reason why we sponsored them-

Q147 Meg Hillier: I know you haven’t bought them, sorry.

Henry Raine: While I have been here, we may have done.

Q148 Meg Hillier: Business is going very well if you’ve managed to buy a football club.

Henry Raine: We sponsor football clubs for one reason only: they are fantastic profiling, nationally and internationally. A number of well-known international companies sponsor other football clubs.

Q149 Meg Hillier: How many football clubs do you sponsor?

Henry Raine: We sponsor Blackpool, which was in the premier league and is now in the first division, we sponsor Newcastle and we sponsor Hearts. An interesting point about football sponsorship-we are often asked this-is that we do not get customer lists, fan lists or leaflet anyone that has anything to do with it. We sponsor football clubs for the same reason that airline companies sponsor football clubs. We are trying to build a big, international business, and it is phenomenal advertising because of television-it is beamed across the world.

Q150 Chair: But you sponsor them in areas of deprivation.

Meg Hillier: They are not rich areas.

Henry Raine: Had Arsenal or Chelsea been available, we might have sponsored them. We do not choose the areas. It is nothing to do with the area they are in.

Q151 Meg Hillier: As a neighbouring MP to Arsenal, perhaps there is an assumption being made about Arsenal, which I won’t be drawn into. Just out of interest, do you make donations to any political parties?

Henry Raine: No.

Q152 Fiona Mactaggart: I am interested in your response on the Bristol study. I hope I am not wrong in assuming that there has been a slight change of tone in Wonga’s reaction to caps on the cost of credit. You just said to this Committee that you are awaiting the results of the Bristol study, and your response to this issue will be guided, to some degree, by that. That is very interesting. I wonder whether that implies that you have seen evidence about what Bristol is coming up with, because Members of Parliament haven’t.

Henry Raine: Just to be clear, and I stand to be corrected, I don’t think Wonga has ever led a campaign against capping.

Q153 Fiona Mactaggart: No, but you have proposed it.

Henry Raine: We said, and we still say, that a number of regulatory changes need to be made which would be more beneficial to the consumer.

Q154 Fiona Mactaggart: Have you seen the Bristol report?

Henry Raine: No. Goodness, no.

Q155 Fiona Mactaggart: Have you been given any hints as to what it contains?

Henry Raine: No. I don’t think Wonga would be in any position-

Jackie Doyle-Price: Are we entitled to look at mobile phones and have questions texted from other Members of Parliament while we are in session?

Fiona Mactaggart: I can show you exactly what I did. I just wanted to see who commissioned the Bristol report.

Q156 Justin Tomlinson: We’ve all disagreed about what the costs are, based on the APR. I just want to reinforce my point that if we could regulate just one thing, it would be to put everything in cash terms-because none of us could accurately calculate the APR-and imagine what the typical person looking to borrow money would be able to do. When we talk about high-cost lending, it has to be put into context. As I said, 4,000% sounds a lot, but if you have an unauthorised overdraft with Barclays, it is 80,000%. We should be debating borrowing £100 for two days costs £2.08 and borrowing £100 for 30 days costs £31.22; then we can make a subjective view about whether that is appropriate.

Austin Mitchell: Mr Raine has been a much better witness than the two old ladies who do his commercials.

Q157 Chair: Can I ask one final question? Steve, quite rightly, is pushing me on. You said you don’t let people roll over. How many of your million customers are repeat customers?

Henry Raine: The average is about 4.3 times per year.

Q158 Chair: They will come back to you 4.3 times per year.

Henry Raine: But again, we credit check them each time, and we reject customers.

Q159 Chair: You credit check them each time?

Henry Raine: Oh yes. And we reject a number of customers who reapply.

Q160 Chair: Can we move on to Mr Rees? I am sorry it has taken so long.

Now, you are an interesting character, Mr Rees. Accepting Justin’s point that it would be easier if we had it in cash terms than percentage terms, you have a great dominance in the market in which you operate, don’t you? You have, I am told, 60% of the market.

David Rees: Yes.

Q161 Chair: You have 2.6 million customers and 10,000 agents, is that right?

David Rees: Yes, 10,000 agents. I would like to thank you for calling me to the Committee. To explain the sector, I would say to the Committee that for everything I am about to say, you need to completely forget everything that has been said, because there are no similarities. This is a very different product in every aspect and dimension. The home-collected credit sector lends to about 2.5 million to 3 million customers. There are probably 16,000 to 20,000 agents who serve those customers every week.

Most-probably 70% to 80%-of those agents are women, who call every week on their customers at the customer’s home. There are 450 firms engaged in the business. About 240 of those are sole traders or small family businesses, and at the larger end you have Provident, which, as you say, has a 60% share of this particular market-the home-collected credit sector.

We are a listed company. There is another listed company called S and U, there are two other large companies-Shopacheck and Morses Club-and then there is a block of mid-sized companies, so it is a big industry. If we trade in a particular town, my company will find that we are probably competing with the three other large companies, plus a block of smaller local companies, so there is a lot of competition in all the areas that we trade.

What else can I tell you? The socio-demographic is important.

Q162 Chair: We will come to the socio-demographic. We are looking at your company, although I know that you are also representing the trade association. Given your position, why do you charge so much for what you do?

David Rees: We have a different system. We have a home-collected credit system. One thing that we have in common with Wonga is that our loans are very small relative to the market as a whole. Our average loan in the sector is between £300 and £500, and the average term is between six months and a year-26 weeks to 52 weeks.

Q163 Chair: If I borrow £100 from you and I pay you back in six months, what am I paying you back?

David Rees: My particular company probably lends over a year. I can give you the year figure, which is £82 on £100.

Q164 Chair: So you double it in a year.

David Rees: Yes, but what you get for that £82 is a whole series of product features. The first is that you get an agent calling to your home 52 times. If it takes you 78 weeks to repay, that would be 78 visits. The key point to remember, and this is very different from every other credit product, is that the £82 does not increase at all. In other words, it is absolutely fixed. If it took the customer two years to repay that loan, the charge would still be only £82.

Q165 Chair: Only?

What struck me when I looked at those figures was that the price reflected more your monopoly status than the risk.

David Rees: I would disagree. It is a very mature sector. The charges in the sector are fairly similar. You can explore those charges. What we have had-

Q166 Stephen Barclay: Could you finish on the other product features? You told us the first product feature, but you did not finish, so could you run through the product features, please?

David Rees: Yes. We have weekly home collection, so it is very labour intensive. We have no default charges of any sort; it is a fixed loan and a fixed charge, no matter what happens and no matter how many calls are made. We have a very transparent system. The customer for each loan-these are fixed-term loans-gets a credit contract. They are sent a copy of that contract in the post. They also have a payment book, which sets out the repayments, and that is filled in by the agent as the payments are made. It is very flexible. If the agent calls at the customer’s home and the customer says, "I’ve had a disaster this week; the washing machine has broken down, I’ve had to get it repaired and I can’t afford to make a repayment," the agent will simply say, "Fine, I’ll call back next week." It happens on the spot instantaneously.

