Spivs, speculators and loan sharks have always been able to make money from the poor in hard times but in this downturn it is new aggressive business organisations which are doing most to profit from the poor and getting incredibly rich in the process.
These ‘get rich quick’ merchants include ‘cash for gold’ operators and pawnbrokers, which have all seen their profits rocket since the recession began. But the most successful profiteers of the lot have been payday loans companies like Wonga, Money Shop, Speedy Cash and Quick Quid, which have spread like a rash across our high streets over the past few years.
A combination of factors, including the worst squeeze on living standards in 80 years, restrictions on lending by high street banks and one of the most lax regulatory regimes in the developed world, have opened the door to these legal loan sharks and they have wasted no time in rushing through it. Home-grown companies like Wonga, which increased its profits to over £14 million in 2010, have been amongst the most successful in exploiting the opportunities open to them but American companies, many pushed out of their home market by increased regulation, have also been moving into the UK and making big profits. These include DCF Global, which owns the Money Shop, Cash a Cheque and Payday Express and which is now our biggest payday lender.
UK, American, Australian, Canadian and other lenders are a regular feature on many high streets but they have also gone on-line in a big way. DCF Global’s on-line operations, for example, are now understood to have at least 24 different trading companies registered with the Office of Fair Trading. There are also large numbers of brokers which get loan applications on their websites and sell them on to lenders. One of these is a British company called PDB UK which is understood to have 30 different trading names registered with the OFT.
Having so many different trading names gives the impression that there is vigorous price competition in the payday loans market, but control by a number of bigger companies means that there is little such competition and interest rates charged are almost universally exorbitant. A recent survey by the Financial Times, for example, found 15 companies quoting a representative Annual Percentage Rate of 1,737%, while eight others quoted 2,120%. These were trumped by Wonga, however, which quoted an APR of 4,214%. And there are apparently some lenders which charge up to 5,000% a year, so that a £100 loan could end up costing £5,000 if not repaid for twelve months.
The payday lenders say that quoting APR figures is misleading since their business is to offer short-term loans to those who need them and that their rates are much more reasonable when viewed in that light. But the consumer organisation Which? reported figures last year which showed a range of lenders charging £25 to £30 interest on £100 borrowed for a month, with Wonga reported as charging £36.72. But Which? also found that £100 borrowed from a high-street bank by way of an unauthorised overdraft could actually attract interest and charges totalling £186 a month – five times as much as Wonga!
These kinds of interest rates and charges amount to bare-faced profiteering at the expense of the estimated four million people who borrow from payday lenders every year. Many of these borrowers are amongst the poorest and most vulnerable people in the country and many have several loans which they often have to roll over, incurring even more exorbitant charges. But how are the Wongas and others getting away with it? Because the regulatory regime in the UK is so weak and because there is no legislation preventing lenders from charging whatever interest rate they want, that’s why!
In fact the last time the Office of Fair Trading looked at the sector, they pointedly refused to contemplate capping interest rates, on the grounds that it would make it more difficult for people on low incomes to get loans! Yet in the US, a country not known for being regulation-friendly, about half of the states have put a legal cap on interest rates and some have withdrawn payday loan companies’ licences to operate. Small wonder then that American and other companies are setting up shop in the UK and praising our regulatory regime as the ‘most sane’ in the world. Indeed Errol Damelin, founder of Wonga, has admitted that his company’s business model would be illegal in some countries.
When this issue hit the headlines in a big way at the end of last year, government politicians did what they always do when an outrage is exposed; they put up David Cameron to say that he ‘gets it’ that people are appalled and to condemn the bad guys and say that the situation will not be allowed to continue. But then, in a week or two, other issues hit the headlines, the caravan moves on and nothing has changed. However the Office of Fair Trading (soon to become the Financial Conduct Authority) is planning to conduct a full–scale review of consumer lending this year and it is hoped that this will lead to some restrictions on the payday loan companies.
But unless we step up the fight against these profiteers and insist on a major crack-down on them, there is a danger that the review will come up with some wishy-washy proposals about more transparency on interest rates and more financial education in schools, and leave the companies largely free to charge whatever they want and continue to maximise their profits at the expense of the poor.
Richard Lynch is a Dudden Hill resident. He is a retired Unite the Union official and currently conducts voluntary work on employment rights for the Brent Community Law Centre. He also acts as an accompanying representative for the GMB union.