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House Prices - Biggest Fall in a Decade, Why?

House Prices – Biggest Fall in a Decade, Why?

Britain’s housing market is valued at approximately £7 trillion. Just recently London real estate prices experienced the biggest drop in 10 years. The recent drop came in the wake of Theresa May’s efforts to deal with criticism over ever-increasing prices and lack of housing. In case you are wondering what the recent fall means in regards to employment, investment, housing consumption, government deficit, etc. here’s what you need to know.

The ”Greater fool” mechanism

London’s real-estate prices have been fuelled by what is known as the ”greater fool” mechanism. Although London’s real estate buyers have known that property prices were ridiculously high for a long time, they continued to buy counting on the
fact that they would sell the property at a profit to a ”greater fool”. This phenomenon has been displayed in many instances the most notable being the free markets crisis. Although the ”greater fool” mechanism works, the upward usually reverses violently if the prices show the slightest indications of a fall. This happens when property investors start trying to sell in a hurry before property prices fall further. In the ”greater fool” mechanisms, property values which have been built over decades can collapse in months, and the slum is based purely on expectation.

London relies heavily on international property investors who view property as a commodity which can be sold readily for the sole purpose of maximising profit. International property investors accounted for approximately 82% of London’s property activity back in 2013. The ”greater fool” mechanism is a real threat in London now that the expectations are set.

Housing consumption and the Wealth Effect

Although real-estate prices in London are subject to the ”greater fool” mechanism, it’s important to note that most properties belong to households, mostly families who don’t need to sell. Nevertheless, a fall in property prices means that pension funds, as well as investment bonds, will suffer since they rely heavily on the property market to generate returns.

It’s also important to understand the Wealth Effect. Economists have shown that there is a strong relationship between spending behaviour and perceived real estate wealth. What this means is; property owners feel more financially secure if they believe their property is worth more. As a result, such property owners spend more and save less. This is evident given the number of people willing to subsidise their retirement using property generated wealth.

Considering 64% of England’s homes are occupied by owners, the negative effects of the wealth effect are dire if households start spending less. The Wealth Effect is crucial in most developed countries more so the UK which is heavily dependent on ever-increasing consumer spending for growth. A small drop in the value of homes/properties in the UK would result in a catastrophic loss of wealth. With the housing prices experiencing the biggest drop in 10 years, things don’t look good for UK households.

Ripple effects (Trade deficit and foreign direct investment)

The falling housing prices come with additional problems for the UK. Britain has been having a trade deficit for over two decades now. The effects of the deficit haven’t been dire since Britain has been enjoying hundreds of billions of pounds as foreign direct investment channelled to the property market over the same period. In a nutshell, the trade deficit has been manageable.

According to Bank of England statistics, over 50% of all commercial real estate deals since 2013 have been done by overseas companies. Since international investors expect a fall in prices, foreign direct investment inflows may slow down or stop soon. Britain may also see a sharp decline as foreign property investors choose to sell property instead of holding when there is a clear expectation of a decline.

A drop in foreign direct investment in the long-term will have a negative effect on the UK GDP and trade deficit. Britain will no longer have a cushion against its longstanding trade deficit when foreigners stop buying property. Britain’s credit rating would also fall which would, in turn, make UK government debt more expensive to refinance. When this happens, the UK government may be forced to tax its citizens more to handle an increasing deficit. Increased taxation would cause other effects such as increased unemployment.

Policy issues

The recent fall in housing prices has created a need for new policies to reduce Britain’s property addiction. There is also need to boost confidence in this single asset class considering it accounts for approximately two-thirds of Britain’s wealth. Theresa May’s efforts to push for more affordable housing are a step in the right direction although it has been politically challenging trying to push for such policies. The effects of targeting the UK real estate market are huge currently. Theresa May risks scaring away investors and triggering the ripple effects discussed above. Considering Brexit has introduced many risks, Britain may face a long period of economic stagnation.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

Data Protection Laws Set to Tighten in the UK

Data Protection Laws Set to Tighten in the UK

The British government has proposed a data protection bill meant to give the British people more power and control over how their personal data is used. The bill proposes a number of changes to the current data protection laws the most notable being; easier access to all data held by companies, increased ability to withdraw access as well as the ability to request data deletion.

