High Cost Credit

The money pouring into a boom for consumer loans

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High street banks have lent to payday loan companies. (Image: Barclays bank via Sutterstock.com)

The rapid growth of the high-cost consumer credit industry has attracted considerable investment despite criticism of the huge interest rates charged by many companies.

The Bureau’s investigation into the sector, which includes many payday loan companies, reveals that Britain’s high street banks have put millions of pounds into the industry. US companies, some banned by law from issuing payday loans in the American states where they are based, are also investing in the UK’s less regulated market. Many have bought up UK companies, paying the UK founders millions of pounds for their shareholdings.

Criticism of the industry has focused on the level of interest charged, with some loans costing up to 4,474% in interest. The government has rejected calls to cap the interest rates the firms can charge, claiming it would force people to turn to illegal loan sharks.

Instead the Office of Fair Trading (OFT) is attempting to crack down on the industry, threatening to remove firms’ licences if they fail to check whether customers can afford the loans or use aggressive debt collection tactics. The OFT has already removed three licences.

Buying in
Despite this new attempt at regulation, international businessmen including some from eastern Europe, a South African mining company president and US venture capitalist Don Valentine – who made his name funding Apple, Google and YouTube – have bought into the industry.

Many of the companies in the Bureau’s research offer payday loans, a term referring to a short-term, high-cost loan, regardless of whether the payment is linked to a borrower’s payday. These companies charge over 4,000% interest rates. Other companies provide loans, some more long-term, with interest rates above 50% – considerably higher than conventional mortgages, overdraft facilities and even credit cards.

Among those who have invested is the Arbuthnot Bank Group run by chief executive Henry Angest, a Swiss-born millionaire, and a major Conservative Party donor.

Angest now controls Everyday Loans Limited, which offers the ‘financial freedom’ of unsecured loans of between £500 and £10,000 at 74.8%. This is not a short term payday loan company, but has rates of interest higher than other more traditional consumer loans such as credit cards.

US companies, some banned by law from issuing payday loans in the American States where they are based, are also investing in the UK’s less regulated market. 

A former Conservative party treasurer, Angest has contributed £7m to the party in loans and donations.

Last year Everyday Loans was purchased by an Arbuthnot group subsidiary, Secure Trust Bank, which is investing millions of pounds to fund new lending.

Arbuthnot Latham, a private bank, in which Angest owns a majority stake, and which is also part of the Arbuthnot group, has offered a £5m loan to the Conservative Party at 3.5% interest. The loan is listed on the official Electoral Commission register but a Conservative Party spokesman described it as a ‘credit facility’ which the Party had not drawn upon.

A spokesman for Everyday Loans claimed the company was a responsible lender. He said the firm does not provide ‘payday loans’ nor is it a ‘short-term lender’.

He said customers had to borrow over a minimum of 13 months and added: ‘Everyday Loans provides loans to customers who are underserved by the high street banks. If Everyday Loans did not provide this service those looking for loans would have to approach payday loan companies, pawnbrokers or home collected credit companies where interest rates would be very much higher.’

He said: ‘We are not engaged or plan to engage in payday lending. The interest rate charged on [our] loans reflects the risks involved in lending to the individual borrowers. The rates we charge are typically 3 times less than the representative rates of lenders like the home collected credit companies and 20 times less than payday lenders.’

Asked whether the firm or its chairman and chief executive Henry Angest had discussed the company’s business with the prime minster or the government, the spokesman added: ‘We can confirm that we have not discussed the business of Everyday Loans Limited with either the Conservative Party, the current Government or Civil Servants.’

Angest is the second leading Conservative donor with a connection to a high-risk lending company. Adrian Beecroft runs Dawn Capital Investments, a private investors fund, which has a major stake in Wonga, one of Britain’s best-known and fastest growing payday lenders.

Beecroft, who is also a government adviser, has given almost £800,000 to the Conservatives since 2006, most recently contributing more than £100,000 last December. Wonga’s turnover has trebled to almost £185m the last year.

Related article: Get the data – The high cost lending companies

Research by the Bureau also shows that these high-cost lending companies are often heavily reliant on the leading high street banks for funding and set up costs.

Despite widespread criticism that the major banks are reluctant to lend to small businesses and entrepreneurs planning start-ups, payday lenders have found them willing partners.

One major payday firm, US-based Lending Stream, describes Barclays Bank, which currently lends to businesses at 5.1% APR, as a major ‘strategic partner’.

3,378% interest rate
The firm, owned by Delaware-registered Global Analytics Holdings Inc, had a £32.7m turnover in 2011 with 142,000 British customers borrowing £31.2m. Its customers pay 3,378% APR to borrow from it.

The firm’s Californian-based boss Krishna Gopinathan claims he founded the firm to ‘give back’ and to ’empower’ people with low access to credit.

How much Barclays lends the firm is not disclosed, but it has a fixed charge over the company’s deposits providing, according to Lending Stream, ‘integrated banking solutions … lending, risk management, trade, cash and liquidity management, and specialist asset and sales financing’.

Barclays, which at one stage sought a taxpayer-funded government bail out before instead reaching a deal with Middle East investors, is also involved with several other high-cost lenders.

