Can credit scores make payday lending ethical?

Payday lenders need to work harder to not target vulnerable borrowers.

A new report (pdf) by Damon Gibbons, published in partnership by Friends Provident and the Centre for Responsible Credit, looks at the benefits of credit data sharing and raises another possible solution to the problem of irresponsible lenders targeting the financially vulnerable.

It might be a surprise that credit scoring is not standard procedure for high-cost lenders on the high street and online. But most of us are familiar with payday lenders' adverts promising easy cash with no credit checks. The speed with which hard-up borrowers can obtain very expensive loans does have consequences, and making data sharing a priority would start to set this problem straight.

What does credit scoring and data sharing involve?

Credit scoring, simply put, is the system financial institutions have in place to check whether a person is said to be creditworthy before assessing a loan application. The system, regulated by the Financial Services Authority, works on a points system and is often shared with credit reference agencies. If a person's points score is deemed high enough then their loan application will generally be accepted; otherwise, that loan application can be denied.

How it can benefit responsible lending?

The Office for Fair Trading's guidance to lenders on responsible lending states that a creditor must consider whether a credit commitment will adversely impact upon an individual's financial situation. Ideally, credit scoring and data sharing can help lenders adhere to those guidelines. They will finally have a database to look at which will give them some indication of whether a loan of a particular amount, say, will be beneficial to them or impact negatively on their financial situation.

What bad behaviour it can stop?

At the moment there is no law stopping a payday lender from lending large sums of money, at expensive rates of interest, to low income consumers. There is only guidance to do this, and we know that this is not always adhered to. While we know payday lenders profit from repeat customers, and that only between 50 and 60 per cent of loans from payday lenders are notified with credit reference agencies, even some in the industry say that moving to a culture of data sharing would ensure that the risks attached to lending money are reduced, as well as some of the front end costs.

What are the risks?

The big risk is that credit scores could make it more difficult for a person to obtain credit.

The government, on this, have said that while they appreciate the need for credit scoring, they do take into consideration the “unintended consequences”, such as to those with no, or "thin", credit rating struggling to get loans.

However in addition to better quality lending decisions, it would be worthwhile for mainstream credit providers to be less needlessly risk averse when considering overdraft and credit applications to low income customers who may otherwise rely on a high cost payday lender, where the average loan can cost around £30 per £100 borrowed.

What policy makers should do

Two things: set criteria for what is meant by responsible lending, such as setting a minimum level of disposable income a borrower is left with after taking on a loan; and oblige lenders to refer high risk customers to credit unions, where they can receive budget management advice and borrow money at far cheaper prices.

Furthermore, payday lenders should be obliged to implement a system of five roll-over loans per customer. Credit checks will provide the data for customers who reach this point.

Credit scoring and data sharing, implemented properly, can be the lifeline borrowers need at a time when personal debt is growing and the payday lending sector is seeing its profits soar.

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 Images/AFP
Show Hide image

Is Yvette Cooper surging?

The bookmakers and Westminster are in a flurry. Is Yvette Cooper going to win after all? I'm not convinced. 

Is Yvette Cooper surging? The bookmakers have cut her odds, making her the second favourite after Jeremy Corbyn, and Westminster – and Labour more generally – is abuzz with chatter that it will be her, not Corbyn, who becomes leader on September 12. Are they right? A couple of thoughts:

I wouldn’t trust the bookmakers’ odds as far as I could throw them

When Jeremy Corbyn first entered the race his odds were at 100 to 1. When he secured the endorsement of Unite, Britain’s trade union, his odds were tied with Liz Kendall, who nobody – not even her closest allies – now believes will win the Labour leadership. When I first tipped the Islington North MP for the top job, his odds were still at 3 to 1.

Remember bookmakers aren’t trying to predict the future, they’re trying to turn a profit. (As are experienced betters – when Cooper’s odds were long, it was good sense to chuck some money on there, just to secure a win-win scenario. I wouldn’t be surprised if Burnham’s odds improve a bit as some people hedge for a surprise win for the shadow health secretary, too.)

