James Moore: Regulators and politicians not ready to be courageous and set interest rate cap
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Wednesday 29 May 2013
Outlook There is a simple solution to the problem of payday lenders – one that has been highlighted again by Citizens Advice, whose admirable service is being swamped by the industry's victims: an interest rate cap, such as one that already exists in the Irish Republic.
And yet, despite fresh scandals emerging at an alarming rate, there is a strange reluctance to embrace this solution.
Partly this is because academic research on the impact of such a measure has been equivocal, as academic research usually is. Partly it is because imposing a cap would be a courageous step to take; as the Civil Service well knows, the best way to divert a politician from a policy you don't much like is to describe it as courageous.
One of the standard arguments deployed by opponents of the measure is that it may restrict supply of a service that, while it might be unpalatable, can sometimes be needed – particularly by people who find themselves in short-term need. One example is the self-employed, who often face cash flow problems; another is those with limited means who suddenly get hit with unexpected bills.
The fear is that if you crack down on organisations which are legal, if not legitimate, you leave the field clear to those which operate outside the law and show few scruples in the way they collect outstanding monies.
But then the tactics employed by some of the businesses which are legal – threats, harassment, bullying – are little different from those that are not. Which explains why Citizens Advice is doing such brisk business.
And, anyway, restricting the size of this market may not be such a bad thing. The wall-to-wall advertising indulged in by the likes of market leader Wonga and, more recently, Cash Lady, is arguably creating a market where one didn't previously exist. These organisations compete not so much on price but on the speed and ease of access to funds they offer to their clientele. The evidence suggests that it has simply become too easy to get your hands on this sort of credit and, as the Office of Fair Trading has found, once a payday lender has its hooks into a client, the likelihood is they will stay there. Up to 50 per cent of payday lenders' business comes from customers rolling over their loans.
Therefore, an interest rate cap which makes the market less attractive for operators might be a very good thing for the very reason that critics argue against it: it could reduce the supply as well as the price of this sort of credit.
The problem is that even though the Financial Conduct Authority has been given the power to act in this area, it won't get it until next year – and even then it will have to put it out to consultation. If the watchdog favours a cap, and regulators are no fonder of taking courageous decisions than politicians are, it won't be able to impose one any time soon.
In the interim, the OFT will almost certainly formally refer the market to the Competition Commission (it's said it's minded to), which will then have to conduct its own investigations before making recommendations.
To its credit, the OFT has at least used the powers it has to strip the really awful, as opposed to the common or garden awful, of their credit licences. But that amounts to, at best, treating the symptom rather than the underlying cause of infection.
For now, the parade of misery knocking on the doors of Citizens Advice Bureaux up and down the country will continue. If it hoped its intervention would push things forward, it's likely to be disappointed.
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