Loan Sharks v. Short‐term Lenders: How Do the Law and Regulators Draw the Line?
| Date | 01 September 2013 |
| Published date | 01 September 2013 |
| DOI | http://doi.org/10.1111/j.1467-6478.2013.00633.x |
| Author | Abdul Karim Aldohni |
JOURNAL OF LAW AND SOCIETY
VOLUME 40, NUMBER 3, SEPTEMBER 2013
ISSN: 0263-323X, pp. 420±49
Loan Sharks v. Short-term Lenders: How Do the Law and
Regulators Draw the Line?
Abdul Karim Aldohni*
With the Office of Fair Trading (OFT) having just published its
`comprehensive review' of some aspects of the business of short-term
lenders, this article examines the phenomenon of short-term lenders. It
draws on the legal and conceptual changes in the United Kingdom's
consumer credit sector that have aided their proliferation. It argues
that short-term lenders in their current form are no different from loan
sharks and that the current legal and regulatory framework has failed
to provide the required protection for vulnerable credit consumers. It
highlights how the United Kingdom's legal approach to consumer
protection has been to the detriment of short-term borrowers.
INTRODUCTION
With credit becoming less accessible and banks becoming more stringent
with their lending strategies, there has been a proliferation in the number of
short-term lenders or payday loan providers (which represent one aspect of
the business of sub-prime lending
1
). They specialize in offering `quick cash'
or a `quick loan'. Increasingly, different media platforms (websites, radio
stations, and TV channels) have been advertising for the like of these
420
ß2013 The Author. Journal of Law and Society ß2013 Cardiff University Law School. Published by Blackwell Publishing
Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
*Newcastle Law School, Newcastle University, Newcastle upon Tyne NE1
7RU, England
a.k.aldohni@ncl.ac.uk
I would like to thank the anonymous referees for their helpful comments and I am very
grateful to Dr Alison Dunn for her thorough and invaluable feedback on many drafts of
this article. The information herein was up-to-date on 14 July 2013.
1 There are two types of sub-prime lending: short-term unsecured loans and sub-
prime mortgage lending. This article uses sub-prime lending to refer only to the
former, and on the basis of the FSA's description of sub-prime lenders (see n. 33
below), the term is loosely used to include short-term lenders and payday loan
providers.
lenders, such as wonga.com and quickquid.co.uk, where the promise is
simply easy access to credit without the complications of credit history.
However, this rare act of generosity does not come cheap as the repre-
sentative Annual Percentage Rate (APR) is, on some occasions, soaring over
4000 per cent. This APR calculation factors certain variants in the total cost
of credit including the interest rate and other payable charges. However, it
does not include default charges.
2
It is expected that the majority of those
who are prepared to pay such extortionate rates are generally with limited
access to mainstream lending and have a poor credit history. According to
the Office of Fair Trading (OFT) such characteristics are mostly associated
with consumers who are described as vulnerable.
3
It has been argued that
vulnerability of consumers should be viewed from two perspectives: first,
when they are compared with the service provider and second when they are
compared with other consumers.
4
In general, vulner able consumers ar e `those who are partic ularly
susceptible to loss or harm'.
5
In the context of consumer credit, consumers'
susceptibility to `loss or harm'
6
could be due to a number of factors such as
the lack of information before making their credit decision (information
vulnerability) or the lack of options (supply vulnerability).
7
Historically, the shortage of credit was part of the reality of a large
segment of the working class in the United Kingdom. In the eighteenth
century, in addition to street lenders, some basic credit facilities were
invented at community level to serve this particular group. By the time many
additional modes of consumer credit emerged in the nineteenth century ±
such as pawnbroking, mail order, hire purchase, credit drapers and check
traders ± consumer credit was already extensive in the working-class
community.
8
Despite many concerns over the nature of its business and its
morality, pawnbroking had particularly flourished during the nineteenth
century accommodating the credit needs of the working class.
9
421
2 The Consumer Credit (Total Charges for Credit) Regulations 2010 (S.I. 2010/1011),
para. 4 [5a] and para. 6.
3 Office of Fair Trading (OFT), Vulnerable Consumers and Financial Services: the
Report of the Director General's Enquiry (1999) 13. The meaning of vulnerability
in the context of consumer credit will be explored in detail later.
4 P. Cartwright, `The Vulnerable Consumer of Financial Services: Law, Policy and
Regu lat ion ', at < htt p:/ /www .no tti ngh am. ac. uk/b usi nes s/f oru m/d ocum ent s/
researchreports/paper78.pdf>. Cartwright suggests that concern over fairness is at
the heart of the vulnerability discussion (p. 16).
5 id.
6 id.
7 id., p. 17.
8 S. O'Connell and C. Reid, `Working-Class Consumer Credit in the UK, 1925±60:
The Role of the Check Trader' (2005) LVIII Economic History Rev. 378, at 378.
9 M. Tebbutt, Making Ends Meet, Pawnbroking and Working Class Credit (1983)
115±17.
ß2013 The Author. Journal of Law and Society ß2013 Cardiff University Law School
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