Finally there's agreement that payday lending needs to be tackled. But how?

Access to banking, co-operative credit and caps on interest should all be considered.

The payday lending industry is in total disgrace. After a survey and report carried out by Citizens Advice, who called the industry “out of control”, it has been shown that lenders have sold loans to young people aged below 18, people with mental health difficulties and people who are drunk. This is contrary to any responsible lending criteria and should therefore be dealt with rigorously by the authorities. 

To make matters worse it has emerged that complaints to the Financial Ombudsman Service (FOS) about payday lending shot up 83 per cent last year, the third highest rise of any sector with the exception of the home credit industry (139 per cent) and payment protection insurance (PPI – 140 per cent).

The Office for Fair Trading officially began their investigation of the industry in March 2013, but since the CAB's results run up until 13 May 2013 (when their in-depth analysis of 780 cases stopped) it's safe to say that bad practice carried on regardless of OFT oversight. 

Even the payday lending trade association, the Consumer Finance Association, has its own Code of Practice which its members (making up 70 per cent of the payday lending market in the UK) pledge to commit to, including rules of affordability assessments, debt collection procedures and grace periods for troubled debtors. 

The trouble is irresponsible lending is woven so firmly into the business model of payday lending it is hard to erase it. When we consider for example that 28 per cent of loans are either rolled over (where one loan is taken out to service the interest on an existing loan) or refinanced, which provides 50 per cent of a lenders' revenue, it's a very big ask to expect the industry to voluntarily give up a big part of its profit maximisation. 

What's more is that payday lenders do not compete on price, but rather speed of service. Therefore if a high street is littered with lenders this will not have too much effect on the price at which a loan will cost (which ranges from around £25-35 per £100 loan, per month) but drives lenders to make faster decisions, incentivising the accepting of loan applications irresponsibly. 

As Stella Creasy MP said on Tuesday “this industry continues to fall out of the grip of regulators”. Indeed it looks like its getting worse before it gets better. 

However we are still at a point where we are merely finding faults with the industry and not seeking solutions. 

Gillian Guy, the chief executive of Citizens Advice, in her FT editorial on Tuesday, pointed out that banks need to take some part in the blame for the rise of payday lending. 

In so doing they should also do the following: a) accept responsibility and offer a product to challenge payday lending; b) provide basic “jam-jar” accounts for individuals which also offer budgeting support; c) offer face-face financial support; and d) reopen their offer of current accounts to undischarged bankrupts. 

This would be a fantastic start in the consumer credit industry, but alongside this government should also acknowledge the ways in which other countries tackle predatory lenders.

The Financial Conduct Authority will have the power to cap the cost of credit when they take over from the Financial Services Authority on payday lenders in April 2014. They should use it, looking to the rest of the world for guidance. 

For example in France and Germany there are restictions on where credit is available from. In Germany interest rates are capped at twice the market rate and in France the limit is reviewed every three months. There is no evidence to suggest illegal lending is any more a problem in those countries than in the UK where there is no cap on the price at which a lender can sell credit. 

Furthermore, in the UK, there are 7.7 million bank accounts without credit facilities, nearly four times the number of Germany (2 million at the end of 2006) and France (2.1 million in 2008),while 9 million people cannot access credit from mainstream banks in the UK, as opposed to around 2.5 million in Germanyand between 2.5 million and 4.1 million in France.

Looking further afield to Canada, unless changed through provincial legislation concerning the provisioning of payday loans, usury laws prevent lenders to charge interest above 60 per cent per year. In case this squeezed supply without addressing the demand for this type of finance, Canada has made a big push on credit unions as an alternative to high cost, short term credit. 

According to the World Council of Credit Unions Canada has the highest per-capita membership in credit unions in North America. More than a third of the population is a member of at least one credit union.

Also in Japan there has been a total cost of credit cap from 40 per cent to 29.2 per cent between 1986 and 2000. While illegal lending has not risen (in fact it rose with the loosening of restrictions on the amounts credit sellers could lend at) neither has lending from mainstream banks or Shinkin (the equivalent of credit unions). 

According to Damon Gibbons of the Centre for Responsible Credit, this has been “part of a more general trend amongst Japanese households to reduce their use of credit over this period.”

There are many more examples like this that the government could and should consider but instead it runs scared of firmer regulation. We've seen the damage and irresponsibility done by payday lending, now we need to do something about it. 

If Gillian Guy's recommendations about what the banks could do to incorporate more people into mainstream finance were taken up, government could really start to crack down on the legal loan sharks, bringing some crucial changes to responsible credit and financial inclusion.

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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What I learnt when my wife and I went to Brexit: the Musical

This week in the media, from laughing as the world order crumbles to what Tristram Hunt got wrong – and Leicester’s big fall.

