Despite new regulation, the big lenders will remain.
Despite new regulation, the big lenders will remain
In early 2013 I attended a conference with people from charities and housing associations, as well as the odd policy researcher, talking about social and financial exclusion, welfare, debt and what could be done to start helping people who were in dire need, either as a consequence of the cuts or over a longer term.
When the conversation turned to debt it was mentioned that the Labour shadow Business, Innovation and Skills (BIS) team member and tireless critic of certain loan firms, Lord Parry Mitchell, had just successfully got an amendment made into the Financial Services Bill that meant the regulator – the Financial Conduct Authority (FCA) – could put a cap on the cost of credit charged by payday lenders, something that took a real effort, particularly with the regulation-phobic Conservative and Liberal Democrat parties in power.
It was called an ‘historic day’ in the Labour Lords press release; and indeed at the conference I was at, populated by people who had been campaigning against payday lenders for years, and where there was the feeling that we had reached a conclusion to our efforts. Finally something had been done about this bloody industry.
But in actual fact the real work had just begun. A few months later BIS released a report to say it didn’t want a cap on the cost of credit after all, so the FCA would essentially only have the power to cap if ministers were happy with the evidence (they actually proved clueless on this point, as I found out myself when I interviewed the consumer minister).
Then the FCA themselves released a report essentially agreeing.
As I said at the time, this was one step forward, two steps back for those campaigners.
In another couple of months, as public opinion was turning against payday lenders big time, George Osborne made a surprise announcement that there would be a cap on the costs associated with payday loans, as part of the Banking Reform Act, and that the FCA would start the ball rolling trying to assess at what price that cap should be placed.
The consultation for this ended in September, the suggested cap ensuring that people would never pay more than 100 per cent of the principle sum of a loan, and that the cost of credit would be around £24 per £100 borrowed. The daily rates that a lender can charge have been changed, and lowered fairly significantly from what they are now, and it is expected that many lenders will not be able to operate any longer. Some lenders, not cut out for being better regulated, have already dropped out of the market.
However while many changes have taken place, the costs are still too high. The point of regulating on cost is to make changes where the market has failed. Because these lenders compete on speed rather than price, the volume of lenders in the market has not made the prices of a loan any cheaper for borrowers – this pretty much sums up the broken market.
For this reason the regulator could have afforded to be stricter with the cap, on the evidence from interventions in other countries that show that prices for credit tend to gravitate towards the maximum cap. I say that the cap should be for £12 in every £100 lent.
Because of the heightened consciousness around the industry now, lenders are facing a lot more scrutiny. The company Wonga recently wrote off debts to 330,000 customers who are in arrears for 30 days or longer, on the grounds that if those loans were made fairly then they wouldn’t be in so much trouble today.
The industry has for so long made money from people struggling. A lender makes only a little profit from a one-off loan, the real money comes from repeat customers and that’s what the payday lending business model has historically been aiming for.
But because of the crackdown by the FCA that dominated last week’s headlines, there is now a tendency again to suppose the problematic industry has been sorted. The FT ran a headline recently that read: ‘Payday lenders on edge of extinction’. This is not true.
There are hundreds of payday lending firms in the market, and many of them will now go out of business because they relied too much on not being touched by the regulator or picked up for frequent malpractice. That has changed. However the biggest lenders, who are equally as guilty for bad practice and irresponsible lending, will still remain.
In my new book, Payday Lending: Global Growth of the High Cost Credit Market, I make the claim that lenders in the UK, as elsewhere, will look to change the terms of their loans to make them longer instalment loans. Different types of loans, but still at a high price which shows that even after changes those who are least able to afford it are obliged to pay the most for their credit.
Short-term loans by these lenders will also stay, and there will still be need to assess and research the interplay between lenders and borrowers, but historically and internationally predatory lenders are often two steps ahead of the regulator. We’ve still a long way to go.
Carl Packman is a contributing editor of Left Foot Forward and the author of the new book Payday Lending: Global Growth of the High Cost Credit Market, published by Palgrave Macmillan
Leave a Reply