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"Which?'s report highlights some important issues for borrowers to be aware of.  Nonetheless, we are disappointed that Which? chose to ignore the positive experiences of thousands of customers who use payday loans every month and the consumer protections in place from responsible lenders.

4. More than 90% of applicants for on-line loans from CFA members are turned down after credit checks have been carried out.

The Bishop of Durham has criticised payday lenders, describing their interest rates as "a sin". The Consumer Finance Association (CFA), which represents the major payday lenders, has responded to the Bishop's comments and requested a meeting with him to discuss the matter in person.

4. More than 90% of applicants for on-line loans from CFA members are turned down after credit checks have been carried out.

 

One of the largest ever pieces of research into the payday loan industry, conducted by international research agency, YouGov, has revealed a massive gulf in attitudes between payday loan customers and politicians.

The survey revealed sharply contrasting views, with customers expressing very high levels of customer satisfaction and positivity about how they are treated and the fairness of the deal they get; conversely politicians are very negative:

• 93% of customers think that payday lenders treat customers with dignity and respect; whereas only 5% of policymakers think they do so.
• 89% of customers think payday lenders explain their charges and fees clearly; whereas only 12% of policy makers think they do.

The survey also revealed that the average personal income of a payday loan users is £17,582, some £4,707 more than the minimum wage, and that 45 per cent of customers are from the ABC1 socio-economic group, demonstrating that consumers are choosing to use payday loans over other forms of credit , for a variety of reasons, including convenience.

Ends

 

The Consumer Finance Association, the trade body that represents some of the largest payday lenders in the UK, has welcomed the latest Business, Innovation and Skills Committee report into Debt Management which looks at payday loans and commercial debt management companies.

Commenting on the report, John Lamidey, chief executive of the CFA, said: “The CFA welcomes any move which promotes best practice and responsible lending in the payday industry, so we fully support the recommendations in the report. However, we believe that significant progress is already being made to improve standards in the industry through other research and governmental reviews that are currently underway and that the report’s recommendations need to be considered in the context of these developments

“The CFA and its members are actively participating in the BIS research into total cost of credit and are also working proactively with the Office of Fair Trading on its review of payday lenders, which was announced recently. We are also engaging with HMT and BIS on the future FCA regulatory model. All of these initiatives will have a significant bearing on enhanced consumer protection and will help to stamp out mal-practice; something which we are keen to assist with in any way.

“With regard to self-regulation, we are pleased that the report recommends an update to the Committee on the development of industry codes of practice by the end of 2012. The CFA is working pro-actively with BIS and other major trade associations to address legitimate concerns through an enhanced Code of Conduct that is due to be launched next month. The Code features a wide range of consumer protections including limits on rollovers, transparency in advertising and assistance for consumers who get into financial difficulty.

“However, we are concerned that no attempt has been made to measure the hoped-for consumer benefits against the costs. Implementing a database which requires payday providers to record all of their transactions in order to prevent consumers taking out multiple loans, will be expensive to deliver and maintain. This could push up the cost of loans and make loans unavailable to some consumers, yet there remains no data of academic quality proving the positive impact of databases. Simply removing access to payday loans does not remove a consumer’s need for credit. Indeed evidence from the US shows that consumers in database states might borrow less, but they also suffer from expensive overdraft charges, unpaid bills or worse, use of illegal money lenders.

“Responsible payday lenders, such as the CFA’s members, have no desire to lend to consumers that cannot afford to pay back their loans and put them in a position of financial hardship, so we will continue our extensive efforts to work with the Government and regulators to set the high standards that the industry should follow.”

Following today’s announcement by the Office of Fair Trading (OFT) that it is commencing an extensive review of the payday lending sector, the Consumer Finance Association has responded by welcoming the announcement.

John Lamidey, chief executive of the CFA, said: “The payday lending industry has faced a great deal of criticism in recent times and we fully understand and agree with the OFT’s concerns around some of the practices adopted by some players in the market.

“The CFA represents some of the largest payday lenders and we believe that our Code of Conductembodies best practice and sets the standard for the industry. Nonetheless, our Code is currently being enhanced to include many more consumer protections and this is due to be launched very soon.

“We welcome the OFT’s review and the CFA and its members are looking forward to working proactively with them to identify areas to enhance consumer protection”.

John continued: “The OFT’s approach is absolutely right. We have to identify areas of mal-practice and stamp it out. We know that there are payday lenders around who are less than transparent in their advertising and do not carry out the right levels of financial checks, in fact some of them brag about that, but they are not and will never be members of the CFA.

“Research shows that payday loans have a valuable role to play in today’s society and meet a real need for consumers who like the short term, limited nature of the loan and want to avoid borrowing larger amounts over long periods of time. So the OFT’s review, by clamping down on poor quality payday lenders, will be good for consumers and good for our industry.”

For more information, or for interviews with the CFA please contact Richard Griffiths at richard.griffiths@cfa-uk.co.uk or on 07875 653959

Editor notes

1. The Consumer Finance Association, (CFA) represents some of the largest short-term lenders in the UK. Its members are highly regulated, adhere to an industry code of practice that was devised with input from Government departments, consumer groups and consumer credit trade associations and conduct thorough affordability checks in line with EU and UK legislation before granting a loan.

