Can credit scores make payday lending ethical?

Payday lenders need to work harder to not target vulnerable borrowers.

A new report (pdf) by Damon Gibbons, published in partnership by Friends Provident and the Centre for Responsible Credit, looks at the benefits of credit data sharing and raises another possible solution to the problem of irresponsible lenders targeting the financially vulnerable.

It might be a surprise that credit scoring is not standard procedure for high-cost lenders on the high street and online. But most of us are familiar with payday lenders' adverts promising easy cash with no credit checks. The speed with which hard-up borrowers can obtain very expensive loans does have consequences, and making data sharing a priority would start to set this problem straight.

What does credit scoring and data sharing involve?

Credit scoring, simply put, is the system financial institutions have in place to check whether a person is said to be creditworthy before assessing a loan application. The system, regulated by the Financial Services Authority, works on a points system and is often shared with credit reference agencies. If a person's points score is deemed high enough then their loan application will generally be accepted; otherwise, that loan application can be denied.

How it can benefit responsible lending?

The Office for Fair Trading's guidance to lenders on responsible lending states that a creditor must consider whether a credit commitment will adversely impact upon an individual's financial situation. Ideally, credit scoring and data sharing can help lenders adhere to those guidelines. They will finally have a database to look at which will give them some indication of whether a loan of a particular amount, say, will be beneficial to them or impact negatively on their financial situation.

What bad behaviour it can stop?

At the moment there is no law stopping a payday lender from lending large sums of money, at expensive rates of interest, to low income consumers. There is only guidance to do this, and we know that this is not always adhered to. While we know payday lenders profit from repeat customers, and that only between 50 and 60 per cent of loans from payday lenders are notified with credit reference agencies, even some in the industry say that moving to a culture of data sharing would ensure that the risks attached to lending money are reduced, as well as some of the front end costs.

What are the risks?

The big risk is that credit scores could make it more difficult for a person to obtain credit.

The government, on this, have said that while they appreciate the need for credit scoring, they do take into consideration the “unintended consequences”, such as to those with no, or "thin", credit rating struggling to get loans.

However in addition to better quality lending decisions, it would be worthwhile for mainstream credit providers to be less needlessly risk averse when considering overdraft and credit applications to low income customers who may otherwise rely on a high cost payday lender, where the average loan can cost around £30 per £100 borrowed.

What policy makers should do

Two things: set criteria for what is meant by responsible lending, such as setting a minimum level of disposable income a borrower is left with after taking on a loan; and oblige lenders to refer high risk customers to credit unions, where they can receive budget management advice and borrow money at far cheaper prices.

Furthermore, payday lenders should be obliged to implement a system of five roll-over loans per customer. Credit checks will provide the data for customers who reach this point.

Credit scoring and data sharing, implemented properly, can be the lifeline borrowers need at a time when personal debt is growing and the payday lending sector is seeing its profits soar.

Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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Why there are fewer free-range eggs on sale right now

Because of restrictions designed to combat avian flu, some farms are losing their free-range status. Should consumers accept barn birds for now?

“How do you like your eggs,” asks the terrible chat-up line, “fried or fertilised?” But caged, barn, free-range or organic is the tougher choice faced by many. And come March the decision could get more complex still - as measures taken to combat the recent outbreak of avian flu begin to bite.

An H5N8 strain of flu has been identified across a number of UK and European farms this winter, and in response the government ordered all poultry to be kept indoors. But under EU regulations on classification, any hen kept inside for more than 12 weeks loses its "free range" status. Many consumers prefer free-range eggs for their higher welfare potential - so farmers fear losing business along with their label.

The 12-week limit has been reached today. After that, what happens next depends on whether farmers are working in a higher or lower risk area, as identified by the Department for Food and Rural Affairs on this interactive map. Those at higher risk must either cover their outdoor space with expensive netting or keep their hens indoors.

Those in lower risk areas may let their hens outside under supervision. But even then, producers are fearful of letting their hens outside and potentially exposing them to the flu. “It would finish us off if we got it,” says Susie Macmillian of Macs farm, “we’d lose all our wholesale customers – and I’m absolutely terrified about it."

The British Egg Industry Council (BEIC) has thus ruled that all commercial boxes of free-range eggs must now carry stickers explaining that the hens have been housed indoors, regardless of what risk area they came from.

So what can consumers do to help? For Phil Brooke from Compassion in World Farming, it is vital that consumers temporarily put aside concerns about keeping hens indoors in order to support free-range and organic producers through this tricky time.

“In the short run these farmers need supporting - whether they call their eggs barn-produced or free-range,” says Brooke. “If people stop buying the eggs because they think the hens are being shut inside, then the farmers are going to have to kill the flocks. And you may end up without the free-range market”.

Continuing to buy these newly labelled eggs will therefore help tide the industry over this present crisis. But the scramble to explain the flu crisis to consumers is also showing up the sector’s wider cracks. "Free-range systems have the greatest potential to provide high welfare conditions for hens, but this potential is not always achieved,” says Professor Christine Nicol from the University of Bristol. 

Cage-free brands thus compete to attract consumer attention with promises of various welfare add-ons – from “woodland” egg to “happy” hens. But what difference do these provisions really make to a hen’s wellbeing? And are the big brands really best placed to decide?

Pressure to save on costs is also pushing some free-range and organic producers into ever larger economies of scale, says Susie Macmillian. And while the UK’s major retailers have committed to becoming cage free by 2025, they have not yet specified what will replace caged eggs as the value option.

Taken together, these trends suggest an urgent need for new ways of evaluating hen wellbeing.

EU categories currently divide eggs into four levels -  colony (caged), barn-produced, free-range and organic - and each level entails higher welfare standards than the last.  With free-range hens, for instance, there must be no more than nine birds in a square metre, while for organic hens it is no more than six.

But what about hens who enjoy roomier conditions but not the organic diet? At present there is no independently certified "free-range plus" to help distinguish such cases. The RSPCA Assured label (previously known as freedom Foods) ensures that hens' welfare has met standards above the legal minimum. Yet in an effort to help lift all hens out of the caged-sector, it is also very inclusive. In fact it currently covers almost all of the non-caged market.

Yet a sunny-side is in sight for further independent certification.  The Soil Association has already added an extra layer of conditions that organic producers must meet to gain its seal of approval: from free-range conditions for pullets (young hens), to smaller colony sizes, more pop-holes, and a ban on beak tipping. And some European welfare bodies have introduced new, multi-tiered systems of independent assessment across the cage-free spectrum. In Holland, the Dutch Society for the Protection of Animals awards its “Beter Leven” (Better Life) seal on a rising scale of one to three stars.

So could a similar system be introduced for UK free-range?  The RSPCA is not currently considering tiering its mark but the possibility for further differentiation in the future does exist. The RSPCA already conducts “welfare outcome assessments,” says Mia Fernyhough, who writes the RSPCA’s standards for laying hens. These take into account indicators of birds’ comfort  – such as their levels of feather cover - and allow assesors to place each individual farm on a sliding scale of success.

More streaming within free-range could also benefit farmers. According to Ben Pike of Bfrepa, the British Free Range Egg Producers Association, producers fear that if free-range becomes the norm, they will lose the small price differentiation that has kept them afloat.

The present flu crisis is expected to recede by April, and when it does the biggest welfare gap will still be between caged and non-caged hens. But if consumers are to help British egg prodcution continue to improve in sickness and in health, then more ambitious independent certification should be top of the pecking order.

India Bourke is an environment writer and editorial assistant at the New Statesman.