THE prospect of the payday lending industry being all but wiped out over the coming months is one that, on the face of it, sounds worthy of celebration.
Unless they adapt to new rules unveiled by the City watchdog last week – and do so sharpish – the “villains of recession Britain” face “annihilation”, as Dr John Gathergood of the Nottingham School of Economics put it.
The impact of the regulator’s crackdown on payday lenders raises other questions, however – not only about where we go next but also what went before.
It was only in April this year that the Financial Conduct Authority (FCA) took over the regulation of consumer credit from the Office of Fair Trading (OFT). In that short time its actions have been sufficiently effective to raise serious questions as to what on earth had been going on before.
To say the OFT’s approach was hands-off is an understatement. It did pathetically little to tackle not only payday lenders but also a debt management sector in which the FCA has already uncovered bad practice on a shocking scale. That the OFT was allowed to get away with being so feeble and incompetent in protecting consumers surely merits investigation.
The FCA has introduced new rules forcing lenders to carry out affordability checks on borrowers and signpost them to free debt advice, while it has also limited borrowers to two “rollover” loans
Now it has finally unveiled the details of the price cap that will be imposed on payday lenders in the new year, when daily charges for interest and fees will be limited to 0.8 per cent of the loan amount. Default charges will be capped at £15 and borrowers must never have to pay back more in fees and interest than the value of the loan, under a total cost cap of 100 per cent.
The package will wipe out all but a few of the UK’s payday lenders, although Wonga – paying millions in compensation after sending “fake” legal letters to borrowers in default – will survive and may even thrive.
Chancellor George Osborne had the nerve to claim the cap was all part of his government’s “long-term economic plan” for a banking system for “hardworking people”. On the contrary, it’s the government’s vindictive welfare reforms that have forced so many of those “hardworking” people into the grateful arms of payday lenders.
So where do those struggling borrowers go now? Illegal money lenders, or “loan sharks”, in many cases.
With the government turning the screw on society’s most vulnerable, while miraculously finding the cash to fund tax cuts for high earners, the problem isn’t going to go away.
The hope is that enough payday lenders will discover scruples and develop a sustainable business model that allows them to remain competitive yet fair.
As Gathergood put it: “These firms have grown used to being able to do whatever they want in this market, but now they have to obey the rules. In short, they have two months to adapt or die.”
In most cases it’ll be the latter. The alternatives include credit unions and employer loans. The former need to be publicised far more effectively, while the government has an opportunity in next month’s Autumn Statement to introduce tax incentives encouraging the latter. It could also address the shortage of affordable short-term finance from high street banks and building societies, but the political appetite for that approach is sadly lacking.
Which takes you back to the regulator. It continues to uncover poor practice in areas including banking and self-invested personal pensions (Sipps), yet seems content to merely offer guidance rather than crack down on the offenders.
Its robust, interventionist approach to payday lending unfortunately highlights its shortcomings in protecting consumers from other unscrupulous parts of the industry, but it may also point the way forward.