Payday loans in Scotland: a new 'Fast Track Debt Arrangement Scheme' to help consumers? 1.

Payday lending is usury lending (typically at rates of interest equivalent of 3,000 to 5,000 APR), which often entraps consumers in cycles of debt, with roll over lending from month to month. Arguably there is significant missellingtaking place. And evidence of significant consumer detriment; certainly from our casework experience. There is no apparent appetite for UK law reform at present, only self-regulatory codes of practice.

2. Consumer credit law is a reserved power under the Scotland Act 1998, but debt is not. Scotland could introduce a Fast Track Debt Arrangement Scheme for payday lending whereby impecunious consumers entrapped in roll-over payday loans could get out of them quickly, and speedily by fairly repaying the sum borrowed with interest re-set at an equivalent of 8% per annum as part of a new fast track or mini DAS. A condition of entry could be taking free financial and money advice and access to a credit union.

3. At present the DAS (made under the Debt Arrangement and Attachment (Scotland) Act 2002) requires all debts to be paid via the agreed Debt Payment Programme. It generally takes 2-3 months to set up a DPP with all creditors and such schemes often run for several years, sometimes 5 to 10. The current DAS is essentially a form of debt relief, but with much less negative consequences than bankruptcy as debtors pay back a much large proportion of the debt.

4. How might we help debtors in Scotland trapped in unaffordable payday loans? A targeted Fast Track DAS (FTDAS) could enable Scottish consumers to repay one or several payday loans within parameters designed to keep to the fast, restricted and targeted nature of the proposed scheme. In effect we need a more flexible mini scheme to deal with the problem of usury rate short term loans. The definition of debt could cover short term unsecured loans with an equivalent APR in excess of 500% APR, for example. We could set a maximum threshold of 5,000 for the debts to go into a FTDAS, and a requirement for the principal sums borrowed to be repaid within 24 months.

5. Applying to the FTDAS would have the benefit of resetting interest and any rolled up charges at the judicial rate of 8% APR. This would enable the actual sums borrowed to be repaid fairly. We would need to have a scheme register, and a restriction on the consumer from taking out other payday loans during the repayment period, and perhaps a requirement for the applicant to undertake free financial management and money advice, and be given credit union details etc., 6. The FTDAS could mirror other aspects of the current DAS a right of appeal to the Sheriff Court to ensure ECHR compliance, on prescribed grounds. But it would be targeted on usury rate interest loans in Scotland, and ultimately we could create a

device which prevented companies from exploiting vulnerable consumers, because they would not be unable to profit from usury rates of interest and/or rolled up charges.

7. There is an argument to say the enabling powers in sections 7 and 7A of the 2002 Act (as amended) are sufficiently wide to enable the Scottish Ministers to create a sub-species (or sub-category) of DAS for payday lending debts without primary legislation (section 7(3) permits different regulations for different types of debts, and section 7A enables flexible debt relief). If that were so, Scottish Ministers could have a scheme up and running relatively quickly in Scotland by way of secondary legislation, on the back of existing DAS infrastructure, but targeted at payday loans under a fast track mini-Scheme. 8. GLC would welcome your thoughts and comments: you can leave these below or e-mail m@govanlc.com Questions: 1. Have you any concerns about payday lending in Scotland? (if so, do you have any evidence of consumer detriment either as a customer or an advisor?) 2. Would you support or oppose the introduction of a fast track DAS targeted at payday loans? 3. What other solutions ought the Scottish Government be considering to assist financially vulnerable consumers in Scotland who regulary take out usury rate interest payday loans? Mike Dailly Principal Solicitor Govan Law Centre Glasgow 4 September 2012