The regulation which will bring GDPR (General Data Protection Regulation) into UK law is set to be in effect in less than a year according to Matt Hancock, the UK Digital Minister behind the proposed bill. Hancock states that the new data protection laws will offer the UK a more dynamic and robust set of data laws. In a statement issued by Hancock, ”UK citizens will have more control over how their data is used. The proposed data laws will also prepare UK citizens for Brexit.”

The new regulation has caused concern in organizations across the UK given the fines applicable are easier to issue and more damaging to companies which fail to comply. For instance, fines could amount to 4% of a company’s total global turnover which could easily lead to the downfall of many companies in the event of serve fines. Currently, data protection fines can’t exceed £500,000.

Data protection incidents

Data breaches in the UK have increased in the recent past. Hundreds of thousands of UK citizens have been left exposed by data breaches in the past. A notable example is the data breach that hit UK’s leading payday loan lender Wonga. The incident affected approximately 245,000 Wonga customers in the UK and 25,000 in Poland.

The Wonga data breach happened in March 2017. Wonga, however, waited until April 2017 to notify its clients after establishing the extent of the breach. The incident saw Wonga customer’s names, addresses, phone numbers, bank a/c and sort code numbers stolen. Wonga has suffered another data breach back in 2012/13. The identity theft incident saw Wonga customers lose £3 million after scammers made over 19,000 fraudulent payday loan applications.

UK telecom company TalkTalk has also been a victim of a data breach. In October 2015, TalkTalk systems were hacked compromising customer information belonging to 157,000 customers. The company was fined £400,000 which was far from substantial according to many people. The importance of better data protection laws can’t, therefore, be ignored. With the new laws, firms must be more vigilant in protecting customer’s data or face serious repercussions. Research from Veritas indicates that only 9% of companies in the UK have appropriate data protection practices in place today even with the ongoing regulatory changes.

Repercussions/effects

With the proposed data protection laws set to take effect in less than a year, it is important for organizations to take all the necessary steps in the right direction.

Information Technology

Organizations using cloud and automation technology already will find it easier to cope with the new data protection laws. When GDPR comes into effect, all organizations handling personal data belonging to UK citizens will have to comply. The first step towards compliance is getting the right IT systems in place. Safeguards must also be built into all processes from the beginning to the end.

Data migration

Organizations may also be forced to move data. According to Peter Godden, Vice President of EMEA at Zerto, businesses may be required to move critical data in/out of Britain to comply with the new regulations. Many companies stand to struggle to move critical data across various systems without experiencing problems like downtime. Good businesses continuity plans are crucial going forward for companies keen on avoiding data migration problems.

Data storage

The new data protection laws will also introduce data storage challenges. According to Matthew Bryars, CEO of Aeriandi, ”many companies have not considered the impact of GDPR on data storage processes such as storage of customer calls done to improve customer service. The new laws give customers an express right to demand for their personal call information/data to be erased. The laws are also more stringent on backup and storage of voice call data. Businesses must develop the capacity and ability to store and retrieve customer call data faster on request.”

Nexsan COO, Geoff Barrall also shares the same sentiments. According to him, ”CIO’s must evaluate their current IT infrastructure and create purpose-built secure data storage environments to be able to meet the new data protection laws. Barrall stresses the need for either cloud-based or on-site storage customer data storage solutions as long as they are flexible, agile and secure.”

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

The FCA Maintains the Payday Loan Price Cap in Place until 2020

The FCA Keeps the Payday Loan Price Cap in Place until 2020

On 31st July 2017, the FCA published the results of a review it had done on high-cost credit which included an assessment of the effectiveness of its recent payday loan price cap.

