Opening Statement by Director of Consumer Protection, Bernard Sheridan, to Joint Committee on Finance, Public Expenditure and Reform

Following his appearance at the Joint Committee on Finance, Public Expenditure and Reform on 29 January 2014, Director of Consumer Protection Bernard Sheridan has written to the Chairperson of the Committee in response to queries raised. See letter

Chairman and Members of the Committee, I would like to thank you for inviting me here today to discuss the licensed moneylending sector in Ireland. I am joined by my colleagues Colm Kincaid and Terry Murphy. I intend to give you a brief overview of the licensed moneylending sector and how the Central Bank regulates it. I would also like to share with you what I see as some of the current issues in the sector and our views on them.

Background

Moneylending, as defined in legislation, is the practice of providing credit to customers on foot of a moneylending agreement which is, in essence, where the total cost of credit is in excess of an annual percentage rate (APR) of 23 per cent or the agreement is concluded away from the business premises of the moneylender. The credit will usually take the form of a cash loan, but may also involve the provision of goods on credit from a retailer, the purchase of goods from a catalogue company or the purchase of vouchers.

There are currently 40 licensed moneylending firms in Ireland (down from 52 in 2003 when we took over regulation of this sector). The business models operated by these firms fall broadly into three categories, with some firms operating in more than one category:

• Home collection firms – there are 31 firms providing a home collection service to approximately 130,000 customers. Most firms in the home collection category have a relatively small number of customers, i.e. in the range of 100 to 1,000 customers.
• Catalogue firms – where consumers can select goods from an on-line or paper based catalogue. There are 3 firms operating in this category, with customer numbers representing approximately 50 per cent of the moneylending market.
• Other firms – this category covers both retail firms which sell goods on credit (e.g. electrical appliances) and remote firms to which payment must be made other than by means of home collection (e.g. by direct debit).
  
  

Customer numbers in the sector have increased from 300,000 in 2005 to around 360,000 today and outstanding loan amounts are in the region of €200 million.

Moneylender loans are generally short term in nature and their cost can be very high when compared to other forms of credit. In addition to the actual cost of credit, APR is heavily influenced by the term of the loan as well as any collection charge included. The maximum APRs, which are currently being charged in respect of specific loans, range from 23% to 188.45% (excluding collection charges) and to 287.72% when collection charges are included (cost of credit for this loan is €30 for every €100 borrowed over a 20 week term). These rates have remained largely unchanged since 2003.

Regulatory Framework

Anyone wishing to engage in the business of moneylending requires a licence from the Central Bank in accordance with the Consumer Credit Act, 1995 and this licence must be renewed every year. These firms are subject to the requirements of the Consumer Credit Act and also subsequent European legislation in the form of Consumer Credit Regulations. The Central Bank supervises firms in this sector through annual reviews of their activities as part of the annual licensing process, inspections (both firm specific and across the sector), applying a fitness and probity regime, conducting consumer research and monitoring trends including complaints made to the Financial Services Ombudsman. The sector is closely monitored and follow up regulatory action is taken when necessary.

Our statutory role in respect of the annual licensing of a firm is to assess each individual application, which includes an assessment of whether or not (in the context of that application) the cost of credit to be charged is excessive or any of the terms or conditions are unfair. In terms of cost of credit, we look therefore at the specifics of the firm’s proposals and requests for increases to the maximum permitted APRs of specific loans in the sector have, in the main, been rejected.

One of the challenges we face in considering rates charged by moneylenders on specific loans is finding a balance between, on the one hand, the availability of credit for people who do not have access to legitimate credit elsewhere or who do not use other regulated credit providers and, on the other hand, the provision of short term unsecured loans at what can be a high cost. There has been some public discussion in this regard about introducing an industry wide cap on the rates that moneylenders can charge. Lower interest rate ceilings could be ineffective and counterproductive in this regard and may result in excluding low income households that have repayment capacity, even at the high rates charged by licensed moneylenders. We would have some concerns therefore about the imposition of an industry wide interest rate cap without there having been a full assessment of its impact on consumers.

