George Osborne has told the Today programme that he has asked the Financial Conduct Authority to use its powers to cap “the overall cost of credit” for payday loans, once the new regulator takes over responsibility for the industry in April.
Payday lending has been the subject of campaigns from the Archbishop of Canterbury and Labour MP Stella Creasy. The chancellor’s decision is a sign of their success. It is also a low cost political move – there aren’t many votes in supporting Wonga – ahead of the festive period where high interest lending has been forecast to rise sharply. Instead of his usual role of Scrooge, Mr Osborne seems to be having a go at being Dickens.
But perhaps more than any other factor, this morning’s announcement by the chancellor is a recognition that payday loans have become a normal part of economic life for hundreds of thousands of Britons. (Ironically, Wonga itself has been striving to normalise its presence through a sleek, sickly and tendentious documentary film.) Users of payday loans say they do so typically to meet an immediate financial need rather than to fund a splurge. Costs of living are rising faster than real wages, and benefits are being cut and their availability delayed. Two-thirds of low-income households have less than one month’s salary worth of savings. Payday loans fill this gap in a quick, easily accessible way, without the stigma attached to asking friends and family, and while offering an alternative to bank overdrafts and store and credit cards.
Only a few months ago, the FCA announced it was cracking down on rollover charges and other indirect ways payday lenders make money. This would have likely reduced the most egregious parts of the market, which seems to have its share of charlatans. Nineteen of 50 companies currently being investigated by the OFT have simply disappeared from the market after the regulator asked them for further details of their business practices.
The last FCA action made sense: more than half of the industry’s (thought not Wonga’s, which is a relative saint among the sinners) revenues came via overdue lenders. Research from the business department suggests that many companies are far from clear in telling customers about their possible costs and range of options, such as debt counselling. But given the firm presence of these lenders in the market, even without the worst practices, the chancellor felt that something more was required to deal with their costs, and has clearly looked at the Australian model for capping costs.
Details are still forthcoming but one interesting gauge of Mr Osborne’s proposals will be how hurt Wonga, the icon of contemporary usury, is by the changes. It is always keen to point out that it freezes interest charges once delinquent lenders start an affordable repayment plan. In effect, its argument is that it doesn’t need to act unethically (not that does so, of course) because it is a tech-savvy business supplying a gap in the market. And as my colleague Tim Harford has argued, Wonga is transparent about its costs.
This final point is important because it means that a cap on credit would be a sign that the chancellor – no socialist he – is willing to consider some limits on prices for their own sake, even when there are no information failures. The evidence from Australia suggests this is a mark of pragmatism (the market survives, fewer people get hurt) but the chancellor’s critics from the free market right will claim blasphemy. Those from the left will use the decision to push him in other areas, such as energy. So if the biggest payday lender is caught by these changes we will know that the chancellor is not merely cracking down on the worst of the market but all of it. And that would be another sign of how the notion of Britain as a Wonga economy is all too real.
Get alerts on Opinion when a new story is published