British regulators have finally made some progress in efforts to keep a lid on the payday lending sector. A cap on costs will reduce the impact on those forced to borrow under the industry’s tough terms, but the Financial Conduct Authority (FCA) has failed to deal with the very issue they outline as the most problematic.
The FCA proposal for a price cap on high-cost short-term credit is the product of a long-standing campaign. It is designed to better regulate the practices of a small and very exploitative, not to mention profitable, part of the everyday consumer credit sector in the UK.
There is some cause for celebration. The proposal for a price ceiling on how much a lender can charge per day is a good result. The move from about 4% to 0.8% means the current £30 per of interest for £100 loan is reduced to £24 per £100.
In harm’s way
There remains a more fundamental issue at hand. Some 50% of individuals taking out a payday loan are significantly financially harmed by it – that is, made worse-off by using this credit product, according to the FCA’s own 2014 Consultation Report. In fact, this new consultation paper shows that nobody makes a financial gain from a payday loan (except the lenders that is), only varying degrees of harm. It is the most financially vulnerable who experience the negative effects of payday lending the hardest.
The FCA is seeking feedback for its consultation until the beginning of September but it has already received criticism from both the industry and those campaigning to change it. It is anticipated that a large amount of extortionate lenders will leave the market and, consequently, consumers are estimated to make an annual median saving of £76 overall (a saving of £14 per loan according to the FCA). Some consumer groups are worried that the price of a payday loan will still be much too high.
To put it in context, the Bank of England lends at 0.5%, effectively a negative interest rate when you factor in inflation, and that serves as the benchmark for the cost of credit to financial markets. On the other side, the payday lenders will complain that the £15 cap on default charges – meant to curb the excess fee creation and extraction rife within this industry – simply adds a new risk that lenders will take borrowers in arrears straight to court.
Bending the rules
As we have come to expect in the post-financial crisis era, every new financial regulation has built-in workarounds for the industry.
Importantly, this is a cap put on a very specific product, payday lending, and we could conceivably see lenders simply renaming their product “micro-lending”, for example, to get around this. Alternatively, lenders could simply extend the term of the loan (so, you pay back £100 over 16 or 23 days instead of 14 or 21) so it falls out of the category of payday lending as they do in the United States. In reality, high-cost short-term credit describes a large number of consumer credit products that could be used and abused in varying degrees by lenders. That includes bank overdrafts, door-step lending, catalogue loans, logbook loans (on cars), pawn broking, and also more mainstream products like store cards and credit cards.
Framing payday lending as the last credit outpost before crossing over to illegal “loan shark” lending territory is a well-rehearsed red herring of the industry. The tactic effectively legitimises bad business practice on the grounds that it is better than illegal business practice. However, industry standards set as marginally better than a leg-breaking mobster essentially means setting standards so low that the persistent malfeasance in the industry are overlooked.
One easily circumvented regulation basically means campaigns and activism around payday lending are not over, far from it. More practical solutions for solving this problem are needed, such as how to effectively offer better, more responsible alternative finance.
Bred by austerity
The Department for Work and Pensions has undergone a Credit Union modernisation programme, but there is a risk that in working with credit reference agencies such as Experian the DWP will be reverting back to type with lending decisions pegged to credit scoring. This, while not a bad thing in principle, may not be the initiative that encourages credit unions to bring custom from those once in hock to less responsible payday lenders.
In reality, looking to the credit unions to out-compete the payday lenders simply ignores the fact that credit unions are much more regulated than the payday lending industry. This regulatory quagmire also means that even the most pro-active credit unions (because it is important to note that not all credit unions are keen to lend more to the urban poor) cannot help those in need because of rules imposed on them, but they could if they were operated under the same limited rules as the entire payday lending industry.
The FCA’s consultation on its proposals has at least given us a document to debate from, but the problem of irresponsible payday lending and access to responsible alternative finance is far from over. The conversation between the regulator, the industry, and consumers over the coming months – until a price cap is set in January 2015 – will be some of the most important we’ve seen. However, the problem of payday lending is not entirely a regulatory one.
In other words there is not a simply “supply-side” solution to the payday problem. A significant part of the problem is the demand-side: the growing legions of poor families living in urban centres or rural communities with limited access to retail finance services and who only have payday lending to cope with pressures of a stuttering economy which has seen wages lag prices. The most obvious remedy for the scourge of payday lending is beyond the scope of the regulators. It lies in addressing the growing problems of poverty and deprivation that appear to be the price of pursuing the austerity-led growth strategy favoured by the coalition government.
This piece was co-authored by Carl Packman, a writer & researcher and author of Loan Sharks: The Rise and Rise of Payday Lending.