2. CFA members require their customers to have a bank account, as well as regular and disposable income. 94% come from a household where there is at least one full-time worker.

3. CFA members are governed by the Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006); Consumer Credit Regulatory Guidance issued by the Office of Fair Trading; the Data Protection Act 1998; Privacy and Electronic Communications (EC Directive) Regulations 2003; Consumer Protection from Unfair Trading Regulations 2008 and related Office of Fair Trading Guidance Financial Services (Distance Marketing) Regulations 2004; the Enterprise Act 2002, and Money Laundering Regulations 2007.

4. More than 90% of applicants for on-line loans from CFA members are turned down after credit checks have been carried out.

Following ltoday’s publication of research by Payplan1 on behalf of the ITV Tonight programme, the Consumer Finance Association (CFA) – which represents the major payday lenders - has emphasised that responsible lending and transparent information is the key to ensuring consumers can manage their debts.

John Lamidey, chief executive of the CFA, said: “Payplan’s research paints a pretty gloomy picture but it certainly doesn’t tell the whole story. On the contrary, recent independent research2 into credit use by low-income consumers shows that consumers will often choose payday over mainstream credit options as they can see that the short timescale for repayment is less high risk than an open-ended overdraft or revolving credit facility.

“More than half (54 per cent) of payday loan users feel that their loans make it easier to pay bills on time. A similar proportion (56 per cent), say that using payday loans has prevented a one-off financial difficulty from becoming a wider financial crisis.

“The average payday loan debt is £273 not £500 as Payplan’s survey suggests and the fact that only a minority of customers refinance their payday loan and even then they only do it twice on average, shows that consumers use payday loans to smooth the peaks and troughs of their finances rather than relying on them month in, month-out, as many commentators would have you believe.”

The CFA represents some of the largest payday lenders in the UK. Its members are highly-regulated and operate stringent affordability tests to ensure that loans are provided responsibly and that customers have the ability to repay. Over 90% of applicants for on-line loans from CFA members are turned down after checks have been carried out. Complaints levels are extremely low, whilst customer satisfaction levels are as high as 94%.

John says: “We acknowledge that there are payday lenders around who do not carry out the right levels of financial checks, in fact some of them brag about that, but they are not and will never be members of the CFA.

“Payplan’s research¹ surveyed 707 people but no details of the sample’s demographic are provided. Given that they are a debt management company, you have to assume that most of their interviewees are long-term debt sufferers, not the average consumer who may take out a payday loan to smooth the peaks and troughs in their family’s finances.”

The Payplan research states that over half of people surveyed owe more than £500 to their payday loan lenders. This is contrary to more robust research that was conducted using a nationally representative survey sample of 1511 people which found that the average payday loan debt is £273.

Payplan also state that a huge 69% of respondents say they do not know the rate of interest on their payday loan. This is in direct contrast to the market research conducted by CFA members which finds that 97% of customers say the deal was totally transparent and 86% say that they would recommend the service to a friend.

John added: “Our members offer small loans to consumers who have a bank account, regular income and disposable income. Our loans are popular because our customers want to avoid borrowing larger amounts over long periods of time”.

Whilst APRs appear very high on face value, it is important to note that APRs distort wildly when applied to very small loans (typically a few hundred pounds) borrowed over a very short period of time (often only a week or two). These are the factors that create the very high APRs. They bear no relation to the actual cost of the loan in cash terms (typically between £10 and £30 for a £100 loan).

The CFA's member research, alongside our customer satisfaction surveys, finds that more than nine out of ten customers of a CFA member said they had never felt they were being pressured by staff to extend existing loans.

Added John: "Our advice to all consumers is that if it is necessary to borrow a small sum, never borrow more than you can repay and always use a lender that is reputable and a member of a UK trade association. "Anyone struggling with debt should seek free help from debt advice charities such as the Consumer Credit Counselling Service or Credit Action."

Ends

For more information, or for interviews with the CFA please contact Richard Griffiths at richard.griffiths@cfa-uk.co.uk or on 07875 653959



Editor notes

1. The Payplan survey was carried out on behalf of ITV's Tonight programme. It surveyed 707 people during January 2012. http://www.payplan.com/debt-news/2012/01/25/payday-loan-borrowing-the-facts/

2. Figures were taken from the report entitled ‘Credit and low-income consumers: a demand-side perspective on the issues for consumer protection’ which is available at: http://www.friendsprovidentfoundation.org/reports.asp?itemid=312&itemTitle= Credit+and+low-income+ consumers%3A+a+demand-side+perspective+on+the+issues+for+consumer+protection§ion=24& sectionTitle=Reports The research, which was carried out by Policis and Liverpool John Moores University on behalf of Friends Provident Foundation, was undertaken with a nationally representative sample of 1,511 consumers in the lowest 50 per cent of household incomes, aged 18–65. The fieldwork was undertaken by GFK NOP in January 2010. This was supplemented with a telephone survey with non-standard lending users, to ensure adequate representation of this group for detailed analysis. This was based on a random representative sample of 500 home credit users and a random representative sample of 500 users of payday loans, undertaken in January 2010 by Teamsearch Market Research. The samples of both the home credit and payday borrowers were from borrowers who had taken on home credit/payday loans in the previous twelve months. There was no income filter for either the payday loans or home credit samples. The sample was split evenly between online and retail members and provided by the leading lenders in each case, who agreed both to independent verification of the sample and provided contractual undertakings that the sample supplied was a random representative sample.

