Dogged by debt

Poor Carol Vorderman can rest assured she is not alone in being vilified for peddling the questionable benefits offered by consumer loan firms. In Japan, where the consumer finance industry is reeling from a recent scandal, the public's odium has been reserved for a small white lap dog.

Until recently Ku-chan the chihuahua was the popular public face of Aiful, one of Japan's biggest consumer lending companies. But sadly for Ku-chan, his corporate owner's face has been stripped of its mask of respectability to reveal an unsightly core.

This month Aiful was forced to suspend operations at its 19,000 outlets for between three and 25 days following allegations that it had used illegal methods to squeeze loan repayments out of its clients, among them some of Japan's poorest people.

Its tactics are alleged to range from the pushy to those that wouldn't be out of place in a mafia thriller.

According to the Financial Services Agency, Japan's financial watchdog, they phoned and faxed clients several times a day demanding money, and in at least one case telegrammed the home of one debtor in the middle of the night. The most aggressive staff berated the wives and mothers of debtors, yelling at them until they secured an agreement to repay.

The firm was temporarily banned from extending new loans and from asking existing clients to repay their debts, although borrowers are free to make voluntary repayments. It cannot advertise on TV until the end of the month and its president, Yoshitaka Fukuda - one of the richest men in Japan - took a 30% pay cut for three months.

Aiful, and its main rivals Acom, Promise and Takefuji, have become familiar sights on the Japanese urban landscape. Typically, their neon-lit outlets are to be found in busy railways stations - nice and handy for commuters who give in to the temptation of fast and easy cash rather than have to contemplate the sorry state of their bank balance on the journey home.

The consumer loan industry's message, that borrowing money is now no more difficult than withdrawing cash you already have from an ATM, is clearly getting through.

An estimated 20 million Japanese have consumer loans, and 2 million are thought to have multiple debts. Last year the country's top five consumer lending firms wrote off more than 500bn yen (£2.4bn) in irrecoverable loans. According to the Japan Consumer Finance Association, outstanding loans exceeded 11.7 trillion yen in March 2004, a 2.5-fold increase on a decade earlier.

Much of the blame for the explosion in personal debt has been directed at the 1993 introduction of automatic screening machines that allow people to arrange loans of up to 500,000 yen without the need for collateral, guarantors or even an interview.

This month's ban on Aiful's TV adverts is telling as it has momentarily deprived the firm of its most effective marketing tool. Its Ku-chan ads were a stroke of genius, tapping into the Japanese weakness for even remotely cute animals and a tendency, spawned by mindless TV shows, to give in to stomach-churning sentimentality.

Ku-chan's owner, a middle-aged man, was prepared to go to any lengths to give his pooch the best in life, clothing and companions ... paid for with a quick and easy Aiful loan, of course. The ads were voted the nation's favourite two years in a row and pet shops reported a surge in sales of chihuahuas costing up to 600,000 yen. Since the scandal broke demand for the pets has dried up and prices have dropped by more than two thirds.

But the canine controversy pales into insignificance compared with the deep well of human misery caused by consumer loan firms. The insidiousness of escalating personal debt has driven countless borrowers to despair, and a few to suicide.

The government, faced with evidence that its enthusiastic embrace of deregulation and the free market has fomented a consumer credit industry with the ethics and business methods of the worst backstreet loan sharks, has decided to act.

The FSA has recommended new regulations that would prevent firms such as Aiful from charging more than 20% interest. Currently they are able to operate in a controversial "grey zone" created by discrepancies between two key laws, one of which sets a 15-20% ceiling, while the other allows lenders to charge up to 29.2% provided they have the borrower's consent.

The scandal, meanwhile, has hit Aiful where it hurts most. This week it said its consolidated net profit had dropped 13% in the year up to the end of March and that it expects more bad results as a result of the government's action and clients' demands for excessive interest payments to be returned.

The companies insist they need to charge higher interest than banks because they offer high-risk loans and that reducing rates would simply encourage even more people to take out loans they can't - or won't - pay back.

That may be some truth in that. After all, there is no use denying that people can be irrational - stupid even - when offered an apparent quick fix to their money troubles. But as Japan's experience shows, those normal human weaknesses have created havoc because "respectable" loans firms were only too happy to exploit them.

However the government decides to tackle the consumer loan industry's more unsavoury aspects, borrowers can no longer say they haven't been warned about doe-eyed chihuahuas in bespoke morning suits.