Q167 Chair: You do not use continuous payment authority.

David Rees: Absolutely not. That is one of the things that I did note down. We do not do that. We simply collect-

Q168 Chair: Cash.

David Rees: Or a cheque, if the customer wants to pay by cheque.

Q169 Mr Jackson: How do you get new customers?

David Rees: The majority of our new customers are by personal recommendation-probably about 40%.

Q170 Stephen Barclay: Anyone with an interest in financial services knows that having weekly collections like that is a hugely expensive model.

David Rees: Correct, but it enables us to offer a product where we do not charge extra charges. That is actually the deal. What the customer is buying into is a very-

Q171 Stephen Barclay: But you are sending someone round to badger them each week. I am struggling to understand why that is a feature for the client rather than for you. It is a feature for you because you do not have default charges and therefore you have a very strong incentive to ensure that they stick to plan, so you send someone round every week to ensure that they do stick to plan. I can understand why that is a feature for you, but it is not so much a feature for the client.

David Rees: The customers do actually appreciate that discipline and routine. We have had a Competition Commission inquiry into us. This is a completely intense process. Every component of our business has been analysed and researched. They have done many surveys into our customer base. Those surveys and, in fact, the surveys of the National Consumer Council, which launched the super-complaint that began the Competition Commission inquiry, found that the customers actually like this system. They find it very helpful. They are buying certainty. They know that they can talk to the agent and they know that if they have a problem, the repayments can be zeroed in a particular week or if they want to pay half an instalment in a particular week, they can-

Q172 Chair: But Mr Rees, it also gives you an opportunity to sell a product to your customer again. The story I heard was that you knock on the door to take the payment for one loan and say, "Isn’t it your daughter’s birthday next week? Wouldn’t you like to buy her a present? Take out another loan."

David Rees: Again, Madam Chairman, the research-this is not our research; it is research by third parties-shows that that is not how the system operates.

Q173 Chair: But does that not happen? I understood that actually it happened when our NAO officials went round with you on the doorstep. That is where I got the story from.

Jackie Doyle-Price: We all know it happens.

David Rees: But there is nothing wrong with promoting your business. There is-

Q174 Jackie Doyle-Price: No, there’s not, but how do you remunerate your staff?

David Rees: We pay our agents a commission, but-but-it is a commission based on what they collect.

Q175 Jackie Doyle-Price: That’s still an incentive to sell.

David Rees: No. Sorry. If you sell a loan that you do not collect back, you do not receive any commission, so it is not an incentive to sell; it is an incentive to make loans that can be repaid.

Jackie Doyle-Price: It is an incentive to sell, because this person has to go back every week anyway.

Q176 Justin Tomlinson: Let me explain my biggest challenge with this. I met other representatives of your industry, and they told me their strength was the impeccable trust that the customer has in the sales advisers. It was that trust that I thought was the utmost weakness of your industry, because they are making that suggestion of "Isn’t it your daughter’s birthday? We could sort that out. It would be another £2 a week over 30 weeks" or over a year as you do it. To me, that is the biggest area of concern.

David Rees: All I can say is that the research-it is not our research-paints a completely different picture.

Q177 Stephen Barclay: But that was the nub of the complaint from the National Consumer Council, wasn’t it-that there was little evidence of switching and there were significant costs? You present a picture of bliss among clients, which begs the question: why did the National Consumer Council instigate a complaint?

David Rees: I don’t know the answer to that question. They did, but the research-

Q178 Chair: Let me ask the question in another way, which I did previously. How many repeats? You have how many customers? How many customers does Provident have?

David Rees: We have 1.8 million customers.

Q179 Chair: And how many of them are repeat customers?

David Rees: We probably-can I read to you from what was said by the Competition Commission? They looked at this, so this is definitive.

Q180 Stephen Barclay: While you are thinking about that, the OFT response back in 2004 was that these customers were in a poor bargaining position. Financial need may mean that they are not price-sensitive. They have difficulty comparing loans. It talks about the roll-over loans tied to customers and the relationships with agents. That is not quite the picture you are presenting.

David Rees: Those statements were made before the Competition Commission inquiry, which was a multi-million-pound investigation. If I can read to you what the Competition Commission said-

Q181 Stephen Barclay: We’ll come on to how effective the OFT has been. The Report says it does not give value for money and has not been particularly effective, but we’ll come on to that.

David Rees: That would be the competition side of the Office of Fair Trading, which is a-

Q182 Mr Jackson: Can I take you back to an issue you touched on? You said that the business model was totally different to Wonga, and that you got 40% of new clients by word of mouth.

David Rees: Yes.

Q183 Mr Jackson: I will ask you the same question: do you prospect for the other 60% using demographic data?

David Rees: I don’t think we use prospecting-broadly, we know the kind of areas that we trade in. If I could say, our customer base is drawn, in socio-demographic terms, in roughly equal shares from groups C, D and E, so it is a much wider base than is often supposed. We would leaflet drop in areas where we thought our customers were living.

Q184 Mr Jackson: That makes you very distinct from Wonga, from the evidence that they gave. Mr Raine from Wonga said that, effectively, if I heard correctly, only 2% of their clients were on benefits. How many of your clients would you say were on benefits?

David Rees: If you mean on benefits-unemployed-it is roughly 15%, but the rest are working.

Q185 Mr Jackson: That is at the thick end of 400,000 people.

David Rees: I don’t think so.

Q186 Chair: Out of 1.6 million-yes.

Mr Jackson: Yes, it is.

David Rees: No, 1.8 million.

Mr Jackson: Sorry, 100,000-I beg your pardon.

Chair: No it’s not. It is more than 100,000. It is somewhere between 250,000 and 300,000.

Q187 Mr Jackson: Sorry, I only got a grade C at maths. I should start working for a consumer credit company.

The generic criticism of your kind of company is that you prey on vulnerable people. Frankly, you inveigle into their lives, you know a lot about them and then you hit them with enticing offers, which are often too good to be true, and you use demographic and socio-economic data to do that. Would you totally reject that characterisation?

David Rees: Yes. We don’t make enticing offers-our charges are the same across the board for every customer. The charging is very straightforward. We do not offer deals in the way that, for instance, credit card companies might offer a low rate. There is none of that type of activity. I reject that characterisation.

Q188 Mr Jackson: Finally, do you absolutely not acknowledge the Chairman’s point about, not pyramid selling, but double or triple-selling of loans, on the basis of one inquiry? In other words, family, friends-

David Rees: Sorry, I am not quite sure what point you are making.