The review offers undisputed evidence that the FCA regulation on payday loan lending has worked in favour of consumers as intended given that approximately 760,000 payday loan borrowers in the UK are saving over £150m every year. The review also shows that payday loan firms are now seeing fewer borrowers and debt charities with debt problems arising from expensive short-term credit. For these reasons, the FCA has decided to leave the current payday loan regulation unchanged until 2020.

Other forms of high-cost short-term loans

Besides clearing concerns on payday loans, the review also addresses concerns on other high-cost credit such as overdrafts. According to the review, The FCA feels fundamental changes on overdrafts are necessary in the future. Fees charged on unarranged overdrafts remain high and complex.

Home-collected credit, Rent-to-own credit as well as catalogue credit sectors are also on the spot. Although high-cost products and markets have many similarities, there are significant differences on how these products and markets work as well as how borrowers use them. The FCA is in the process of making tailored solutions to address these issues and is set to give a way forward in spring 2018.

According to the C.E.O. of the FCA, Andrew Bailey, high-cost credit products are a key focus for the regulator given the risks they expose to vulnerable customers. Bailey is pleased with the current evidence showing a clear improvement in the payday loan market after a period where payday loan firms used unacceptable business models. Besides the obvious improvement, he feels there is more to be done in terms of identifying other areas where short-term credit consumers may be suffering. Bailey’s focus is now on the nature as well as the extent of problems surrounding unarranged overdrafts without touching on the positive that customers find useful.

Clarifications

Alongside the review are proposals published to clarify FCA rules on affordability and creditworthiness. Most lenders understand the regulator’s rules concerning checks on prospective borrower’s creditworthiness including the products they can afford, however, there are uncertainties in parts of the credit market. For this reason, the FCA is proposing to effect some changes to make its expectations clearer.

The regulator has also published additional details on its motor finance work highlighting the issues it is considering as well as the steps it will take to develop an understanding on the market. An update is expected to be issued in 2018 during the first quarter.

Industry reaction

The FCA review results and comments have been received well in the industry. According to Eric Leenders, Managing Director, ”UK Finance members are committed to responsible lending and serving better those clients who need access to credit regardless of the type of credit product they need.” Leenders affirms the importance of consumer credit in promoting economic growth when used sustainably and recognises the importance of lenders working hard to balance between helping customers and ensuring long-term affordability. Leenders also agrees that transparency is an important issue and UK Finance is doing everything necessary to make overdraft fees clearer. Leenders also stresses the fact that UK Finance members are open to help customers struggling with repayments and welcomes efforts by the FCA to work closely with lenders.

Stephen Sklaroff, Director General of the FLA (Finance and Leasing Association) is of the same opinion. According to Sklaroff, ”the FLA is working tirelessly to make sure its members lend responsibly as well as treat customers fairly. We are aware that the FCA has found that most lenders are addressing affordability appropriately and we look forward to engaging the FCA on affordability assessments as the regulator does more exploratory work in motor markets.”

Gillian Guy, Citizens Advice C.E.O. attests to the fact that the payday loan price cap has protected many borrowers from unmanageable debt. According to Guy, ”many people were subject to extortionate charges trapping them into debt. Since the price cap among other new measures, fewer people are seeking our help.” Guy, however, states that things have improved for payday loans only. ”Other high-cost loans such as guarantor loans, doorstep loans, rent-to-own services and overdrafts are experiencing problems. It’s good to see the regulator recognise this and take the necessary action. We think a similar price cap will help safeguard consumers of these other forms of high-cost credit.”

 

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

UK Household Debt in Figures as of 2017

UK Household Debt in Figures as of 2017

The latest official government statistics indicate that UK household debt has increased by 7% since 2012 with consumer credit and student loans being the worst hit. The 7% increase has been adjusted for inflation. Back in 2012, the total UK household debt stood at £1.52 trillion. The debt has increased to £1.63 trillion as of March 2017.

