A victory?
”We win” this was the news ECRC received from its London based member the Centre for Responsible Credit. The UK member of ECRC would like to thank the coalition and its partners for helping them organise and encourage exchange of evidence and thinking over the years to achieve change in the UK high cost credit markets as the UK government is to introduce a new law to cap the cost of payday loans by 2015.
However the celebrations on behalf of responsible credit may be premature since in reality the UK government law being launched and supposed to limit the cost of payday loans to consumers, is still unknown as to its exact content. It took the example of Australia (not Europe and its long tradition of credit interest rate ceilings) to convince the UK and provide them with an encouraging example that the existence of such caps would not harm financial markets However the Australian 2013 laws that are used as a reference are specifically targeting payday lenders instead of credit providers generally (see extracts of the Australian regulation and the scope and excluded entities at the bottom of this news).
A historic achievement
While the English seem to be the last to understand that markets do not produce any limits and responsibilities towards those who need money at any price, to cover their short term liquidity problems, they at least seem to have some good ideas to make it more effective than in many countries on the continent. The ECRC welcomes the intention to also want to attack those forms of fees (like kick back provisions in payment protection insurance as well as constant refinancing) to circumvent interest rate restrictions.
This is a significant step in responsible credit concerning the rest of the world where we still wait to see a usury ceilings report published by the World Bank, who claims to be officially in charge to prevent poverty in the world. The UK could be called the motherland of usury. It never got far from what one of their sons Jeremy Bentham wrote in letters to Adam Smith about usury. In these letters he criticised the father of market liberalism as too welfarist. He used the same arguments that predatory lenders in the UK still employ to defend their exorbitant interest rates: caps would stop credit extension, exclude poor people from the joys of irresponsible credit and debts and prevent productive distribution of capital in society. (see Bentham, Jeremy (1787): Defence of usury. Shewing the impolicy of the present legal restraints on the terms of pecuniary bargains. In a series of letters to a friend. To which is added, a letter to Adam Smith, Esq; LL. D. on the discouragements opposed by the above restraints to the progress of inventive industry. London: Printed for T. Payne, and Son (ECCO).)
We should remember that UK policies have been very influential and were mirrored even in the post Financial Services Action Plans of the EU which promised to ban interest rate caps as detrimental to the internal market. We should remember the letter of a well-known sociologist to the house of Lords, before the financial crisis took off, claiming that empirical research (for which no evidence was provided) had proved that the poor were most hit by interest rate caps. We also should remind the public that the English banking authorities published a report on France and Germany in which it was argued that rate caps were not efficient in these countries and that poor people were excluded from credit (a result that had been achieved by interviews and the omission of the number one short term credit: the overdraft facility). The law and announcement by the UK government is indeed a big step and it does not come from Labour but from the Conservatives.
Acknowledging predatory lending beyond the payday lenders and a cultural change that lags behind?
The news has been spread by BBC who has a long tradition trying to make the public aware of the enormous social cost usurious credit has had in the UK. While in these former reports the cost were seen with regard to the exploitation of the impoverished and overindebted lower classes it has now become obvious that all citizens have to pay for predatory lending practices since notorious predatory lenders like Royal Bank of Scotland had to be rescued. What a bank does to its weakest clients it will also apply wherever it can wherever possible. This insight has been proven true not only in the UK but also elsewhere such as through the practices of Citibank and the German HypoVereinsbank.
The BBC reports: ”The government is to introduce a new law to cap the cost of payday loans. The level of the cap, which has not yet been announced, will be decided by the new industry regulator, the Financial Conduct Authority (FCA). The Treasury says there is „growing evidence“ in support of the move, including the effects of a cap already in place in Australia. But the industry said the move could restrict credit, and encourage more illegal lending. The cap will be included in the Banking Reform Bill, which is already going through Parliament. Speaking to the BBC, the Chancellor, George Osborne, said there would be controls on charges, including arrangement and penalty fees, as well as on interest rates. „It will not just be an interest rate cap,“ he told BBC Radio 4’s Today programme. „You’ve got to cap the overall cost of credit.“ Previously the government had said such a cap was not needed. But the chancellor denied the government had a made a U-turn on the issue, saying he was not pre-judging the outcome of a Competition Commission inquiry into payday lending.”
But a look at the comments on the BBC Website reveal that many English citizens still think it is due to a lack of education when a single mother of three children tries to cope with the breakdown of her car in order to survive and is then exploited by predatory lenders who claim that they already know that she will default on the credit which then justifies such relatively high instalments that she has to default. This is why financial education is still held up as an important ideology to justify the disastrous consumer credit markets where especially credit card credit is not far away from payday loans.
First step of a journey
There is a long way to go to responsible credit but the financial crisis has shown to everybody: that responsible credit not only saves social peace but also the productivity of the real economy.
The ECRC Secretariat and Chair
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See the press release from CfRC below about the regulation of high cost credit in the UK. The level of the cap will be decided by the FCA. As though the evidence from its EU peers was not enough, the UK government quotes evidence of the net beneficial effects of a cap from where they have been introduced on a local level in Australia (interest rate limit of 4% per month, after a maximum up-front fee of 20%). The regulator must now decide what is the best form of cap. As the BBC article states, the controls will be on charges, including arrangement and penalty fees, as well as on interest rates. It would appear that other FCA proposed measures such as limiting loan roll-overs to just two, and restricting the use of continuous payment authorities (CPAs) are not enough.