Q189 Mr Jackson: The point I am making is about cross-selling to family and friends on the basis of a regular visit. Would you deprecate that, or would that be something that you would encourage?

David Rees: If I want a service, I know that the best way to get a good service is to get a recommendation from somebody who has used that service. I would argue that that is what our customers do. They get a good service from us. I have to say as well that the satisfaction-

Q190 Chair: How do you define a good service? What is a good service-paying £80 on every £100 you borrow?

David Rees: But they’re getting certainty and transparency.

Q191 Chair: You haven’t answered, Mr Rees. I am really interested in how many are repeat customers. You must know that.

David Rees: I am going to read from the Competition Commission report, which says, "We found that renewals were relatively common (around 40 per cent of all loans involve the refinancing of a previous loan from the same lender) and are popular with customers, and we found no evidence that they were being sold by agents in a way which was detrimental to customers’ interests. Customers clearly value the opportunity provided by renewals to secure more credit without, in many cases, increasing the weekly repayment." On that point, probably most of the people around this table have renewed a loan in that way, because when we move house we would renew our mortgage loan-we would pay off what is due on our new mortgage. What they went on to say is: "We have been told that a small proportion of loans are renewed (our estimates suggest at least a third)." These are different parts of the report. "However, we see nothing to suggest that more than 1 or 2 per cent are refinanced by a home credit company other than the existing lender. We have also been told by lenders that the initiative for renewal generally comes from customers."

Q192 Chair: May I just ask my question again, because I think you misunderstood it. I am really sorry. You get a customer. You entice me into agreeing that I will pay £80 for every £100 I borrow from you. How often do I borrow more money for another purpose? How often do I repeat, not renew?

David Rees: We aim to keep our customers for as long as we can, as any business would.

Q193 Chair: That’s not an answer. So every customer you get you expect to make not one loan to them, but lots. So you do go and say, "Wouldn’t you like to borrow a bit of money to buy a present for your daughter’s birthday?

David Rees: Yes, we do that but that is marketing as undertaken by any credit business.

Q194 Chair: Except that 15% of your clients are on benefits. You are operating in areas of greater poverty. You have said C2, D, and E. You are putting them into long-term debt, probably at the expense of their being able to buy food and clothing and the very basic things they need for their families.

David Rees: I would reject that.

Q195 Stephen Barclay: What we are trying to work out is the element of churn. So the distinction between those who take out their £100, pay that off and then come back again six months later and borrow again-

David Rees: Yes.

Stephen Barclay: The distinction between those and whether you are churning anywhere before they have paid it off and you say, "We can open another loan." That is what we trying to get to.

David Rees: I accept your point. It is a complete mixture. We have some customers who do what you have described. We have some customers who will pay a loan off. They won’t take a loan out for six months. Then they will take another loan. We have some customers who wait until they have got absolutely to the end of a loan and then take another one out, but they run the two sequentially. Then we have some customers who, often because they need money to cover an expense, will refinance a loan part way through. In other words they might let the first loan run three quarters of its term and-

Stephen Barclay: And then churn it. May we suggest that the NAO put a few questions and could we get a note with some figures around this?

Q196 Meg Hillier: We have seen some quite serious changes to the social fund. It used to be grants and now it has become loans. Have you done any analysis of whether that has had an impact on your business? Do you analyse what people are buying for? Is it for things like washing machines which you might previously have got a social fund loan or grant for?

David Rees: No, we have not. All I can tell you is the proportion of customers. These are just two interesting statistics: in terms of payday lending, only about 5% of our customers use that. That is not because they don’t have a bank account; 86% of our customers do have a bank account.

Q197 Chair: They have to, to get their benefits.

David Rees: Roughly 13% of our customers have a social fund loan, but we have not done the analysis that you described.

Q198 Meg Hillier: They have a social fund loan as well as a loan from you?

David Rees: Yes.

Q199 Chair: 13% have a social fund loan?

David Rees: Yes, 13: one three.

Chair: So they are the poorest of the poor.

Meg Hillier: My constituents find it hard to get social fund loans.

Q200 Justin Tomlinson: I want to explore areas where I think the regulations should come in. I recognise that you are in a different industry so you will give different responses from the previous person. First of all, cash terms: I am not familiar with how you work day to day, but if I take out a loan with you, how clear is the cost in cash terms rather than just straightforward APR? How clear is it at the point I take the loan out in cash terms? I borrow £100. I know the cost is £82 but is that made crystal clear at the point I take out the loan?

David Rees: It is made absolutely clear. What we have also learned in evidence to the Competition Commission-it is actually Professor Elaine Kempson’s colleagues at Bristol. They put a submission in to the Competition Commission, which said, "Just about every home credit customer we have ever interviewed knows the total cost of borrowing - unlike the generality of credit users. They do not know the APR on their loan and nor can they easily compare costs from different lenders. But work we are currently undertaking for the Financial Services Authority for a base-line survey of financial capability shows that this is true of the great majority of credit users too." In other words, our customers know more accurately.

Q201 Justin Tomlinson: So you would support regulation that all credit lending was displayed in cash terms.

David Rees: Technically, at the moment you have to put the cash amount of the charge in the contract anyway, so it is already there. If I can go on, the Competition Commission also said-this goes back to earlier points-that APR is "a poor measure of the cost of a home credit loan…APRs, especially for shorter-term home credit loans, can be very high. We do not consider that the APR is a useful comparator for customers, when it is at such high levels. With APRs above 100 per cent, customers may be able to tell that a particular APR is greater than another, but the APR conveys little further useful information". That is after a multi-million pound, two-year, in-depth inquiry into our sector and, to follow-up on your point, they actually said that they thought a more useful indicator was the cash cost of the loan. So, in a roundabout way, my answer is yes.

Q202 Justin Tomlinson: The second point was on credit checking. We heard the first speaker talk about what they do on credit checking. Say you have come to my house and I have agreed in principle to borrow money from you, what credit checking do you do?

David Rees: We do things differently. The original way of checking credit before credit scoring was to have a face-to-face meeting with the customer, to assess what was known in the industry as the three C’s: character, conditions and capacity. Modern credit systems attempt to replicate that using data that the customer has supplied. To answer your question, what we actually do is we use a face-to-face meeting, because we visit every customer before we make a loan. We as a company are making nearly 100 million visits to our customers every year and the sector is making nearly 150 million visits to its customers every year. We visit the customer and we only make a small loan to start with, which is the system used in the credit union sector, where they require the customer to show savings capacity. We carry out CCJ checks and voters roll checks, which we have to do for money laundering purposes.

Q203 Justin Tomlinson: So why don’t you spend the £2-ish on a more comprehensive credit check? If you came to visit me, I would hardly present financial chaos to you. I would convey a position of confidence that if you lend me the money, I will definitely pay you that money back. So why will you not spend that £2?

