Jeff Salway: Lenders exploit payment system

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THEY are fast becoming a key weapon in the payday lending armoury, making it easier for unscrupulous firms to exploit struggling borrowers.

Continuous Payment Authorities (CPAs) are similar to direct debits and standing orders and sound harmless enough. But payday lenders have been accused of exploiting CPAs, prompting calls for a crackdown on their usage.

CPAs are used by businesses including lenders and mobile phone providers to collect recurring payments from customers. Used properly they are a fair mechanism, working like direct debits to enable money to be taken from the customer’s account.

There’s a big catch, however: they don’t give consumers the same guarantees as other repayment methods. If there’s a mistake with a direct debit, for example, such as an unauthorised transaction, you are protected by rules that oblige your bank or building society to refund you. Under CPAs there is no such obligation.

Keith Dryburgh, policy manager at Citizens Advice Scotland, said: “Our advisers often see people who have taken out a loan and have ticked a box to consent to pay by CPA, without realising the implications. The problem comes when the company then takes money from your bank account without your permission, often without even notifying you.”

Thousands of borrowers have discovered to their cost that CPAs don’t give them the protection of other arrangements, fuelling calls for regulatory action and forcing the Office of Fair Trading to issue new guidelines on their use.

Problems with CPAs are “rife”, according to Sharon Bell, head of StepChange Scotland, the debt charity.

“We have seen numerous examples of poor practice by payday lenders, including instances where money has been taken from people’s accounts, leaving them unable to cover food and housing costs.

“We also have evidence of lenders continuing to take unauthorised payments right up to the present day.”

Some payday lenders have used CPAs to take payments from borrowers even after they have repaid their loan and interest, according to both StepChange and Citizens Advice Scotland. That can trigger bank charges for going further into overdraft and for missing other repayments.

The problem facing those borrowers can be exacerbated by banks refusing requests to cancel recurring and unauthorised payments.

Banks and building societies are bound by payment services regulations under which they must cancel any regular payment at the customer’s request, whether it’s a CPA, direct debit or standing order.

However, charities and consumer groups are reporting that some banks are breaching those rules: failing to stop payments unless they get permission from the company involved, putting their customers at risk of deeper debt problems.

The issue of CPAs has emerged with the boom in payday lending. The number of Scots going to StepChange for help with payday loans has increased fivefold in just two years. The amount owed to payday lenders by debtors in Scotland almost hit the £2 million mark last year, with an average debt of £1,665 – 31 per cent higher than the monthly net income of the average StepChange client.

An OFT crackdown launched earlier this month gave firms 12 weeks to clean their act up or face having their licences revoked. Its move followed a study that found “deep-rooted” problems in the sector which could see it referred to the Competition Commission.

But consumer protection remains limited, as payday lenders aren’t regulated by the Financial Services Authority. That changes in April 2014 when the Financial Conduct Authority – which replaces the FSA next month – assumes responsibility for consumer credit, giving it the power to ban payday lenders and impose fines.

For many of the growing number of Scots taking out payday loans, however, that will be too late – especially when it comes to CPAs.

So how can you avoid CPAs? The biggest step you can take is at the outset, by making sure you know what you’re signing up to before you pass on your bank details. Many people taking out payday loans tick the box that gives consent for the lenders to use a CPA without realising the implications.

If you can, use a direct debit, standing order or even opt to pay manually by cash or cheque.

Once you have consented for a CPA to be used, you are allowing the lender to take regular payments from your account. Make sure you agree the payment amounts, when the money should be taken and how often. Clarify that the agreement gives you a right to cancel the CPA without penalty.

Make a note of the time and date that you make any cancellation request, as well as the name of the person you spoke to.

“Anyone struggling to make a payday loan payment should cancel it as soon as possible by contacting both their lender and bank,” said Bell at StepChange.

“Anyone worried about meeting a payment, or thinking of taking one debt out to meet another, should seek free debt advice immediately.”

The charity’s website has a template letter for cancelling a CPA at


A Glasgow mother of two discovered the hard way just how much damage payday lenders can do when using CPAs to take money from borrowers’ accounts.

Michelle*, a 33-year-old pupil support assistant, has so far had £550 taken from her account to repay a £300 payday loan she took out last October.

Yet Michelle, who took the loan to ease cashflow problems while on a career break to look after her three-year-old daughter, discovered to her surprise last week that she still has almost £350 to pay off.

The lender used a CPA to take five payments ranging from £99.60 to £117 out of her bank account between November and December. On learning how much more had to be repaid, Michelle contacted the lender for an explanation.

“I requested a transaction sheet and the amounts on there are completely different to the ones on my bank statement,” she claimed. “The money has been coming out of my account but the figures I owed weren’t coming down.”

Michelle then contacted debt charity StepChange Scotland.

“I haven’t got the money to repay the rest and it’s getting bigger each month,” she said. “I tried to cancel the CPA and have the interest frozen but they refused. Only when StepChange helped me did they cancel it.”

* Fictional name used by request