The Chancellor’s decision to legislate to cap the costs of payday loans is a rather peculiar one.
For a start, its launch does not have the hallmarks of a long-planned policy. Announcing something on the morning airwaves but not pre-briefing the newspapers suggest a rather short notice decision.
The Financial Conduct Authority says it was given no prior warning, which adds weight to the impression this is a bit of a snap call.
The implication for the future of regulators is rather confusing, too. The FCA has the power to intervene on prices if it chooses, but it chose not to.
George Osborne has evidently decided that muscle ought to be flexed, and is therefore over-ruling them. What is the point of the much-heralded “independent regulator” system if this becomes common practice? There is now a risk that other regulators will clamp down on practices just in case the Treasury thinks they ought to, rather than on the basis of their honest assessment of the facts.
The political opportunity the Government is grasping at is also unclear. Maybe this is a cost of living issue, or a matter of market morality, but if so are Wonga and their ilk the most important part of either issue for those concerned about them? Even if they were, would capping their charges be a vote-winner? Lynton Crosby, it is reported, thinks not, raising further questions as to how and why this policy has emerged.
Stella Creasy and others have gained a lot of attention by campaigning on payday lenders, but it’s hard to see them passing the credit to the Chancellor for the success of their campaign. If anything, this is simply likely to add fuel to the fire – Creasy is already, predictably, issuing new demands for further intervention.
That is the real risk involved in this step: the weakening of the argument against Labour’s proposal to intervene in every market imaginable.
I don’t have any particular love for payday lenders – borrowing what you can’t afford is as ruinous for an individual or family as it is for a nation – but the wider implications of Government capping their charges trouble me deeply.
If overpriced payday loans should be capped, why not overpriced DVDs, sandwiches or, er, energy bills?
Our answer to those questions would normally be that competition, deregulation and low taxation provides a better answer to high prices than top down intervention. On energy the Conservative Party goes further and describes price-fixing as a “con”.
I struggle to see the difference between what Osborne calls a con when Labour propose it, but what he now argues is sensible and justified when it’s his idea.
On the Today Programme this morning he tried to suggest this is simply a form of regulation which is compatible with free market principles. It isn’t – there’s a clear difference between regulating restaurants by saying they must not poison people with rotten food, and a man in a ministry setting the prices on their menu.
Today’s announcement weakens our defence against whichever barmy price-fix or freeze Labour might propose next. Deliberately opening such a chink in our own armour, when Labour intend to make cost of living a battleground for the election, is a problem.
The sad irony is that this news comes only a few months after a truly free market answer to rip-off payday loans arrived on the scene. In July, Archbishop Welby announced that the Church of England is set to go into competition with Wonga and others, breaking from a tradition of calling for regulation and instead choosing to use sensible market forces to deliver his aims.
At the time, I wrote that:
“It seems Justin Welby, unlike his predecessor, actually understands how markets work – and has retired the jerky knee Williams used so regularly.”
I fear that on this morning’s evidence, the jerky knee has not been retired, but loaned to the Government (who knows on what rate of interest…).