Written evidence submitted by Debt Hacker (CAF0074)

 

Alan Campbell, founder of Debt Hacker, submission to Treasury Select Committee - Consumers’ Access

to Financial Services – 30.11.2018

 

 

About Debt Hacker

Executive summary

 

 

Vulnerability

  1. The FCA’s definition of vulnerability is a clear and accurate one. As the Treasury Select Committee has analysed, there a numerous important and related issues that drive indebtedness and increase an individual’s financial vulnerability. There are of course multiple societal and economic drivers that are exacerbating the plight of many.
  2. However, the Committee rightly identify that many firms are “not acting with appropriate levels of care.” This is at the core of the problem.
  3. Lenders are under explicit regulatory obligations to only provide affordable loans. Pay day lenders, and other unaffordable lenders, have been ignoring those rules for years and have been piling unaffordable debts on the people who could least afford it.
  4. Wonga, and others, are learning the hard way that borrowers have had enough and are learning about how they have been cheated. The collapse of Wonga and the complaints piling on others has exposed a systemic flaw in the unaffordable lending business model; in all its forms.
  5. The pay day and high-cost credit industries are just the very tip of the iceberg. The affordability issue will eventually reach high street lenders.
  6. The scale of latent unaffordable claims is enormous. “Unaffordable lending” and “overindebtedness” are the two sides of the same coin, as the unaffordable lending by regulated lenders has led to the overindebtedness of the borrowers. Current lending practices not only exploit already vulnerable consumers but make even more people vulnerable through their extortionate prices.
  7. There are 8.3 million people in the UK who are dangerously overindebted, for many of them their debts have been perpetuated by unaffordable lending on a massive scale.
  8. The public policy debate has focused on the country’s and individuals’ indebtedness. This is of

course important for establishing the root causes of peoples struggles. However, the debate has


failed to focus on a key protagonist in this state of indebtedness; that is the lending industry advancing unaffordable loans.

  1. The flagrant disregarding of Financial Conduct Authority (FCA) rules on affordability is by no means unique to pay day. Doorstep, catalogue, credit cards, car finance, and more, have a lot to answer for.
  2. The FCA obliges lenders to have a simple duty of care for their customers; and that is to check, and evidence that they checked, that the customer can afford the loan. They are failing on this measure, and know they are.
  3. Credit is not a bad thing in and of itself. Credit should improve lives by allowing people to deal with life shocks or smooth the ebbs and flows of day-to-day finances. When servicing debt makes someone’s life worse it is by definition unaffordable. The country’s current personal debt crisis demonstrates that the billions in debt that people collectively hold was not affordable in the first place.
  4. There are 16 million people with less than £100 of savings. Which means they have almost no financial resilience. Yet they struggle to repay high cost loans, most of which should never have been advanced.
  5. People have been allowed to think that if they struggled and managed to repay a loan, then it was affordable. To reiterate, if someone struggled, and even managed, to repay a loan then it was by definition unaffordable.
  6. The Treasury Select Committee’s previous report on Household finances was an important exploration of the current extent of debt – yet nowhere in that report did it address the key question; were the loans affordable? Where they were not, that is the fault of the lender.
  7. To protect vulnerable people, the lending industry must cease unaffordable lending. The debt trap
  8. UK families owe a record £213.5 billion on credit cards, car finance and short-term loans. This is because the lending system is systemically flawed, designed to create an inescapable cycle of spiralling debt by advancing unaffordable loans. This trap captures huge swathes of society, with NHS workers, teachers, and gig economy workers being the most prolific users of unaffordable pay day credit.
  9. At the heart of this problem is a simple principle that is being ignored wholesale by the industry, and unenforced by regulators. Lenders are only supposed to advance loans that are affordable. But they do not properly check whether it is affordable because, fundamentally, they just want to lend people money as that is the nature of their business, with little regard for the personal consequences for borrowers.
  10. Furthermore, the high-cost credit industry spends millions on marketing to acquire its customers, a cost burden that drives more unaffordable lending to grow the loan book. They claim they charge higher rates because they lend to ‘riskier customers’, the fact is they charge high rates to make more profit and fuel the acquisition of more customers. It is a vicious cycle that preys on the most vulnerable.
  11. The biggest cost to these businesses is not the bad debts, it is customer acquisition cost.
  12. Wonga, before its collapse, reported in its accounts that they expended up to 50% of operating revenues on customers acquisition costs (i.e. marketing). Therefore, the lender needs to make multiple loans once a customer is acquired, leading to unaffordable lending.
  13. There are 3.6 million pay day loans annually and millions of people use high cost credit just to keep their heads above water. Naturally industry has a vested interest in loaning as much as possible to as many people as possible; without caring if it is even affordable. The pay day price cap just limited the amount of money lenders could make; but the business model is predicated on trapping

