BLOG: Wonga scandal – Why more regulation isn’t the answer
But it’s not breaking news that cheap borrowing options available to the cash-poor in the UK are few and far between.
The way financial institutions lend people money is ripe for change. If we all got together and created a lending industry from scratch in the UK, would it really look like it does now? Almost certainly not. But look out. The winds of change are currently bringing a flood of intervention and potential regulation. This will be like pouring boiling oil on a burn.
The dynamics of high cost borrowing are deeply troubling. People are turned down for loans by retail banks due to their credit history or financial circumstances. This forces them in towards high interest rate providers, unrealistic payment plans and a desperate future.
The explosion of the payday lending industry has led to widespread criticism that new providers exploit the vulnerable. However, the success of payday lending is also evidence that consumers urgently need an outlet – or at least feel they have no other. One should not ignore the complacency, insouciance and digital paralysis of the banks in this equation.
Payday lending, pawnbrokers and door-step lenders provide a solution to simple financial needs. After all here is a remedy which appears to offer the chance to avoid form-filling and relentless approval processes. It is quick and easy, often as you queue at the bar peering at your smartphone through beer goggles. Your immediate need is solved. These services have plugged a gap in the market for quick money. But ultimately it is a sticking plaster that sees you strapped into years of stress and financial hardship.
While the media and the politicians love to beat their chests about the terrible “many thousand % APR’s” (without thought of the cost of short-term money or risk, and happily ignoring the much higher rates charged by many banks on some of their overdraft charges), the real problem lies in the lack of alternatives.
Mainstream sources of unsecured loan funding have all-but shut up shop to those most in need, facing cost of living inflation which outstrips real earnings. Many people that need loans are not riddled with debt but just need some extra money to pay for unforeseen costs like repairs or accidents. And often these people are turned away.
Inevitably short-term payday lenders, pawn shops and door step lenders have created instant loan offers without the need to answer too many questions about how they will pay the money back. This is classic market behaviourialism. If there is a need, opportunistic providers will appear. And initially, in that immature market moment, they lack competition and have a free run on pricing. The trouble is that we are not talking about burgers or baked beans here. Lives are being vapourised.
In June an investigation into the industry by the Competition and Markets Authority (CMA) revealed that a lack of genuine competition in the loans market could be adding between £30 and £60 per year to customers’ bills. The CMA has recommended creating an independent price comparison website for the payday market and forcing lenders to make the true cost of loans clearer. Sigh. The cost this loads on the loan providers, and inevitably therefore on the customers will outweigh the downward pricing pressures. On most comparison sites this is about £50 per new customers! Gulp.
Beware of the argument for more regulation. This is classic lazy statism. While giving a sense of warmth to the policy-makers, it just forces up costs and adds to the misery of those buying the loans. There is one equation in life to be sure of: every additional piece of regulation increases market inefficiency and drives up cost to consumers. Regulation needs to be sensible, light touch and well informed.
What would be helpful would be more competition, which is classic capitalism. This drives down costs and enforces a price effective market. Creating more competition with tax breaks for lower APRs would be the sign of politicians truly understanding how to manage market forces.
Lending is a risky business. Indeed let’s simply start from the right point, not just with the right attitude. Consumers will always borrow and no end of state intervention can stop this. Whisper it quietly but the poorer the sector you lend to, the higher the risk. The real job is to make sure they get enough choice, and a fair chance. It requires people who really understand this industry to create a positive framework to generate healthy market and healthy competition.
Perhaps we should get rid of the hopeless APR measure too while we are about it. Time for a better, more meaningful measure. If the policy makers want to help, then start here. If the policy makers don’t get it right now, then, unwittingly they will simply heap more misery on the already desperate. That may not be their goal, but it is what they may very well achieve. Lives, not philosophical theories, are at risk.
Alex Letts is chief executive of Ffrees, the digital current account provider