The Bank of England and Student Loan Company statistics for individual household debt segments show that mortgage loans increased from £1.2 trillion to £1.33 trillion from 2012 to 2017. Student debt increased from £46.9 billion to £100.5 billion while consumer credit increased from £159.6 billion to £197.3 billion during the same period. Although the UK government plans to reduce its yearly deficit going forward every year until 2025, UK households are headed in the opposite direction. The household debt and GDP ratio is set to heat the peak as was the case before the financial crash.

The wage growth has grown by a mere 0.7% when adjusted for inflation minus bonuses over the same period. This growth figure clearly shows that UK consumers have turned to loans to buy essentials. Incredibly low interest rates have managed to keep mortgage loan costs down. However, this is a cause of concern since a small increase in interest rates may pose serious financial challenges to many borrowers given the current debt climate.

Borrowing on second mortgages and credit cards has increased drastically making things worse. Most UK households have increased their debt uptake twofold by getting into arrears on monthly bills such as council tax. Let’s take a close look at unsecured credit, car finance, mortgages, student debt and arrears.

Unsecured credit

UK consumer credit levels have increased by 19% since 2012. The consumer credit levels currently are the same as those experienced back in September 2010. Unsecured consumer debt was at 45% of the total household income in 2007. In the years following the economic recession, UK households were forced to deal with bad credit habits which resulted in a decline in borrowing and an increase in savings. Unsecured debt levels were at 35% of the total household income in 2012, but since then, UK households have failed to clear store and credit card bills. Charges on those cards have increased unsecured credit debt drastically. According to the Office of Budget Responsibility, unsecured household debt in the UK is set to hit 47% of the total household income by 2021. In the past year (July 2016 to July 2017), the debt has increased from £192bn to £201.5bn when adjusted for inflation (a 4.9% increase).

Car Finance

The latest statistics show that auto finance dealers issued more than £30 billion as new credit in 2016 alone. These types of loans have become increasingly popular because they are cheaper than regular car loans. Borrowers can also make lower monthly repayments. In fact, this type of car finance currently controls 86% of the new car finance market. Over a million cars are being bought in Britain using auto finance dealer loans. The main cause for concern is this form of lending isn’t highly regulated which poses serious risks in the future.

Mortgages

The Mortgage debt levels have increased by 2% since 2012. This household debt segment isn’t as marked as the others although there are concerns of borrower risks if the Bank of England raises rates in the near future. The UK government has done a lot to revive the mortgage industry such as giving subsidies to 1st time home buyers. Some critics argue that this has encouraged unhealthy borrowing, i.e., people who wouldn’t qualify for a mortgage normally getting easy access. Furthermore, over 40% of all mortgage borrowers in the UK today haven’t been forced to deal with an interest rate hike which makes repayment obligations harder triggering cutbacks on spending and foreclosures in worst case scenarios. Considering there is a looming Bank of England interest rate hike by the end of 2017, the mortgage industry is set for tough times ahead.

Student debt

Student debt levels in the UK have surpassed other forms of debt. Since 2012, the student debt levels have doubled to £100.5 billion. This is raising concerns on how UK students should be funded considering the recent hike in fees to £9,250 this year. Furthermore, the slow growth in wages coupled with increasing taxes is bound to make it hard for UK graduates to meet their student debt obligations.

Arrears

Utility bill arrears are usually an indication of financial distress. Council tax arrears in the UK have increased by 12% between 2012 and 2017. UK households have arrears on water bills, power bills and gas bills. A continuation of this trend could make it impossible for UK households to enjoy basic services.

International perspective

UK households are the 2nd most indebted among the G8 nations. The UK also has a large trade deficit and a government spending shortfall. This can only make the looming debt crisis worse if drastic action isn’t taken.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

Facebook Planning to Crackdown on Deceptive Payday Loan Advertisers among Other ''deceptive'' Advertisers

Facebook is Planning to Crackdown on Deceptive Payday Loan Advertisers

The hunt for payday loan advertisers isn’t over. After Google’s May 2016 announcement that they were going to ban payday loan ads that met certain criteria, Facebook has decided to do the same.

