Where do you stand on payday loans? I only ask because the question of what to do about them sets two Conservative traditions against each other. Some of you might veer towards a paternalist position: that this sort of debt, with its associated hyper-interest, is bad for people and bad for society, and ought to be curtailed. Whereas others might swing looser: if someone wants to enter into a contract for a loan, why the Hell should the state bother?
Which is one reason why yesterday’s proposals for regulating the payday loan market, courtesy of the Financial Conduct Authority, are worth checking out. What they do is sit somewhere in between those two impulses I mentioned. There’s plenty there for the paternalists, including a greater obligation on lenders to check whether their customers can really afford these loans, as well as these-loans-can-damage-your-health-style advertising. But there’s also a significant gift for the free-marketeers: despite several hundred atmospheres of political pressure, mostly applied by Labour’s Stella Creasy, the FCA hasn’t committed to a cap on the cost of credit – it has only said that it will consider one once it has greater access to “regulatory data”.
Should we be happy with this? I must admit that, since I first wrote about this issue for the Spectator two-and-a-bit years ago, I’ve wavered on the answer. I still think that, on the whole, there are moral, economic and political reasons to cap payday loan charges. But it’s the detail that’s the difficult part. Economies are intricate, unknowable things, and the sort of caps that seem to function OK in Australia and Japan may simply not work here. Besides, as a University of Bristol report (cited by the FCA) points out, the evidence from Europe is rather mixed. Get it wrong, and there’s always the chance that the least well-off will be forced into the jaws of disreputable doorstep loan-sharks, with terrible results. I highlighted one particular example in an article for the Times (£) in 2011; I hope you don’t mind if I quote a couple of paragraphs here:
“Have you heard the parable of Helen Wood? It relates only tangentially to her threesome with another prostitute and Wayne Rooney, and to her lurid transaction with a married actor that is wrapped up in a superinjunction. She tells it in The Spectator.
‘My mistake,’ she writes, ‘was to get into debt.’ An £800 loan for a holiday from a predatory lender was topped up with £500 to pay the rent. Before long, extortionate interest rates pushed the debt up to £2,500, the bailiffs were knocking and suddenly the idea of being an escort girl, dating men for £1,500 a night, seemed a realistic escape hatch. She reached for it — and pulled hard.”
All of which is to say that, even if we believe in a cap, it is not something to impose without immense forethought. The FCA’s cautiousness is a probably good thing, whichever Tory tradition you belong to.