Pay-Day Lenders

There has been some media attention about so-called ‘pay-day lenders’. These lenders typically offer very short term loans to tide borrowers over until their next pay-day. The advertised representative APRs associated with these loans can be as high as 4,000 – 5,000 per cent. Although a number of firms have expressed an interest in offering pay-day loans in the Irish market, I can confirm here today that no such business model has been licensed by the Central Bank of Ireland.

Current issues in the sector

Changes in the sector

The number of firms in the sector continues to decline with some smaller firms either closing or transferring their business to other licensed firms. The number of people who are using moneylenders has risen since we published our previous research in 2007 with the larger firms, including the catalogue companies and other specialist firms, seeing an increase in the number of customers and the smaller traditional door to door lenders seeing a decline. This changing profile of the sector, which now has fewer firms, but also larger firms, will inform our future regulatory approach.

Cost of Moneylender Loans

There is no doubt that, when compared with other credit providers such as banks or credit unions, the cost of loans from some moneylenders is indeed high, irrespective of loan size or length. This is particularly so when this form of lending is used on an on-going basis. There are three points I would like to make on this issue:

• First, through our assessment of individual applications, maximum permitted APRs have not increased overall in the last few years.
• Secondly we have also sought, through engaging with potential new entrants, to keep the practice of moneylenders offering very short-term loans at excessive APRs out of the market and we will continue to pursue this policy.
• Thirdly, our focus has also been on improving the transparency of these costs and increasing consumer awareness, by way of requirements such as the need to warn consumers about the high cost nature of the loans and to disclose all the fees, costs and interest in a clear manner, prior to entering into an agreement. We also set up a Register of Moneylenders on our website which sets out product details such as the maximum APR, maximum cost of credit and the collection charge (if any). The recent research found that 65% of customers surveyed report knowing the rate of interest they were being charged on their most recent loan, by contrast to findings in 2007 that 71% of customers did not know this rate.
  
  

Availability of alternative sources of credit

According to the research findings, 31% of customers surveyed had borrowings (other than mortgages) from other institutions including from banks and credit unions. However, only one in five considered alternative credit providers before taking out a loan with a moneylender, with over half of these considering a credit union. Approximately one quarter of customers also reported being refused credit by a bank/building society or a credit union. (I would like to point out to the Committee that this figure was originally reported to us incorrectly by the Research Company and we are revising this and a small number of other items in the published research findings following further detailed analysis of the data the Research Company reported to us.) Clearly what the figures show is a significant number of customers who use moneylenders are not considering alternative sources of credit including credit unions.

Other factors relevant to this issue are the robustness of the credit worthiness assessments being carried out by moneylenders (a topic we have given firms feedback on previously) and also the continued availability of credit for existing customers. It is especially important in such a high cost sector, where over a quarter of borrowers surveyed cite ease of availability of moneylender credit as a key factor in their choice of a moneylender over another type of credit provider, that lenders have effective systems in place to assess the ability of the borrower to repay. This is all the more important where a quarter of those surveyed found it difficult to make moneylender repayments in the previous 18 months, and this overall figure will be higher in some moneylender sectors.

The research found that more customers are holding longer-standing loan arrangements (of 5 years+) with a moneylender. While there may be circumstances where a customer needs an additional loan, we would be concerned that the new loan is simply a way of extending the existing loan and therefore the credit becomes longer term in nature but yet is being charged on the basis that it is short-term. It may also mean that it becomes more difficult for the borrower to consider alternative sources of credit. Concerns have also arisen through our supervisory work as well as from the research that some moneylenders may be making credit available but reducing the amount of the new loan to the customer in order to repay an existing loan. This is an issue we are examining further.

I would like to thank the Committee for its invitation today to discuss this important topic. The Central Bank’s focus in regulating licensed moneylenders is on the protection of borrowers’ interests. While we believe we are achieving this through the regulatory framework we have put in place and our ongoing monitoring of the sector, we continue to be vigilant to the sector’s trends and to develop our supervisory approach accordingly.