Matthew Lawrence says that Labour must prioritise the creation of a fair and sustainable consumer credit market
The recent declaration by the Archbishop of Canterbury, Justin Welby that the Church of England will “compete Wonga out of existence” has once again put the payday loans industry in the spotlight. Yet if the contest between God and Mammon is ancient, the rise of the industry is a modern – and troubling – phenomenon of austerity Britain.
With UK workers suffering the most protracted squeeze on their incomes since the 1870s the £2 billion industry has exploded in the recession as hard-pressed households seek quick access to credit to cope with surging living costs. The recent, authoritative, Aviva Family Finances Report shows that one in twenty households now rely on payday loans to simply get by each month, despite the loans often costing as much as £25 for every £100 borrowed.
With estimates that as many as 5 million loans will be taken out in 2013, usurious payday lending has taken its place alongside food banks and zero-hours contracts as the harsh face of life in Coalition Britain.
The industry, of course, claims that it is servicing high-risk clients with much-needed credit who have been excluded from the mainstream banking system. That it provides a service is not in doubt; the question is what type and at what cost. For as the Office of Fair Trading made clear in March, when it referred the entire sector to the Competition Commission, the industry is riddled with “widespread irresponsible lending” causing widespread consumer detriment for the profits of a few.
So, what is to be done? It will be an endless wait under the government for broad-based wage growth to ease the strain on household finances. An economic recovery premised on the strategic discipling of labour, whether in worsening working conditions or in wage constraint, will not deliver the gains for workers that would ease the demand for credit when times are tight.
A future Labour government must act to put more pounds in the pockets of middle and low income households, whether by implementing the Living Wage, for example via a coherent public procurement strategy, to a commitment to uprate the minimum wage above inflation rates until it closes the gap with the Living Wage.
Reform of the institutions of the UK labour market are vital if we are to tilt the playing field more fairly towards workers when it comes to dividing the economic pie; demand for short term credit is an occasional part of life but it becomes damagingly institutionalised when wages aren’t enough to live decently on. However, embedding inclusive economic institutions in the economy will be a long process that will require the patient building of institutions that are currently starkly absent.
In the meantime, payday lenders are causing a tear in the social and economic fabric of communities and we have to act now. The way to do that is a reform of the architecture of the payday lending market. Here is how:
Firstly, the government must act to limit the drivers of escalating debt: the practice of rolling over loans should be banned and the number of loans should be restricted. As both the OFT and the Public Accounts Committee have found, the business model of many lenders is premised on rapid not responsible lending which causes or reinforces cycles of often unsustainable debt. Too many companies simply haven’t got their house in order and are making huge profit margins by reckless and damaging behaviour; the government should act to force them to improve or get out of the market.
Secondly, as Stella Creasy and others have argued, a cap on the total cost of credit (not just the interest rate) should be proactively enforced when the new Financial Conduct
Authority gains the power to act in 2014. Despite industry scaremongering to the contrary, where a total cap has been introduced, for example in Japan in 2006, there has not been a surge in illegal money lending, but there has been downward pressure on the cost of credit for consumers. However, recent noises from the government suggest that it may be backsliding on the commitment to better regulate the industry. Labour must be ready to hold the government to its word and will have the support of the many community campaigns across the country, including one I am involved in in Brent, in that fight.
Thirdly, in a period of acute financial stress for many people, the state must ensure it is not unnecessarily adding to the burden and forcing people to borrow at excessive costs to achieve even a basic standard of living. Encouragingly, local communities are beginning to act on this insight. For example, in Islington, expertly led on this issue by Councillor Andy Hull, the council is reviewing its debt arrears policy to ensure no one is driven to the payday lenders by council debt.
Similarly, as the rollout of Ian Duncan-Smith’s welfare reforms continue, there is a real fear that they will drive the needy to resort to highcost credit. The sanctions regime, for example, appears to be punitive but not effective; Labour needs to think hard about how to ensure that even if governing in a fiscal vice it can create a welfare system that does not drive financially vulnerable citizens into the arms of predatory lenders.
Fourthly, the industry has a point when it suggests that the high cost of mainstream banking for the financially vulnerable, for example the cost of going into the overdraft, means for some the high cost of payday loans is nonetheless rational. The answer, however, is not simply to allow usury to become commonplace but to force banks to better serve financially excluded or vulnerable consumers. For example, Labour could consider whether the equivalent of America’s Community Reinvestment Act might be appropriate, which would give greater transparency to the bank lending and be a lever to force banks to invest in financial infrastructure in low-income communities.
Finally, there must be greater innovation in the supply of consumer credit. Credit unions are part of this but they are not a magic bullet; they are currently undercapitalised, fragmented and held back by legislation. To support them, Labour should examine how councils, housing associations and large companies can do more to promote membership-owned credit unions and other forms of democratic lending. They should also go further, promoting new funding models that offer the potential to offer rapid access to cash at a reasonable rate. For example, peer to peer lending has doubled in three years in America where there are specific firms such as SpotLoan or Fairloan which operate on p2p lines; how can we stimulate a similar market in the UK?
Turning the money lenders out of the temple will of course not be easy. The rise of the payday lending industry reflects deeper structural trends: the privileging of creditors over debtors; the continuing growth of an hour glass economy in pay and conditions; widening inequalities heightened by the dominance of capital over labour when it comes to who gets a fair financial reward. However, if Labour is serious about being a “One Nation” party, it must tackle the payday industry and make ensuring that the consumer credit market is more affordable, sustainable and fair a priority.
Matthew Lawrence is the lead organiser in Brent and Camden in the campaign against payday lending.
This article first appeared in the Autumn 2013 edition of JFA.