Today’s record £1.1bn fine imposed by the Financial Conduct Authority on five of the world’s biggest banks should not just disappear into the FCA’s coffers. George Osborne was quick out of the blocks this morning at 6am with a statement welcoming the record FCA fines on our banks over the foreign exchange rigging scandal. Unscrupulous bankers had tried to rig ‘the fix’, as it’s known, to pocket extra cash. Not good for London’s reputation, not least given Libor has already been tarnished.
Of the £1.5bn in fines, Osborne said: “I will ensure that these fines are used for the wider public good”. Given that some of those will be paid by the taxpayer owned RBS, there’s an element of us fining ourselves and then redistributing the cash elsewhere. The fine, imposed for the systematic rigging of the £3.5tn a day foreign exchange markets, should instead go to tackling another problem the FCA is grappling with: the high cost short-term credit market. For earlier this week, the FCA also announced the new payday lending cap, with loan rates to be capped at 0.8 per cent per day of the amount borrowed. However, not only are there legitimate concerns that the rate remains too high, the move does nothing to spur the growth of alternative affordable providers people desperately need. Given worries that the cap could lead to a significant shrinkage in the payday loan market with people resorting to illegal lenders, building an alternative network of providers is even more urgent.
We therefore believe that today’s £1.1bn should be used to capitalise and expand a network of such providers. Earlier this year, IPPR’s report, Jumping the shark set out a strategy for doing exactly that. We argued that regulation can reduce the damage done by providers of high cost consumer credit, but it is more effective at preventing harm than promoting good. Alongside a tougher regulatory system, the UK also needs new forms of local, democratic finance that serve the needs of low- and middle-income households in the short term credit market, that otherwise risk being excluded.
To develop this network, we are calling for a new national institution – an Affordable Credit Trust – to be established with the remit of mobilising and capitalising a diverse range of local not-for -profit lenders. Affordable credit providers could draw down capital from the Trust and access technological infrastructure necessary to keep costs low, in exchange for offering affordable loans and operating in a democratic fashion, with borrowers becoming members of the institution. They could range from credit unions, housing associations to social enterprise providers and more, with the Trust encouraging innovation in how to service affordable, easy to use loans. Moreover, providers should partner with institutions like local Post Offices or churches to ensure they operate at the heart of their community.
To keep the system sustainable, lenders would be able to use as a last resort a repayment backstop mechanism similar to that employed with the DWP’s Budgeting Loan system, which consistently achieved over a 90 per cent repayment rate without placing the debtor in undue difficult. We estimate that this in place, and with the right support, loans could be offered for as little as £3 for every £100 borrowed per month, compared to nearly £30 for the average payday loan. In a time when household incomes continue to be squeezed, that difference can make all the difference.
However, we also know from past experience that the affordable credit market won’t grow on good wishes alone; it needs financial and technical support to get off the ground and compete with the payday lenders. This is how it has grown in places like America, where one in three are members of a credit union. If today’s fine by the FCA was used to capitalise an Affordable Credit Trust it could have the means to really turn the tide against high cost lenders, potentially offering up to 5 million affordable, manageable loans a year once the Trust and local provider networks are fully established, based on our previous research.
An Affordable Credit Trust capitalising affordable, democratic forms of finance captures the spirit of the times: it is about shifting capital and power away from the consumer credit industry and towards people and communities, giving them the means to build affordable alternatives to high cost credit. It means shifting away from a reliance on cash transfers from the central state and towards rooting democratic forms of capital that allow people to be more assertive in standing up to markets where they dominate. So on a day when the banks have been shown – yet again – to have little regard for the rules the rest of us have to live by, their fine should be used to help ensure those that need access to affordable credit are no longer alone. The £1.1bn fine should be used to help us jump the shark.
Mathew Lawrence is Research Fellow at IPPR. He tweets @DantonsHead
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