David Rees: Actually, the bigger companies in the sector do, because the Competition Commission required them to input the data into the credit reference bureau.

Q204 Chair: Do you?

David Rees: We do, but what we have been able to establish from that data is that it is not particularly predictive. In other words, the system that we currently use is more predictive than the automated system for our sector.

Q205 Justin Tomlinson: I have a sneaky feeling that with your industry, you are not fussed if they cannot pay you back, because with your weekly visits-I am not talking about big burly men turning up and threatening-there is that pressure, so they will invariably end up having to pay you. My worry with your industry is that you are targeting people who cannot service these loans. I respect consumer choice, but ultimately there are some people who should not be getting this money, and I do not think that that is a problem for you.

David Rees: If we were to lend to people who could not repay, we would not have a business, frankly.

Chair: But Mr Rees, you have just said that 15% are on benefits and 13% are social fund recipients.

Q206 Justin Tomlinson: This is the crucial bit. They will pay you, because you keep turning up every week, but the crucial bit is at what cost they are paying you and what they are not then spending that money on. I support consumer choice, and if there was proper credit checking and we said, "Person A can afford to borrow money from you and that is their consumer choice," I would be supremely relaxed about your industry. But it is the fact that there are people who should not be doing that, and you are not doing credit checking; you are looking and thinking, "There is a good chance if I turn up every week I’ll get it one way or another."

Q207 Meg Hillier: My instinctive feeling about this profile of customer is that they use social fund loans for one thing, BrightHouse or an equivalent for the sofa or the TV and you for the daughter’s birthday present because they do not want to lose face with the neighbours, and it is friendly. A lot of my poorer constituents like to have key cards for the meter because they find that there is an element of control there that they like to buy into. I understand the psychology. But you do not do any checking to see whether people have these other debts. You are just reading the situation in a human way, instinctively-the three C’s. Is that a fair summary?

David Rees: The three C’s, yes.

Q208 Chair: What do you pay your agents?

David Rees: They receive about 7% of what they collect.

Q209 Chair: That is all?

David Rees: Yes.

Chair: So they do not get a wage?

David Rees: No. They are self-employed.

Q210 Justin Tomlinson: So am I right that if the regulations said there would be compulsory credit checking that you had to adhere to, you would oppose that?

David Rees: We would argue that markets should be as efficient as possible. If the law requires a sector to engage in an activity that does not produce value, that is not sensible regulation, in our view.

Q211 Meg Hillier: It may produce value for you, but there is a cost to the consumer-to constituents of mine and of others around the table-who will take out loans and borrowing in all sorts of other ways as well as your loan. You are not checking to see whether they are capable. I would expect now with a reputable high street bank, some of which keep offering you loans and so on, that they would credit-check you and say, "We do not think you have the capacity to pay that back."

In terms of income, we ought to be clear that around this table most of us are not in the same position as some of the people we are talking about; we have got better options. We have to be clear that the reason why we have these sectors is that many people have fewer options. You are not taking into account the misery that it can cause if people get indebted. It is not your sole responsibility, but surely if you are going to be lending at this rate to people, you have to take that into account. In the end, they come to our surgeries unable to pay the rent and pay for food, so they are going to food banks and so on. That is the reality of being over-indebted. You are not taking into account any of the other indebtedness that people have.

David Rees: I would like to use some more research that was not prepared by us. This was precursor research for the Competition Commission inquiry, carried out in a relatively low-income part of Leicester. The question was, "When you have had difficulty making payments, have you resorted to any of the following?" There is a whole string of things, including: went without food, went to a money advice agency, got a loan from the social fund, missed the gas bill and borrowed money from friends and family. The largest figure on that list-this is a customer who has had difficulty making payments-is 84% missed the payment to us, the home credit lender. In other words, when budgets get especially tight, it is the home credit company that is taking the load of that. This is not our research.

Chair: I will just quote to you some research from R3, an insolvency practitioner, which says that 13% of the population in Britain have prioritised paying back the loans over essentials such as buying food and paying gas and electricity bills. We can play this a lot of ways.

Q212 Meg Hillier: I recognise here that there is a flat rate. I am just looking here on your calculator, and if I were to borrow £200 under your model and pay it back over 52 weeks, that is £7 a week. You can also see what the temptation is, because that £7 at a crucial moment seems an easier figure to pay back than perhaps having an accumulating problem with a landlord or another lender, but it adds up over time. It still tips into the next year. How many payments can people miss without any penalty? You must have some way of enforcing it.

David Rees: No. I have to reiterate this, because it is hugely unusual. There are no extra charges on top of the charges displayed in the agreement. Absolutely nothing. No extra interest-

Q213 Meg Hillier: But they have to say no to the nice lady who comes round and asks for the money.

David Rees: It does not actually work like that. The statistic that I have just given you explains that it does not work like that.

Chair: We can all trade statistics.

Amyas Morse: I have a question from the business point of view, just to understand this a little. As I was listening, I found myself asking a naive question: you have a quite traditional, old-fashioned model, which you have not changed, despite everything, and it is quite labour-intensive, so there must be some key business benefit features that make you retain that model, rather than thinking of going to something else. As you said, a lot of customers have bank accounts, and you could go to something more electronically enabled, so this personal relationship thing, without characterising it unkindly, must give you, first, a high degree of priority in getting further business and, secondly, an intimacy of relationship-a through-the-door relationship-which gives you a lot of influence. I am not saying that is bad; I am just saying that I am asking myself a question. You guys are not doing this for fun-it is a business, right? So the reason why you have stuck with this model, which is quite traditional, and you are dominant in it, is that it is giving you something that you judge is worth keeping, as opposed to introducing some more mechanised model. You must have had a strategic discussion at some point, and I am asking you openly, what is it about this model that makes it so valuable that you keep it?

David Rees: Because the customers like it, frankly. If you look at all the surveys, you will find-this is extraordinary-the satisfaction ratings for our product are off the scale as far as banks and building societies are concerned. This is something very, very unusual.

Amyas Morse: So the component is the fact that you have a quite intimate relationship with them.

David Rees: No, the component is that it cuts both ways. If we upset a customer, we lose that customer. Businesses in our sector in the 1960s, when computers first came in, decided that they would try to add default interest on to the product, because they thought that that would be a way to earn more money. What they actually found was that they destroyed their businesses, because the customers just evaporated and went to other lenders. This is about having a system where the lender trusts the customer, and where the customer trusts the lender. It is a mutual relationship: if the lender gets it wrong, they will lose the customer. That is a very powerful driver for the best possible customer service.

Q214 Justin Tomlinson: My third bit was about this technique. I think we have covered this before. My worry is that that trust is the problem. You mentioned repeat customers, but you almost have to look at this in a different way. Are repeat customers-I do not know this without speaking to hundreds of thousands of them-in fact dependent customers, rather than repeat customers?

