25 Nov 2013

Capping payday loans: from light touch to strong arm

Extraordinary, unexpected move from George Osborne this morning on capping payday loan costs. Why extraordinary?

The idea of government intervention in a market with absurd APRs has always been perfectly plausible. But just weeks ago the new independent regulator of this market expressly suggested that this type of measure was a “very intrusive proposition”, which could end up raising the cost of credit to the cap, which very specifically, it would only ponder and research after it takes up the role of payday regulator in April 2014.

That was the position last month (it’s paragraph 6.71 in this document).

Payday Loan Companies Face Tougher Regulations

There is also an ongoing Competition Commission investigation, due to report by 2015.

Treasury ministers were also quoted sounding sniffy about rate caps (though Mr Osborne himself was rather stronger, talking to me over the summer). So why has the chancellor moved so strongly to cap the cost of payday credit now?

Well there’s clearly some politics here. It fits into the war for living standards for “hardworking” people. Let’s see if this is ballast for a less poor-centric autumn statement. But the chancellor’s people say they have informed the FCA that new powers will be included in the Banking Bill.

The experience in Australia is key here, apparently. Australia’s Gillard government brought in a cap of 4 per cent a month (with upfront charges of 20 per cent) last year.

Let’s compare this to Wonga’s famous business model of a 1 per cent interest rate per day. On an average loan of 17 days, that is 17 per cent. In theory that would be less than the upfront fee allowed under the Australian model.

The key here is that the upfront fee, in theory, should change the behavioural finance of consumers around taking the loan in the first place (there are ways around this though). So this is an intervention based not on lack of competition, but asymmetries of information in consumer finance.

One might stretch such interventions to, say, energy bills. As I pointed out the other day, a Yougov/CLASS poll showed a majority of the UK public believe in price caps for energy, rent and transport, and 35 per cent for groceries!

After the Miliband energy cap announcement I pointed to a new cross party agenda for a stronger state intervening in dysfunctional markets. This is yet more evidence. It won’t be the last.

Follow Faisal Islam on Twitter.

4 reader comments

  1. Lemog says:

    oh dear, poor George, methinks he has been spooked that Labour now seem to be making the running when it comes to the impact of austerity on peoples suffering.
    Remember the old maxim George, we reap what we sow and you and your colleagues have sown the seeds of your downfall

  2. Philip Edwards says:

    Faisal,

    Can I just get this straight?

    The London political gangsters who stood aside and allowed transnational bankers to steal trillions from across the world, the people who haven’t chased let alone jailed scum like the Yank Bob Diamond……..these are the same people we expect to “regulate” relatively small time loan sharks? Could there be any greater hint than “Treasury ministers were also quoted sounding sniffy about rate caps”?

    The sight of Georgy Boy firing pop guns on this issue would be laughable if it wasn’t for the tragic consequences for ordinary citizens on the brink of poverty.

    Of course this is merely the tip of the iceberg for what lies ahead for this country. This plus the sale of student loans tells you what reasonably informed people have known all along: neocons would sell their own parents and grandparents if it made them some profit.

    New Labour and the Cleggies are no different.

    So, it looks like the short 20th century experiment with universal, democratic one vote to each citizen is well down the road to eventual extinction. Any day now we’ll be hearing from the Daily Mail, the Sun, the BBC of the need for “a strong man,” a “leader” who will crush all opposition and “restore the country.”

    You know, like the McCarthyite construction industry black listing destroyed thousands of lives. But was largely ignored by mainstream media, C4 News included.

    Don’t kid yourself there is no linkage.

  3. Caliban says:

    You know, I always though the Loony Left went extinct during the Blair-ocene period. A process of rapid decline that started after the well known Kinnock Conference extinction event.

    But it’s nice to see a few have been preserved in the safety of the Wild(ish)life Sanctuary of the C4 Blogs comment section. Especially as their survival in the wild real world is so threatened.

    These living fossils are a fascinating window into the past, and explain much about our evolution (most notably the dead ends). But one can’t help hoping the breeding programme is not a success.

  4. Lemog says:

    I know how Caliban feels. I thought that with the age of the Condem Coalition all rabid right wingers had perished but alas, they too have found sanctuary in the C4 Blogs comments. Still, come the next general election they will be cast into the wilderness where they belong

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