Friday, 28 January 2011

End legal loan sharks lefty clap trap

Ideals - that's where the argument falls down. I'd rather someone paid high interest to a regulated lender than lost their kneecaps. Lenders won't take risks with the unbanked, no fixed abode types, who dodge their bus fares and borrow irresponsibly. There's a reason for the interest rates on high cost credit - low rates of return.

Okay guv, you got me. No, seriously you have. I know lenders hate hard to reach borrowers, that “no credit check” comes at a premium and the bottom line is it makes sense. Beg pardon, I’ll stick with the Provi and keep my mouth shut.

There are plenty of families, who would never celebrate Christmas without the Provi: first Doris, then Margaret, Sharon, Tracey and Shaniah have all helped them out. Year in year out, Christmas on the Provi is a great British tradition - costs spread through the year on a 52 weeker. We should respect Provident Financial for a valued social service, using a business model that most would reject - due credit.

Supposing we do accept this, how are we to achieve less dependence on the Welfare State, when credit markets operate as they do? At what point will low-income households achieve the financial inclusion that allows them to borrow at mainstream rates? Moreover, what proportion of benefit payments end up in lenders’ pockets, not simply because those who should not borrow do, but because any hard to reach borrower pays more to do so? Let’s not forget that point scoring from credit records makes no distinction between no and low credit ratings.

Forget the poverty premium for a moment. Let’s talk the hard facts of institutional benefit fraud, in which consumer markets exploit poverty to perpetuate benefit dependence. Surely, if you are the kind of realist who wants bums off couches and an end to scrounging off the state, where is the economic logic in allowing the Treasury to foot the bill for commerce, which exploits this?

But the kneecaps... what, that old chestnut! Have you knocked any doors on a sink estate recently, seen the signs for no unexpected callers, no door to door, no leaflets, no papers and Neighbourhood Watch? Tell me, if in the mainstream world we are accustomed to paperless billing, the phasing out of cheque books and introduction of NFC, do you not think that in satellite city, with its CHAV handsets and hoodies, folk are likewise equipped? Organised crime moves with the times, don’t you know.

No matter how we regulate credit, there will always be thugs, who want Shylock’s pound of flesh. Time was that the Provi offered a safe, though expensive, alternative. However, doorstep lending is a cash cow past its prime. Payday is the new kid on the block. Over the past two and half years we have seen high cost credit pushed through television adverts, event sponsorship, websites, pop-ups and targeted data mining. The sector is brimming with potential and we need to ask ourselves why.

Recession is the short answer, but if you seriously think that lower income households borrow more in recession to the tune of million pound marketing campaigns then you are less of an entrepreneur than I thought - as a Lord Sugar wannabe, you’re fired! The evidence is in the data, in who’s knocking at debt’s door. From 2004 to 2008, average monthly net income in the UK rose by 0.2%. The average monthly net income of Citizens Advice debt clients rose by 25.9%. Quite simply, more people are finding access to credit a problem. A larger target market and more kneecaps, I hear you cry and this time, I concede you are right. 

Whilst the EU reports (p17) that opinion on interest rate capping is divided, what is clear is that the microeconomic preventative measures to address levels of indebtedness necessarily differ between member states. Sauce for the goose may not suit the gander. In short, when the economic drivers of indebtedness are reported as particularly prevalent in the UK, we could be deemed to have a debt dependence.

In this context, an analogy with drug abuse is not so far removed. Thus, if you would refrain from the direct marketing of methadone as a safer alternative to heroin because this would simply boost levels of heroin awareness and use, your refusal to cap interest rates on high cost credit is likewise destined to achieve the virtual kneecapping of middle income Britain. There is no incentive for responsible money management in high cost credit. The Bank of England readily admits that savers are penalised by current economic policy, and they are clearly not benefiting from rocketing interest rates - and rocketed high cost credit rates most surely have.

Take a look at these interest rates from This is Money’s 30 second guide to Payday Loans in August 2008 - the highest is 1845%. Then look at their article about Wonga in November 2010 – the rate is 2689%. Have borrowers become harder to reach? From adverts for Cash Converters on Boxing Day, I’d say not. Whatever you think of Stella Creasy, her efforts for next Thursday are of critical importance. The OFT High Cost Credit review reported market data for 2008 and as we have already seen from the CAB stats, a lot has changed in only a few years. Leaving the high cost credit sector unfettered places us all at significant risk of irresponsible borrowing and lending to the point of widespread over-indebtedness and defaults. If you think we can afford that, by all means, don’t ask your MP to vote.
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