You have already covered the bit about roll-overs. You said you freeze the costs at that point, so you would presumably welcome regulation that freezes the cost of a debt at a point-

David Rees: May I just say there is no question of freezing our charges, because there are no extra charges clocking up? I have to stress that. There are no other charges; there is no question of freezing the charges.

Q215 Justin Tomlinson: So you would support regulation on that, whereas other lenders may very well add additional burdens?

David Rees: No, in terms of the wider ramifications of doing that, if you intervene in market function in any way, you will get other things happening in that market. If you freeze interest, or say that people cannot charge default charges, you will have reactions occurring as a result of that.

Q216 Justin Tomlinson: We are nearly there. In terms of the way the enforcement is carried out, the regulators at the moment are very much reactive, so they rely on customers. To be fair, as an individual MP, while I am very sceptical of your industry-your particular segment-I have never actually had a complaint from a constituent, so I should put that on record. But the regulators rely very much on complaints. I wonder whether people so absolutely trust your guys who turn up on the doorstep that they do not feel it would be right to go and complain. I feel there is a lack of mystery shopping going on. I would love one of your people to turn up and try to sell something to me, because I would write everything down about the sales technique, and I would report you straight away. Would you support that as part of the regulation? Would you support the regulators being able to do mystery shopping with you?

David Rees: We have had mystery shopping done. We have gone through a two-year Competition Commission inquiry that involved a lot of mystery shopping. It is difficult for me to add to that. But all the surveys, no matter who does them, show the same thing: very satisfied customers and very few problems.

Q217 Justin Tomlinson: One last request I would have is that the money that we currently waste on the Money Advice Service should be given to the citizens advice bureaux and, at the point that somebody takes a loan from an organisation like yours, there would be a 7-day cooling off period where they could cancel it. You would be forced to provide the telephone number for the citizens advice bureau who could give them one-to-one advice. Would you support that?

David Rees: That already happens. If our customers-with the agreement of our agent, because everything happens with the agreement of our agent-do, in fact, miss more than 8 weeks’ worth of instalments in total, we have to write to the customer to tell them that the citizens advice bureau is available to advise them. So our customers are already getting those notifications.

Q218 Chair: Are there any more questions? Just tell me, I wonder what you feel like, being in this business where you are getting your income and profit out of lending money to people who cannot afford to borrow and charging them a lot for it. I sit here and I wonder how I would feel waking up, thinking about all that. I would not feel good.

David Rees: I think it is an extraordinary business, I have to say that. And I am very proud of it. Absolutely extraordinary.

Q219 Chair: Right, Fair Finance: a completely different model.

Mark Hannam: Thank you for inviting me. Fair Finance is a social business. We seek to be profitable but we do not distribute profits to our shareholders or investors; we aim to reinvest any profit that we make back into our products and building our business. We have been going for about 8 years now. We are based in east London but gradually spreading across London, and we currently have about 2,000 customers and a loan book of about £1 million. So we are very small by comparison with Wonga and Provident, but growing at a fair rate; we hope to be across the whole of London in the next 3 or 4 years and to be 2 or 3 times bigger than we are currently.

To begin with, I would say that, in some ways, our loan product is more similar to Provident in terms of the size of loans and the length of loans, but we are different from them in important respects, and we see our customer-

Q220 Chair: What do you charge?

Mark Hannam: For somebody who came in to take out a first loan, which would be no more than £500 and the length of which would be in the region of 8 to 12 months, the way we calculate it internally is that we would charge an interest rate of 59%. How that works out as an APR will depend on the length of the loan: the shorter the loan is, the more that will turn into a large APR, and it may come up towards 100%.

Q221 Chair: So on £500, I would pay £600 or £700 back?

Mark Hannam: Something of that order. Again, it slightly depends on the tenure-the length of time. We would make clear to our customers the APR, which we have to do for legal reasons, the total cost of credit and the weekly or monthly amount-most of our customers pay back on a weekly basis, with some monthly-which is the number that our customers find most useful to understand.

Q222 Chair: Why do you have to charge so much?

Mark Hannam: Because we are aiming to be a sustainable business-that is, not dependent on handouts-and the cost of providing small loans is very expensive. I can talk to you about that in more detail if you like, but we charge-

Q223 Chair: Do you pay your staff, or do you get them on commission?

Mark Hannam: They are paid a salary.

Q224 Chair: Of what?

Mark Hannam: They are not well paid by the standard of people who work in financial services.

Q225 Chair: Minimum, minimal wage?

Mark Hannam: A bit more than the minimum wage; loan officers would be on £20,000 to £25,000 a year. That is someone with a lot of experience who would earn a lot more if they went to a comparable job in a mainstream bank. We do not pay our staff a lot and they are not incentivised by sales volume, so they do not have a financial incentive to make loans.

The cost we charge is the lowest amount we think we are able to charge and yet recover our costs of making loans. Perhaps I could explain that, because I think it feeds into some of these debates about interest rates and capping costs. When you are making a loan, and obviously these numbers will vary depending on your scale, you can calculate the unit cost of making a single loan: the cost of acquiring your customers, which may be through marketing; the cost of delivering the loan-that is where the loan is made, so the paperwork, the processing times and setting it up on the system-the cost of sending the money; and the cost of collecting the money, and that would include costs for people who are not paying on time, where you might need to chase them up, and eventually some capital is written off because people default. When you account for all your costs and include management overheads, risk and so forth, and then divide that by the number of loans that you can make, you come up with the unit price per loan, and that is what you have to recover from each loan.

If you make some easy numbers up, so the maths are easy-I am not saying these are representative, but they are easy numbers-if the cost of making a loan is £50, and someone wants to borrow £500, you can charge them 10% and you cover your costs, if the loan is for a year. If they want to borrow £100, you have to charge them 50% to recover your costs.

Q226 Nick Smith: Can we stop there? It is really helpful to get the complexity of your business explained and understand the different elements that make up your costs and the charges, but the problem, as you pretty much said, is that if you lend them £100, they are going to have to pay back £180. It is going to cost people £80. If you lend someone £100, what are they going to have to pay back over a year?

Mark Hannam: First of all, we generally do not make loans of that size. One of the things we have done is discover that lending anyone money under about £250 is so expensive that we prefer not to do it, but if you think of the people who are taking loans of that kind of size-say, £200, £250-it will depend a bit on how long the loan goes for. As I say, if somebody borrowed £200 for a year from us, they would pay roughly £120 in addition to the £200. It is a bit difficult to work out, because we charge interest on a declining balance, so if people pay back regularly, the better payers end up paying less, because if they do not miss payments, their balance declines more quickly-and therefore the interest charge at the end. So we can give people a good idea of what they would pay if they pay on time regularly.

