BIS and OFT hint at cosmestic changes to payday loan regulations

Some positive, but largely symbolic, news.

There are going to be some positive changes happening to the regulation of the payday lending industry as of Wednesday–though we can expect a mixed reception from the release of two government reports looking in to it, one by the Office for Fair Trading (OFT) and the other by the Department of Business, Industry and Skills (BIS). 

To put a positive gloss on them more work will be done by the regulatory body to ensure bad practices in the industry, such as not carrying out rigorous credit checks, will be properly punished. On the other hand the BIS report has found evidence that capping the cost at which credit can be sold (notoriously high by payday lenders on the high street, many of whom have a 4000 per cent APR attached to them) would be a detriment to consumers.

Despite the prospect of rogue lenders losing their licenses, this will come as a disappointment to critics of the payday lending industry who felt there would be a significant change in direction by the government, after amending the Financial Services Bill last year to give the newly created Financial Conduct Authority the power to cap the cost of credit. 

But there are many reasons why Wednesday's reports will be disappointing. Recommendations by the OFT rehash their existing guidance on lending rules. Indeed nothing much is changing, what they are now promising again to do is better enforce their own guidelines. 

For example 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.

Their call for better affordability assessments has always been stipulated for by the regulators. The other recommendations they have made, including transparency on how lenders collect their money and the need for forbearance measures, are also already catered for. The only difference being that they have been unable to properly enforce their regulations. Only time will tell whether that has changed. 

As for the BIS report the research into what effect a cap on the cost of credit will look like was only based upon research of interest rate caps. As the report itself says:

The available evidence about the impact of price restrictions on the cost that consumers pay for credit relates to interest rate restrictions, however, not the total charge for credit.

We might excuse this on the grounds that no other country puts a cap on the total cost of credit, while many other countries have interest rate caps. But the government should waste no more time on this and assess properly what kind of regulation we really need to ensure borrowers are not paying over the odds for their credit. 

Essentially all that BIS, who commissioned the Personal Finance Research Centre at the University of Bristol to carry out the research, have done is look at what will happen if you remove the supply of credit when there is high demand. Inevitably, in isolation, this will be detrimental to consumers.

Government focus, however, should be on how to get payday lenders themselves to reduce their front end fees like administrative costs. There needs to be greater transparency on how these costs are realised and work should be done with the payday lending industry to see if those costs can be cheaper for the borrower.

Focus should also be laid upon how mainstream banks can incorporate those borrowers who might otherwise seek high cost credit, which itself is detrimental to their personal finances, discourages savings behaviour or putting money away for a rainy day, and impacts negatively on consumer-led growth.

Furthermore government needs to look into building up alternative lenders such as non-profit credit unions, who sell credit at a much cheaper rate of interest, and provide debt management advice for those in vulnerable situations. 

And lastly more focus should be put on addressing the root cause of the growth in the payday lending industry: stagnating wages; the rising cost of living; and high unemployment.

We can draw some positivity from this latest news, but it is largely symbolic. In truth the findings of both reports will only scratch the surface of the problem. Far more work needs to be done, and fast, as personal debt crises, bolstered by payday lenders, are taking grip of vulnerable households right now. 

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.
 

Getty
Show Hide image

Debunking Boris Johnson's claim that energy bills will be lower if we leave the EU

Why the Brexiteers' energy policy is less power to the people and more electric shock.

Boris Johnson and Michael Gove have promised that they will end VAT on domestic energy bills if the country votes to leave in the EU referendum. This would save Britain £2bn, or "over £60" per household, they claimed in The Sun this morning.

They are right that this is not something that could be done without leaving the Union. But is such a promise responsible? Might Brexit in fact cost us much more in increased energy bills than an end to VAT could ever hope to save? Quite probably.

Let’s do the maths...

In 2014, the latest year for which figures are available, the UK imported 46 per cent of our total energy supply. Over 20 other countries helped us keep our lights on, from Russian coal to Norwegian gas. And according to Energy Secretary Amber Rudd, this trend is only set to continue (regardless of the potential for domestic fracking), thanks to our declining reserves of North Sea gas and oil.


Click to enlarge.

The reliance on imports makes the UK highly vulnerable to fluctuations in the value of the pound: the lower its value, the more we have to pay for anything we import. This is a situation that could spell disaster in the case of a Brexit, with the Treasury estimating that a vote to leave could cause the pound to fall by 12 per cent.

So what does this mean for our energy bills? According to December’s figures from the Office of National Statistics, the average UK household spends £25.80 a week on gas, electricity and other fuels, which adds up to £35.7bn a year across the UK. And if roughly 45 per cent (£16.4bn) of that amount is based on imports, then a devaluation of the pound could cause their cost to rise 12 per cent – to £18.4bn.

This would represent a 5.6 per cent increase in our total spending on domestic energy, bringing the annual cost up to £37.7bn, and resulting in a £75 a year rise per average household. That’s £11 more than the Brexiteers have promised removing VAT would reduce bills by. 

This is a rough estimate – and adjustments would have to be made to account for the varying exchange rates of the countries we trade with, as well as the proportion of the energy imports that are allocated to domestic use – but it makes a start at holding Johnson and Gove’s latest figures to account.

Here are five other ways in which leaving the EU could risk soaring energy prices:

We would have less control over EU energy policy

A new report from Chatham House argues that the deeply integrated nature of the UK’s energy system means that we couldn’t simply switch-off the  relationship with the EU. “It would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks,” they argue. “A degree of continued adherence to EU market, environmental and governance rules would be inevitable.”

Exclusion from Europe’s Internal Energy Market could have a long-term negative impact

Secretary of State for Energy and Climate Change Amber Rudd said that a Brexit was likely to produce an “electric shock” for UK energy customers – with costs spiralling upwards “by at least half a billion pounds a year”. This claim was based on Vivid Economic’s report for the National Grid, which warned that if Britain was excluded from the IEM, the potential impact “could be up to £500m per year by the early 2020s”.

Brexit could make our energy supply less secure

Rudd has also stressed  the risks to energy security that a vote to Leave could entail. In a speech made last Thursday, she pointed her finger particularly in the direction of Vladamir Putin and his ability to bloc gas supplies to the UK: “As a bloc of 500 million people we have the power to force Putin’s hand. We can coordinate our response to a crisis.”

It could also choke investment into British energy infrastructure

£45bn was invested in Britain’s energy system from elsewhere in the EU in 2014. But the German industrial conglomerate Siemens, who makes hundreds of the turbines used the UK’s offshore windfarms, has warned that Brexit “could make the UK a less attractive place to do business”.

Petrol costs would also rise

The AA has warned that leaving the EU could cause petrol prices to rise by as much 19p a litre. That’s an extra £10 every time you fill up the family car. More cautious estimates, such as that from the RAC, still see pump prices rising by £2 per tank.

The EU is an invaluable ally in the fight against Climate Change

At a speech at a solar farm in Lincolnshire last Friday, Jeremy Corbyn argued that the need for co-orinated energy policy is now greater than ever “Climate change is one of the greatest fights of our generation and, at a time when the Government has scrapped funding for green projects, it is vital that we remain in the EU so we can keep accessing valuable funding streams to protect our environment.”

Corbyn’s statement builds upon those made by Green Party MEP, Keith Taylor, whose consultations with research groups have stressed the importance of maintaining the EU’s energy efficiency directive: “Outside the EU, the government’s zeal for deregulation will put a kibosh on the progress made on energy efficiency in Britain.”

India Bourke is the New Statesman's editorial assistant.