3. The Consumer Finance Association, (CFA) represents some of the largest short-term lenders in the UK. Its members are highly regulated, adhere to an industry code of practice that was devised with input from Government departments, consumer groups and consumer credit trade associations and conduct thorough affordability checks in line with EU and UK legislation before granting a loan.

4. CFA members require their customers to have a bank account, regular and disposable income. 94% come from a household where there is at least one full-time worker.

5. CFA members are governed by the Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006); Consumer Credit Regulatory Guidance issued by the Office of Fair Trading; the Data Protection Act 1998; Privacy and Electronic Communications (EC Directive) Regulations 2003; Consumer Protection from Unfair Trading Regulations 2008 and related Office of Fair Trading Guidance Financial Services (Distance Marketing) Regulations 2004; the Enterprise Act 2002, and Money Laundering Regulations 2007.

6. More than 90% of applicants for on-line loans from CFA members are turned down after credit checks have been carried out.

Following publication of research by the housing charity Shelter, the Consumer Finance Association (CFA) – which represents the major payday lenders - has emphasised that this form of borrowing is designed to meet short term needs, not manage long term financial commitments.

John Lamidey, chief executive of the CFA, said: "We do question the assertions in the Shelter survey¹, since to claim that one million people use payday loans to pay their rent or mortgage means that virtually everyone who takes out a payday loan uses it for this purpose. There are probably not many more than 1 million payday loan customers in total!

"Also, it would not be practical for people to use payday loans to pay their mortgage or rent on a regular basis. It might provide a one-off solution when they had a low income one month and expected more money the next month (shift work, overtime, commissions, bonuses etc). However, using a payday loan to pay off a mortgage every month would be financially impossible, since the total repayments (payday loan and mortgage) would be much greater than simply paying the mortgage.

"Obviously, some people do need to juggle short and long-term borrowing to manage their finances, but the CFA's advice has consistently been that a payday loan is for a short term need or desire, not for managing long term debt."

Borrowing a small sum can help to bridge an income gap and prevent customers having to pay high credit card charges or unauthorised bank overdraft fees, which can create long term debt problems.

Added John Lamidey: "If it is necessary to borrow a small sum, never borrow more than you can repay and always use a lender that is reputable and a member of a UK trade association. CFA members are highly-regulated and operate stringent affordability tests to ensure that loans are provided responsibly and that customers have the ability to repay. More than 90% of applicants for on-line loans are turned down after checks have been carried out.

"Our advice to people who are struggling with housing costs is to speak to the mortgage lender or landlord and to get advice from organisations like Shelter or Citizens Advice. If debt is a wider issue, consumers can get free help from debt advice charities such as the Consumer Credit Counselling Service or Credit Action."

Research published today by insolvency researcher R3 paints a gloomy picture on the nation’s finances and levels of debt. However the Consumer Finance Association, CFA, has questioned the assumptions that are being made about the use of payday loans. It warns that presenting a negative and unsubstantiated view of the payday loan service will ultimately reduce choice and protection for consumers, leading to them paying more for their credit use.

John Lamidey, chief executive of the CFA says: “We are surprised to see some of the figures and assertions in the R3 research. Our own independent research, and that of our members, has shown that on the contrary, 94% of payday customers are satisfied with the service and crucially that more than nine out of ten customers of a CFA member said they had never felt they were being pressured by staff to extend existing loans. This is in contrast to the R3 assertions.”

The Association says that in the case of payday loans offered by its members, complaint levels are extremely low, as demonstrated by Financial Ombudsman Service data – fewer than 60 in a six month period. The most complained about finance products between July and September 2011 were Payment Protection Insurance (19,259) credit cards (5,751) and current accounts (4,197). There was also a considerable increase in the number of new complaints regarding bank overdrafts and loans (1,718).

John explains: “The research points out that it is primarily mortgages and credit cards that are the real problem areas. Research undertaken by a CFA member found that 92% of their customers agreed that they are treated fairly and honestly and 61% agreed that charges and fees are reasonable. In contrast, when bank customers were quizzed just 55% said they felt they received fair and honest treatment from the banks and only 33% of bank customers felt that bank charges are fair.”

The CFA believes that when a payday loan is used for the purposes of which it is designed (short-term borrowing of small sums) it is an ideal product; this is supported by evidence that over 85% of payday customers would recommend the service to friends.

