Backlash brews against payday loan firms

Payday loan companies pride themselves on being able to approve advances online in less than 15 minutes.

So, in the time it takes the British government to clamp down on this largely unregulated industry, how many more financially vulnerable people will be lured into signing up for loans with annual interest rates in excess of 5,000 per cent?

As more families struggle to stretch their finances to the end of the month, the payday loan industry has boomed, surging from £900 million three years ago to about £2.2 billion today.

As many as one million households are reckoned to take out payday loans each month – and four in 10 of those loans are used to pay for essentials such as food or fuel.

Already the target of a Competition Commission investigation, the controversial payday lending industry was the subject of a government-led summit on Monday, hosted by consumer minister Jo Swinson and attended by representatives from the lenders, regulators and debt charities.

One person not invited, however, was Labour MP Stella Creasy, who has been a vocal critic of the industry and is campaigning for a cap on total repayments.

Lenders such as Wonga argue that the annual percentage rate (APR) it charges (5,853 per cent in Wonga's case) is not a true reflection of the cost of their short-term loans, which are initially taken out for just one or two weeks.

But a high proportion of these loans are rolled over as customers struggle to repay them, sending the cost soaring.

Longer-lasting loans
According to the Office of Fair Trading, half the industry's revenue comes from loans that last longer and cost more because they are rolled over or refinanced.

A cap on loans was not on the agenda at Monday’s summit, which probably explains why Creasy was not invited.

There were promises from the head of the Financial Conduct Authority (FCA), Martin Wheatley, that the advertising of these loans would be looked at, although he doubted there would be an outright ban.

One of the many criticisms of payday lenders is that they concentrate more on the speed of granting loans than ensuring borrowers will be able to repay their advances.

They claim not to target the unemployed, young people or students but, as Wheatley observed, they advertise heavily on daytime television.

The FCA plans to publish a paper on the industry in the autumn and will take over from the Office of Fair Trading (OFT) as regulator – but not until next April, a time lag that will allow many more desperate borrowers to be sucked in by the promise of instant cash.

Timid control
In a damning verdict on the failings of the regulators, the British public accounts committee last month blasted the OFT for its "ineffective and timid" policing of the industry.

The committee chairwoman, Margaret Hodge, said it had failed to stop lenders targeting vulnerable people, inaction that had cost consumers some £450 million a year.

The new regulator may be talking tough, but 10 months is a long time to wait for a clampdown on an industry that is expanding so rapidly.

There are signs, however, of a public backlash against the “legalised loan sharks”.

Last month, after an outcry from fans, Bolton Wanderers football club called off its sponsorship deal with QuickQuid, saying it had "underestimated the reaction to the sector of business in which the sponsor operated".

Several universities have banned payday loan advertising on campus and, in Glasgow, the council plans to open a credit union account for every teenager in the city after discovering that 100,000 Glaswegians use payday lenders to survive.

Archbishop and his branches
Help may also be on the way from a higher power – the Archbishop of Canterbury, Justin Welby.

A fierce critic of short-term lenders, whom he has compared to Old Testament usurers, Welby wants congregations to set up credit unions and is offering the use of church halls and other properties as “branches” for those who need access to funds.

Welby is a vocal member of the parliamentary commission on banking standards and, speaking in the House of Lords last month, he noted that the alternatives to payday lenders were, for many people, few and far between, particularly in deprived areas.

“My own group, the church, can play a part in the development of credit unions up and down the country,” he said.

“We have, so to speak, branches in every community – 16,000 branches in 9,000 communities – even more than the banks.”

He added: “My hope is that a thriving alternative credit movement will one day mean that payday lenders simply are not necessary.”

Fiona Walsh is business editor of guardian.co.uk