Payday lenders are bad and the rates they charge should be capped. That could have been the shortest leading article published by this newspaper, a half-tweet of condemnation and opinion based on the assumption that lending money to people with poor credit histories at extortionate rates of interest is wrong. Unfortunately, the problem of unsecured lending is more complicated than that.
In many countries, including France, Germany, Australia and Japan, and in many states in the US and provinces in Canada, interest rates are capped at maximums, such as 36 or 48 per cent a year. But this means that companies cease to offer loans to risky customers, who are then forced into the hands of illegal loan sharks, often run by organised crime. It is better to have payday lending in the legal economy, where it can at least be regulated, than to drive it into the criminal underworld.
However, as Stella Creasy, the Labour MP who has campaigned tenaciously against irresponsible lending, said: "The problems with a rate cap do not mean that we cannot act. Rather, we must work harder and learn from others how best to act." She has proposed a cap on total repayments to try to put a brake on compound interest and rollover debts that end up many times the size of the original loan, without choking off the legitimate market for emergency short-term borrowing.
That should, however, be just the start of a programme to limit abuses in the payday-loan market. Some of these should be addressed by the investigation launched last week by the Competition Commission. Its main task is to look at unfair competitive practices that are suspected of giving borrowers a bad deal, such as confusing information about interest rates and lenders making it hard for borrowers to switch to a rival company.
But there are many more reforms that are needed, which should start with the underlying causes of problem borrowing. Advertising should be restricted, on the same principles that have been applied to advertising alcohol and tobacco. Adverts for payday loans could, for example, be required to carry information about where to get debt advice. Payday lenders could be required to pay a levy to fund helplines and services to help with addictive and self-destructive behaviour that contributes to indebtedness, and to support credit unions.
The evidence that payday lending is a problem has been growing in recent years – and we report the latest alarming findings today: that a million households took out a payday loan in the previous month. But the Government's response has been slow and defeatist.
Tomorrow, finally, Jo Swinson, the Liberal Democrat consumer affairs minister, is chairing a meeting of lenders and consumer organisations. Surprisingly, she has failed to invite Ms Creasy to attend. Ms Creasy has made no protest, but, as we report today, Ms Swinson's view is believed to be that Ms Creasy's presence might "inhibit a full and frank discussion between all sides". If this is the case, the minister is guilty of cowardly and counter-productive partisanship. If Ms Creasy were at the meeting, any agreement that might be reached would have infinitely greater credibility; and if she did not agree with the conclusions, they would at least have been tested in battle.
The problem of payday lending is too important for such pettiness, and too complex to exclude any knowledgeable person from helping to draw up the best policies to minimise harm.