CfRC welcomes decision to cap payday lenders but urges action across the high cost credit sector | 25th November 2013
CfRC response to today’s announcement that Govt will cap the cost of payday loans
The Centre for Responsible Credit has welcomed today’s announcement that the Government will place the Financial Conduct Authority under a duty to cap the total cost of credit that can be charged by payday lenders. However, we urge Government to extend the proposed price capping duty to cover other forms of high cost credit which are just as exploitative of low income households.
Our recent research into payday lending regulation in both Japan and the United States shows that caps on the cost of credit work. A total cost of credit cap of just $11 per $100 lent is in place in Florida, yet this has not put lenders out of business. In fact, the business there is growing because other rules also prevent rollover lending and ensure (through the use of a real-time database of payday lending agreements) that borrowers can only take out one loan at a time. These rules have drastically reduced loan loss rates for lenders. In Florida, the loan loss rate is less than 2 per cent, compared to an average of 14 per cent for payday firms operating in the UK. However, a cap on the cost of credit is essential to ensure that these lower default costs for lenders are passed onto consumers. Without a cap, then the rules would simply mean more profit for payday lending firms.
The Government and the FCA need to take these lessons on board, and put in place a package of measures, including a cap, that provide real protection for UK consumers. If it can be done in other countries, then there is no reason that it cannot be done here. In fact, many of the payday firms operating in the UK already operate under much tighter regulation and price caps in the U.S and Canada.
However, we should not lose sight of the fact that payday loans are just one aspect of the high cost credit market in the UK. For example, in 2005 the Competition Commission found that the door to door lenders (e.g. Provident Financial) were making substantial excess profits because of a lack of effective price competition. It failed to grasp the nettle and implement a cap and in the time since the end of its inquiry the cost of credit has risen from £65 to £82 per £100 lent.
Commenting on today’s announcement, CfRC Director, Damon Gibbons, said:
„The Government’s decision to cap the cost of payday loans is an extremely welcome one. But we should remember that it has taken a 14 year long campaign to get here, and that much more work will need to be done to ensure that Britain’s hard up households are provided with credit at fair prices. Government must make sure that the proposed price capping duty for the FCA extends to all forms of high cost credit. The FCA should now, as a matter of urgency, review the international evidence concerning caps and other measures, including the use of real-time databases of high cost agreements, in order to ensure that consumers in this country are provided with the best level of consumer protection possible.
Notes to Editors:
The CFRC’s prior research on payday and other high cost credit markets can be found on our website at www.responsible-credit.org.uk . Damon Gibbons can be contacted on 07961869473
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Details about the UK reference in Australia. Extract from the official Australian Money advice website about credit regulation: https://www.moneysmart.gov.au/borrowing-and-credit/consumer-credit-regulation
Short term and small amount loans (including payday loans)
From 1 March 2013, there are new laws affecting loans of $2,000 or less.
Loans that are banned
‚Short term‘ loans of $2,000 or less that you must repay in 15 days or less cannot be offered from 1 March 2013.
Loans that require a warning
Credit providers are required to display a warning that notifies you of your options before you borrow money when they offer a ’small amount‘ loan of $2,000 or less that is to be repaid between 16 days and 1 year.
Fee limits on small amount loans ($2000 or less)
From 1 July 2013, fees charged on small amount loans are capped (that is, limited to a maximum amount).
Credit providers can only charge you the following fees:
- A one-off establishment fee (of not more than 20% of the loan amount)
- A monthly account keeping fee (of not more than 4% of the loan amount)
- A government fee or charge
- Default fees or charges (the credit provider cannot collect more than 200% of the amount loaned if you default – that is, fail to pay back the loan)
- Enforcement expenses (if you fail to pay back the loan, these are the costs incurred by the credit provider going to court to recover the money owed under your credit contract)
Who is exempt?
This cap on fees and ban on short term loans does not apply to loans offered by Authorised Deposit-taking Institutions (ADIs) such as banks, building societies and credit unions, or to continuing credit contracts such as credit cards.
Medium amount loans and all other loans
From 1 July 2013, the fees and charges allowed on loans of more than $2,000 are capped (that is, limited to a maximum amount).
Fee limits on medium amount loans ($2001-$5000)
From 1 July 2013, for ‚medium amount‘ loans which are for amounts between $2,001 and $5,000 to be repaid between 16 days and 2 years, fees are limited to:
- A one-off fee of $400
- A maximum annual interest rate of 48%, including all other fees and charges
Fee limits on all other loans, including continuing credit contracts
For all loans of more than $5,000 or with terms longer than 2 years and all continuing credit contracts such as credit cards, the fees and charges allowable are capped and must not be more than 48% annually (including any establishment or other fixed fees).
Who is exempt?
ADIs such as banks, building societies and credit unions are exempt from these fee caps.