The cost of credit must be capped fairly

It's no longer fair for consumers to bear the large, usurious costs associated with loose regulation.

It was with a horrible knowingness that I listened to colleagues on the Movement for Change Sharkstoppers National Strategy Team talk about their experience with payday lenders.

One of them, Serai, explained how she and her friends ended up on the slippery slope into a sea of bad debt.

It was an experience I had heard many times. One that was clearly going to take hold of many British people as I watched my own high street in Kilburn slowly colonised by payday lenders. With their colourful adverts and bright lights they seemed friendly. But we know now that they’re anything but.

The stupid thing is; we should have seen this coming.

The UK has not had a cap on interest since 1974, before which it was set at 48 per cent. After the introduction of the Consumer Credit Act of that year, where interest rates were made limitless, there was a concerted effort by the Thatcher government, and her ‘Big Bang’ policies, to deregulate financial markets.

After 1979 Britons living in poverty rose from 22 to 28 per cent, while between 1980 and 1989 the proportion of low income households using credit to maintain a decent standard of living rose from 22 per cent to 69 per cent.

Following completion of full credit market liberalisation, which began in 1980, both consumer credit and mortgage debt to income ratios, as well as house prices, soared. In 1980 the average household debt was 45 per cent of annual income and the ratio of consumer and mortgage debt to income had doubled by 1990.

UK personal debt is at an all-time high of £1.4 trillion, but credit usage is changing. According to a CityWire report last year, some 52 per cent of credit products used to do this are non-bank, which includes payday loans.

Clearly this type of credit poses a significant problem on households trying to make ends meet. Which is why it is so tremendously vexing that the regulation over the industry continues to be so lacklustre.

After a concerted effort by Sharkstoppers campaigners, Labour parliamentarians successfully tabled amendments to the Financial Services Bill in 2012. This was followed by Sharkstoppers forcing policy commitments from the Labour Party to cap the cost of credit, which in turn led to George Osborne announcing he would follow Labour’s lead.

And back in February the Financial Conduct Authority (FCA) – which takes over the regulation of the payday loans industry from the Office of Fair Trading in April 2014 – issued final plans for its consumer credit regulatory regime.

However its key flaw was delaying the introduction of a cap on payday loans to January 2, 2015. The continued wait for a cap is only a grace period that allows payday lenders themselves to work out how to circumnavigate it.

There is, as yet, still no indication at what price a cap will be set at, and whether or not this will be effective to fix a broken and expensive market. A recent best practice estimate showed how a cap of £12 per £100 lent, including fees and charges, took into consideration a break-even rate (which is around £8 per £100 lent) and the cost of loan defaults (which to payday lenders is around 14 per cent of the total loans lent) incurred to the lender.

So we are now moving our campaign forward. We are asking for a fair rate for the cap on the cost of credit.

Alongside other aims – such as new rules on payday loan adverts, and an NHS scheme for credit union payroll deduction – this is a crucial step to ensuring a fairer credit market. A market where credit is available at a reasonable rate. Where consumers don’t bear the large, usurious costs associated with a such loose regulation. And where people don’t have to run the risk of falling into oceans of debt just to lend some money to make ends meet.

We’ll be taking action to make these changes happen over the coming weeks and months, and we need you to be a part of it. Pledge to take action with Sharkstoppers here.

Carl Packman is a member of the Sharkstoppers National Strategy Team

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