Miliband's promise to clamp down on payday loans is a good first step
The start of a One Nation economy
While bloggers and columnists have focused on Ed Miliband's call for a reintroduction of the 10p tax rate, scrapped by Gordon Brown, paid for through a mansion tax on £2m properties, it should be noted that the opposition leader signalled signs of hope on personal finance as well.
In his speech, he noted that as a start to building a One Nation economy Labour would:
Break the stranglehold of the big six energy suppliers. Stop the train company price rip-offs on the most popular routes. Introduce new rules to stop unfair bank charges. And cap interest on payday loans.
The financial pinch that people are feeling will not be easy to undo, but I want to suggest two things to complement Ed Miliband's call for building the One Nation economy.
Firstly he must take seriously wages. While millions of state sector workers will see their wages freeze, the average private sector worker’s pay has risen by just 1.4 per cent. All the while, according to latest ONS figures food prices have risen by 4.5 per cent in the last year. Indeed the real wages of many workers fell to 2003 levels.
For many years wages were effectively supplemented by the relative free flow of credit. Today, access to mainstream credit is denied to people who have for a long time seen their wages stagnant, losing the battle against inflation and the rising cost of living.
As academics from the university of Bristol pointed out, while the UK may be out of a technical recession, the public’s recession has never gone away and is getting worse. People having to drive their own personal austerity measures just to get to the end of the month.
Others have not been so lucky - which brings me to my second suggestion. Last year the charity Shelter published findings showing that a million people took out a payday loan to help with their mortgage payments.
Research by Which?, also published last year, showed that 40 per cent of payday loans are being taken out to buy basics such as food and bills.
Many payday lenders can charge up to 4,214 per cent interest on amounts ranging from £50 to £800. On average a payday lender will charge £25 for every £100 borrowed on a loan of 28 days but costs can soon go up if there are missed payments, with fees anywhere from £12 to £25. Compared to authorised bank overdrafts or loans from credit unions these are extortionate figures.
What Labour should be calling for is a total cost of credit cap. Instead of just targeting interest rates a total cost of credit cap would legislate for how much a lender can charge in total, such as administration fees (in Australia, for example, lenders got around interest rate caps by obliging borrowers to buy their financial DVDs).
As I have been told time again, market rules do not seem to be working with high cost credit. Given the large amount of market entrants, prices for credit are still sky high. However when I spoke to Matthew Fulton, a key figure in the End the Legal Loansharking campaign, he told me that an internet company’s break-even point is at around 70 per cent APR, while payday lenders with a shop front can average at 130-40 per cent depending on the types of scheme and duration.
Payday lenders are in the business of ripping off the poor and hard up. So it is very encouraging that Ed Miliband has already pledged himself to place a cap on the prices that payday lenders can charge at.
But it can not be an isolated move. As Veronika Thiel put it in her report on doorstep lending: “Interest rate caps have to be levelled among a series of other regulations and interventions.”