Sunday 21 April 2013

Against Legal Loan Sharking

Payday loans have become something of a sexy political topic. Stella Creasy has done a great deal of work to get it in the spotlight and Ed Miliband kicked off Labour's local election campaign with a pledge to give councils the power to push payday lenders (and bookies) off the high street. Like the SWP, I'm always happy to clamber aboard a passing bandwagon and, to this end, I invited Carl Packman to come and speak to Stoke-on-Trent Central Labour Party's meeting on Friday night. As readers may be aware, Carl has become the 'go-to' man for payday loan comment and recently had his Sky News debut cut short by the expiration of Margaret Thatcher.

Carl opened by noting how payday loans have been a real growth industry. In 2004, the sector collectively was worth approximately £100m. Now the figure is somewhere in the region of £2.2bn. While some of this could be laid at Labour's door, it has grown to the tune of £1.3bn since 2009. Clearly, the recession and wage stagnation have played their part and will continue to do so until economic policy changes course. As an illustration of how lucrative payday loans are, it costs the industry between £50 and £60 for each number they buy off telecommunications providers. While nearly everyone who receives automated phone calls or text messages would just delete and block, for the number of people the lenders net this is still a profitable outlay. Unfortunately, some one million are in hock to our legal loan sharks.

Now, there is a great deal of official concern over payday loans. But, unfortunately, while the government likes to talk tough it has been completely hands off. For example, Uncle Vince's department for Business, Innovation and Skills was able to insert an amendment to the Financial Services Act 2012 that empowered the Financial Conduct Authority to enforce regulation and good practice on payday loan companies, but have opted not to do a thing. The official line from Whitehall is that the FCA's use of powers would limit credit availability to those who most need it(!)

But this is no philanthropic service to those on very low incomes. Far from it, they're deliberately targeted. The marketing materials, the speed and convenience at which a loan can be approved, the assurances about unsecured loans (and the fact they don't come and brake your legs like real loan sharks) are all designed to make them very attractive to those fallen on hard times.

Therefore as this government are deliberately unwilling to take any concrete steps against the industry, what is to be done? On the policy side, Labour needs to look at why people feel payday loans are taken up as an option and push hard on the living wage campaigns. More also needs to be done to roll out banking services to the poor, and take up financial education in schools. On a more immediate level, we can all join credit unions and support their work by saving with them. For example, credits unions are capped at 26.8% APR for the loans it provides. Compare this with Wonga, who are uncapped and charge up to 4,000% APR in interest. Councils too can give them vacant shops for nothing or peppercorn rents. Carl also noted that some lenders are run on a franchise model, and individual manager/franchisees can be pressured by local action into taking promotional materials for credit unions. The Money Shop, for example, structure their business this way.

The subsequent discussion brought out a large number of issues. Brother S observed how the wide shift from weekly to monthly pay has no doubt exacerbated hardship for many, and Brother J added that the move to Universal Credit's monthly pay structure will deepen the problem. Brother M, a former JobCentre worker, said that even with the old system of (now abolished) zero interest crisis loans, some people had difficulty paying those back. Brothers T and A talked about how working class communities used to pull together to help out those in direst need; a practice that, Brother A noted, was still common among Muslims. An interesting observation from Brother L covered the Tory 'shares for rights' wheeze. He suggested the report pushing this, overseen by Conservative donor and Wonga proprietor Lord Beecroft, had more than a conflict of interest about it. For example, if hundreds of thousands of workers were to lose their statutory employment rights, aren't they likely to be placed in a more insecure situation, be more at risk of unemployment, and therefore more likely to require the services of a payday loans company?

The fact Labour are taking this issue seriously indicates how the party is generally heading in the right direction. But as Carl made clear, payday loans exist because its customers often live very precarious existences. Driving them from the high street and replacing them with credit unions does not address this. While 'making work pay' is a sexy slogan, the eradication of payday lenders depends on pursuing a sensible economic strategy with job creation at its heart, raising the minimum wage substantially and legislating for greater job security.


Anonymous said...

Take a look at how we are taking care of payday loans at

Phil said...

For a moment I thought this wasn't spam, but it is. Nevertheless it does look like an interesting service, albeit one open to US residents. Are there any loop holes that can be exploited in our law?

George Carty said...

What do you propose to do about the main reason why so many jobs don't pay a living wage (in a word, China)?