For us, the issue is understanding what is affordable for one of our clients. We do that by figuring out what we think their capacity is in their budget-so what their income is, what their expenditure is, and what that leaves in terms of money they could reasonably be expected to pay, and we use that figure to determine how much we would lend them. Somebody might come and ask for £600, but if we figure out they can only reasonably pay us back a loan of £300, we would cap the amount that we would lend them by what we think they can afford. Our decision about the loan is going to be driven by our assessment of their capability of making a weekly or monthly repayment.

Q227 Nick Smith: How do you do that assessment? Do you go to the credit reference agencies or have you got your own internal system?

Mark Hannam: To make a loan, someone has to come in and book a meeting with a loan officer, where they will do an interview. We will look at such things as bank statements and other information. We will check what income they have. Many of our customers are going to be in part-time work or on benefits, so we will have a reasonable idea, when they tell us what benefits they are on, of how much they are getting. We check outgoings. We do use some information from the wider credit collection community. We find it to be not always helpful, and as my colleague has mentioned, not very good at predicting behaviour. Our judgments are therefore based on a series of questions and answers that people give us and on the judgments of our loan officers.

We do a personalised and what you might call old-fashioned interview, and we make a judgment on whether we think the person is serious about paying us back, whether they intend to, whether they are able to, and we make a judgment based on those factors. We then feed our credit information into the system because part of what we want to do is give credit histories to people outside the system who are trying to acquire a credit history. If they borrow money from us and pay it back, their data will go on to national databases, which will make it easier and cheaper for them to access credit from other sources in future. But we do not rely on that information ourselves.

Q228 Jackie Doyle-Price: What you have just set out, when you were talking about how expensive it is for a lender to lend a sum of less than £250, goes to the nub of what we are talking about with the high-cost lending market. We are talking about a substantial group of consumers who are in the market only for that kind of short-term loan. The difficulty is how to get to a system where we satisfy that market in a way that is fair to consumers. Lots of colleagues have got very excited about the headline rates of APR, which I think are profoundly unhelpful, to be honest. It is about getting an efficient system of regulation that regulates the behaviour of firms so that they do not abuse the vulnerability of consumers in that position.

From your perspective, what sorts of thing would a good, efficient regulatory system really be looking at? Some of the things that we talked about earlier involved sales practices. I notice that you do not have any kind of sales incentive remuneration-for me, that is key-but what things would you say are relevant in this context to make sure that consumers are not exploited?

Mark Hannam: Let me say three things. First of all, we think that interest rate caps are a very bad idea. We do not support them. The reason is that the income that a lender can make is a product of the amount of money they lend and the interest rate they charge. If you cap the interest rate, you incentivise the lender to increase the amount. If interest rates are capped, a certain section of the community will come and look for loans. They will be uneconomic to lenders at a certain level. They will either be turned away, which means that they will probably go to the illegal sector, or they will be encouraged to borrow more, because if they borrow more, you can get the interest rate down and cover your costs. I think it would incentivise lenders to extend more credit than people need and would lead to greater over-indebtedness. I think a cap is the wrong way to go.

What I think could be done instead is a much greater emphasis on, broadly, customer service issues. There are two particular points here. One is that at the point of delivery of the loan there is a requirement, which is mentioned in the report by the National Audit Office, that lenders check affordability. Can the customer afford it? Our experience is that we get a lot of customers coming in because they have taken out loans with other people which they clearly cannot afford, and we end up refinancing them at a much lower interest rate. They are paying several hundred per cent., and when they come in, we refinance them at a lower rate. The lender did not do proper checks on what their income was, what their expenditure was and what realistic amount of money they could afford on a weekly or monthly basis.

Our view is that that is a very important test. How are firms demonstrating that they are checking affordability? I suggest that one mechanism that you might want to look at is default rates. In our opinion, if you have a high default rate, that is because you have not done very good affordability tests. The business model of some firms in the industry is to lend money without doing much checking, because it is cheap and brings down unit costs. If you do not do many checks and do not spend much time with a customer, your loan officers can make many more loans per day, so the unit cost falls, but then you just anticipate a high default rate. We know informally that there are firms in the industry who are writing off 30% or 40%-

Q229 Chair: How would you regulate that? I do not understand.

Mark Hannam: The question would be that if you saw a very high-

Q230 Chair: But then what happens if the default rate goes up above the-

Mark Hannam: If you see a very high default rate, that will be a risk indicator that a firm is not doing proper affordability checks. Of course, it may be that they are doing checks and it just happens that many of their customers default: in one area, an employer might make a lot of staff redundant, or there might be some other change in the benefits system or something which meant that many people could not afford their loan. But as a lead indicator that firms are not doing this properly, I think default rates would be a good place to start.

The other issue is reasonable adjustment-so, the cases where someone takes out a loan, they are paying back and then something happens that means that their ability to pay changes, and they seek some kind of rescheduling or discussion with their lender about either a holiday period, or missing a few payments, or something like that. They look for reasonable adjustment but they don’t get it; what they get instead is this: to give an example, we have had cases where people have got into trouble paying back a loan, have gone to receive debt advice from a citizens advice bureau or a debt counselling service and have been advised to prioritise their bills-so you pay your rent and utility bills first-and deprioritise other creditors. So they cancel their direct debits but then, using a CPA, some lenders have reinstated taking money out of people’s accounts. Again, this is one of the areas we think is a lead indicator of poor customer service-the use of CPA. I am not saying that you should not be allowed to do it; clearly there is a reason why that mechanism was developed and, as has been mentioned, it is used by many people in perfectly legitimate ways. But the high incidence of usage of it by lending companies would suggest to me that they are not talking to their customers; they are just trying to take their money. So there are areas you could look at, which give warning signals; the regulator could then focus on lending behaviour. That would be much more effective than simply a broad-brush cap on credit.

Q231 Jackie Doyle-Price: That is extremely helpful. I could see representatives of the FSA were nodding in agreement, which is all very encouraging. The only point I would make is that those things are far more effective at tackling bad practice, but sadly they are just not as sexy as interest rate caps. So I expect to see my colleagues making lots of noise about them, but some of us will push for a better solution.

Q232 Chair: I have just looked at what you are doing in Barking and Dagenham. Can you explain this to me: why are 3 out of 4 of your loans to women?

Mark Hannam: Because they are the people who have come to borrow from us. Our customer demographic is very different from both Wonga and Provident. The majority of our customers are people who are on benefits-probably 60% or 70%. The majority of our customers are women.

Q233 Chair: The majority are refinancing other loans?

Mark Hannam: A significant proportion are refinancing, but others are people who need help balancing their income and their expenditure, generally because an unexpected cost has landed on them. Often the people who come in for our loans are people who have very steady but very low income: they might have part-time work, which would be a few hours a week and not very well paid but is steady, or they would be on benefits. Their income is very predictable, but then something happens. For a very large number of our first-time borrowers, it is a funeral: they have a funeral expense, but no one has saved money for a funeral, it costs several hundred pounds, they need the money for it and they will not get it from mainstream credit providers. Or it could be that something breaks down-a washing machine or a fridge-or else a child changes school and needs a school uniform. It is those kinds of things-unexpected, lumpy expenditure items.

