ED MONK: The payday loan party is finally over – now is the time to look back and ask “what were we thinking? “
There will be a lot of headaches for a while, but the UK payday loan party is finally coming to an end.
There is good reason to believe that the controversial industry has now reached its peak and that there will now be fewer payday loans, as borrowers who benefit from them are better equipped to repay them.
A crucial moment was reached last week when Wonga agreed to forget the debts of 330,000 borrowers because loans had been granted without establishing whether they could be repaid.
The party is over: Millions of people will have to live with payday lending hangovers – and regulators should ask if they could have done more.
Even before that, Wonga, by far the biggest payday lender, had told his investors that it would not be the same company anymore. FCA regulations, which started in April and are getting tougher, mean it won’t give out as many loans and they won’t be as profitable.
And Wonga’s decline is nothing compared to those of its competitors. Last year, when the top 50 lenders were asked to show that they were sticking to the looser rules of the Office of Fair Trading, nearly a third of them simply decided to go out of business. .
The FCA believes its tougher requirements will now put all but the largest lenders out of business. These companies cannot play by the rules and make money, it seems.
Payday loans are therefore on the decline, but their rise and fall holds a lot of lessons for the authorities, and for the rest of us as well. As with all the worst hangovers, a period of soul-searching is necessary – what were we thinking?
It’s hard not to conclude that regulators have been just too complacent.
As early as 2010, debt charities and individual MPs were reporting stories of ordinary people coming to them after being trapped in payday loans. One loan was taken out to pay off another, and enough money was put back in fees and charges to clear the original debt, but this remained intact.
That year, the OFT looked at payday loans as part of a high-cost credit review and made a series of recommendations that now seem softer.
Government financial literacy programs should mention payday loans, he said, while payday lenders should volunteer to be listed on a comparison website.
The government should “explore” whether payday lenders might include “wealth warnings” on their ads.
Voluntary codes of conduct, the last refuge for all badly conducted industries, have also been suggested.
Meanwhile, proper price controls have been rejected for reasons that now seem extremely fragile.
The 2010 report includes the zinger that: “The imposition of price controls in high cost credit markets creates a risk for suppliers that they would generate lower profit levels.
“It would be reasonable to expect these suppliers to respond to the imposition of price controls by seeking to recoup this shortfall by limiting the type and risk of consumers they are willing to supply.”
And they say it like it’s a bad thing.
Two years later, MPs had another chance to cap costs, but the reforms were rejected. In a written response to Parliament at the time, Jo Swinson, Minister for Labor Relations and Consumer Affairs, said: “We … recognize that a voluntary approach can bring real improvements in consumer protection more quickly. than government regulation. “
He couldn’t, and hundreds of thousands of payday loans have been issued since then which should not have been.
Tower of Wong: Jo Swinson (left) predicted in 2012 that payday lenders like Wonga would tidy up their homes without price controls.
At the heart of the regulators’ failure were assumptions that turned out to be disastrously wrong. One was that top-down restrictions should be avoided at almost any cost and that all issues can be resolved as long as consumers are more engaged.
To that end, solutions invariably aimed to give people more information and transparency so that they could then make better and more rational decisions.
It ignores the fact that people who decide to take out a payday loan are not rational, they are tempted by instant gratification.
Wonga boasts on its website that 77% of its borrowers could borrow through a credit card or bank overdraft if they wanted. But it takes time and paperwork and maybe interacting with another person who can tell you the consequences of borrowing money.
A payday loan is anonymous and almost instantaneous, so there is little opportunity for the rational part of the brain to activate.
The truth is, payday borrowers don’t always need money. Sometimes they just want it, and no number of warnings or price comparisons will deter them. It is a difficult thing to take into account for the surveys and statistics of the administration.
Another mistake has been to fail to understand that lenders can get money from almost anyone if they are allowed to dip into their bank account whenever they want.
A key defense used by payday lenders has been to ask “why lend to someone who can’t pay us back?” “. But continuous payment authorities have enabled them to collect what is owed, whether the borrower can afford to pay or not.
The Financial Ombudsman Service reports that a common theme of the complaints it sees is that borrowers are unable to pay other essential bills after payday lenders resume their repayments.
These issues are finally resolved and, if properly vetted, it is reasonable to believe that the new rules will put an end to the worst payday lending excesses.
A price cap, encompassing interest and fees, will mean borrowers will never repay more than twice the amount they borrow, and lenders will be limited to using CPAs only twice. The comparison service which was recommended on a voluntary basis in 2010 is now made compulsory.
These measures were unthinkable just a few years ago. Thousands of people got inappropriate payday loans in the time it took authorities to wake up.
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