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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Commons Confidential: Fearing the Wigan warrior

An electoral clash, select committee elections as speed dating, and Ed Miliband’s political convalescence.

Members of Labour’s disconsolate majority, sitting in tight knots in the tearoom as the MP with the best maths skills calculates who will survive and who will die, based on the latest bad poll, observe that Jeremy Corbyn has never been so loyal to the party leadership. The past 13 months, one told me, have been the Islington rebel’s longest spell without voting against Labour. The MP was contradicted by a colleague who argued that, in voting against Trident renewal, Corbyn had defied party policy. There is Labour chatter that an early general election would be a mercy killing if it put the party out of its misery and removed Corbyn next year. In 2020, it is judged, defeat will be inevitable.

The next London mayoral contest is scheduled for the same date as a 2020 election: 7 May. Sadiq Khan’s people whisper that when they mentioned the clash to ministers, they were assured it won’t happen. They are uncertain whether this indicates that the mayoral contest will be moved, or that there will be an early general election. Intriguing.

An unguarded retort from the peer Jim O’Neill seems to confirm that a dispute over the so-called Northern Powerhouse triggered his walkout from the Treasury last month. O’Neill, a fanboy of George Osborne and a former Goldman Sachs chief economist, gave no reason when he quit Theresa May’s government and resigned the Tory whip in the Lords. He joined the dots publicly when the Resolution Foundation’s director, Torsten Bell, queried the northern project. “Are you related to the PM?” shot back the Mancunian O’Neill. It’s the way he tells ’em.

Talk has quietened in Westminster Labour ranks of a formal challenge to Corbyn since this year’s attempt backfired, but the Tories fear Lisa Nandy, should the leader fall under a solar-powered ecotruck selling recycled organic knitwear.

The Wigan warrior is enjoying favourable reviews for her forensic examination of the troubled inquiry into historic child sex abuse. After Nandy put May on the spot, the Tory three-piece suit Alec Shelbrooke was overheard muttering: “I hope she never runs for leader.” Anna Soubry and Nicky Morgan, the Thelma and Louise of Tory opposition to Mayhem, were observed nodding in agreement.

Select committee elections are like speed dating. “Who are you?” inquired Labour’s Kevan Jones (Granite Central)of a stranger seeking his vote. She explained that she was Victoria Borwick, the Tory MP for Kensington, but that didn’t help. “This is the first time you’ve spoken to me,” Jones continued, “so the answer’s no.” The aloof Borwick lost, by the way.

Ed Miliband is joining Labour’s relaunched Tribune Group of MPs to continue his political convalescence. Next stop: the shadow cabinet?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage