Credit unions ‘good value for money’ but must be easier to access, survey says

Three times as many consumers have turned to payday loans or doorstep lenders rather than credit unions, despite considering the high-cost borrowing rates to be worse value for money, according to a new survey.

In research published on Monday, one in 20 people surveyed by Scape Group, a public-sector procurement specialist, and the Association of British Credit Unions (Abcul), said they had taken short-term loans from payday firms, while the same proportion had borrowed from doorstep lenders to make ends meet. In contrast, just 3% had used credit unions.

Credit unions offer savings accounts and loans, typically to people in a small geographical area. Borrowing is normally far cheaper than that available from a commercial lender, and in 2013 the Archbishop of Canterbury said he wanted to compete Wonga out of existence by offering loans through a church credit union.

However, the survey suggests that positive publicity for credit unions in recent years has convinced consumers that they make financial sense. Of those questioned, 41% said credit unions were good value for money, compared with only 1% who said the same of doorstep lenders and 2% who saw payday loans as being good value.

While take-up was low, 62% said they would use credit unions if accessing them was easier. Abcul is working on how to make credit unions more accessible through online and mobile channels and via payroll deduction schemes – the sort of innovation it said had led to the growth of credit unions in the US, where membership has passed 100 million people and there are now $1.2tn (£773bn) of assets under management.

Mark Robinson, chief executive at Scape Group, said: “It is worrying that people have turned to payday lenders who can charge over 2,000% APR and technically legal doorstep ‘loan sharks’ whose fees and methods are exorbitantly higher, rather than seek alternative finance such as in the form of credit unions.

“Equally, we are concerned that even though the recession has ended and the UK economy is growing, people are still having to rely on borrowing money from their friends and family, and are not in a position to save for when the going gets tough.”

The chief executive of Abcul, Mark Lyonette, said he wanted employers to make credit union membership an easier option for staff. “The most successful credit unions in the world have strong links with employers who allow staff to save and repay loans through payroll deduction. In fact in some places, credit union membership is seen as a fairly standard employee benefit,” he said.

However, a regulatory clampdown on the payday loans sector – led by a cap on the overall cost of loans – appears to be benefitting vulnerable borrowers. Citizens Advice said that the number of complaints it had received over payday loans had nearly halved since last year. The rights organisation said it helped with 5,554 payday loan problems across England and Wales from January to March 2015, marking a fall of 45% on the same period in 2014, when 10,155 problems were reported.

Payday lender Cash Genie faces £20m compensation bill

Payday lender Cash Genie has been landed with a £20m compensation bill after engaging in “unfair” practices.

The firm, which offered short-term loans at an annual interest rate of 2,986%, will be compensating 92,000 customers who lost out as a result of its “serious failings”, the Financial Conduct Authority (FCA) said.

The regulator added that it was disappointingthat examples of poor practice in the payday loans sector kept emerging.

Cash Genie, which is registered under Ariste Holding Limited, ceased all lending in September 2014. It has reviewed its past business practices and has agreed to pay £10m in redress to customers. It has already voluntarily written off £10.3m of fees and interest.

According to the FCA, the firm’s failings included:

• Charging fees and interest that were “unfair”. For example, it charged £50 to transfer customers to its sister debt collection firm, Twyford Developments (trading as Carter Forbes) even though it incurred no extra costs. In other cases, Cash Genie charged fees that it was not entitled to under its customer contracts.

• Using bank account information that customers had provided to other websites owned by Ariste Holding Limited – such as Txtmecash and Paydayiseveryday – to take payment for existing Cash Genie loans without customers’ informed consent. Many customers were encouraged to apply to these websites for loans and hand over their banking details “under the false pretence” that the loan had been pre-approved.

• Rolling over or refinancing loans without customers’ explicit request or consent, and without carrying out proper checks of customers’ financial situations.

• Failing to send annual statements to customers who had not paid back their loans after 12 months, which meant the firm should not have imposed further fees or interest to people’s accounts.

The redress package agreed with the FCA will see Cash Genie write off or refund fees and charges that should not have been imposed. It will also write off or refund interest where the firm rolled over loans inappropriately, and refund payments taken without permission. In addition, it has agreed to write off or refund interest and fees added to accounts after the point at which it should have sent out an annual statement.

Customers do not need to take any action, and Cash Genie aims to contact all affected customers by 18 September 2015.

On its website, Cash Genie said: “We are committed to putting things right for any of our customers who have been affected by one or more of these issues, both those who currently have an open account and past customers whose account has now closed. We have therefore agreed a redress scheme with the FCA. Customers who were affected by any of these issues will either have the amount they owe to Cash Genie reduced, or will receive a cash payment. In some cases, customers will receive both a reduction in the amount they owe and a cash payment.”

In June 2014, the UK’s biggest payday lender, Wonga, was forced to pay £2.6m in compensation to customers who were overcharged or sent threatening letters from fake law firms. The following month, another payday lender, The Money Shop, agreed to repay £700,000 to customers it had given short-term loans to against its own lending policy.