Should we ban all payday loan ads?
News that the OFT (Office of Fair Trading) has finally cracked down on payday loan companies is good news for all, well unless you are a legal loan sharks making profit from exploiting the poor and vulnerable.
The consumer watchdog announcement it had discovered “widespread irresponsible lending,” how come that comes as no surprise to us all? But is the OFT’s bite as bad as their bark?
Payday loan companies have been given 12 weeks to change their business practices or risk losing their licences.
OFT chief executive’s Clive Maxwell commented: “We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers. Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or refinanced deals where unexpected costs can rapidly mount up.”
Wonga is the biggest and best know payday loans company in the UK and saw it’s business triple in size, in part due to heavy TV advertising. Other brands include Speedy, PayDay UK, Donkey Loans, The Money Shop, QuickQuid, PoundstoPocket – in fact there are now 240 registered but 50 major players in the market.
Payday loans is a highly controversial business, and considered to be probably the most unethical legal business there is in the UK. It’s been called “legal loan sharking’. But it’s lucrative and worth over £2bn, so no surprise it attracts some dubious players.
Critics claim these companies prey upon the poor and vulnerable and exploit them by loaning money at astronomical rates – 4,214% APR in the case of Wonga, thanks to exploiting a loophole in the law.
One woman borrowed just £240 and had to pay back £1200, that was cheap! For the poorer in society it is often their desperation that leads them to go to theses companies, and because these companies are only in it for the massive profits, poor people are driven into a worse situation.
Many charities have condemned pay day loan companies, claiming they force people into further debt, and want them banned from advertising. The question many are asking is, why the government hasn’t shut them down before? Money Advice Trust (MAT) received over 20,000 complaints in 2012 with even more expected this year.
Muslims are also upset because under Sharia law you must not benefit from either lending money or receiving money from another person – meaning that interest is prohibited.
Shaykh Ibrahim Mogra, assistant secretary general of the Muslim Council of Britain said, “The idea is to protect the vulnerable and the needy from exploitation by the rich and powerful. When they are lending and are charging large amounts of interest, it means the poor will have short-term benefit from the loan but long-term difficulty in paying it back because the rate of interest is not something they can keep up with. The Islamic system is based on a non-interest-based system of transaction.” (Quote from the Independent.)
Leader of Newcastle City Council, Nick Forbes, commenting on Wonga’s sponsorship of Newcastle United football club, “I’m appalled and sickened that they would sign a deal with a legal loan shark. It’s a sad indictment of the profit-at-any-price culture at Newcastle United. We are fighting hard to tackle legal and illegal loan sharking and having a company like this on every football shirt that’s sold undermines all our work.” He has suggested that Wonga should put money into debt advice in Newcastle instead. Dream on Nick!
In their defense, you can partly blame the banks. The payday loan business grew out of a need for quick, short term loans and these were exactly what banks cut back on. If banks were more consumer friendly and less bureaucratic and cautious, payday loan companies wouldn’t exist.
The loan companies also claim that the vast majority of people are happy with their service and pay back their loans with weeks and so only pay small charges. But what about the rest? The OFT The review said: “It would appear that payday lenders’ revenues are heavily reliant on those customers who fail to repay their original loan on time.”
Wonga is the smartest of the brands when it comes to marketing (even if the ads are annoying). They are big spenders on big media (TV, posters, buses, radio, etc) while others seem to stick to PPC (expensive and doesn’t build brand).
Wonga has realised that brand building in this market is essential, and when you have a well known brand, people trust you and search for you – so the savings you can make on PPC offset the TV budget. Smart! Daily deal sites could learn a lesson from Wonga.
Recently, former Atomic Kitten star Kerry Katona (who ironically went bankrupt) caused a massive publicity backlash for appearing in a TV ad that targeting women for Cash Lady payday loans.
Few would disagree that payday loans companies represent the lowest ethical level of the financial industry, as one caller on LBC said, “It’s morally no better than exploiting kids, that’s why we banned child labour, pay day loans needs to be next.”
The Financial Conduct Authority (FCA), a new regulator, takes over the consumer credit market from 2014 and has committed to bringing in tighter rules on payday lending. Labour said they would consider banning them if they win the next election. With such a tidal wave of opposition to them it’s only a matter of time before they get their wings clipped.
With such a black cloud over the payday loan industry these companies will be rushing to spend their ill gotten gains on advertising to try and get a share of share of market and raise their brand before they are stamped on, so should we not have a temporary ban on all payday loan companies? If not just for the sake of the vulnerable.
Of course the other reason to ban them is because they all do such terrible ads, just look at PoundstoPockets alien ad, Wonga’s elderly bunch or PayDay UK’s bomber pilot ad with the slogan, “Don’t say mayday, say Payday UK.” I rest my case!