borrowers with unaffordable lending. The industry treats the fines it receives as a mere operating cost. It did not address the core problem. These lenders should not be lending to people who cannot afford it. As Wonga found out, this unaffordable lending can come back to haunt them.

  1. The industry makes very little effort to establish whether a loan is affordable to the borrower, they instead choose to rely on paper thin credit checks as it is in their interest to do so.
  2. The very fact that the borrower is using a pay day loan, or similar, should be an indication of financial distress/difficulty. If the borrower has taken out multiple such loans or is clearly taking loans to pay off other loans, that is also a clear indication of financial distress. It would not take much interrogation by the lender to establish this fact. But of course they have a vested interest to forward the loan, so they do not check appropriately. Current financial technology also means that there is no excuse for not being able to make these checks quickly and effectively.
  3. The creditworthiness checks that lenders make are inadequate. This is clearly evident from the amount of financial distress in the market. Lenders merely establish whether the borrower has paid debt previously, not whether they really can afford to do so. A borrower keeping on top of payments is of little significance to the reality of their circumstances in trying to keep up with those payments, whether that is skipping meals or going without other essentials. The high-cost credit industry cares not.
  4. The FCA’s own research bears this fact out. When high-cost credit providers refuse to loan, the borrowers often find other ways to manage (there is fortunately little evidence of them falling into the arms of loan sharks, so far), as it is often the high-cost of the credit they took that was making their situation worse. Debt begetting debt.
  5. As the FCA’s Christopher Woolard told the Treasury Select Committee on 31 October 2017 “Perhaps most interestingly, for about 64 per cent of people who we surveyed, they said that was the moment where they effectively said, ‘Right, enough is enough’. They described being refused as actually being beneficial.” Therefore, the industry must bear the burden and be scrutinised for the loans they forwarded that were clearly unaffordable.
  6. What makes the situation even more appalling is that the lenders know they are breaking the rules.
  7. Enova is the US parent company of CashEuroNet UK (on which the Financial Ombudsman Service has received 4,692 complaints), which owns payday lending brands QuickQuid, Pounds to Pocket and On Stride Financial.1
  8. In their 2017 annual report they acknowledge that the regulatory enforcement changes in the UK were going to have a negative impact on their business – because they have been lending where they should not.2
  9. “Customer complaints to the Financial Ombudsman Service (“FOS”) could increase, which could

have a negative effect on our operations in the United Kingdom. 

  1. We have experienced an increased volume of complaints about loans issued prior to changes we implemented in 2014, and the FOS has taken a very consumer friendly approach to its complaint handling process and in dispute resolutions [bold for emphasis]. We have been required to make significant payments to customers to resolve these complaints. If the FOS continues to issue findings in favor of consumers, and we are required to continue to make significant payments to resolve the complaints, such findings could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.”3
  2. They clearly recognise the threat that proper regulations represent to their business; “The implementation of stricter affordability assessments and underwriting standards resulted in a