Facebook has announced that it is going to trace and punish advertisers who bypass its review policies, particularly those advertisers who encourage Facebook users to click on ”phony” links. Facebook intends to use AI and human review processes to get rid of ads which create ”disruptive or negative experiences” for its users. The social media giant has already banned thousands of advertisers guilty of the practice popularly referred to as ”cloaking”.

This financially-motivated marketing technique has seen many bad actors disguise the actual destination of their ads or post links as well as the real URL content taking users to unrelated pages. These actors then generate income from views or clicks with affiliate deals. What’s more is; these unrelated pages host shocking content or scams.

Facebook cloaking is easy. A simple search on Google reveals countless tutorials on how to do it. Cloakers have been getting away with this unethical practice by showing Facebook’s approval team one ad and another totally different ad to the audience that clicks on the ad. Facebook’s new AI and human review processes will help it get rid of this malpractice that usually leaves its users shortchanged in most cases.

According to a blog post co-written by Rob Leathern, Facebook’s product director alongside software engineer, Bobbie Chang, ”we can now observe differences in the kind of content offered to people using apps compared to Facebook’s internal systems. In the recent past, these new efforts have allowed us to take down thousands of offenders misleading Facebook users.”

Facebook has also been on the record threatening to remove all Facebook pages found to be engaging in cloaking. The company has also initiated collaborative efforts with other companies in the industry to discover new and more effective ways of finding and punishing bad actors. These efforts come in the midst of a spam content and fake news crackdown within its walls.

There are also ongoing efforts to make the global digital ecosystem more transparent. Many global tech leaders are also focusing on improving digital experiences for their users. The largest marketing spenders in the world such as P&G and Unilever have also been calling for tech giants to tackle ad fraud.

What motivates cloaking?

There is a clear link between cloaking and making money from clicks as well as page views originating from Facebook ads. Facebook is at the forefront of this problem given the social media site has over 2 billion active users every month which accounts for 42% of the total monthly social media visits globally.

Similar actions

Google had to deal with a similar problem being the biggest search engine in the world. Google’s efforts were, however, more targeted, i.e., the search engine giant was focused on getting rid of payday loan ads which featured high-interest rates (36%+ APR) as well as tight repayment periods (i.e., 60 days from date of issue).

Starting 13th June 2016, Google banned all payday loan ads meeting these criteria. This was a follow-up for a similar ban that saw Google disable approximately 780 million ads back in 2015 for reasons such as counterfeiting, phishing, and obscenity. Google has been hunting for ”questionable” service/product ads for a while now. After getting rid of porn ads, the search engine giant turned its attention to payday loan ads and other high-interest financial product/service ads.

Google has been on a mission to protect its users from harmful or deceptive ads according to David Graff, Director of Global Product Policy at Google. The search engine has already terminated 1,300 advertiser accounts guilty of cloaking. Like Facebook, the search engine’s actions were motivated by external pressure (from consumer privacy and protection groups).

In 2016, Google banned 1.7 billion ”bad ads” for a number of offenses. This included 68 million ads featuring unapproved pharmaceuticals, 80 million ads deemed to be misleading or shocking to users as well as 5 million payday loan ads.

Facebook stopped showing payday loan ads back in 2015. Advertisers have however become smarter using tactics like cloaking which have forced the social media giant back to the drawing board. Any payday loan advertisers among other deceptive advertisers on Facebook today have their days numbered. The new AI and human review process are effective enough to deal with cloaking once and for all.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

How Falls in Real Wages Could Increase Demand for Payday Loans

How Falls in Real Wages Could Increase Demand for Payday Loans

People use payday loans as a means to tide them over to their next pay cheque in a wide range of situations. For example, they may rely on this type of credit if they are short of money to cover expenses such as rent or mortgage payments and food costs, or if they encounter unexpected expenses like car or property repair bills.

More people may be turning to these short-term loans as the pressures on consumers’ finances continue to rise.

Official statistics

According to figures from the Office for National Statistics, when adjusted for inflation regular pay dropped by 0.5 per cent year-on-year in the three months to May. This came after a fall of 0.6 per cent in real pay in the three months to April and a 0.4 per cent year-on-year decrease over the three months before that.

