SafetyNet Credit (SNC) temporarily stopped lending this week for a few days. Customers were told on 13 July 2022 by email:
SafetyNet has in recent weeks been paying close attention to the significant changes we have seen in customer behaviour as a result of the current cost of living crisis. As a result of this and following engagement with the FCA we have decided to temporarily stop all lending until further notice.
That makes it sound as though SafetyNet Credit made this decision… but it probably had little choice. The day before, the Financial Conduct Authority imposed major new restrictions on Indigo Michael, the company that owns the SafetyNet Credit brand.
UPDATE on 15 July customers were told that lending had restarted.
So what is the background to this? And what should you do if you are a customer?
In this article, I just talk about SafetyNet Credit, but similar points also apply to Tappily, the other much smaller brand that Indigo Michael operates.
How SafetyNet Credit’s lending works
SNC gives you a credit limit which can borrow up to, a bit like a credit card. This is called “rolling credit” – it isn’t a loan you repay then have to apply for another loan. If you have a limit of £500 and withdraw £400 then repay that, you can immediately take out up to £500 again.
SNC takes repayments through a Continuous Payment Authority (CPA) – they come straight out of your bank account.
Where SNC is totally unlike a credit card is that they choose the repayment they will take from you, after looking at how much is in your bank account using Open Banking.
Although there is a minimum payment set, SNC actually takes as much money as it can, saying this is to minimise the interest someone pays. So often they take back the full amount owed, with the result that the borrower is left with so little money that they have to borrow again from SNC. The new FCA restrictions will limit this in some cases.
That is the classic payday loan trap.
Very expensive borrowing
SafetyNet Credit’s APR doesn’t give the true picture
SafetyNet Credit says:
interest is charged at 0.8% per day only on any amounts you borrow, capped at 40 days. No extra costs, no hidden charges.
0.8% per day interest rate is the maximum rate a payday lender can charge. And payday lenders quote APRs of 900% or more.
But SNC quotes a representative rate of 68.7% APR. In practice that it is quite misleading as most people will pay a lot more.
It seems that in calculating that APR, SNC assumes that the borrowing is repaid within 40 days and that you do not borrow anymore. But that isn’t what happens.
An Ombudsman describes why this is not cheap
In this example, over a period of just under 3 years, Mr P borrowed a total of £37,000 and repaid just over £41,000. SNC told the Ombudsman this was cheap borrowing.
A loan of £37,000 repaid in 3 years for £41,000 would have been pretty cheap credit. But as the Ombudsman said:
I think it’s somewhat misleading to use a figure of £37,000 in any interest comparison as Mr P never had access to £37,000 from SNC. He only ever had access to a maximum of £800 and, in reality, most of the £37,000 SNC has referred to went back and forth between Mr P’s account and SNC.
The Ombudsman’s conclusion was:
SNC collecting Mr P’s payments in the way that it did meant that Mr P paid a high amount of interest for access to a relatively small amount of funds… in reality the amount of interest paid in proportion to the funds Mr P had available is very similar to interest payable on a high-cost short-term credit product [the regulator’s term for a payday loan].
The only difference here of course is that the effect of SNC collecting payments and then providing drawdowns in this way is that it managed to keep this arrangement going for three years, which is something that a high-cost short-term provider wouldn’t be able to do on a single agreement.
How does this compare to an overdraft?
NatWest’s calculator says the monthly cost of a £600 arranged overdraft used for 31 days is £17.20. That overdraft used everyday for 3 years would cost £619.
Mr P paid £3,883 over that period to SNC for an average balance of £600. So it was massively more expensive than an overdraft.
That is not what anyone would expect if they looked at NatWest’s overdraft APR of 39.49% and compared it to SNC’s representative APR of 68.7%. Debt Hacker estimated the true interest rate in Mr P’s case at 942%.
SafetyNet Credit – losing a LOT of cases at the Ombudsman
I have been saying for several years that affordability complaints against SNC are some of the easiest complaints to win:
- SNC could see what was in your bank account so it should have spotted if you were in difficulty;
- repeat borrowing most months suggests that you are not using the facility for a one-off need, but have become dependent on it.
The statistics from the Financial Ombudsman back this up, with Indigo Michael losing 72% of cases in the second half of 2021.
A responsible business losing such a dramatically large percentage of cases would do what the FCA’s DISP 1.3.3 rule says and:
put in place appropriate management controls and take reasonable steps to ensure that in handling complaints it identifies and remedies any recurring or systemic problems.
Instead, it seems that SNC’s response has been to object to the claims from claims management companies. The Ombudsman has dismissed these objections, with the following wording being used in several complaints:
I’m not persuaded there is any reason why the Financial Ombudsman can’t consider this complaint. It is disappointing that SNC has taken the stance that it has in relation to this particular jurisdiction issue considering that, in my view, it is patently incorrect and is therefore simply delaying the resolution of this complaint.
The new FCA restrictions
The FCA has brought in 7 new restrictions on SafetyNet Credit.
My summary of these is:
- when setting a credit limit, SNC must assume the full repayment will be taken and check that the lending would be affordable if this is done.
- SNC must not use a CPA to take repayments where there are insufficient funds in the account or taking the payment would leave insufficient funds for priority debts or other essential living expenses, leading to the customer borrowing further from SNC or another firm, or entering their overdraft facility to meet such expenses.
- SNC must explain to customers how its use of CPA is changing.
- where a customer may miss a minimum repayment, SNC should contact the customer explaining why the CPA has not been used and invite them to make a payment or offer to freeze interest and accept a lower payment.
- stop objecting to complaints brought by claims companies unless it has specific evidence to support this.
What should SNC customers do?
If you currently owe a balance
The first email from SNC explained that it has paused taking any payments from your bank account. It pointed out that you can make a payment to them manually to minimise the interest that is being added.
But from 15 July, SNC has restarted not just lending but also taking money from your account. SNC says:
Repayment will still be made using Continuous Payment Authority (CPA) but will now be capped against new affordability criteria. Customers who wish to pay more than the sum restricted by cap will be able to do so via the product dashboard.
If you can simply clear your current balance and not be left so short that you have to borrow again from some other lender, then that is your best option.
Clear the account and close it is my suggestion!
What is important is that SNC interest is “capped” – after 40 days no further interest will be added.
So if you cannot afford to clear the whole balance now, you do not need to worry about huge amounts of interest being added every month – after 40 days it becomes interest-free from that point.
If you are struggling to pay your bills and essential expenses at the moment, read Can’t pay your bills & debts? What help can you get? and talk to a debt adviser about your options. Expensive credit such as SafetyNet Credit may get you through to the next month, but it isn’t helping you clear your debts.
Consider an affordability complaint now
If you have borrowed repeatedly from SNC for more than a few months then you should consider making an affordability complaint. This applies if you still have an active account, if a balance is being paid in a debt management plan or you no longer owe anything.
If you win this, you will get a refund of some of the interest you have paid.
You don’t have to use a claims company to do this. You can treat it as a payday loan complaint and use the free template letter here.
SNC’s complaint handling has been very poor recently. My guess is now the FCA is watching, they will be trying to a lot better! But if you don’t get a reasonable offer, send it straight to the Financial Ombudsman.
Also look at affordability complaints about other expensive credit you have had:
- has a credit card or catalogue increased your credit limit too high?
- large loans including car finance
- have you been in your overdraft constantly for a long period?