I still don’t think that there is a plausible path to victory for Yvette Cooper

There is a lively debate playing out – much of it in on The Staggers – about which one of Cooper or Burnham is best-placed to stop Corbyn. Team Cooper say that their data shows that their candidate is the one to stop Corbyn. Team Burnham, unsurprisingly, say the reverse. But Team Kendall, the mayoral campaigns, and the Corbyn team also believe that it is Burnham, not Cooper, who can stop Corbyn.

They think that the shadow health secretary is a “bad bank”: full of second preferences for Corbyn. One senior Blairite, who loathes Burnham with a passion, told me that “only Andy can stop Corbyn, it’s as simple as that”.

I haven’t seen a complete breakdown of every CLP nomination – but I have seen around 40, and they support that argument. Luke Akehurst, a cheerleader for Cooper, published figures that support the “bad bank” theory as well.   Both YouGov polls show a larger pool of Corbyn second preferences among Burnham’s votes than Cooper’s.

But it doesn’t matter, because Andy Burnham can’t make the final round anyway

The “bad bank” row, while souring relations between Burnhamettes and Cooperinos even further, is interesting but academic.  Either Jeremy Corbyn will win outright or he will face Cooper in the final round. If Liz Kendall is eliminated, her second preferences will go to Cooper by an overwhelming margin.

Yes, large numbers of Kendall-supporting MPs are throwing their weight behind Burnham. But Kendall’s supporters are overwhelmingly giving their second preferences to Cooper regardless. My estimate, from both looking at CLP nominations and speaking to party members, is that around 80 to 90 per cent of Kendall’s second preferences will go to Cooper. Burnham’s gaffes – his “when it’s time” remark about Labour having a woman leader, that he appears to have a clapometer instead of a moral compass – have discredited him in him the eyes of many. While Burnham has shrunk, Cooper has grown. And for others, who can’t distinguish between Burnham and Cooper, they’d prefer to have “a crap woman rather than another crap man” in the words of one.

This holds even for Kendall backers who believe that Burnham is a bad bank. A repeated refrain from her supporters is that they simply couldn’t bring themselves to give Burnham their 2nd preference over Cooper. One senior insider, who has been telling his friends that they have to opt for Burnham over Cooper, told me that “faced with my own paper, I can’t vote for that man”.

Interventions from past leaders fall on deaf ears

A lot has happened to change the Labour party in recent years, but one often neglected aspect is this: the Labour right has lost two elections on the bounce. Yes, Ed Miliband may have rejected most of New Labour’s legacy and approach, but he was still a protégé of Gordon Brown and included figures like Rachel Reeves, Ed Balls and Jim Murphy in his shadow cabinet.  Yvette Cooper and Andy Burnham were senior figures during both defeats. And the same MPs who are now warning that Corbyn will doom the Labour Party to defeat were, just months ago, saying that Miliband was destined for Downing Street and only five years ago were saying that Gordon Brown was going to stay there.

Labour members don’t trust the press

A sizeable number of Labour party activists believe that the media is against them and will always have it in for them. They are not listening to articles about Jeremy Corbyn’s past associations or reading analyses of why Labour lost. Those big, gamechanging moments in the last month? Didn’t change anything.

100,000 people didn’t join the Labour party on deadline day to vote against Jeremy Corbyn

On the last day of registration, so many people tried to register to vote in the Labour leadership election that they broke the website. They weren’t doing so on the off-chance that the day after, Yvette Cooper would deliver the speech of her life. Yes, some of those sign-ups were duplicates, and 3,000 of them have been “purged”.  That still leaves an overwhelmingly large number of sign-ups who are going to go for Corbyn.

It doesn’t look as if anyone is turning off Corbyn

Yes, Sky News’ self-selecting poll is not representative of anything other than enthusiasm. But, equally, if Yvette Cooper is really going to beat Jeremy Corbyn, surely, surely, she wouldn’t be in third place behind Liz Kendall according to Sky’s post-debate poll. Surely she wouldn’t have been the winner according to just 6.1 per cent of viewers against Corbyn’s 80.7 per cent. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.