Carl Packman busts two myths about the recent remarks about Wonga by Archbishop Justin Welby.
Issue 1:
The Archbishop competing Wonga out of business
The misunderstanding:
So, the Archbishop has given up on legislation and regulation of the payday lending industry?
The reality:
What Justin Welby said in the interview with Total Politics is that his church is “putting [its] money where [its] mouth is”, that is to say the church is starting a credit union. He refers to the church as ‘we’. This same ‘we’, he explains in the subsequent paragraph, are “not in the business of trying to legislate you [as in Wonga] out of existence, we’re trying to compete you out of existence”.
What Welby has said is not contrary to regulation, but is what many campaigners against the payday lending industry have always said: that is, we want to squeeze the payday lending industry out, but are acutely aware that the demand for this type of product – short term credit – will not go away.
Instead the supply of this type of credit should come from ethical lenders like credit unions which are less expensive, non-profit so have no incentives to drive people into poverty, and willing to offer debt advice where needed, as well as tips on savings.
Legislation against the total cost of credit, rollover loans, and advertising – to name just three – is absolutely vital. Indeed back in November 2012 Justin Welby himself, when he was the Bishop of Durham, called for a cap on the total cost of payday loans, which would require legislation. What he has said last week is just another element of the raft of changes that need to be made to credit selling in the UK. Squeeze out the dubious supply – payday lenders – and satisfy the demand with something better – credit unions.
Issue 2:
Church of England pension fund and Wonga
The misunderstanding:
So, the Church of England fund Wonga through its pension fund, right?
The reality:
The Church of England made commitments to a venture capital fund of funds in 2004 and 2007. This venture capital firm – Accel Partners – in 2009 was the leading firm who put up investment to start up Wonga along with The Wellcome Trust and others. I’ve been told by the CoE press team that the total amount of exposure to Wonga is £75,000. I spoke to an expert on these matters and they told me that “I’d read “exposure” to mean the amount CoE has invested in Accel divided by Accel’s stake in Wonga”.
For example, I was told, if the CoE invested £750,000 in one of Accel’s funds, and Wonga accounts for 10% of that fund’s assets, then the CoE’s exposure is 10 per cent of £750,000 = £75,000.
The expert also told me that in investments like this often come with “lock up” periods where theoretically someone like the CoE could want to sell its stake in Accel but are unable to. This should be part of the investigation that Welby ordered around the church’s commitment to Accel.
In sum, the CoE may have indirectly had its funds from the Church Commissioners Fund be exposed to the creation of Wonga in 2009. Since these commitments happened in 2004 and 2007 it would be impossible for the church to see in to the future and see what Accel would do, and with the “lock up” period perhaps would have been impossible to get out of in 2009 anyway. The point to be made here is whether ethical investment is ever completely guaranteed with private equity firms?
4 Responses to “The Archbishop and Wonga: busting a few myths”
Selohesra
If CoE can compete with Wonga then good for them – perhaps Miliband, Harmen etc can put some of their millions to the cause as well. I suspect however they will find that the administrative costs of small short term loans whilst modest in absolute terms becomes large when expressed as APR. Just calculate the APR on a guy who lends his mate £20 for a week to tide him over and at end of week he pays back and says thanks with a pint of beer (£3)
paddymanning
The high moral groundism and sick paternalism of the anti wonga brigade make be nauseous. I’m looking forward to Archbishop Welby getting a harsh lesson in economics from having to compete with a service that people have voted for with their own money. Go Wonga!
Cole
Er, desperate people going to Wonga to keep their heads above water. But of course free market fundamentalists think this is just fine.
Hopefully the CofE, who have considerable experience in managing a large financial portfolio, will pull this off.
paddymanning
Free markets are evil, desperate people have purchased tablets and laptops produced by them….. May Welby can compete there too.