1 http://www.ombudsman-complaints-data.org.uk/

2 http://ir.enova.com/annual-report-and-proxy-statement

3 Page 23


decrease in the number of consumer loans written, the average consumer loan amount and the total amount of consumer loans written to new and returning customers.”4

  1. They add; “Our primary regulators in the United Kingdom previously expressed serious concerns about our compliance with applicable U.K. regulations, which caused us to make significant changes to our U.K. business that negatively impacted our operations and results [bold for emphasis], and future changes to our operations as a result of regulator concerns could have a material adverse effect on our U.K. business.”5
  2. It is worth noting that this US company could very well strip its assets from its UK businesses leaving consumers who have a legitimate claim with nothing.
  3. Poor lending behaviour is by no means unique to pay day lenders. Overdraft and credit card practices are equally exploitative, and often make the financially vulnerable’s situation worse. The industry’s hypocritical approach to the plight of consumers can be demonstrated through UK Finance’s submission to the Treasury Select Committee’s Inquiry into Household Finances. Their submission explicitly acknowledges that customers circumstances can change for the worse.
  4. “Whilst a detailed assessment of creditworthiness and affordability is undertaken at the point of application, subsequent changes to a customers’ circumstances can lead to financial difficulty (such as unemployment, illness or relationship breakdown). Lenders recognise that customers circumstances can change, the Money Advice Service calculate that there are 8.3m adults that are over-indebted in the UK (meaning they are likely to find meeting bills a heavy burden and/or those missing more than two bill payments in a six-month period).”6
  5. UK Finance go on to note the explicit obligation their members have on affordability.
  6. “Lenders have a long-standing commitment to responsible lending. This is not only an FCA regulatory requirement to ensure that they lend responsibility when assessing consumer credit and mortgage applications, but also a sound economic reason for doing so. It is in neither the borrower’s or lender’s interests to enter into a financial commitment that they cannot afford to repay. Responsible lending and responsible borrowing can help customers improve the quality of life, such as through home ownership.
  7. The FCA through its rule books has established clear rules and guidance to ensure that new credit applications are assessed to ensure that the commitments are affordable to the consumer. The rule book requires that lenders consider the potential for any new commitment to adversely impact the customer’s finances. When assessing applications for credit, lenders will use a wealth of information, including from the application form, any past performance where the applicant has previously had a relationship with the lender (or perhaps the banking group) and information provided by credit reference agencies. All of these data form multiple variables from which to calculate credit scores, credit risk policy and affordability. The degree of rigour must not end at the origination stage, but continue as firms manage the accounts of existing customers, including where they might identify the early signs of financial difficulties [bold for emphasis].
  8. Assessments should consider not only the customers’ actual circumstances at the point of application, or at a particular point in time for an existing customer, but must also to consider future changes that could reasonably be expected to have a significant impact upon the customer’s circumstances [bold for emphasis].”7


4  Page 22

5  Page 22

6 UK Finance submission, Treasury Select Committee inquiry Household finances: income, saving and debt, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury- committee/household-finances-income-saving-and-debt/written/76241.html

7 http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury- committee/household-finances-income-saving-and-debt/written/76241.html


  1. Why are these standards not being implemented across the board? Those with financial vulnerabilities are the most likely to be using high-cost credit and fall foul of overdraft fees and the like. Therefore, it is surely doubly important that responsible affordability assessments (mindful of a customer’s potentially febrile circumstances) are made of those using these forms of credit. Yet it is these customers who have been consistently let down by an industry that does not make responsible checks, thereby perpetuating the debt troubles of millions.