The theory is that people should save for unexpected items, and if people put aside £10 a week or £15 a month into a savings account or a jam jar, they would have a pool of resources that are available when these things happen. The problem is that there is a group of people in our society for whom that is very difficult, not least because if anyone in your family or community knows that you are a saver, you are the person that they come to when they have an emergency. So savings disappear, and it is very hard to protect them. One way that we think about what we do is that our loans are, in a sense, a reverse savings account: instead of people saving over 52 weeks and having cash for an emergency, we lend them money and then they save by paying us back. Actually, the economics of it are very similar, except that people don’t have this pool-

Q234 Fiona Mactaggart: Except that it is you who makes the money: it is not the person who has been saving who gets the interest.

Mark Hannam: That is true, but our experience is that many of our customers, when they come to us, do not have access to bank accounts or savings accounts. The sorts of places where they might have saved historically would have been Christmas clubs-after the Farepak example, many people became very sceptical about those-or informal arrangements where they trust the person holding the cash, who is just someone they know or a friend.

Q235 Ian Swales: Do you have credit unions in the area in which you operate? Do you ever recommend that people save or borrow from credit unions?

Mark Hannam: Yes, there are credit unions working in many parts of London, which is where we work. Our experience is that our customers tend not to be their typical customer base. We get some people who both borrow from us and use a credit union. We know the credit unions in our area, and if we thought they would provide our customers with a beneficial service, we would recommend them. But credit unions are constrained in other ways, such as the way they can lend or the amount of capital they have. Again, there is the issue about creating savings discipline. If someone has acquired the discipline of saving, that is a great thing for them to do; but if someone does not have that discipline and then has an emergency, it would not help for us to say, "You should have started saving a year ago." We have to decide whether we think that person genuinely will pay back the loan and effectively use the loan repayment as the start of disciplined saving behaviour.

Q236 Chair: What proportion of your revenue is bad debt or "impaired loans," as the lingo goes?

Mark Hannam: Last year, 7%.

Q237 Chair: That compares with 32% for Mr Rees and 41% or 42% for Mr Raine.

Mark Hannam: Our current proportion would be lower. I predict it will be 6% by the end of March.

Q238 Meg Hillier: We have talked a bit about continuous payment authorities, and, just to be clear, you have never used that to recover money?

Amyas Morse: It is the proportion of the loan book that matters, not the annual amount.

Q239 Chair: What is the proportion of your revenue?

Henry Raine: Perhaps you could help us on this, Mr Morse, because I think there is a bit of confusion. I think the traditional way that default is measured is by a proportion of how much money you have lent; the revenue is not the relevant comparison.

Amyas Morse: That is right. Just from the banking industry, you have a total loan book and you are looking at the rate of default on that total loan book on an annual basis. That tells you the quality of a loan book, generally speaking. In asking my question, I was trying to find out the rate of default on your total loan book.

Q240 Chair: If you can measure it in the same way, what is it as a proportion of your revenue? I hear what you say.

Mark Hannam: Curiously, as a proportion of our loan book, our rate is also around 6%, but that is an accidental coincidence of the growth trajectory we are on at the moment. The measure that the risk committee of Fair Finance looks at and targets is money not paid as a percentage of the net loan. So you take the loan made, exclude the interest anticipated and work out, of the capital we lend out, what per cent we do not get back. Our target is to be around 7% or 8%, and we came under that last year, and we hope to do so this year. We think that reflects the fact that we spend a lot of time with our customers early on having that discussion with them.

Q241 Chair: You have the poorest of the poor as your customers, too.

Mark Hannam: But that also reflects the fact that they are very good payers.

Q242 Meg Hillier: Just to be clear for the record: you have criticised continuous payment authority, so you never use that for recovering loans?

Mark Hannam: No, we would not use continuous payment authority. One of the ways in which we are different from Provident and more like Wonga is that we try to move our customers away from the cash economy and into the banking economy and the use of direct debits and online. When we give someone a loan, they have to have a bank account. If they do not have one, we will open one for them. We have an arrangement with a couple of banks whereby we can open bank accounts on behalf of our customers so they enter the banking system, which starts to give them points in the credit system. We will pay their money into their account, and they will pay us back-we will reclaim money. We use a system where, if customers are unable to pay us, they can phone us and we will miss a direct debit payment to avoid charges. But if, for some reason, they do not have sufficient funds in their account and our payment won’t clear, we will cancel it for that week or month and renegotiate it.

The issue that we had, however, was that if people get into difficulty, we have a process where a team will work with customers to reschedule and to make the payment period longer, which means that they pay back less as a weekly amount. We have a percentage of our portfolio-between a quarter and a third-that contains people who have missed a payment and are therefore on a rescheduled payment track, but we find that having that discussion with them and moving them on to this generally works, and we will eventually get most of our money back. For the small number of people who either decide not to pay us or cannot pay us for some reason, when we run out of tools to try to get them back on to a plan and after a period of about 180 days of no payments, we will take them to the county court and get an action against them that means that, were they come into money at some point in the future, we would still be a creditor, but we simply stop pursuing them at that point.

Our concern is that we have people who come into our office either for loans or for debt advice who have this experience where they tried to stop their bank paying a loan company, so that they can prioritise their housing association rent or their utility bills, and the payments are reinstated because there appears to be a difference of opinion between the regulators and the banks about quite what the law is around continuous payment authorities. Some of the banks keep saying that they think that they are obliged to reinstate the payment by the contract that has been signed by the customer. My understanding is that the regulator says that that is not the case, but it clearly is happening. In my view, the regulator needs to make the legal position clear and whether CPAs can be reinstated or what the circumstances are in which they can. Once that is clear, they need to tell the banks not to do it and to put customers’ interests first. It is a problem.

Q243 Meg Hillier: You have just described a good, personable model and it is the sort of the thing that we would think of referring constituents to in our surgeries, but your overheads must be pretty high in order to watch so closely for whether someone is going to go overdrawn with a normal direct debit payment. That is an intense amount of work for your staff. How does it work in terms of overheads? You pay your staff, but what are your overheads in relation to your loan portfolio? Is there a limit on how much you can do? I know that you are trying to expand, but it does not get cheaper.

Mark Hannam: The economics, broadly speaking, are that small loans over short periods are expensive and an intensive customer service is expensive, so the cost of us doing business is expensive. We are in a position where we have borrowed capital from some banks with a view to expanding to get to a size where economies of scale will allow us to bring that cost down. Our long-term hope is that our prices will fall as we become bigger. At the moment, we are only just getting to the point where we are covering our costs. Our costs are still being subsidised by investors.