Rising levels of inflation and stagnating wages mean many households now have less, if any, money to spare each month. Inflation hit 2.9 per cent in June, which was up from 2.7 per cent the previous month and was considerably above the Bank of England’s target of two per cent.

With the prices of goods and services increasing relative to pay, more people may struggle to balance their budgets and this could result in an increase in applications for payday loans in the UK.

Public sector workers under strain

Workers in the public sector may be among those who are especially likely to need short term loans. There has been a lot of attention on public sector pay restrictions over recent weeks, with the government under pressure to lift pay limits first imposed in 2011-12. Since a two-year pay freeze starting in 2011-12, rises have been limited to one per cent.

According to an analysis conducted by the Trades Union Congress, firefighters, nurses and border guards may all see their real wages decline by more than £2,500 over the next three years if the pay restrictions remain in place. Meanwhile, the National Union of Teachers suggested that teacher pay has dropped by around 15 per cent in real terms since 2010.

Decreases in inflation adjusted earnings like this could make people more likely to approach payday lenders seeking short-term loans.

Could a payday loan be the right option for you?

Regardless of the sector you work in, if you’re short of money, you might be considering taking out a payday loan. Whether you need cash to cover a particular expense such as a bill or you simply need some extra money to help you meet your general living costs, these loans could offer a solution. One of the benefits of these products is the fact that they can be easy and quick to access, even if you have a bad credit history. If your application is approved, you may be able to receive the money the same day.

However, it’s important to realise that these financial agreements are only suitable if you want to borrow small sums of money. If you’re applying for a loan through Swift Money, you can request up to £1,000. If you require a larger sum than this, you will have to consider other options, for example taking out a personal loan. Also, bear in mind that payday loans tend to have higher interest rates than alternatives such as personal loans and the repayment terms are shorter.

Before you sign up to one of these products, make sure you have shopped around to find the best payday loans on the market. It’s also important that you’re confident you can meet the repayment terms set by the lender.

Sources: 

https://www.theguardian.com/business/2017/jul/12/uk-pay-squeeze-real-wages-tuc-unemployment-ons-figures
https://www.tuc.org.uk/economic-issues/government-must-act-after-three-months-falling-real-wages-says-tuc
https://www.teachers.org.uk/news-events/press-releases-england/public-sector-pay
https://swiftmoney.com/
https://www.moneyadviceservice.org.uk/en/articles/payday-loans-what-you-need-to-know
http://www.bbc.co.uk/news/business-40259392

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

New Report Warns Average UK Family Will Be 15k In Debt By 2020.

New Report Warns Average UK Family Will Be 15k In Debt By 2020.

A recent TUC (Trades Union Congress) report shows that the average UK family will be £15k in debt by the year 2020. The shocking report revealed that UK households are heavily dependent on credit cards and payday loans. Unsecured debt per household expected to hit £13,900 by the end of 2017. The TUC reports that Britain is in a living standards crisis given that millions of families in the UK use credit cards and payday loans to pay for essentials. According to the report, UK households are ”running on empty”.

Back in 2016, unsecured debt per UK family stood at £13,200 which is the highest ever unsecured debt figure since Britain and the world at large was hit by the financial crisis. The figure is only a small margin below the £13,300 peak in 2007. The report highlights unsecured debt as debt from; payday loans, credit cards, store cards, car loans, bank loans and student loans (mortgage payments are excluded). The TUC report blames the low investment and low wages for the debt crisis and stresses that these difficulties have to be solved by the next government if we expect the average debt per household to reduce.

UK wages are still below the pre-financial crisis level by approximately £20 a month. This simply shows that it has taken more than a decade for UK wages to recover fully. What’s more shocking is; official figures indicate that real wages have begun falling again. The TUC report believes that the increasing level of household debt in the UK should be the most important concern for political parties and the next government given the UK economy heavily relies on household spending to sustain growth.