Barclays Capital, its investment arm, lent £75m to Everyday Loans Limited according to its filings to Companies House to provide ‘funding for the provision of consumer finance lending to customers’, until this was paid off when the firm was bought out last year.

According to documents filed at Companies House the bank also has a charge over credit balances facility for TxTLoan Limited, a firm offering 4,474% interest loans through mobile text messaging.

Barclays confirmed it had previously been involved with firms in the industry. But a spokeswoman for Barclays Bank said this was no longer the case. ‘We do not lend to any of these companies,’ she said.

Related story: Revealed – The £1billion high cost lending industry

Other major banks are also involved in funding the industry. HSBC provided seed capital for Money in Advance Limited, a firm registered in the British Virgin Islands, the offshore tax haven, which explains, for example, that it will loan customers £250 for 22 days and collect £305 – an interest rate of 3,697% APR.

Taxpayer-owned Royal Bank of Scotland (RBS), which was bailed out after the financial collapse in 2008 with £45bn from the government, is another that has invested in the high-cost credit sector.

RBS funds Amigo Loans Limited, owned by entrepreneur James Benamor, who is paid £890,000 a year. His firm, which says it has now stopped doing payday loans, was, until recently lending at 199% APR. The Bureau has included the company in its data as the financial records cover the period when it was still operating as a payday lender.

Before the bail out the bank, though subsidiary NatWest, helped Nottingham city jeweller Henry Hallam build up his Money Shop business before he sold out to US-giant Dollar Finance in a deal in 1999.

Its website advertised: ‘Borrow £400 for 31 days, pay £400 interest’.

Taxpayer-owned Royal Bank of Scotland, which was bailed out after the financial collapse in 2008 with £45bn from the government, is another that has invested heavily in the payday business.

At the end of last year it replaced these with new longer term ‘guarantor loans… Based on how much your friends trust you, NOT your credit score’, it says. These loans charge 49.9% APR in interest.

Lloyds TSB, which took £5.5bn from the taxpayer to save it from collapse, is another high-street name involved in funding the payday market.

The bank helped fund Instant Cash Loans Limited, owners of the Money Shop.

Investment in the industry is flowing in from the US too. The Bureau’s research highlights the growing involvement of US firms in the British payday industry at a time when such companies are facing tighter regulation of their activities at home.

Rapid growth
Dollar Finance has overseen the massive growth of the Money Shop taking it from a company with 34 staff and a turnover of £2.9m in 1998 to one with 2,300 staff and an income of £172.3m today.

The success of its Money Shop stores has made Dollar Finance, which is owned by Philadelphia-based DFC Global Corporation, keen to expand.

In 2009 it acquired Express Finance (Bromley) from Michael Thorpe, who, before the buy out, had employed his 25-year-old son and his wife to help run the business, for almost £5m. In the three years after the takeover the company’s revenues increased tenfold to £51.7m and it is making profits of almost £17m a year.

In April 2011 Dollar Finance expanded further, buying internet loans business MEM Consumer Finance, which trades as PaydayUK and issued £30m worth of loans last year.

Expansion of the payday loans industry in the US has been curtailed by a growing clampdown on high interest rates by state governments. Some states have even banned payday loans.

In 13 states the loans are either illegal or, while not explicitly banned, prohibited by strict usury limits – hard interest rate caps on the annual percentage rate.

Since 2007 a federal law has also capped lending to military personnel at a maximum of 36%.

Dollar Finance is based in Pennsylvania, where state laws cap interest rates on short term loans at 30% compared to the 2,949% APR offered on its PayDayUK website this week.

In 13 states the loans are either illegal or, while not explicitly banned, prohibited by strict usury limits – hard interest rate caps on the annual percentage rate.

Cash Choice UK Limited is another firm owned in a US state where its interest rates, advertised on its website as 3,491% APR, would be outlawed.

The firm is owned by US citizen David Vickers, president of Cash Choice Inc, based in Atlanta, Georgia, where payday loans have been banned for more than 100 years.

A statement on the Georgia governor’s website says: ‘Payday loans have become a multibillion dollar industry in recent years. Nevertheless, it is illegal in Georgia to make a payday loan.

‘(The) law authorizes felony and racketeering charges against violators, as well as fines of up to $25,000 per violation and a possible jail sentence of 25 years.’

The risks of similar legislation in Britain is reflected in the annual report of Texas-based Cash America International Inc, owners of one of the biggest UK payday lending firms. CashEuroNetUK, which trades as QuickQuid and Pounds To Pocket, and advertises interest rates of 1,734% APR.

In Texas the state senate has been pushing for new laws that would put limits on payday and short-term loan firms charging interest rates of 1,000%.

The latest proposal would limit customers to one payday loan at a time. The size of the loans would also be limited by their monthly income and the loan could only be renewed four times.

With the UK operation generating revenues of £198m, Cash America warned its shareholders: ‘If prescriptive regulations are adopted  (in the UK) the Company’s compliance costs will be significantly increased’.

RBS and Lloyds did not respond to the Bureau’s questions.

Copy changed after publication to include a response from Barclays bank.