Let the Loophole Wars Begin . . .

Wonga has been in the news lately and for all the wrong reasons. Following an investigation by the Financial Conduct Authority the payday loan giant was hit with a $4.4 million compensation bill to be paid to no less than 45,000 customers, after it was found to be sending misleading letters purporting to be from law firms to customers.

Alleged ‘bad financial practices’ on the part of Wonga were highlighted as far back as 2008 by the investigation which culminated in the action taken by the Financial Conduct Authority. The investigation was initiated by the Office of Fair Trading who investigated whether Wonga was ever in breach of financial best practice rules.

So, does this highlight all that is wrong with the growing trend of using payday loan lenders or is it an example of a top-heavy, ‘regulation – happy’ administration? Is business and enterprise likely to be helped or hindered by the Financial Conduct Authority or will all this legal wrangling just line the pockets of lawyers with a sharp eye for an exploitable loophole?

A comparison may be drawn between the new Financial Conduct Authority and similar bodies in the UK with similar ‘public interest’ remits like the Serious Organised Crime Agency. SOCA was established in 2006 with a remit to tackle organised crime and money laundering in the public interest. Rumour has it though that SOCA has been under enormous pressure to rake in cash as a justification for its own existence. If true, what implications has this got for human rights? Many have argued that SOCA has run rough-shod over human rights to secure convictions that increase the agency’s record of ‘fighting crime’ and cash recovery records, and as such the line between pursuing crime in the public interest and pursuing crime as a means of self certification has arguably been crossed.

These implications highlight why we debated but decided against the introduction of ‘performance’ related pay for police officers. How can we measure the ‘performance’ of an agency or individual whose job it is to pursue the public interest? In the case of SOCA, you could argue that ‘performance’ has been measured through the metric of cold hard cash since their budget of £500 million odd is regularly scrutinised by various Westminster committees.

With this in mind it is possible to raise an eyebrow about the now similar activities of the Financial Conduct Authority. Is this just another SOCA but with a remit to target corporate giants like the Wonga website? You might shrug your shoulders and say, ‘well, doesn’t Wonga have lots of cash anyway?”. Well, this is true but this does not mean it is right that it and other successful businesses should be subject to fines in the ‘public interest’ when the ‘public interest’ has been, in the case of SOCA so brazenly measured in terms of ‘performance’ and cash recovery.

It is interesting to note that in the case of Wonga and the ‘fake legal letters’ debacle, no fines were imposed by the Financial Conduct Authority. Ultimately, Wonga avoided a fine, but was forced to pay compensation to customers affected by their actions. However, what is important is that the Financial Conduct Authority had the power to impose a substantial fine and as the years roll on, the ‘performance’ of the Financial Conduct Authority is likely to be measured and scrutinised in the same way we have seen SOCA examined. This will create the same dynamics currently being debated in the case of SOCA, in the case of the Financial Conduct Authority since its activity raises questions of how we can possibly measure the ‘public interest’ in terms of cash recovery?

On the other hand, consumer groups have endorsed the actions of the Financial Conduct Authority on the basis that it encourages an end to bad practices in the financial services sector. Aren’t there better ways to encourage an end to bad practices in the financial sector though? Moreover, are we just going to see a chain reaction as a result of public policy like this where corporations ‘lawyer-up’ and try to find loopholes to justify their actions? This does nothing for the public interest, unless you class enriching lawyers as being in the public interest.

The ‘performance’ of the Financial Conduct Authority remains to be seen and it is true that as yet we have not blatant examples of how cash recovery may have been placed above the pursuit of public interest, as we have in the case of SOCA. However, if the truth is told, we are not far off another SOCA-type body whose activities are likely to attract all the same controversies we have yet to resolve in the case of SOCA.

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coinsTaking an in depth look into the media hype around payday loans

Pay day loans have been receiving some particularly bad press in recent weeks, with the latest damning article published by The Telegraph suggesting that many short term loan borrowers are being overcharged to the tune of £45 million.


How do Pay Day loans work?

Pay Day loans are designed to be fast access to amounts of up to £1000 for a matter of days up to a month maximum, however as warned by moneysavingsexpert.com, borrowers frequently get caught up in late payment fees that start the downward spiral into unmanageable debt.


Some of the familiar players

Many of us have seen adverts on TV for payday loans. Take for example the older animated characters that advertise the wonga.com website for payday loans. They have become iconic figures on their TV ads. Many critics have slammed such well marketed companies for their high interest rates and the way they do business. However, companies such as this offer solutions to educated people that can make savvy financial decisions and of course- can actually pay off the loan on time. It is not for vulnerable people who are poorly educated and can’t make a proper decision with regards to their finance.


Getting people educated

Education is essential to the prevention of debt, and a recent article published by The Guardian suggests that better financial sense could and should be taught in schools up and down the country to prepare our children for life in the real world where careful money management is a necessity.


Are there any alternatives?

The higher cost of payday loans from lenders can deter those for whom money is particularly tight, and therefore they may choose to consider taking out a larger loan that has a better interest rate. Moneysupermarket.com compares the rates of hundreds of lenders for larger amounts, as banks and other lenders can offer far more attractive rates when you borrow in excess of £1000 over a period of 1 year or more. However it is often the case that borrowers aren’t looking to be tied in to a lengthy repayment contract and prefer the convenience of a more short term solution, and other options include taking out a credit card or using an agreed overdraft to bridge the gap temporarily until income arrives.


Time to get money smart

It is fair to say that most reputable payday loan companies make no secret of the interest charges and late payment fees applicable to each borrower, therefore it begs the question who is really to blame for the debt that people accrue? Surely the borrower themselves knows their personal financial situation better than anyone and so should be able to make an informed decision as to whether they can actually afford the loan repayments prior to agreeing a loan in the first place.

There are several fantastic charities available to assist local authorities, schools and councils with how to deliver a successful budgeting course or enable them to correctly signpost children and families on where they can find this information for themselves.

Pay day loans are indeed a high interest method of accessing small amounts of money instantly to be repaid within the month, and it is made clear from the outset that they are not intended for regular or prolonged use. The majority of borrowers using the payday loan facilities need to bridge a funding gap due to an emergency or unforeseen circumstance requiring a considerable sum of money that they just do not have access to, however the sensational Telegraph title is unfair to the millions of satisfied payday loan customers who have repaid their loans on time and so avoided excessive charges or late repayment fees.


Recession led rise in payday loan popularity

In recent years Britain has faced extreme economic challenges that have resulted in the need for more and more people to access short term loan facilities to make ends meet. With thousands of people across the UK have been made redundant or laid off, the demand for finance to cover every day bills such as rent, mortgage and utility bills has reached an all-time high and shows no signs of slowing down anytime soon.

All in all, it has to be said that any loan agreement whether it is for £100 or 10,000 presents very real risks to the borrower if the amount borrowed exceeds their personal funds or ability to repay within the agreed time frame. However we need to stop shifting the blame on to others in our scapegoat society and take responsibility for our own lives, our own decision and our own financial behaviour. If we cannot repay the payday loan before the end of the week then we should not be taking the loan out in the first place.


Author Bio

This writer is likes to write about upcoming and pressing financial issues and challenging the media hype around a topic.


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