Consumer spending has skyrocketed in the past eight years. One notable segment is the amount of money Britons borrow to buy new cars every year. The figure currently stands £30 billion. This is against the official government debt figure of £1.7 trillion whose interest payments demand £10 million monthly as of April 2017. The savings ratio has also reached a record low. The latest figures show that the ratio of income to savings in the UK stands at just 3.3%.

The UK household debt crisis looks worse from a legal perspective given County Court judgments relating to consumer debt have risen to 35 percent in England and Wales. The debt crisis has also attracted the attention of the Bank of England which has currently launched an investigation on unsecured lending to UK households.

According to the TUC General Secretary, Frances O’Grady, the increasing household debt is pushing Britain’s economy into a danger zone. O’Grady attributes the problems to the fact that UK wages haven’t recovered fully since the financial crisis forcing families to rely on payday loans and credit cards to cater for household bills. She stresses that the next government needs to act urgently to increase the minimum wage as well as end pay restriction affecting public servants like firefighters, nurses and midwives otherwise economic growth won’t be sustainable.

According to O’Grady, the next government must do more for many parts of Britain where good jobs are minimal or non-existent. She argues that communities lacking well-paying jobs have an opportunity to thrive in the future if the government invests adequately in training, broadband, transport links and decent housing.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

CMA competition markets authority

Summary of the UK Payday Lending Market Investigation by the Competition Market Authority (CMA)

Just recently, the Competition Market Authority (CMA) conducted a payday lending market investigation (Click here to download the official report). Below is a summary of the findings as well as recommendations.

Overview

According to the CMA investigation, the average size of a payday loan in the UK stands at £260 and almost all loans are £1000 or less in value. The loans vary depending on repayment terms with most loans repayable in a month or less with a single instalment.

The average term of most payday loans in the UK is just over 21 days or three weeks.
In terms of growth, the UK payday loan industry grew the fastest from 2008-2012. During this period, payday loan lenders we issuing approximately 10.2 million loans per year valued at approximately £2.8 billion. Growth has been reducing since then. In 2013 for instance, payday loan industry revenues dropped by 5%. The market also contracted in 2014 with the number of new loans falling by approximately 27% between January and September 2014.

The year 2014 saw four out eleven major payday loan lenders, as well as many small lenders, stop offering payday loans. The market hasn’t recovered since following the introduction of Price Cap Regulation in January 2015 which saw many payday lenders unable to operate profitably under the new regulation.

In-depth CMA findings

The CMA payday lending market investigation reveals a lot of information on various aspects of the industry. Here’s what you need to know;

1. Payday loan usage (number of loans taken out per customer)

According to the CMA report, most payday loan customers take out many payday loans over time with the average lender taking out approximately six loans every year. In regards to borrowers’ lender preferences, most borrowers use two or more lenders.

2. Online vs high street borrowing

In regards to loan platforms, most payday loan customers today prefer taking out loans online i.e. 83% vs. 29% who take out loans on the high street. 12% of all payday loan users borrow using both channels today. On amount, borrowers borrow more online i.e. £290 compared to the high street £180.

3. Borrower loan application assessment

Most payday lenders today have developed computerised risk models that help them conduct thorough assessments on their client’s credit worthiness as well as their ability to repay the loan successfully. Borrower assessment has been and is still part of every lender’s loan application process. The sophistication of risk models, however, varies from one lender to another. In regards to loan application success, the number of loan applications turned down was above 50% for most of the major lenders back in 2012. The figure continues to rise to date as lenders become more cautious in the wake of the new FCA regulations.

4. Payday loan customer profile

The CMA investigation shows that the typical online payday loan customer in the UK has an average income of £16,500 while high street borrowers have an average income of £13,400. In general, most people who have been using (and are still using payday loans) in the UK earn less than the average income in the UK which stands at £17,500.
In regards to gender and occupation, most payday loan customers in the UK are male working in full-time jobs. They also happen to be younger (than average) and living in larger households.

