Not SLAPPED-down: intimidating threats from SafetyNet’s City law firm

Debt Hacker began looking into SafetyNet Credit in 2020 after our considerable success helping people to raise complaints against high--cost short-term lenders.

“It didn’t seem to make sense” says Hock Chan.

“The advertised representative APR didn't correlate to the data in the company’s published accounts – it declared it had 150,000 customers a year with a £45 million net loan book, but it was declaring audited interest income of about £94 million.

“In order to claim a representative APR of 68.7%, more than half of all customers must be receiving that rate or better. How can you effectively make three times what you declare to be charging customers as represented by an APR of 68.7%?

“We went through their website to see what they were offering and the terms. It was a running account credit arrangement. And the promise was, ‘We will charge you interest for only 40 days, at 0.8% a day and it's interest-free thereafter.’ Yet it was designed that no customer ever received the benefit of the interest-free period.”

The trap

Chan explains that “SafetyNet would use their Continuous Payment Authority (CPA) to go into customers’ accounts and collect the outstanding balance so no borrower received the benefit of the interest free period.

“Say you were paid on the 25th of every month and borrowed £100 on the 5th of January to get by. On 25th January you’ve borrowed money for 20 days, so IML helps itself to £116 – the principal and the interest.

“But then next month you have an even bigger hole in your monthly outgoings. So partway through the month, you borrow that £100 again. You think you’re into an ‘interest free’ period, but it was then charged at 0.8% per day again, as a new £100 pound loan. And the cycle went on, becoming a perpetual payday loan at the maximum interest rate that an authorized high-cost short-term lender would be permitted to charge, 0.8% per day.

“This perpetual payday loan arrangement put people into perpetual monthly payday loans, because they repaid the full amount every month. And that was the trap.”

Financial Ombudsman Service decisions

We are grateful to The Financial Ombudsman Service (FOS) for sharing with Debt Hacker the upheld complaints against the firm during our investigation. These were shocking.

For example, Mr. P. was charged £3,883.44 interest on a £600 average revolving loan balance over three years

The FOS wrote: “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 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.”

This decision demonstrated that IML’s loan product was designed so no borrower could benefit from the interest-free period.

After this 2020 decision, IML continued to trade in the same manner despite having an obligation to take account of FOS adjudications. With the FOS upholding around 80% of complaints against IML, it is inconceivable that IML was not aware of the damage their business model continued to cause to customers.

Aggressive legal threats

We prepared our analysis and wrote to Indigo Michael Ltd (IML) setting out these calculations.

“We gave them seven days to answer our questions,” says Chan, “and on day six, we received a very aggressive letter from Herbert Smith Freehills, a major international law firm, threatening to take an injunction against us the following day and to sue us for defamation and conspiracy to commercially injure, if we did not withdraw our findings and undertake not to publish the report.”

We won’t be steamrollered

IML and Herbert Smith Freehills probably expected Debt Hacker to back down in the face of such an intimidating threat. “But we showed them they needed to prove our analysis was wrong and assured them that if they could explain themselves, we’d happily modify our (unpublished) report. And they couldn’t,” says Chan.

We asked how many customers did benefit from an interest-free period, and how many had disabled the continuous payment authority feature, but IML’s solicitors repeatedly refused to answer; despite us pointing out that IML would be obliged to produce this evidence to court anyway (in a process called standard discovery and disclosure) if they carried out their threat to sue us.

Several exchanges followed during December 2020 and January 2021.

Herbert Smith Freehills could not address our concerns that:

  1. No IML borrowers ever benefited from any interest-free period, let alone the 325 days,

  2. IML ignored the requirements that 51% or more of customers must receive an APR of 68.7% or better and for IML to place the fair treatment of customers at the heart of its business model,

  3. IML abused CPAs to repay itself from borrowers’ monthly pay packets fully and then almost immediately re-advanced new funds, with this loan churning keeping its borrowers in a perpetual 0.8% per day charge rate and making the interest-free period impossible to benefit from.

Counsel says approach contrary to required conduct

We put IML’s arguments to consumer finance law specialist barrister, Damian Falkowski (then QC), who concluded that:

“I consider the approach, confining matters to the date when the product was “approved” and ignoring the actual APR being charged to borrowers for four or five years after that, is contrary to the principle of treating customers fairly.”

Correspondence with Herbert Smith Freehills ceased after we informed them of Counsel’s opinion. Debt Hacker subsequently shared our analysis and the legal opinion with the FCA.

Adherence to rules not checked

We were incredulous at the FCA’s response: “The FCA’s director of Retail Lending told us that as matter of general supervisory policy, they never check the APRs of licensed lenders,” says Chan.

We pointed out that this should be of grave and obvious concern to Parliament and the public in our 2021 response to the All Party Parliamentary Group (APPG) on Personal Banking and Fairer Financial Services Call for Evidence about the FCA.

Debt Hacker told this enquiry how SafetyNet’s CPA abuse meant many customers were locked into a cycle of repeated reborrowing at 1200% APR.

A January 2022 article by the Financial Times, one of the world’s most respected newspapers, covered our calls for the UK financial regulator to carry out independent periodic checks on representative APRs in the light of Debt Hacker’s extraordinary evidence.

FCA acts and IML collapses

The FCA finally imposed several licence restrictions on IML in July 2022 after Debt Hacker’s 20-month campaign.

The restrictions banned IML from using Continuous Payment Authorities to take repayments from any existing customers “where it has reason to believe there are insufficient funds in the account, or that taking payment would leave insufficient funds for priority debts or other essential living expenses.”

It placed further restrictions on the firm in December 2022, and Indigo Michael Limited, trading as SafetyNet Credit and Tappily, entered administration in January 2023.