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.
 

Photo: Getty
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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.