Damian Hinds is Member of Parliament for East Hampshire and chairs the all-party parliamentary group on credit unions. Damian welcomes government support to modernise credit unions – to extend affordable, responsible credit and promote a savings culture. Follow Damian on Twitter.
In his recent ToryDiary article, Peter Hoskin welcomes the prospect of the Financial Conduct Authority being able to cap the interest on payday loans when it takes over consumer credit regulation in 2014.
As Peter notes, taking out a payday loan can be rational (cheaper than direct debit payments bouncing), but there are real concerns about the rate of growth of the industry. And with online lenders, there is a particular worry about the ease and speed of getting such credit. ‘Rolling over’ the loan to the next month can soon become a very expensive habit.
As Conservatives, of course, we believe in competition and personal responsibility – but in this market, the normal rules of supply, demand and consumer rationality often don’t seem to apply, and you are sometimes dealing with vulnerable people. Britain is unusual in not already having some sort of usury ceiling.
So, I agree with Peter Hoskin in welcoming the facility to cap the worst excesses of the payday market.
But payday is not the only part, or even the majority, of the sub-prime and high-cost loans sector. Home credit in particular is a massive source of lending, with the largest operator’s 11,500 local agents making weekly visits to 1 in every 20 UK households to collect repayments from mostly low income or benefit-recipient customers. Within the licensed market, there are also pawnbrokers, rent-to-buy stores, and (though declining) agency mail order. The headline APRs may not be as high (because the terms are longer), but paradoxically they can be as or more expensive.
Plus, operators can find ways around regulation – by creating new categories of product or finding non-APR ways of making money. And there is a danger that to the extent regulation restricts availability, some people are pushed into the arms of illegal money-lenders, which is a far worse place to be.
Regulation is at best only one part of the approach needed. We also need more financially literate consumers – a challenge for schools – and alternatives to the high-cost lenders.
The government has just announced that it will shortly launch another consultation, on the APR cap for credit unions. It is a little ironic that credit unions are the only UK lenders subject to such a cap, given that they are responsible, not-for-profit local community organisations, offering affordable loans and promoting savings.
In fact, the cap (2% a month, 26.8% APR) has served the sector pretty well: it gives people reassurance and its existence helps exempt credit unions from other, more onerous consumer finance rules it would otherwise be subject to.
On the other hand, it also stops credit unions competing on some types of loan. The smaller and the shorter term the loan (and the riskier the customer), the more costly in percentage terms it is to offer. In effect, the 2% a month cap means credit unions just cannot offer payday-type loans, because they couldn’t break even.
The government’s consultation is likely to float the idea of raising the cap from 2% a month to 3% a month (42% APR). It is not easy to break even on a payday loan at this rate, but it may make it easier for credit unions to offer more small, shorter term loans to people tempted to take out payday loans, and help them to get their finances back on track. Moreover – though it will seem a mighty high rate to Con Home readers, compared to their own credit card – it would be a much, much lower rate than consumers could get for such a product elsewhere.
Some credit unions will resist the change; others argue for the removal of the cap altogether. Neither would be the right approach. The sector needs a sensible degree of change which maintains safeguards and comfort for customers, but allows them to get onto competition terms with payday and home credit lenders and rent-to-buy stores.
There is massive potential for credit unions to grow here as they have in the US, Australia, Canada and elsewhere. The government has been very supportive, seeing through key de-regulation measures earlier this year and embarking on a modernisation and expansion programme, in partnership with the sector. Raising the credit union APR cap would be another key step forward, enabling far more people to access affordable, responsible financial products.