Ed Miliband will today propose payday lending companies be forced to pay a levy in order to support credit union alternatives and free debt advice.
Ed Miliband will today propose payday lending companies be forced to pay a levy in order to support credit union alternatives and free debt advice – in a move that will boost ethical finance in local communities.
The commitment which will further drive a wedge between Labour and the Tories and will see millions of pounds raised to strengthen Labour’s call to tackle the cost of living and curb the personal debt crisis.
Is it fair to place a levy on an industry like this?
Payday lending in the UK is the quintessential crony capitalist enterprise. It excuses itself by lending to people who the banks have forgotten, but the price for that is hard-up people are ripped off (it costs between £25-37 to borrow £100 from a payday lender, which annualised is around 4-5,000 per cent APR). Their bank accounts are drained with use of the continuous payments authority which lenders use to retrieve money (think of it as a blank cheque that lenders use at their will), and proper credit checking is out of the question.
A recent Citizens Advice study found 87 per cent did not ask the borrower to provide documents to prove they could afford to repay the loan, which risks putting borrowers in even more precarious positions. A further 84 per cent were not offered the chance to freeze payments when struggling; this leads to rollover loans where lenders make most of their money.
It is for this and many other reasons that the Office of Fair Trading put almost the entire payday lending industry under investigation after it found widespread irresponsible lending practices. Not from a few rogues, but from most of the payday lenders operating in the UK.
The move by Labour to place a levy upon lenders to fund a greater supply of alternative finance like credit unions will not solve the problems of those people who have suffered with payday loans debt, but it would begin to send a message to lenders: government will not sit by and let you rip off and exploit your customers anymore.
Is it fair to place a levy on an industry to fund debt advice?
Debt services are being severely stretched, and the proliferation of payday lending is at fault. StepChange, the debt charity, helped 36,413 people in 2012 who were struggling with payday loans, with average debts of £1,657 – a good deal more than the average monthly wage making them impossible to pay back.
Shockingly, there was a 421 per cent rise in calls to StepChange from clients who had over 5 payday loans out at one time. From 2011 to 2012 the charity saw a 109 per cent increase in the number of our clients with payday loans.
In short, and unsurprisingly, the rise of payday lending is making it harder for people on low and middle incomes. While we cannot blame payday lenders for financial hardship in total, they are responsible for putting already vulnerable people in worse debt.
What will the levy do?
If payday lenders were responsible lenders – as they say they are, despite hard evidence to the contrary – they would signpost better suited credit products like those from credit unions and free debt advice for many of those who walk through their doors.
By and large they do not. Responsible lending is a requirement when agreeing to the terms and conditions of a credit license, so any lender not doing this should lose their license.
The problem in the past has been a lack of regulatory enforcement by the Office of Fair Trading. However lenders themselves are still largely at fault. It is their lack of responsible lending (i.e. lending to those who cannot afford it) that has made them so much money. The ten biggest payday lending companies had a total turnover of nearly £800m, up from £313m last year. Wonga, one of the biggest lenders, made around £1m profit per week in 2012.
The next Labour government cannot retroactively oversee the removal of licenses, so a levy is the corrective needed to an industry which has been recently described as ‘out of control’.
A levy will help fund good, free at the point of use debt advice, raise money for credit unions who, as with the case of LMCU, are offering similar payday products with lower interest.
But more than anything the levy signals a move from neo-liberal to relational finance. Communities and governments will not allow rip-off lenders – the ones Paul Blomfield MP has acted against – to tear up neighbourhoods and sell dangerous debt. Until such time that these lenders are priced out by ethical finance, they will be obliged to help re-build communities.
Once again Labour have shown that even out of office they work on behalf of public concerns and issues that affect us all – battle with payday lenders is the next move for One Nation.
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