Money Advice Service has shown that the proportion of people struggling to keep up with their bills and credit commitments has risen from 35 per cent in 2006 to 52 per cent in 2013.

Figures abound about financial hardship in the UK. Money Advice Service has shown that the proportion of people struggling to keep up with their bills and credit commitments has risen from 35 per cent in 2006 to 52 per cent in 2013.

This is one of the reasons why the payday lending industry continues to grow so well, with 9 out of the 10 largest lenders making at least double their profits in the last financial year.

Critics of the industry were given a huge boost at the end of last year. Lord Parry Mitchell successfully added an amendment to the Financial Services Bill, now Act, which said the new regulator (the Financial Conduct Authority [FCA] which has taken over from the Financial Services Authority and will begin to regulate consumer credit come April 1 2014) will be able to cap the total cost of credit.

Four months later a report written by the Personal Finance Research Centre at the University of Bristol and published by the Department for Business, Industry, and Skills said that if the FCA were to use its power and cap the cost of credit, it would reduce the supply of consumer credit products to individuals potentially leading them into the hands of illegal loan sharks.

A month later the FCA itself jotted down in an Occasional Paper that: “caps on APRs or restrictions on how often [consumers] can borrow might make their financial situation worse”.

One step forward, two steps back.

Never mind, for example, that there is slim evidence that capping costs of credit does raise the prospect of illegal lending growth. Work carried out in 2010 by Professor Dr. Udo Reifner, Sebastien Clerc-Renaud, and RA Michael, for the European Commission, found no convincing evidence to back up the argument that introducing interest rate ceilings leads to a growth in illegal lending “or would force people into arrears and default on bill repayments”.

Never mind, for example, that the PFRC/BIS report failed to provide any research or assessment into the actual operability of a total cost of credit cap. Such a report we are all still waiting for.

None the less the opinion of the government, as it stands, seems to be the following: we agree with the report that if we limit the supply the demand will go elsewhere, perhaps illegal lending. We are open to suggestion, but that’s the line for the time.

A response to this is simple: fair enough. Why doesn’t BIS, then, commission a report into the actual operability of a total cost of credit cap? Once they do this at least then we can begin to unpick the evidence, not what researchers assume will happen.

In the meantime, Damon Gibbons for the Centre for Responsible Credit has produced another fine research paper, this time looking at introducing a real-time regulatory database, which will allow the FCA to monitor the lending activity high cost credit providers.

A recent investigation by the Office of Fair Trading (OFT) found there was widespread irresponsible lending across the whole of the payday lending industry. The OFT in the past has also admitted that it doesn’t have the capacity to ensure every last lender plays by the rules.

Gibbons’ report shows how the new regulator can make a cost saving with a real time database and be better placed to oversee lenders making good on their commitment to responsible lending.

But the report, importantly, also deals with the prospect of unintended consequences. What happens to those people who are refused credit after regulation has tightened? Do they just end up in the arms of illegal loan sharks as others suspect?

No. If responsible lending requirements result in people being turned away, then they should be referred to a national call centre, set up by the FCA, which can do the following:

–        Refer callers to debt and welfare rights advice;

–        Organise grants or other assistance from local welfare schemes;

–        Utility company charitable trusts (British Gas Energy Trust, for example, which incorporates the Scottish Gas Energy Trust, is an independent Charitable Trust established in 2004 to contribute to the relief of poverty, with a particular focus on fuel poverty and helping those who are struggling to pay for their consumption of gas and electricity);

–        Refer to affordable loans from alternative financial institutions such as credit unions;

–        Assistance from the DWP in form of budgeting advances;

–        Financial education.

Additionally, Gibbons has called for the creation of a ‘rescue fund’, which will amount to around £50m per year that the government should put up in case there are still people who are deemed uncreditworthy in tough times to ensure they do not fall off the radar.

Regulation is getting better already, with 19 payday lenders have left the market. This is a victory. If those companies have chosen not to operate within the rules previously, then they’ve no place lending to already financially vulnerable people or individuals with temporary cash flow problems.

However, we must ensure nobody’s situation is made worse by better regulation. This is what Damon Gibbons and the Centre for Responsible Credit has aimed to do with their new report – best the government and the regulator listens up.

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