Paying to be poor

  1. The University of Bristol Personal Finance Research Centre has identified what it terms the ‘Poverty Premium’, when low-income households pay more for essential goods and services. Their 2016 analysis found that when you combine elements such as higher insurance, pre-payment meters, high-cost credit and paying to access money, low-income households pay an average of £490 more per annum than average.8
  2. This shameful state of affairs is in part perpetuated by the tactics of large parts of the lending industry. There are numerous methods that lenders use that trap vulnerable consumers in extortionate debt, or cause people to become more vulnerable through high prices. The pay day loan sector is just the most high-profile offender. Credit card providers and their unsolicited credit limit increases are another such example, as well as misleading car finance and more.
  3. Another example, which the FCA is rightly examining, is the area of Buy Now Pay Later products.
  4. We have conducted independent research that demonstrates that customers are being wilfully misled, and that customers, understandably, do not fully comprehend the terms they are signing up to with BNPL offer periods.
  5. Working with leading pollster and analysts, Consumer Intelligence, we surveyed 1,844 consumers on tight budgets who had experience of BNPL products to discover how transparent retailers’ terms were and how consumers may be misled by financial jargon and complicated terms which make it difficult to know what they are agreeing to (research available on request).
  6. In our Consumer Intelligence research, we presented consumers with a BNPL offer that could be considered “fair, clear and not misleading.” Those surveyed agreed. It is to these standards that retailers must urgently adhere:

(Example BNPL put to Consumer Intelligence research panel)

 


8 Bristol Personal Finance Research Centre, The Poverty Premium, When low-income households pay more for essential goods and services, p 1. http://www.bristol.ac.uk/media-library/sites/geography/pfrc/pfrc1614- poverty-premium-key-findings.pdf


  1. According to the FCA, there are 2.7m consumers currently using these products – and 1.2m of them fail to pay the balance back in full before the introductory offer period ends. That is because many have been misled on what that ‘introductory offer’ actually entails and are actively encouraged by the retailer to drag repayments beyond the offer. Thereby subjecting them to extortionate interest and charges.
  2. Many consumers on tight budgets understandably opt to purchase goods through these products as it allows them to spread repayments in supposedly manageable chunks with the clear promise of an initial “interest free” period.
  3. However, what many consumers do not realise is that the marketing of these “interest free” offers is highly misleading and designed to trap them into paying outrageous levels of interest. None of which is disclosed to the consumer even though the retailers are under an express obligation from the FCA to be “fair, clear and not misleading” in their marketing.
  4. In the case of catalogue credit, not only do these customers end up buying the product for more than the average high street price (as the initial advertised price is normally inflated), they are also led to believe that, for an initial period, it is “interest free.” This is a common, indeed every day, industry practice – and it is outrageous.
  5. Many of these retailers explicitly advertise their products under bold headlines of “interest free” repayments. They know this is misleading, yet they hide behind a defence that it is all in the “terms and conditions.” Terms and conditions, they know are so complex that you need a law degree to decipher them. We can now prove through our comprehensive and independent survey that consumers are being misled by the offers retailers use; and are extremely angry when they are shown the deceit.
  6. The retailers also know, as a matter of fact, that more than half of borrowers do not pay off the goods in the supposedly “interest free” period. More than 50% of consumers never, ever, get the promised “interest free” period and end up paying the interest from the original purchase date. Yet

the public at large are not aware of this mis-selling, even those who have already been stung are unaware of the deceit.

  1. In the example we used (based on a current real offer from a retailer) the advertised interest by the retailer is 23.9% APR; but when you properly account for the backdating, if they do not pay in the “interest free period,” then it is an effective interest rate of 161.5% APR. At no time is this massive cost of finance explained to the consumer. This is surely mis-selling.
  2. Furthermore, these retailers actively encourage borrowers to fall outside of the “interest free” period, with prompts throughout the term of a loan to switch to lower repayments. Knowing full well that to do so would subject the customer to charges and interest that they were seeking to avoid in the first place by using what they believed was a genuine “interest free” period.
  3. The fact is that the retailers base their business model on the assumption that people will fall into these traps so that they can make exorbitant profit off the backs of those who can least afford it.
  4. We presented consumers with a generic, though common, Buy Now Pay Later offer and asked them a series of questions to establish whether they fully understood the terms and conditions of the product and the amount of interest they could be liable for.
  5. This is the first time that the consumers understanding of a supposedly “interest free” period has been independently tested. We found that consumers, being straightforward and honest people, rely on words being taken at face value. We also discovered that retailers are exploiting this to their advantage and to the detriment of the public.
  6. It is repugnant that highly educated and technically proficient financiers and retailers are using all of their expertise to cheat the public. They then have the cheek to suggest that these borrowers are at fault and feckless when they fall into these well laid traps.
  7. It is crystal clear from the results that consumers felt the product terms were misleading and were extremely angry when they realised that it would lead to significant amounts of interest. It is beyond doubt that none of the retailer’s communications are “fair, clear, and not misleading.”
  1. These sales practices should be banned; and where interest/charges are to be applied they must be clearly communicated as the FCA stipulates.
  2. Here is just a sample of the angry responses from those we surveyed:

-          “The small print is designed to confuse you and in the end you will end up paying a lot more overall.”

-          “It makes me angry that people are duped into buying products they can’t afford. The companies trick people into thinking it’s a good deal when it’s not. The deals should be made more transparent and clearly explained to the customer before purchase.”

-          “Simpler language needed, fines for companies that do not make the terms really clear.”

-          “Mis-selling is exploiting the people in society most in need, they don't have the disposable income available to buy outright and rely on credit, high interest rate just forces these people further into debt. I urge you to force through changes that highlight more clearly the overall cost of finance.”

-          “It makes me angry. Government exists to protect and serve the people. It needs to act. The vulnerable should be protected. Those who target and take advantage of them should be punished harshly.”


  1. The above is yet another example of a systemic flaw in the unaffordable lending industry that serves to perpetuate the plight of many already vulnerable consumers. As described in our own example, these traps could simply be addressed through transparent communication to the consumer.
  2. As followed the mortgage malpractice of the early 2000s, culminating in the 2008 financial crisis, stricter rules were implemented to improve the affordability assessments of mortgages. Communication of a mortgage’s financial impact on the consumer was also improved.
  3. The wider lending industry requires a similar intervention. Enforcement, and wider communication, of existing FCA affordability criteria would improve lending culture and educate consumers on their rights.
  4. Fundamentally consumers have the right to challenge where unaffordable lending has taken place. A key way to support vulnerable consumers in avoiding the debt trap and securing justice where unaffordable lending has already taken place is to educate them on their rights. This is what Debt Hacker has set out to do.

Debt Hacker

  1. I have launched Debt Hacker, an online campaign designed to put power back in the hands of borrowers and help them fight back against exploitative high cost lending. By empowering consumers with honest information and free easy-to-use online tools, Debt Hacker will enable thousands to claim back the costs of unaffordable loans that should never have been offered to them, without targeting ethical lenders.
  2. Debt Hacker is harnessing the power of social media and offers free digital support and tools to help borrowers bring an avalanche of claims and complaints. This will force the unaffordable lending industry to reform. Borrowers are fed up of being blamed for their overindebtedness. Debt Hacker will let them know that they have a right to be protected from lenders who take advantage of them and the time has come for those rights to be exercised.
  3. High-cost lenders claim there is a need for their products among those who need quick finance and cannot access mainstream financial products. They claim that they charge higher rates because they lend to ‘riskier’ customers. This cannot be allowed to stand any longer.
  4. The true alternative solution is a cultural change in the industry itself.
  5. If the penalties for advancing unaffordable loans were adequate, or consumers are suitably mobilised to exercise their rights to claim against a loan that was unaffordable, the entire industry would be forced to change its practice. The costs of advancing unaffordable loans would now sit squarely with the lender, with the borrower entitled to recover all interest and charges (plus interest).
  6. Lenders can and should act differently. There is ample opportunity to lend differently; and modern technology and new Open Banking rules make it entirely possible to make appropriate affordability checks. There has also been extensive work in the field on how affordability can be appropriately assessed. In short, the industry has run out of excuses, and cannot be allowed to target vulnerable people any longer.

 

Submitted January 2019