Most payday loan customers also happen to have experienced financial problems in the recent past. According to the CMA investigation, 38% of all payday loan customers have a bad credit score/rating while 10% have been visited by a debt collector or bailiff. In a nutshell, 52% of payday loan customers have faced some debt problems in the near past. The number of people who repay their payday loans in full has also decreased over time.

It’s also worth noting that most payday loans are taken on Fridays at the beginning or end of the month. Most borrowers also seem to be under some financial pressure when borrowing leaving little room for assessing other suitable credit alternatives that may be available to them. In fact, less than 50% of all payday loan borrowers shop around effectively before taking out payday loans. The typical payday loan customer is also recurring. Repeat customers account for a majority of payday loan business. Most borrowers also take loans from multiple lenders mainly because of problems with existing lenders i.e. late repayment, outstanding loan/s, etc.

5. Overall Payday loan usage

In regards to overall usage, most payday loan consumers (53%) use payday loans to cater for living expenses like utility bills and groceries. 10% take payday loans to pay for vehicle/car related expenses while 7% take payday loans to pay for general shopping such as clothes and household items. Only 52% of payday loan consumers use payday loans to pay for emergency-related expenses. This is despite the fact that payday loans are actually meant for catering for emergency expenses.

Recommendations

The CMA investigation reveals some difficulties in the industry which need to be addressed. Luckily, the CMA has given recommendations for dealing with these problems. Here’s what needs to be done;

1. There is a need to boost the effectiveness of price comparison websites

Most payday loan customers don’t have the luxury of choice when taking out loans as revealed in the investigation. Since borrowers take loans under duress, better price comparison websites can help borrowers shop for loans more effectively regardless of the time constraints or other problems present when taking out loans.
Better price comparison websites will also create a perfect environment for competition which will, in turn, result in better payday loans in every regard from the pricing/fees/charges to variety. Existing price comparison websites have numerous limitations that make it impossible for payday loan customers to make accurate comparisons.

2. More transparency on late fees/overall cost of borrowing

The CMA also feels there is a need for more transparency on fees charged in the industry by different lenders. The Authority believes the FCA needs to take more action to ensure all lenders have a legal obligation to disclose all their fees/charges on previous loans clearly to allow effective cost analysis.

3. Cooperation between the FCA, payday lenders, credit reference agencies and authorised price comparison websites

The CMA also feels the FCA must cooperate with all industry players more so lenders, credit reference agencies, and price comparison websites to improve payday loan borrower abilities to search the payday loan market extensively without compromising their credit history.

4. Real-time data sharing

There is also a need for real-time data sharing according to the CMA. Such efforts will benefit both borrowers and lenders. When lenders are able to get real-time access to their clients’ credit information, they will be in a position to do better borrower assessment and in turn, avail the best possible terms.

5. Increased transparency on the role of third parties like lead generators

The CMA also feels there should be more transparency on the role played by third parties like lead generators, affiliates, brokers, etc. since most of them pose as actual lenders when that’s not the case. The CMA stresses the need for the FCA to do more to make sure borrowers know upfront if they are applying for loans directly or indirectly. This move will reduce instances of erroneous expectations since most third parties tend to overpromise or provide inaccurate information.

Summary

The UK payday loan industry is far from its peak in 2012. The number of payday lenders has reduced following the introduction of the price cap regulation by the FCA. Lenders have also become stricter today. Unscrupulous lenders may have reduced, but borrowers remain vulnerable even after the new regulation since most of them borrow under pressure. There is hardly any time to compare payday loan lenders effectively, and price comparison websites are doing very little to help. This explains why the CMA is calling for better price comparison websites among other recommendations like transparency on fees, real-time data sharing and cooperation between the regulator, lenders, credit rating agencies and price comparison websites. Third parties also need to be more transparent when promoting lenders to ensure payday loan customers make the best possible decisions when taking out loans.

Financial education is also important to reduce over reliance on short-term credit to cater for living and emergency expenses. Financial education is bound to improve the customer profile of the typical payday loan user.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.