Graham Hill Challenges The FCA Over Sub Prime Lending
Wednesday, 22. October 2014
Many years ago I was fortunate enough to have created a fairly substantial asset/vehicle finance brokerage. I had seven offices with a pretty heady turnover but like many entrepreneurs I made a couple of poor judgments and in 1991 I lost the lot. The business, my house and the missus all departed.
Luckily for me I had the good fortune of attending a Dale Carnegie course many years earlier (in fact after a few courses as a graduate assistant I was invited to train as an instructor – which I did for a year until my day job and the added demands following the birth of number 2 son caused me to stop). The good news was that I handled my predicament really well but for the first time in my life I was forced to enter a world that I had never experienced before.
That of Social Security, or as was known then – the dole! My mortgage was £1,250 per month and in order for me to claim part of that from my insurance I had to sign on. I had to stand in the queue to receive my few pounds each fortnight (I think). Now don’t get me wrong, I don’t come from a privileged background. My parents weren’t wealthy but my dad was never out of work and we survived.
But I had never experienced poverty or desperation, until I had to join the dole queue. Not one person I spoke to in the many hours I stood in the queues were lazy, trying to find ways not to work. Some had part time jobs working the maximum hours for a pittance just to be able to add a little to their meager dole payout. I heard stories of sadness and despair that made me feel fortunate that all I’d done is lose my business.
At the same time I heard disturbing stories about moneylenders who would charge crazy rates to those wishing to borrow a few pounds for just a few days till they were paid or received their next dole payout. I also heard about the ways the moneylenders would collect their money. It was a disgrace and frightening. And something, thank God, I never had to experience.
Move on a few years and quite innocently I was working with a jolly group of car traders in Brighton. If they had a client that needed finance we would arrange it for them. I knew that the traders had their fingers in a few pies. They were property developers and some even ‘made a book’ at horse racing meetings. But what I experienced one day was to stay with me to this day. I arranged to meet one of the traders in a pub to pick up a couple of invoices for cars I had financed.
When I walked into the not too pleasant pub it was as though he was holding court. There were men and women standing around outside the pub. When I walked in I could hear a woman pleading to borrow £30 till the same time next week. He gave her £30 but said it would cost her £50 the following week and as she walked away he said something along the lines of ‘Don’t forget to get the money to me next week, you don’t want me to come round to collect it do you?’
Everyone was dismissed as I walked in, I collected the invoices, declined a drink and walked out. As I walked out I heard the trader shouting at a man, clearly struggling with life, telling him that he missed his payment by two days and the debt had now doubled. The man was crying.
They were the last two deals I ever did with this group of, what I thought were, affable old school car traders. The pub no longer exists and the trader himself died many years ago.
As I drove away in my Jaguar I felt for those people. It broke my heart to think that they were being totally exploited by thugs and bully boys just so that they could buy some food or clothe their kids. So why am I revealing this shady activity? Because yesterday I heard the great news that the FCA had managed to put the squeeze on Wonga, a legitimate lender to those in need, so much so that they have just written off £220 million pounds owed by 330,000 customers because they didn’t carry out sufficient affordability tests. Now don’t get me wrong,
I am not a big fan of payday lenders but they are massively better than the alternatives as I have witnessed first hand. Several smaller payday lenders have already gone with little chance of recovering the millions of pounds owed to them. Of course there needs to be checks and measures in place and preventative measures to stop ordinary people who are suffering hard times from falling further in debt.
Whilst the FCA are happily patting themselves on the back I ask what will happen to those desperate to pay for some electricity on their key or food for their children? Will we see the return of the no questions asked, unauthorised, moneylenders? Many of the 330,000 Wonga borrowers I’m sure are responsible people that are simply struggling but with this windfall comes a downside. No doubt this will show up as a default on their credit file stopping them from borrowing for the next 6 years whilst that remains on their file.
One woman who was about to have her £600 loan from Wonga written off complained that they should never have loaned her the money in the first place as she already had several other loans. Can you believe that, Wonga had created the problem by not checking her status carefully enough? Has the world gone mad! But as a result of these sorts of people many legitimate borrowers will no longer be able to take out a payday loan to ‘tide them over.’ And what about the other lenders from whom she received money, has a precident been set? Could she refuse to repay those loans? But it gets worse.
Given my passionate feelings towards the FCA and their ridiculous and mainly unnecessary rules being applied to all lenders (not just payday lenders), it was not a good day for a senior FCA representative to be giving a talk at an International Vehicle Finance Conference with me not only in attendance but sitting on the front row – as I usually do – last Friday. The off pat presentation explained all the new rules regulations and tests that lenders must now introduce.
I first pointed out that whilst there may have been a problem with payday lenders the same problem doesn’t exist in vehicle finance. It aint broke so why are you tryng to fix it? After he had pointed out that the new rules had become effective from April I asked why sub-prime lenders were still trading? These are the lenders who lend at 45% APR and beyond to those with financial problems enabling them to drive a car having been turned down by their bank or other prime lender.
‘How do you square your tight affordability tests that MUST be applied to all loans with the existence of sub-prime lenders?’ ‘Surely if an applicant fails with a prime rate lender offering 6.9%APR how can the same customer still get a loan from a sub prime lender at 45% APR, it doesn’t make sense?’ I went on to ask. He answered by saying that the regulations were still being worked on. I pressed him further by reminding him that the new rules were effective from April.
I then pointed out that the new department, which I read is costing £400 million PA, is creating a massive void of people unable to get finance. I asked what they were doing to redress this potentially massive problem? What is to happen to all those now being dumped by the prime lenders, where are they to go? People that have been ill or made redundant now need to get to their place of work or new job and need a car. He couldn’t answer me. And what of the economy?
I pointed out that the FCA rules could result in one of three situations. Applicants could be told that whilst they had only applied to borrow £5,000 their credit is so strong they could afford to borrow £10,000. We all know that won’t happen. Situation 2 we retain the status quo, the applicants will still borrow as they did in the past. In which case why are we spending £400 million on an unnecessary department? Or, as we all suspect, many more people will fail and not be able to borrow the money.
What will that do to the economy? Could we suddenly slide back into recession. The FCA representative scooted out of the meeting quicker than you can move a Wonga slider without an answer. If this concerns you and you feel we should start up a LinkedIn group please write to me or am I alone on this one? By Graham Hill