As my wife and I watched Brexit: the Musical, performed in a tiny theatre above a pub in London’s Little Venice, I thought of the American novelist Lionel Shriver’s comment on Donald Trump’s inauguration: “A sense of humour is going to get us through better than indignation.” It is an entertaining, engaging and amusing show, which makes the point that none of the main actors in the Brexit drama – whether supporters of Leave or Remain – achieved quite what they had intended. The biggest laugh went to the actor playing Boris Johnson (James Sanderson), the wannabe Tory leader who blew his chance. The mere appearance of an overweight man of dishevelled appearance with a mop of blond hair is enough to have the audience rolling in the aisles.

The lesson we should take from Brexit and from Trump’s election is that politicians of all shades, including those who claim to be non-political insurgents, have zero control of events, whether we are talking about immigration, economic growth or the Middle East. We need to tweak Yeats’s lines: the best may lack all conviction but the worst are full not so much of passionate intensity – who knows what Trump or Johnson really believe? – as bumbling incompetence. The sun will still rise in the morning (as
Barack Obama observed when Trump’s win became evident), and multi­national capital will still rule the world. Meanwhile, we may as well enjoy the show.

 

Danger of Donald

Nevertheless, we shouldn’t deny the risks of having incompetents in charge. The biggest concerns Trump’s geopolitical strategy, or rather his lack of one. Great power relations since 1945 have been based on mutual understanding of what each country wants to achieve, of its red lines and national ambitions. The scariest moments come when one leader miscalculates how another will react. Of all figures in recent history, the Soviet leader Nikita Khrushchev, with his flamboyant manner and erratic temperament, was probably the most similar to Trump. In 1962, he thought President Kennedy, inexperienced and idealistic, would tolerate Soviet missiles in Cuba. He was wrong and the world only narrowly avoided nuclear war.

How would Trump respond to a Russian invasion of the Baltic states? Will he recognise Taiwan as an independent country? Will he scrap Obama’s deal with Iran and support a pre-emptive strike against its nuclear ambitions? Nobody knows, probably not even Trump. He seems to think that keeping your options open and your adversaries guessing leads to “great deals”. That may work in business, in which the worst that can happen is that one of your companies goes bankrupt – an outcome of which Americans take a relaxed view. In international relations, the stakes are higher.

 

Right job, wrong time

I rather like Tristram Hunt, who started contributing to the New Statesman during my editorship. He may be the son of a life peer and a protégé of Peter Mandelson, but he is an all-too-rare example of a politician with a hinterland, having written a biography of Engels and a study of the English Civil War and presented successful TV documentaries. In a parallel universe, he could have made an inspirational Labour leader,
a more thoughtful and trustworthy version of Tony Blair.

No doubt, having resigned his Stoke-on-Trent Central seat, he will make a success of his new job as director of the Victoria and Albert Museum. If nothing else, he will learn a little about the arts of management and leadership. But isn’t this the wrong way round? Wouldn’t it be better if people first ran museums or other cultural and public institutions and then carried such experience into parliament and government?

 

Pointless palace

When the Palace of Westminster was largely destroyed by fire in 1834, thousands gathered to enjoy the spectacle. Thomas Carlyle noted that the crowd “whew’d and whistled when the breeze came as if to encourage it” and that “a man sorry I did not anywhere see”.

Now, with MPs reportedly refusing to move out to allow vital renovation work from 2023, we can expect a repeat performance. Given the unpopularity of politicians, public enthusiasm may be even greater than it was two centuries ago. Yet what is going through MPs’ minds is anyone’s guess. Since Theresa May refuses them a vote on Brexit, prefers the Foreign Office’s Lancaster House as the location to deliver her most important speech to date and intends to amend or replace Brussels-originated laws with ministerial orders under “Henry VIII powers”, perhaps they have concluded that there’s no longer much point to the place.

 

As good as it gets

What a difference a year makes. In January 2016, supporters of Leicester City, my home-town team, were beginning to contemplate the unthinkable: that they could win football’s Premier League. Now, five places off the bottom, they contemplate the equally unthinkable idea of relegation.

With the exception of one player, N’Golo Kanté (now at Chelsea), the team is identical to last season’s. So how can this be? The sophisticated, mathematical answer is “regression to the mean”. In a league where money, wages and performance are usually linked rigidly, a team that does much better than you’d predict one season is likely to do much worse the next. I’d suggest something else, though. For those who won last season’s title against such overwhelming odds, life can never be as good again. Anything short of winning the Champions League (in which Leicester have so far flourished) would seem an anti­climax. In the same way, the England cricket team that won the Ashes in 2005 – after the Australians had dominated for 16 years – fell apart almost as soon as its Trafalgar Square parade was over. Beating other international teams wouldn’t have delivered the same adrenalin surge.

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era