The CFA is warning critics that if individuals ignore a short-term hole in their finances, this will mean falling into an unauthorised overdraft which can leave consumers repaying their bank equivalent APRs of over 800,000%. The BBC Moneybox programme recently showed that a customer borrowing £100 for 28 days without the consent of Santander for example, would repay double the loan amount of £200 and the costs could keep on climbing. On the contrary, a short-term loan from a CFA member costs just £10-£30 per £100 borrowed.*

Using a credit card and not repaying the whole amount can also leave consumers with high debts. Indeed the R3 research states that: “Credit card payments still rank as the largest reason individuals struggle to ‘payday’, with mortgage payments and spending on non-essential items coming second. Our card binge is now skewing our financial priorities, with credit card payments taking up what money we have left.”

Financing a short-term credit need on a credit card can mean that interest continues to be charged on interest every month until the whole balance is repaid – a very expensive way to borrow a small sum.

John explains: “Whilst we would not suggest that people replace regular income with a payday loan, our service is often the most competitive short-term credit option when people are faced with more month than money. CFA members are highly-regulated and operate stringent affordability tests to ensure that loans are provided responsibly and that customers have the ability to repay. More than 90% of applicants for on-line loans are turned down after checks have been carried out.”

Our advice to individuals that are struggling to payday, is that if it is necessary to borrow a small sum, never borrow more than you can repay and always use a lender that is reputable and a member of a UK trade association.”

The Consumer Finance Association (CFA) is warning the critics of the highly regulated short-term lending industry that they are failing to protect consumers from the marketing tactics and extortionate repayment costs of loan sharks and banks.

The warning comes in response to new research released today by insolvency trade body R3 and the industry’s detractor claims that ‘Britain is being bled dry by legal loan sharks’.

The Association is concerned that a lack of understanding about the short-term loan industry and misplaced criticism is placing all lenders in a category that should be avoided. This, it says, may reduce consumers perceived credit options and could leave people paying APR’s of almost one million percent.

The Consumer Finance Association, (CFA) represents some of the largest short-term lenders in the UK. Its members are highly regulated, adhere to an industry code of practice that was devised with input from Government departments, consumer groups and consumer credit trade associations and conduct thorough affordability checks in line with EU and UK legislation before granting a loan.

John Lamidey, chief executive of the CFA said: “If those that seek to protect consumers from extortionate credit truly have the best interests of consumers at heart, then seeking to claim that highly regulated, responsible short-term lenders are the same as loan sharks cannot possibly achieve this aim.”

Loan sharks are illegal, unlicensed and unregulated. APR charges are extortionate and can spiral rapidly, so the borrower is forever in the lenders debt. Loan sharks can also employ illegal debt collection tactics, with psychological and physical impacts on consumers.

But it isn’t just illegal lenders that consumers should watch out for. Customers of banks that fall into an unauthorised overdraft can face APR charges of over 800,000%. BBC Moneybox recently showed that a customer borrowing £100 for 28 days without the consent of Santander for example, would repay double the loan amount of £200 and the costs could keep on climbing. On the contrary, a short-term loan from a CFA member costs just £10-£30 per £100 borrowed.

Consumer Focus has also announced today that changes made by major banks to basic bank accounts could push more consumers out of the banking system. Barclays is making changes to its basic bank account. This will see a tripling in the maximum daily charge for missed direct debit payments if there are insufficient funds to cover the payment. A customer could be charged up to £24 instead of the current £8 if three missed payments occur in a day.

John added: "CFA members account for about 70 per cent of the payday loans made in the UK, but sadly not all lenders in the market operate to the same high standards as our members. Our advice to consumers is to make sure that the terms and cost of any loan are clearly explained and totally transparent. If it is necessary to borrow, never borrow more than you can repay and always use a lender that is reputable and a member of a UK trade association.”

John Lamidey, chief executive of the Consumer Finance Association (CFA), has been invited to give oral evidence to the Parliamentary Business, Innovation and Skills Committee inquiry into Debt Management and Consumer Credit on 29th November.

The CFA represents some of the largest, responsible short-term lenders and its aim is to promote best practice in the provision of consumer credit.

The inquiry is focusing on the Government’s response to its consultation on Managing, Borrowing And Dealing With Debt, and its proposals for policies in relation to consumer debt; support mechanisms for those in debt; and the provision of credit facilities by commercial companies.

In anticipation of likely questions from the Committee, John Lamidey commented: "Our members offer small sum, short term loans (often referred to as “payday” loans) from high street outlets or online. This allows customers to borrow a relatively small amount of money (usually between £50 and £800) which they repay over a short period (typically one or two months).

"These loans can be a useful way of meeting immediate short term borrowing needs or opportunities, and avoiding long term debt, as long as they are paid back in full and on time.

"Calls to impose caps on the total cost of credit for small loans would cause serious consumer detriment. Removing one borrowing option in today's financial environment will only force consumers into more expensive, less desirable and possibly unregulated alternatives.

"Introducing rate caps would not make small sum, short term loans cheaper, they would make them unavailable. This would lead to lower living standards if households cannot manage their personal cashflow by smoothing out the peaks and troughs of income and expenditure. This would be very bad news indeed for consumers, and the CFA is very pleased to have the opportunity to raise these issues with the Committee."

The Consumer Finance Association (CFA), which represents some of the largest short term lenders and promotes responsible lending, has welcomed the Government's response to the Department for Business (BIS) and HM Treasury Review of Consumer Credit and Personal Insolvency.

