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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Why Angela Merkel's comments about the UK and US shouldn't be given too much weight

The Chancellor's comments are aimed at a domestic and European audience, and she won't be abandoning Anglo-German relationships just yet.

Angela Merkel’s latest remarks do not seem well-judged but should not be given undue significance. Speaking as part of a rally in Munich for her sister party, the CSU, the German Chancellor claimed “we Europeans must really take our own fate into our hands”.

The comments should be read in the context of September's German elections and Merkel’s determination to restrain the fortune of her main political rival, Martin Schulz – obviously a strong Europhile and a committed Trump critic. Sigmar Gabriel - previously seen as a candidate to lead the left-wing SPD - has for some time been pressing for Germany and Europe to have “enough self-confidence” to stand up to Trump. He called for a “self-confident position, not just on behalf of us Germans but all Europeans”. Merkel is in part responding to this pressure.

Her words were well received by her audience. The beer hall crowd erupted into sustained applause. But taking an implicit pop at Donald Trump is hardly likely to be a divisive tactic at such a gathering. Criticising the UK post-Brexit and the US under Trump is the sort of virtue signalling guaranteed to ensure a good clap.

It’s not clear that the comments represent that much of a new departure, as she herself has since claimed. She said something similar earlier this year. In January, after the publication of Donald Trump’s interview with The Times and Bild, she said that “we Europeans have our fate in our own hands”.

At one level what Merkel said is something of a truism: in two year’s time Britain will no longer be directly deciding the fate of the EU. In future no British Prime Minister will attend the European Council, and British MEPs will leave the Parliament at the next round of European elections in 2019. Yet Merkel’s words “we Europeans”, conflate Europe and the EU, something she has previously rejected. Back in July last year, at a joint press conference with Theresa May, she said: “the UK after all remains part of Europe, if not of the Union”.

At the same press conference, Merkel also confirmed that the EU and the UK would need to continue to work together. At that time she even used the first person plural to include Britain, saying “we have certain missions also to fulfil with the rest of the world” – there the ‘we’ meant Britain and the EU, now the 'we' excludes Britain.

Her comments surely also mark a frustration born of difficulties at the G7 summit over climate change, but Britain and Germany agreed at the meeting in Sicily on the Paris Accord. More broadly, the next few months will be crucial for determining the future relationship between Britain and the EU. There will be many difficult negotiations ahead.

Merkel is widely expected to remain the German Chancellor after this autumn’s election. As the single most powerful individual in the EU27, she is the most crucial person in determining future relations between the UK and the EU. Indeed, to some extent, it was her intransigence during Cameron’s ‘renegotiation’ which precipitated Brexit itself. She also needs to watch with care growing irritation across the EU at the (perceived) extent of German influence and control over the institutions and direction of the European project. Recent reports in the Frankfurter Allgemeine Zeitung which suggested a Merkel plan for Jens Weidmann of the Bundesbank to succeed Mario Draghi at the ECB have not gone down well across southern Europe. For those critics, the hands controlling the fate of Europe are Merkel’s.

Brexit remains a crucial challenge for the EU. How the issue is handled will shape the future of the Union. Many across Europe’s capitals are worried that Brussels risks driving Britain further away than Brexit will require; they are worried lest the Channel becomes metaphorically wider and Britain turns its back on the continent. On the UK side, Theresa May has accepted the EU, and particularly Merkel’s, insistence, that there can be no cherry picking, and therefore she has committed to leaving the single market as well as the EU. May has offered a “deep and special” partnership and a comprehensive free trading arrangement. Merkel should welcome Britain’s clarity. She must work with new French President Emmanuel Macron and others to lead the EU towards a new relationship with Britain – a close partnership which protects free trade, security and the other forms of cooperation which benefit all Europeans.

Henry Newman is the director of Open Europe. He tweets @henrynewman.

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