Payday lenders have lessons to learn from credit unions

A cap on interest is the first step to transforming predatory lenders into responsible ones.

We know we have come a long way when Iain Duncan-Smith says, "for too long now predatory lenders have been plaguing the homes of vulnerable people." But what does his government intend to do about it? Not a lot so far.

Admittedly, if there was to be an interest rate cap on the loans dealt out by predatory lenders, then they would just find ways around it, like loading up administrative fees and charges elsewhere. So what then? A cap on the total cost of credit is what we should pine for today, placing a cost ceiling on how much a loan, inclusive of charges and administrative fees, would be to a consumer.

The benefits to a person taking out loans would be unprecedented.

Since the "Big Bang" – the sudden deregulation of the financial markets back in the 1980s – policymakers have been loath to right the wrongs of market irresponsibility with anything other than mere guidance. The same must be said of the credit market. At an official level, we require responsible lending, but it is all self-regulated. This has to change.

However there is one financial product that does have, imposed upon it, a legal cap. That is a loan from a credit union. Currently a credit union cannot lend at more than 26.8 per cent interest. This has always been the main pull of a credit union’s appeal – it can lend at a low interest, and offers advice and encourages savings as well.

The first credit union in the UK was likely to have been born out of the first properly documented cooperative institution which was in Rochdale in 1844. As Ann-Marie Ward and Donal McKillop in their paper on the relationship between credit union objects and cooperative philosophies point out, it probably wasn’t the first credit union as such, as the unions grew out of less formal savings groups – but certainly it was the most successful of the day on which many others were subsequently modeled.

Political support for the institutions didn't occur until the 1980s/1990s as they started to become part of local and central government discourse on tackling poverty and disadvantage. In the late 1990s/early 2000s, the Association of British Credit Unions (ABCUL), the sector’s largest trade association, decided to encourage credit unions to be a bit more like a business, so as to encourage middle-class savers and shift the image of being the "poor person’s bank".

Credit unions have been subject to many levels of so-called modernisation. In the Blair years there was a commitment towards more funding for credit unions, which was perfectly consistent with the "third way" appeal to a savings culture assisting with welfare, such as the savings gateway and the child trust fund.

Unions received a great boost from the Department for Work and Pensions (DWP) in 2011, receiving a funding package of £73m for a modernization, but given that only 2 per cent of the UK population is a member of a credit union, something is missing the mark.

A recent report commissioned by the DWP has said that the sector is not financially sustainable. This might suggest that with continued funding, in the amounts that it has been coming, credit unions cost more than they are worth. I take a different view.

It is not how much they cost in funding that is the problem, but how the money is spent. When I asked Sally Chicken, Chairman (Volunteer) at Rainbow Saver Anglia Credit Union, how to make credit unions more appealing to a greater amount of people, she told me:

We are already very appealing to people once they have heard of us, so we really just need a good loud marketing campaign, I don’t understand why ABCUL is so against a national marketing awareness campaign… in the US there are still such public information radio ads, even though there is already high awareness. We need to use modern media in a better way, radio, TV, even Facebook.

The same DWP report suggests raising the maximum annual interest rate from 26.8 per cent to somewhere in the region of 42 per cent. This is bound to cause gasps. But I think it is rather modest – especially given the finding from the Community Development Finance Institutions (CDFI)'s project My Home Finance that credit unions need to charge 68 per cent to cover its costs alone.

One of the modernising moves I recommend is for credit unions to offer a home credit service. A regular feature that always comes up in Provident Financial’s annual reports is that the majority of their customers find the convenience of the loans, from their doorstep, very satisfactory indeed. So much so, in fact, people are willing to pay way over the odds for it.

On the face of it, home credit, at a representative APR of 272.2 per cent, seems irrational, particularly given the availability of lower cost loans elsewhere. Taking note of this, the Joseph Rowntree Foundation, back in 2009, published a report assessing whether there could be scope for a not-for-profit home credit provider – taking the best from the industry and seeing whether it could be achieved at a price that doesn't exploit the customer.

The resulting conclusion from the study found that even without profit, at a break-even rate, 129 per cent APR was going to be typical on a loan of £288 over an average 56 week loan, assuming an investment of £18m with the intention of becoming cash-positive, operating without further investment, after five years.

Credit unions should enjoy continued investment, and in the last few years have received far more than £18m, so a lower rate home credit service could be feasible. This is guaranteed to get people to join credit unions, and signposts a more creative approach to modernisation.

If we want better credit unions, interventions like this one are the way forward. The stock answer that credit unions, as they are, will help wean people off high-cost credit is simply not good enough.

A supporter of credit unions in Los Angeles. The organisations are more widespread in the US. 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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Unconvinced by Ken Loach’s benefits story? That says more about Britain than the film does

The director has clashed with a film critic about his representation of the welfare state in I, Daniel Blake.

I, Daniel Blake, Ken Loach’s new film, has kicked off a row between the director and The Sunday Times’ film critic, Camilla Long.

Published on Sunday, the review – which called the film a “povvo safari for middle-class do-gooders” – has led to Loach and some audience members rowing with Long online.

Long also describes the film – which is an unforgiving drama about the cruelty of welfare bureaucracy – as “misery porn for smug Londoners”.

Her contention is that it is “condescending” and “patronising” to benefits claimants, partly because it will mainly be seen by affluent audiences, rather than “the lowest part of society” – so acts as a vehicle for middle-class guilt rather than an authentic reflection of people’s lives.

I’ve seen the film, and there are parts that jar. A reference to the Bedroom Tax feels shoe-horned in, as if screenwriter Paul Laverty remembered last-minute to tick that box on his welfare scandal checklist. And an onlooker outside the Jobcentre’s rant about the Bullingdon Club, Etonians and Iain Duncan Smith also feels forced. (But to me, these parts only stood out because the rest of the script is convincing – often punishingly so.)

A critic is free to tear into a film they didn’t enjoy. But the problem with Long’s review is the problem with the way Britain in general looks at the benefits system: disbelief.

For example, Long calls it “a maddening computer error” and “a mysterious glitch” that Daniel Blake – a 59-year-old carpenter who has been signed off from work by his doctor after a heart attack – is denied his disability benefit.

Actually it’s because he’s been found “fit to work” after an agonising tick-box phone assessment by an anonymous adviser, who is neither a nurse nor a doctor. This is a notorious problem with work capability assessments under a welfare system constantly undergoing cuts and shake-ups by successive governments.

Both the Personal Independence Payment (which replaced the Disability Living Allowance in 2013 under the coalition) and Employment and Support Allowance (which replaced the Incapacity Benefit in 2007 under New Labour) have seen backlogs and delays in providing financial support to claimants, and work capability tests have repeatedly been under fire for being intrusive, inappropriate, or just wrong. Funding for those in the “work-related activity group” who claim ESA – in which you work if you are deemed able to during continual interviews with an adviser – also suffered a 30 per cent cut in last year’s budget.

Also, when people claiming ESA believe they have wrongly been found “fit for work” and appeal – as Blake does in the film – more than half of decisions are overturned when they reach a tribunal.

It’s a system that puts cost-cutting above people’s welfare; Jobcentre staff are even monitored individually in terms of how many sanctions they impose (Blake’s friend Katie is sanctioned in the film), making them feel as if they are working to targets.

The situation for disabled, sick or broke people claiming welfare is unbelievable in this country, which is perhaps why it’s so difficult for us – or for some watching Loach’s portrayal of the cruel system – to believe it at all. At best, it’s because we would prefer to close our eyes to a system that we hope we never have to grapple with. At worst, it’s because we don’t believe people when they say they cannot work, and demonise them as “shirkers” or “scroungers”.

By all means question Loach’s cinematic devices, but don’t question the point of telling the story at all – and the story itself. After all, it’s the very inability of people who rely on the state to have their voices heard that means they are always hit the hardest.

Anoosh Chakelian is deputy web editor at the New Statesman.