Panorama shows again that the UK payday loan industry is trouble

The government insists that there is enough regulation. They're wrong, writes Carl Packman.

Rochdale, one of the pioneering towns in the UK during the industrial revolution, was a major mill town known for its exemplary textile manufacturing in the nineteenth century. It was also where the first fully documented credit union in the UK was set up in 1844, on which many others were subsequently modelled. 

Now Rochdale is a place blighted by poverty and unemployment (with rates 40 per cent higher than the national average).

It was also the focus of a recent episode of Panorama, showing the burden put on residents by home credit sellers and the wave of payday advance centres like The Money Shop who continue to draw bulging profits at a time of considerable financial hardship.

From various different shops, BBC reporter Richard Bilton collected nearly £1000 with relative ease and little questioning. 

Shockingly, all such shops are covered by the Office for Fair Trading (OFT). In 2010 the OFT's guidance for creditors on irresponsible lending pointed out that: 

“All assessments of affordability should involve a consideration of the potential for the credit commitment to adversely impact on the borrower's financial situation, taking account of information that the creditor is aware of at the time the credit is granted.”

At no point did any of the shops that Bilton entered assess or consider the adverse affects these loans could have on him – thus they were in breach of the OFT's guidance, as well as the codes of conduct by the Finance & Leasing Association, who independently monitor payday companies.

The problem here is light-touch regulation. In addition to guidance, the OFT can revoke credit licenses, but as David Fisher, OFT's director of consumer credit, pointed out earlier this year the OFT runs on only £11m with 120 staff in the consumer credit office. The incentive is therefore to let some cases slide.

With Panorama, Bilton also goes undercover and trains with a collection lady from the Provident – a company set up in the nineteenth century to offer loans to those excluded by banks.

A very telling part of the programme shows the lady say perversely of “good customers”, who do pay back money on each loan, that “you don't ever want them to pay up”.

This itself is indicative of the financial model of the payday lending industry and home credit itself, and really gets to the heart of the matter. Mark J. Flannery and Katherine Samolyk, in an influential paper Payday Lending: Do the Costs Justify the Price?, ask whether payday lenders can survive if they provide only "occasional" credit?

Part of a lender's schtick is that they only extend short-term credit to people as a quick-fix solution and that their model does not depend on customers rolling over on loans (taking out loans to service an existing loan).

But Flannery and Samolyk observe that, if this were true, such businesses might just survive by the skin of their teeth, though its long-term scale would be far smaller. In other words, for a lender to be completely responsible in their lending, they would have to forego profit maximisation and reduce the lifespan of their business – and given the regulatory landscape currently in force we have to trust them on their word that they follow a self-defeating business model.

Perhaps what was most disconcerting about meeting the collector Bilton shadowed was how unlikeable she was. Resorting to calling customers offensive names and lacking sympathy with them, gave the impression (despite this not being the BBC's intention) that all agents for home credit lenders are like this. This isn't the case.

It's often forgotten that collectors are sometimes just as vulnerable as the people they're collecting from. One former agent I spoke to, who worked with the Provident, took over the job from a friend who fell ill but wanted to keep her job with the company.

She told me she originally felt the company was respectable because her friend worked for them, though soon realised this wasn't true when collecting in some of the poorest parts of the area.

“There was a lot of pressure to keep selling”, she continued, “then after 18 weeks, if they couldn't pay, they'd send in collection agencies”. Furthermore, “managers themselves were giving the green light for lending to people who couldn't mentally consent, exploiting their disability.”

On several occasions she sacrificed her own commission to disincentivise customers from taking out more loans and offered them her own advice – something Provident itself would not take kindly to.

In spite of this, it is still the government's position that the UK regulatory architecture is enough. And yet it is evident that self-regulation is failing people in the poorest communities. Until such time that ministers open their eyes these practices will continue under our noses. 

Payday loans. Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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By refusing to stand down, Jeremy Corbyn has betrayed the British working classes

The most successful Labour politicians of the last decades brought to politics not only a burning desire to improve the lot of the working classes but also an understanding of how free market economies work.

Jeremy Corbyn has defended his refusal to resign the leadership of the Labour Party on the grounds that to do so would be betraying all his supporters in the country at large. But by staying on as leader of the party and hence dooming it to heavy defeat in the next general election he would be betraying the interests of the working classes this country. More years of Tory rule means more years of austerity, further cuts in public services, and perpetuation of the gross inequality of incomes. The former Chief Secretary to the Treasury, Seema Malhotra, made the same point when she told Newsnight that “We have an unelectable leader, and if we lose elections then the price of our failure is paid by the working people of this country and their families who do not have a government to stand up for them.”

Of course, in different ways, many leading figures in the Labour movement, particularly in the trade unions, have betrayed the interests of the working classes for several decades. For example, in contrast with their union counterparts in the Scandinavian countries who pressurised governments to help move workers out of declining industries into expanding sectors of the economy, many British trade union leaders adopted the opposite policy. More generally, the trade unions have played a big part in the election of Labour party leaders, like Corbyn, who were unlikely to win a parliamentary election, thereby perpetuating the rule of Tory governments dedicated to promoting the interests of the richer sections of society.

And worse still, even in opposition Corbyn failed to protect the interests of the working classes. He did this by his abysmal failure to understand the significance of Tory economic policies. For example, when the Chancellor of the Exchequer had finished presenting the last budget, in which taxes were reduced for the rich at the expense of public services that benefit everybody, especially the poor, the best John McConnell could do – presumably in agreement with Corbyn – was to stand up and mock the Chancellor for having failed to fulfill his party’s old promise to balance the budget by this year! Obviously neither he nor Corbyn understood that had the government done so the effects on working class standards of living would have been even worse. Neither of them seems to have learnt that the object of fiscal policy is to balance the economy, not the budget.

Instead, they have gone along with Tory myth about the importance of not leaving future generations with the burden of debt. They have never asked “To whom would future generations owe this debt?” To their dead ancestors? To Martians? When Cameron and his accomplices banged on about how important it was to cut public expenditures because the average household in Britain owed about £3,000, they never pointed out that this meant that the average household in Britain was a creditor to the tune of about the same amount (after allowing for net overseas lending). Instead they went along with all this balanced budget nonsense. They did not understand that balancing the budget was just the excuse needed to justify the prime objective of the Tory Party, namely to reduce public expenditures in order to be able to reduce taxes on the rich. For Corbyn and his allies to go along with an overriding objective of balancing the budget is breathtaking economic illiteracy. And the working classes have paid the price.

One left-wing member of the panel on Question Time last week complained that the interests of the working classes were ignored by “the elite”. But it is members of the elite who have been most successful in promoting the interests of the working classes. The most successful pro-working class governments since the war have all been led mainly by politicians who would be castigated for being part of the elite, such as Clement Atlee, Harold Wilson, Tony Crosland, Barbara Castle, Richard Crossman, Roy Jenkins, Denis Healey, Tony Blair, and many others too numerous to list. They brought to politics not only a burning desire to improve the lot of the working classes (from which some of them, like me, had emerged) and reduce inequality in society but also an understanding of how free market economies work and how to deal with its deficiencies. This happens to be more effective than ignorant rhetoric that can only stroke the egos and satisfy the vanity of demagogues

People of stature like those I have singled out above seem to be much more rare in politics these days. But there is surely no need to go to other extreme and persist with leaders like Jeremy Corbyn, a certain election loser, however pure his motives and principled his ambitions.

Wilfred Beckerman is an Emeritus Fellow of Balliol College, Oxford, and was, for several years in the 1970s, the economics correspondent for the New Statesman