Q&A: Payday loans

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Payday lenders have faced criticism from all angles in recent months.

Insolvency experts predict that more people who are short of money are going to turn to payday lenders – who can be found on the High Street and the internet – for a short-term loan.

Some debt charities and consumer groups have warned that such lenders can lure the unwary into taking on debt that balloons out of control.

An official study in 2010 said they provided a legitimate, useful, service that helped to cover a gap in the market.

But in early 2013, the Office of Fair Trading said that there was widespread irresponsible lending in the industry.

How do payday loans work?

Typically someone will borrow a few hundred pounds from a payday loan firm for a short time, to tide them over until they receive their next wage or salary cheque.

The borrower will usually offer a post-dated cheque to the lender to cover the eventual repayment of the money borrowed, plus interest.

The cash is often emergency borrowing to pay an urgent unexpected bill, or rent or utility bills.

How many people use them?

There are no official figures on how many people use this sort of borrowing.

But Consumer Focus estimated last year that 1.2 million people took out 4.1 million loans in 2009.

In 2008, £900m was was taken out in the form of payday loans, according to the Office of Fair Trading in a formal review of all “high-cost” credit businesses in 2010.

But it said the value of the loans was growing rapidly.

As a result of its most recent inquiries, which led to an interim report in November 2012, the OFT thinks that as much as £1.8bn a year may now be being lent by payday lenders.

The Public Accounts Committee (PAC) said that about two million people in the UK used payday loans.

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Insolvencies rising among women

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An astonishing rise in insolvencies among women in England and Wales will see their financial failure rate overtake men for the first time, new research has found.

The Debt Advice Foundation said women accounted for 49% of personal insolvencies in 2011, up from 30% a decade previously.

The charity said analysis of trends in Insolvency Service data revealed that rate would remain broadly equal in 2012, with women projected to outstrip their male counterparts in 2013.

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‘Pensions liberation’ company on brink of insolvency

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A company which offers to unlock pensions for a fee – is on the brink of a formal insolvency arrangement.

Freedom Capital Partners Limited is poised to enter a Company Voluntary Liquidation (CVL) on 11 June, subject to a creditors meeting, Insolvency News can reveal.

Freedom Capital Partners has been the subject of significant press interest following allegations of high transfer fees for permitting pension scheme holders early access to their fund.

Taking money from a pension before age of 55 remains subject to a tax charge of 55% as it is deemed an ‘unauthorised payment’.

Today, a spokesman for insolvency firm CMB Partnership confirmed it is preparing documents with a view to a CVLbeing passed at the meeting of creditors at 23 Ely Place, London on 11 June.

The news comes just days after the City of London police announced that it had arrested three people and seized computers and documents from a call centre in relation to pension liberation activity. Police Scotland and SOCA also confirmed two arrests in Ayr and Glasgow.

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Record numbers of empty shops

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Empty shops in the UK high streets and shopping centres now account for 11.9% of all sites – the highest since records began.

The figures for April 2013 are up from 10.9% in January when the last survey was conducted for the British Retail Consortium (BRC) in January.

Retailer insolvencies which left gaping holes in the UK’s shopping centres led to a drop in footfall of 3% in April, while high streets witnessed a sharp increase in shopper numbers – up 3.4%.

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Dr Vince Cable gives his view on the insolvency profession

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The importance of the insolvency industry has been highlighted in recent months, following the failure of several high profile companies in the UK. The responsibility to make sure that companies were rescued where possible, and those that became insolvent fulfilled their obligations to their creditors and consumers, fell upon insolvency practitioners (IPs). IPs had to carry out this work in the full glare of public scrutiny and deliver what were sometimes difficult results.
This and other less high profile, but nevertheless essential, work carried out by IPs is not easy. The work of the insolvency industry has never been more crucial than it is now, as businesses face a very difficult business environment.
The UK has become one of the key jurisdictions in the world for business rescue, as is reflected by consistently being in the World Bank’s top ten ranking of countries to resolve insolvency. The strength of our insolvency regime is a positive for UK Plc.
The Government, through The Insolvency Service, is always considering ways to make the insolvency regime even more robust. We win disqualifications against around 100 rogue directors every month. Every disqualified director represents a £85,000 saving made from preventing future financial harm to the public.
The efficiency with which practitioners turn around detailed D1 reports should also be noted. In a profession with 1,700 members, there will obviously be a variation in the quality of these reports but The Insolvency Service continues to work withh practitioners to spread good practice and improve the quality of these reports. The evidence they provide forms the basis of every investigation carried out by The Insolvency Service that ends in an eventual disqualification.
None of this essential work would be possible without IPs.
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“Balance sheet insolvency test” questioned by Supreme Court

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The UK Supreme Court has delivered a significant ruling on the issue of balance sheet insolvency tests within insolvency court cases.

The ruling upheld a decision by the Court of Appeal (March 2011) in BNY Corporate Trustee Services v Eurosail UK that the existence of a deficit between assets and liabilities was not in itself sufficient reason to declare a firm insolvent.

Oliver Glynn-Jones, finance dispute resolution partner at BLP LLP, representing Eurosail in the case, warns of the implications that the ruling may have on future insolvency cases.

He explains: “The Supreme Court’s judgment that a court must approach the question of balance sheet insolvency with caution and that the onus is on a petitioning party to demonstrate on the balance of probabilities that there will be insufficient assets to meet liabilities is likely to deter some parties from petitioning on this basis.”
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Travel boss banned for 15 years

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The director of a holiday company has received a 15-year director disqualification – the maximum length of disqualification – following an investigation by the Insolvency Service.

Abdulkadir Aydin, director of Goldtrail Travel Limited, was banned for gross mismanagement of company affairs.

David Brooks, a chief examiner for the Insolvency Service, said: “It is unacceptable that company directors should seek to put their own financial interests above their duty to the company and its customers who have handed over their hard-earned money to pay for their holidays.”

Goldtrail went into administration in July 2010, with debts of approximately £2,324,000. Over 23,000 holidaymakers were stranded abroad and 110,000 prospective holidays were also cancelled as a result.

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Insolvencies at new five-year low

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The number of people becoming insolvent has fallen to its lowest level for five years, according to government figures.

In the first quarter of 2013, 25,000 people in England and Wales were granted insolvency, a fall of 12.9% on the same quarter in 2012.

That is the lowest figure reported by the Insolvency Service since the beginning of 2008.

Company liquidations also continued to fall to levels last seen five years ago.

They were down by 15.8% in the first three months of 2013, as compared with the same period in 2012.

Official figures for Scotland suggest conditions there are improving even faster than in the rest of the UK.

Two weeks ago, it was announced that personal insolvencies in Scotland had fallen by 28%, while company insolvencies there are down by 22%.

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