CFA chief executive John Lamidey said: "We look forward to continuing our work with BIS and the Treasury to enhance the Lending Code for Small Cash Advances (available at http://www.cfa-uk.co.uk/codeofpractice.asp). Our members are committed to driving up standards across the short term lending sector.

"The Code was developed with input from the Payday Loan Forum, whose members include Government departments, consumer groups and consumer credit trade associations.

"The announcement that BIS has commissioned independent academic research into the impact of a total cost of credit cap in the high cost credit market is also good news. We will be raising with the researchers our concerns that rate caps would not make loans cheaper, they would make them unavailable. Reducing access to small sum, short term credit facilities to help people manage their personal cash flow in uncertain times, hardly helps consumers and could drive more people into the hands of unregulated and illegal lenders."

The Consumer Finance Association (CFA) has voiced its concerns over the government’s decision to cut-back funding for the Labour government’s illegal money lender scheme. It says such action will leave many people at the mercy of loan sharks, without adequate protection.

John Lamidey, Chief Executive of the CFA, says: “The CFA represents some of the largest, responsible short-term lenders and our aim is to promote best-practice in the provision of consumer credit. Our members are licensed, regulated and transparent with high levels of customer service.

"Loan sharks are unscrupulous, unlicensed lenders that prey on the vulnerabilities of the poor. The illegal money lender scheme offered people a degree of protection from this and we lament the government’s decision to reduce the six regional teams to just one centralised unit."

CFA members offer small sum, short term loans (often referred to as "payday" loans) from high street outlets or online. This allows customers to borrow a relatively small amount of money (usually between £50 and £800) which they repay over a short period (typically one or two months).

Fewer than 3% of those within the lowest 50% of household incomes use payday loans, which are designed for those who have bank accounts, a job and disposable income.

The CFA is lobbying against calls to cap the total cost of credit on payday loans. It says rate caps would not make loans cheaper; they would make them unavailable, driving more people into the hands of unregulated illegal lenders.

John explains: “Actions like these demonstrate the very real need for the government not to take any action against responsible, licensed lenders which will jeopardise the provision of short-term funding to groups that occasionally experience more month than money.”

As canny consumers continue to shop around for the best deals, the Consumer Finance Association (CFA) has tackled some of the confusion that surrounds the short term lending sector.

"As the trade association for the payday lending industry, we regularly talk to customers, money advice agencies, government officials and politicians," said CFA chief executive John Lamidey. "There seems to be a lot of confusion about the benefits and costs of short term (often called 'payday') loans.

"These loans can be a useful way of meeting immediate short term borrowing needs or opportunities, and avoiding long term debt, as long as they are paid back in full and on time."

The CFA has compiled a list of the ten most frequently mentioned payday loan myths, and some facts about the industry:

High payday APR = expensive loan
APR is a regulatory requirement but is woefully inadequate for small sum lending. The rate of interest does not tell a customer the cost of the loan. Accountancy firm PWC’s influential report, UK consumer credit in the eye of the storm: Precious Plastic 2011 notes that "in the case of payday lending an APR is fundamentally misleading. Annualising the interest cost of a product that is only offered as a short-term facility confuses the purpose of the loan and misrepresents the true cost. It’s similar to suggesting that the typical annual cost of a rental car might be close to £15,000, rather than a daily rate of £40."

Credit cards/bank overdrafts are always cheaper
Payday loans compare favourably to many consumer alternatives, even when expressed as annual percentage rates. For example, payday loans cost £10-£30 per £100 borrowed. So, borrow £200 from a CFA member and clear the debt on day 30 for, say, £250. The APR is 1413.1%. Borrow £200 on an unauthorized bank overdraft (where there is no requirement to show an APR) and clear the debt on day 30 for £350. The actual APR of the overdraft transaction is 90,888.9%.

Payday lenders are not regulated
All consumer credit is regulated and there are common standards throughout the EU. The lending process is regulated rather than individual products, which makes sure everything is covered. UK credit legislation has been substantially revised and updated three times in the last 10 years.

Payday lenders don’t carry out credit checks
Carrying out credit checks is a key part of the responsible lending process. There are four specialist providers of identity data and credit data for the payday industry. Any business not using them gets fatally hit with fraudulent applications and quickly goes out of business. Commentators often highlight the growth in applications for short term loans but more than 90% of applicants for on-line loans are turned down after checks have been carried out.

Payday borrowers often rack up multiple loans
They might do, by also borrowing on bank overdrafts, credit cards, from banks and other lenders. CFA members conduct checks to ensure that those who borrow from them are creditworthy and can afford the loan repayment – every time they want a loan.

Payday lenders target the vulnerable, unemployed and those on benefits
CFA members require their customers to have a bank account, a job and disposable income. 94% come from a household where there is at least one full-time worker. Across society as a whole 1 in 5 households have no worker at all. Those are not CFA members' customers.

Payday lending is fuelling debt
The debt charity Consumer Credit Counselling Service says in its Statistical Yearbook 2010 that “on average, clients continue to owe the most on personal loans (£12,911) and credit cards (£12,418). Debt in other forms of unsecured lending is much lower, including those types which have had a lot of attention paid to them over recent years such as home credit (£1,391) and store cards (£1,286)”. Payday loan debt seems to be too small an issue to mention as a separate category.

