Payday loan rollover plan is challenged by lenders

Greg Stevens (right), of a lenders' trade body, and Henry Raine, of Wonga, were among those quizzed

Payday lenders are divided over a plan to limit the number of rollovers of short-term, high-interest loans, MPs have heard.

The City watchdog, the Financial Conduct Authority (FCA), has proposed a limit of two extensions of payday loans if borrowers chose not to repay.

The Office of Fair Trading (OFT) has suggested that one rollover was a sign that a borrower was in difficulty.

But lenders told MPs that rollovers were suitable in some cases.

Payday lending is being put under the microscope by MPs amid a defence from some of the industry's biggest players.

Members of the Business Select Committee quizzed lenders, consumer groups, regulators and a minister about the industry.

Elsewhere, Labour leader Ed Miliband criticised what he called Britain's "Wonga economy", saying that the rise of payday lenders symbolised the squeeze on living standards facing millions of families.

He accused the firms of preying on the vulnerable, creating a "quiet crisis" for thousands of households left with debts they were unable to pay off.

'Timid'

The one-off committee session heard that consumer groups say complaints are up since the introduction of an industry charter to ensure loans are made correctly.

Consumer Minister Jo Swinson said that lenders had "failed to get their own house in order".

Greg Stevens, chief executive of the Consumer Credit Trade Association, a trade body, challenged the idea that complaints were rising and said there had only been 36 complaints so far this year.

Providers Wonga and Mr Lender said that 2-3% of loans were made to people who then hit financial difficulties.

Henry Raine, head of regulatory and legal affairs at Wonga, said that figure, as well as affordability checks, "compared favourably" with credit card companies and banks.

"We aim to lend to people who can pay us back," he said. "We do everything we can to lessen the load of bad debt."

He added that Wonga's average loan was £176 for 17 days, and that customers received a variety of reminders in the final days to avoid having to extend their loans.

Adam Freeman, of provider Mr Lender, said that it conducted strict affordability checks. It offered a loan to one in 100 applications, but forwarded some others on to credit brokers.

Industry trade bodies said that they had not expelled any payday lenders for failing to adhere to their codes of practice.

Rollovers

The lenders had differing views on the FCA plan to limit extension of loans to two rollovers.

Lender QuickQuid told MPs that it already limited borrowers to two rollovers. However, the Consumer Credit Trade Association described the FCA plan for two rollovers as "arbitrary" and said affordability was more important.

Mr Freeman agreed that there were cases in which it was better for a customer to rollover a loan and pay the extra interest.

"Just because someone rolls over a loan does not mean that they are in financial difficulty," he said.

Russell Hamblin-Boone, ‎chief executive of the Consumer Finance Association, said it had a code of practice that ensured lenders were only able to roll over a loan three times. He said the average time to repay was 41 days.

But later in the session Richard Lloyd, of the consumer association Which?, said: "It is just not credible to say that lenders are acting responsibly to allow people to roll over their loans."

MPs also heard that lenders had no system in place to check what other loans consumers had taken out with other lenders. Mr Lloyd said that rules should ensure that these cross-checks were made.

He said that the fees and charges linked to rollovers was what put people in financial difficulty, and that a two rollover limit was a "good place to start".

Peter Tutton, from the StepChange debt charity said that many borrowers were "in a hole and a payday loan helps them to dig the hole deeper".

Gillian Guy, of Citizens Advice, said that it was not appropriate for some people to be "force fed" a payday loan, rather than given debt advice.

Martin Lewis, of Moneysavingexpert.com, said it was important that the FCA prevented the rollover limit being bypassed. The danger was that borrowers would be encouraged to take another loan to pay off the original one.

Mortgage effect

The hearing comes after an Office of Fair Trading (OFT) report said that there were "deep-rooted" problems in the way payday loans attracted and treated customers.

It presented a dossier to the 50 leading payday lenders, which represented 90% of the UK market, about their failings and told them to improve. It also meant the industry was facing a Competition Commission inquiry.

As a result, 19 firms have exited the market. Three have had their credit licences revoked. There are more than 200 payday firms operating in the UK.

However, the Commons Public Accounts Committee has been scathing of the OFT's record in regulating the industry, accusing it of being "timid and ineffective" in a report published in May 2013.

Providers of these short-term, high-interest loans have faced criticism from many, including Church leaders. The FCA has proposed a risk warning be added to payday lending advertisements.

But loan provider Wonga has told the BBC its business practices are being misrepresented.

Meanwhile, mortgage commentator Ray Boulger from the advisers John Charcol told Newsnight that taking out a payday loan could adversely affect any future mortgage offer.

"Our experience is that mortgage lenders will often turn down requests for people who have had a payday loan - the regulator should require payday lenders to display this," he said.