PAYDAY loan firms will not be banned from charging excessively high interest rates, despite a promised Government crackdown on sharp practices in the industry.

Leading companies were summoned for talks in Whitehall with Consumer Affairs Minister Jo Swinson MP, today, amid a myriad of concerns that they are driving desperate families to financial ruin.

In a toughly-worded intervention, Miss Swinson, the Member of Parliament for East Dunbartonshire, said she is determined to curb ‘irresponsible behaviour which exploits vulnerable consumers in financial strife’.

The minister of state confirmed payday loan firms such as Wonga will not be ordered to cut their interest rates. The LibDem MP cited concerns that people could be forced into borrowing from even shadier loan sharks.

Critics of payday loan firms insist that the exorbitant interest rates, which can reach 5,000 per cent a year, are the root cause of misery suffered by hundreds of thousands of people taking out payday loans.

Recently, the Archbishop of Canterbury, Justin Welby, called for a legal cap on payday lenders and the level of interest they are allowed to charge.

The Archbishop said:

… Once you have taken out the loan, it is difficult to get out of the cycle. With the rates offered, simply paying off the interest becomes a struggle.

Consumer organisation Which? published a study showing a million families a month are forced to take out payday loans. It found some 400,000 people take out the high interest loans to pay for essentials such as food and fuel. A further 240,000 need the cash to pay existing loans.

Which? says that almost half of the people taking out payday loans could not cover their repayments, forcing them deeper into debt as their ‘short-term’ loans are ‘rolled over’, with fresh interest added.

The Whitehall summit comes days after the £2 billion industry was referred by the Office of Fair Trading (OFT) to the Competition Commission. It will have the power to ban or limit the industry’s products, but will take up to 18 months to report.

It is understood the OFT has given the 50 lenders until the end of July to respond to calls for them to clean up their act or face closure. Five firms have since surrendered their licence, but only 20 have responded to date.

Labour MP Stella Creasy accused ministers of being too cosy with the industry. She said:

… Having a summit about payday lending without talking about capping interest rates is like discussing arson without mentioning matches.

In reply that interest rates should be capped, Miss Swinson said that could shut down short-term loans and force people towards illegal loan sharks or by taking other extreme measures. She has suggested, though, that the focus should be on limiting the ease with which loans are ‘rolled over’.

The Consumers Affairs Minister also raised concerns about automatic payment systems that let lenders raid bank accounts of clients to claw back money they are owed.

COMMENT

Payday lenders are notorious by the way in which they operate and the rates they charge should be capped. This opinion is based on the assumption that lending money to people with poor credit histories at sky-high interest rates is wrong. Unfortunately, the problem of unsecured lending is a warren of complexity.

The empirical evidence elsewhere is important to consider. In many other countries, including France, Germany, Australia and Japan, and in many states in America and provinces in Canada, interest rates are capped at a ceiling – such as 36 or 48 per cent a year. But this means that companies cease to offer loans to risky customers, who are then forced into the hands of illegal loan sharks, often run by organised crime gangs. Arguably, it is better to have payday lending in the legal economy, where it can at least be regulated, than to drive it into the criminal underworld.

Stella Creasy MP has campaigned tenaciously against irresponsible lending. She has said that the problems with a rate cap should not mean that we cannot act. Rather, she says, we must work harder and learn from others how best to act. She has proposed a cap on total repayments to try and break the cycle on compound interest and rollover debts that end up many times the size of the original loan. A way needs to be found without choking off the legitimate market for emergency short-term borrowing.

This, however, should be just the start of a programme of reforms to limit abuses in the payday-loan market. Further issues should be addressed by the Competition Commission following the investigation launched last week.

The Commission’s task is to look at unfair competitive practices that are suspected of giving borrowers a bad deal, such as convoluted information about interest rates and how they are applied. Lenders are also known to make it hard for borrowers to switch to a rival company.

A plethora of reforms are needed within the payday-loan industry. Any programme of serious reform should start first with the underlying causes of problem borrowing. Advertising, for example, should be restricted, on similar principles that have already been applied to the advertising of alcohol and tobacco. Adverts for payday loans could carry information about where to get debt advice. Payday lenders could be required, too, in paying a levy to fund helplines and services to help with addictive and self-destructive behaviour that leads to indebtedness in the first place, or to support the work of credit unions.