Complaints about payday lending are high
Data released by the Financial Ombudsman Service shows that payday customers have a very low level of complaints – fewer than 60 in a six month period. The most complained about finance products between July and September 2011 were Payment Protection Insurance (19,259) credit cards (5,751) and current accounts (4,197). Compared to the previous quarter, there was also a considerable increase in the number of new complaints regarding bank overdrafts and loans (1,718).

Rate caps would be good for consumers
Removing one borrowing option in today's financial environment will only force consumers into more expensive, less desirable and possibly unregulated alternatives. Introducing rate caps, for example, would not make small sum, short term loans cheaper, they would make them unavailable. This would cause serious consumer detriment leading to lower living standards if households cannot manage their personal cashflow by smoothing out the peaks and troughs of income and expenditure.

Payday lenders charge ‘interest on interest’
This is precisely what happens with a credit card if the customer does not pay off the whole amount. Interest is added to the balance outstanding to create a new balance. If this is not paid off in full next month, interest is added to the balance outstanding – which includes last month’s interest. Interest continues to be charged on interest every month until the whole balance is repaid. With a payday loan it is normally a condition of any refinancing that the charges are paid first. So, in a hypothetical example, borrow £200 with £250 to pay on day 30. If the loan is to be extended, the £50 charges must be paid, with the £200 capital being carried forward for another 30 days, when a further £50 charges would become payable. It never costs more than £250 to clear this debt.

"While CFA members account for about 70 per cent of the payday loans made in the UK, and follow a compulsory Code of Practice, not all lenders in the market operate to the same high standards," added John Lamidey. "Our advice to consumers is to make sure that the terms and cost of any loan are clearly explained and totally transparent. If in doubt, try another lender."

The Consumer Finance Association (CFA) has today (14th July 2011) launched a new code of practice in the House of Commons, supported by Stephen Lloyd MP.

The Lending Code for Small Cash Advances is for CFA businesses that offer small cash loans (sometimes referred to as 'payday' loans) from high street outlets, by phone or online.

It was developed with input from the Payday Loan Forum, whose members include Government departments, consumer groups and consumer credit trade associations. The Forum was set up by the CFA following recommendations in the Office of Fair Trading's High Cost Credit Review (published in June 2010) and the Consumer Focus report "Keeping the Plates Spinning" (published August 2010).

Companies which sign up to the ten-point Code will make a commitment to:

• Treat all customers fairly and with care, correcting any mistakes quickly
   and courteously, and compensating customers for any reasonable
   losses caused.

• Never encourage customers to borrow more than they need, and seek to
   establish that they can afford to repay.

• Always show applicants the total cost of repayment clearly and prominently
   before they apply for a loan. There will be no hidden fees or charges.

• Clearly explain the costs and consequences of late or non repayment.

• Offer a modified repayment schedule that will pay down the outstanding
   debt in a manageable manner for those customers who encounter
   significant repayment difficulties, and give details of free advice services
   that can help customers who have financial difficulties or repeatedly delayed
   or missed payments.

"CFA members already comply with the Code's requirements as part of their normal customer service standards, but we were delighted to have the opportunity to work with regulators, consumer groups and other trade associations to try to encapsulate good practice in a Code which could be followed by any payday lender," said CFA chief executive John Lamidey, who chaired the Payday Loan Forum

"This Code is in addition to all legal requirements and Office of Fair Trading regulatory guidance, giving customers added quality assurance."

The Payday Loan Forum is also tackling the OFT's recommendation to set up a price comparison website for consumers, and enhanced data sharing so that lenders can access information about other loans a customer has taken out as part of their application processing.

John Lamidey believes that the new Code is part of an ongoing dialogue and that flexibility is needed as the regulation of consumer credit faces significant change over the coming years.

"I hope that participation and the remit of the Payday Loan Forum could be widened to produce an ongoing focus for consideration of payday loan issues. By bringing the industry, consumer groups, legal and technical experts and government departments together we can promote high standards across the payday sector, to the long-term benefit of consumers."

Welcoming the launch of the Code, Stephen Lloyd MP added: "This is a positive step forward by the payday lending sector, and reinforces the commitment of CFA members to lending responsibly. I have been heavily involved in lobbying the government to secure fairer provision for customers in this market, while ensuring that we do not make it too difficult for companies to enter the sector. This code of practice is one step in the right direction, and I am keen to support better provision for the public."

The Lending Code for Small Cash Advances can be found at
http://www.cfa-uk.co.uk/codeofpractice.asp

The Consumer Finance Association, the trade association which represents the larger lenders in the small cash advance sector, has welcomed Treasury Financial Secretary Mark Hoban’s remarks supporting the short-term loan industry and his recognition of the various forms of regulated, licensed lending that enable consumers to access credit choices to meet their needs.

In his parliamentary speech on the Finance Bill on 4th July, Mr Hoban said that consumer credit providers shouldn’t be described as ‘legal loan sharks’ as he rejected Labour MP Stella Creasy’s amendment to the Bill to penalise companies that provide short-term credit.