Q244 Chair: How long have you been around?

Mark Hannam: Nearly eight years, and we are forecasting to break even at the end of the next financial year. It takes a long time to get to the kind of scale where technology systems, telephone systems, training and so on become costs that can be absorbed by the price of the loans. For example, we have a model that we have developed around: when you hire someone to become a loan officer, how long it will take to train them and then how many loans you could reasonably expect them to make in a month. As they get more experienced and they can do it quicker and with more confidence, that number will go up. Our really good, experienced loan officers probably can make 400 loans a year, but the less experienced ones may make only 100 or 150. The more experienced loan officers have to train the less experienced ones, because it is a skill. Every time we hire a new person, we have to take people off the front line to train them. It is a slow and expensive process and that is why our costs are higher than we would like them to be, but they are simply what it costs us to run the service properly.

Q245 Meg Hillier: Fair Finance has a branch in Dalston, which is just outside my constituency, and on the same road there are three high-street payday loan lenders, which have a slightly different model from Wonga. As I understand it, although I have not frequented them, there are at least a couple of less reputable lenders that some people can source. How many of those people, Mr Hannam, who come through your door have been to those other lending bodies-roughly, as a proportion of the people who come through? Lending is big business in Dalston.

Mark Hannam: I do not know the exact number. I could find out for you. I guess that it is probably 20% to 25%. I think a lot of the people who come to us come because they either know they do not want to go to, or they would not even get, a loan from some of those people, because of their lack of credit history or the fact that, as I describe, even the sub-prime lenders do not necessarily want to lend to the customers we are servicing, because they do not have-

Q246 Meg Hillier: One very specific question, because you mentioned funeral costs, which is something I have been looking into in a separate part of my role: people can get money for that from Government, but they do not get it until after the funeral, so do some of them try to pay off the loan quicker? Do you have any relationship with that funeral payment the Government pay out?

Mark Hannam: I would not be able to tell you. I can check, but I do not know.

Justin Tomlinson: This is just a comment on my points about credit checking earlier, because I have been thinking about this more and have picked up a few more figures. The cost of buying credit checking, even if you are only buying in a multiple of 1,000 to 5,000 is as little as £1.15. If you are buying more than 5,000 credits for credit checking, it is considerably less than that, as you get economies of scale. It reinforces my point earlier that there is no excuse for organisations not doing proper credit checking. Which? supplied that information. Just to correct something: I said that the Money Shop was not doing credit checking, but they are actually using Experian for people taking out a new loan.

Q247 Chair: Good.

Sincere apologies. I will talk to you after the session, but we have overrun so much. For us, it was a really very important and informative session, so we are going to take the next session-I hope we can arrange it next week, but if that does not work for everybody, we will look for an early date. My sincere apologies to those sitting in the second row. I am really sorry.

I have one final question, which I meant to ask of Wonga. There was a report in The Sunday Times just before Christmas that you were considering relocating to Switzerland or Ireland. Is that true or not true?

Henry Raine: No. We have already written to the Press Complaints Commission. It is not true.

Chair: It is not true. Thank you.

Q248 Austin Mitchell: Can I just ask each of the three representatives if they are expecting demand for loans to increase this year and why?

Henry Raine: In the case of Wonga, we have built a very successful business and it is very popular. We suspect that people will continue to borrow from us. I do not think that that is a feature of the recession, inasmuch as I think in expansionist times you also see people applying for credit going up, which is one of the reasons why we had a crunch in the past. Wonga, very briefly, is also launching other products-different sorts of products. One is a business product and one is more akin to a pay-later product-a longer-term product. I think all these products will be popular.

Q249 Austin Mitchell: Does recession mean you might get more bad loans-loans that go bad?

Henry Raine: Within recession, the whole point about credit scoring-we have heard some of the issues about costs from others, but it is not a Wonga point. We clearly have to be more and more careful. Recession throws into relief those people who people like Wonga would not lend to. One of the issues, traditionally, about capping the cost, which we talked about, is where those people can go if the costs are capped. I think that is always going to be one of the challenges.

David Rees: Our view is that, first, we have tightened up our credit sanctioning. We turn down eight out of every 10 people who apply to us for a new loan. Our view of the market is that our customers are like all other citizens of the UK; people are worried about events and what is happening-they can sense all that-and they are being cautious. Like many other lenders, we are seeing that people are being cautious and are not taking loans out, so we are not convinced that that is going to happen. It is different if it is a newish business. I think it has different characteristics, but we are established businesses. Our profits in home credit are pretty flat; if you look at them-they are a matter of public record.

Mark Hannam: We will expect to grow. We are growing at about 50% to 60% per annum. We are expecting to keep growing, largely because we are taking some customers away from other providers, where we believe ourselves to be both cheaper and providing better customer service. That would suggest not that the sector is growing but simply that we are taking a bigger share of it. There is clear evidence. Some people are coming to us now who, two or three years ago, would have got credit from mainstream banks, but who are no longer able to do that. There is also evidence that the non-mainstream, or the sub-prime, sector in the UK is growing, because the mainstream banks are retrenching from certain sectors of the market.

Q250 Austin Mitchell: And the effect of the recession?

Mark Hannam: Certainly, last year we saw lots of people wanting to borrow smaller amounts for shorter periods, which looked to us like an aversion to over-indebtedness. I think that that is a very welcome sign. It does not help very much with our business model because those loans are more expensive to process. But we have certainly seen-and I guess there has been a drop in the number of customers who previously had some hours paid work-some effects, which I suspect will influence the way in which people ask for credit rather than the absolute demand. There is more risk aversion, I think, but still a demand for credit.

Q251 Austin Mitchell: I would just like to ask an historical question. When I was a kid, shops in Bradford were plastered with signs that said, "We take Provident cheques". Do you still do that?

David Rees: Not very much. We changed it to a shopping voucher system, but people actually prefer cash. If you took the Provident cheque, you could only spend it in shops that dealt with Provident.

Austin Mitchell: But most of them did.

David Rees: Perhaps most of them did in Bradford. With cash, customers can go anywhere and drive better bargains. That is what customers prefer.

Henry Raine: May I make a quick point in response to Mr Mitchell? The scale of the problem can be shown by the fact that we are turning down two thirds of applications, so where are those people going? We are not selling those leads to anyone. In terms of the need for credit, that paints its own picture.

Q252 Ian Swales: Following the Chair’s questions about the rumours, is Wonga financed by any loans from outside the country?

Henry Raine: No, we do not have any loans at all. We have shareholder equity.

Q253 Ian Swales: So, it is entirely cash generative then?

Henry Raine: Yes, we do not pay dividends to our shareholders. Our shareholders have given us the equity, and we do not pay any dividends.

Chair: Thank you very much indeed.

Prepared 23rd January 2013