While payday didn’t cause the financial crisis, it does benefit from it

Encouraging the FCA to be even more tougher with the industry is of vital importance.

Today the Financial Conduct Authority will take over from the Office of Fair Trading to become the regulator of the consumer credit industry. This includes oversight of over 50,000 businesses and, importantly, the much loathed payday lending industry.

Back in 2012 when the new city regulator drew up early plans to take over on the payday lending industry, it gathered attention by promising stricter measures over the controversial industry. It wanted to make it difficult for the industry to exploit the loose regulation of its predecessor and take a far harder, even radical interventionist model to tame lenders.

Certainly this is needed. Russell Hamblin Boone, the chief executive of the Consumer Finance Association, the largest trade association of the payday industry, said today on BBC Radio Five that over half the industry’s companies could leave the market, not just because of tighter regulation but due to a current investigation being undertaken by the Competition Commission, pressuring the industry.

Even after the OFT’s own investigation the payday industry was riddled with irresponsible practice. And it is relentless. Yesterday Citizens Advice published evidence showing lenders are not freezing charges and interest when borrowers are showing signs of trouble, with additional data showing how borrowers were encouraged to take out further loans.

So far the FCA have promised to drive out unruly lenders and make unannounced visits to shops to ensure rules are being observed. They have also pledged to bring down the maximum times an individual can roll over on a loan to twice – lenders can only try, and fail, to retrieve money from accounts twice via the Continuous Payment Authority (think of it like a direct debit without warning); and also oblige lenders to carry financial health warnings in their adverts.

Some serious gains for consumer advocates, but several omissions, too.

Firstly limiting rollover loans to two is utterly pointless – the impact for hard up consumers will be limited. The commitment to cap the cost of credit, made by George Osborne and subsequently added to the Banking Reform Bill, while positive has made no public progress since it was called in November last year – this at once makes it more difficult for lenders to organise their products (perhaps a positive for those who will try  and circumnavigate the rules), and for the consumer to know to what extent they will gain, if at all.

Furthermore there has been a delay in information about the FCA’s views on a real time database. This would have the benefit of facilitating a tool that payday lenders would have to input data into that the regulator can have oversight of, which would show trends of individual debtors to see whether they were being lent to responsibly.

It would save money for the FCA and make the industry far more credible. In their last report the FCA expressed concern about its effectiveness – which is not encouraging.

The economics professor Udo Reifner once said:

“For today’s consumers, consumer credit contracts now rank as high in importance as contracts for employment. But overindebtedness has also become a similar threat in modern times to unemployment in the last century. Sustainable development therefore requires access to responsible credit products and services.”

One of the reasons that there should be a tightened regulatory environment over payday lending is not because it is a particularly large part of the whole consumer credit sector. In fact it should be noted that the payday lending industry is, in terms of loan volume, relatively minor compared to the whole consumer credit industry.

The impetus for tougher rules, however, comes from the industry’s irresponsible lending practices, allowing people to get trapped in long term, unsustainable debt, as part of its everyday business model.

While it is a minor mark on total consumer credit it has grown rapidly. In 2004 the industry was worth £100m, then at the start of the recession it was worth around £700m. Today, as the practical recession takes a deep impact on household budgets across the country, the industry is worth £2.8bn.

That’s the kind of growth that few industries can dream of having, particularly at such a tricky financial time.

Professor Reifner also said that: “Borrowed money does not itself provide real wealth but only holds the potential to create that wealth.”

Contrary to this, payday lending largely adds to a debtors’ dangerous debt profile. Indeed as a recent Demos report put it, on their Harm Index payday lending rates higher than any other type of legal consumer credit.

While payday didn’t cause the financial crisis, it does benefit from it. But it is not a benevolent bystander. Its business model relies on repeat borrowers and will try to keep them at any cost. This cost is incurred by the borrower, who suffers financially, but also society at large. Debt advice and financial education is key; but encouraging the FCA to be even more tougher over this industry is of vital importance.

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