Contrary to recent assertions about the sector, payday loans provide a valuable credit choice. They allow customers to borrow relatively small amounts of money which they repay over a short period (typically one or two months). The payday loan sector has recently been inaccurately compared to credit cards and overdrafts. Unlike these forms of credit, payday loans are designed to be repaid quickly, meeting a need to improve an individual’s short term personal cash flow. Independent research shows that the use of revolving credit as offered by credit cards tempts many into long-term debt that they cannot afford to repay. The design of this form of credit means there can be no real incentive to repay more than the bare minimum and a debilitating spiral of indebtedness can soon occur.

John Lamidey, chief executive of the CFA said: “The payday loan industry faces a raft of inaccuracies, criticisms and misunderstandings on a daily basis, so we welcome the Minister’s remarks and the sensible approach that the Government is taking. Contrary to some of the statements we have seen recently, payday loans are designed for those who have bank accounts, a job and disposable income. They are not loans for people on benefits or very low incomes and are designed to be repaid quickly. Indeed, most short-term loans are cheaper than running up an unauthorised overdraft.

"There is a plethora of independent research that supports the valuable service short-term loans deliver. Customers like payday loans because they are quick, convenient and it is easy to understand how much it will cost them to repay the loan. Many consumers choose payday loans over mainstream borrowing from banks because they fear being hit by unexpected overdraft and credit card charges or that these credit options will tempt them into long-term debt.”

Prior to putting forward an amendment to the Finance Bill, Ms Creasy had called for a cap on the total cost of credit. However, the conclusion of the Office of Fair Trading High Cost Credit Review (a year long market study, published in June 2010) did not support rate caps. Restricting total charges for credit could destroy many existing credit markets including mortgage products and personal loans.

Arguments for new legislation also disregard the imminent findings of the joint Treasury and Department for Business, Innovation and Skills Consumer Credit and Personal Insolvency Review, soon to be published, and the new approach to financial regulation that will be established under the Financial Conduct Authority. A draft Bill has been recently published which sets out wide ranging reforms of the entire regulatory framework for financial services.

Mr Lamidey continued: “We are satisfied that the Government has not supported Ms Creasy’s amendment at this time. Imposing a restriction on the cost of credit or a tax on the industry would not make our loans cheaper, it would make them unavailable. This would cause serious consumer detriment leading to lower living standards if households cannot smooth out the peaks and troughs of their income and expenditure."

New personal debt data from R3 – the trade body for insolvency practitioners – shows that eight million people are likely to go into overdraft on their bank current account in June with two million of them failing to get the overdraft authorised.

John Lamidey, chief executive of the Consumer Finance Association (CFA), advises consumers to consider other forms of short term finance to avoid being landed with high unauthorised overdraft fees, which could well make their financial situation worse.

"CFA members offer a number of options for small cash advances, sometimes known as payday loans, and it's certainly worth comparing all the costs before making any borrowing decisions."

He cites the example of one of the major banks which has recently contacted customers with details of its new, simple, transparent pricing policy for overdraft charges. Following significant criticism of the banks for having overdraft charges that were complex and opaque, they are now coming up with much clearer pricing structures.

"The bank says that an arranged overdraft costs 50 pence a day, capped at £5 a month. An unarranged overdraft, however, is charged at £5 a day, plus a £25 item fee whether or not the bank decides to make the payment requested. So, it appears that every time you issue a cheque whilst in unauthorised overdraft, the bank will charge an additional £25, whether the cheque is paid or bounced.

"A customer who is in unauthorised overdraft for say, £200 for 30 days will pay £150 in charges, plus £25 for every transaction on the account. To clear the debt, he or she will have to pay at least £350.

"Compare this to a small cash advance offered by payday lenders. They operate online or from high street stores. Here a £200 loan for 30 days will result in a repayment of around £220 to £260, so much less expensive than the unauthorised bank overdraft. Yet payday lenders are sometimes criticised for having high charges.

Added Mr Lamidey: "Our advice to those two million people who R3 say will go into unauthorised overdraft is think before you borrow. Rather than just allowing bank charges to rack up, why not shop around to find a cheaper way of funding short term cash flow issues."

The Consumer Finance Association has welcomed two new reports which help to dispel myths about the payday loans sector.

Recent data released by the Financial Ombudsman Service (FOS) shows that payday customers have a very low level of complaints about the industry, whilst a briefing note from economic and social research consultancy Policis reveals that borrowing in the credit mainstream appears to result in higher overall indebtedness and more debt spirals than does short term lending such as payday loans.

In data published by the FOS for July to December 2010, payday loans attracted fewer than 60 complaints¹, out of a total of 97,237 new complaints. The most complained about finance products were current accounts (10,354), credit cards (8,682), bank overdrafts and loans (2,959) plus 'point of sale' loans (1,557).²

The Policis briefing note³ is a summary of data and findings from a forthcoming study “Credit and low income consumers”, funded by the Friends Provident Foundation, which aims to understand the benefits and risks of credit use by those within the lowest 50% of household incomes, and inform discussion on how most effectively to protect their interests.

Key findings include:

• Fewer than 3% of those within the lowest 50% of household incomes use payday loans.

• 58% of low income borrowers use overdrafts as a credit facility and 44% of those with credit cards have missed payments. For those incurring charges, the average number of overdraft fees is 6.2 per annum with the average number of missed payments on credit cards at 3.4 per annum.

• Some 29% of payday loans are refinanced, with those refinancing rolling over an average of on just 2 occasions.

• Under uneven repayment conditions the cost of credit associated with low APR products can quickly approach or exceed that of high APR products. Critically, individuals can pay a high cost for their overdraft or credit card credit while not being able to repay their debt.

• Non-standard products may have a higher up-front cost, but are repaid over a short term and the loans tend to be small scale. As a result, debt is usually lower value and is usually only a small part of overall indebtedness.

Policis also notes that despite the significant advances in the sector, social lenders are not in a position to provide credit on anything approaching the scale that would be required to compensate for the loss of private sector lending for those currently using their products, far less for a wider spectrum of borrowers who might find their access to mainstream products restricted.

"While some politicians and activists may criticise the payday industry, the FOS figures and Policis research speak for themselves," said John Lamidey, chief executive of the CFA. "Customers find that payday loans are simple, transparent and meet their short term cashflow needs in a manageable manner. Rarely does anything go wrong and where there is cause for complaint lenders resolve the matter without the customer needing to turn to the Ombudsman.

"Payday customers appreciate this style of lending as it is not designed to run up large, long term unsecured debt - which has been a significant feature of the consumer credit market in the past. Customer satisfaction levels are high among our members, complaint levels are very low, and friendly and helpful staff highly valued. In one recent survey, 87% of customers said they would recommend the use of their payday lender to a friend."

The Consumer Finance Association has welcomed the very low level of complaints to the Financial Ombudsman Service (FOS) about the payday loans industry.

In data published by FOS for July to December 2010, payday loans attracted fewer than 60 complaints, out of a total of 97,237 new complaints. The total number of complaints was an increase of 15% on the 84,212 cases received in the first half of 2010. The FOS upheld an average of 53% of complaints in favour of consumers, compared to 44% in the first half of 2010.

The most complained about finance products were current accounts (10,354), credit cards (8,682), bank overdrafts and loans (2,959) plus 'point of sale' loans (1,557).

"While politicians and consumer groups may criticise the payday industry, the FOS figures speak for themselves," said John Lamidey, chief executive of the CFA. "Customers find that payday loans are simple, transparent and meet their short term cashflow needs. Rarely does anything go wrong and where there is cause for complaint lenders resolve the matter without the customer needing to turn to the Ombudsman.

"Payday customers appreciate this style of lending as it does not run up large, long term unsecured debt which has been a significant feature of the consumer credit market generally. Customer satisfaction levels are high among our members, complaint levels are very low and friendly and helpful staff highly valued. In one recent survey, 87% of customers said they would recommend the use of their payday lender to a friend."

Click here to go to the Financial Ombudsman Service's website:
http://www.financial-ombudsman.org.uk

The Consumer Finance Association (CFA), which represents most of the major businesses in the payday loans sector, has made a formal complaint to The Sunday Times over grossly inaccurate reporting.

In a piece published on 2 January 2011 in the 'Business and Money' section about Dollar Financial Corporation's purchase of Payday UK from its American parent company, Compucredit, journalist Dominic O'Connell stated:

"Last month the Office of Fair Trading (OFT) issued a scathing assessment of the payday loan industry following an 18-month investigation. Its officials said that half of the 200 lenders they visited failed to “fully demonstrate competence”.

Officials found the companies often did not explain the full costs of a loan and did not explain customers’ cancellation rights.

The OFT sent warning letters to 50 firms. It said while most of the larger payday loan companies met its guidelines — almost all firms that offer credit have to be licensed by the OFT, and all must comply with its responsible lending code — some smaller companies did not."

This is entirely wrong. The Office of Fair Trading comments and action were in relation to home credit (doorstep) lenders, not suppliers of “payday” loans. In reality, the 50 warning letters were sent by the Office of Fair Trading to home credit firms, not payday businesses. Details of the OFT comments and warning letters are in an Office of Fair Trading press release at:
http://www.oft.gov.uk/news-and-updates/press/2010/144-10

Home credit offers small loans to low income consumers, repaid weekly to an agent who calls at the home. Payday loans are short term loans, typically with one or two repayments, issued over the internet or from high street outlets to customers who have a job, a bank account and disposable income. Recent OFT research shows that the customer demographics for these two distinct types of loan are entirely different and there is no crossover between to two customer groups.

CFA chief executive John Lamidey made a formal complaint to The Sunday Times about the inaccurate reporting. "I am surprised that a journalist at a respected newspaper like The Sunday Times made such a basic error in confusing home credit with the payday sector, and then criticised payday lenders on the basis of incorrect information. I have contacted Mr O’Connell on behalf of our members, and he immediately accepted our criticism and corrected the online version of the article. The Sunday Times will also publish a correction and apology in the 9th January issue. "