The "shabby end" of the credit market is costing borrowers nearly half a billion pounds a year and the Government agency that is meant to protect them has fallen down on the job.
That is the bottom line of today's report from the Public Accounts Committee, chaired by the redoubtable Margaret Hodge.
The short-term credit market, including the now notorious "payday loans", has expanded rapidly to fill the space left as high street banks have tightened lending criteria. These alternative providers are also all that is available to those, mainly with low incomes, who do not have bank accounts. Some loan companies argue, with justification, that they meet a demand from those who otherwise would be driven back on illegal unregulated loan sharks. For customers on tight budgets faced with an unexpected emergency, a short-term loan can tide them over.
However, though it would be unfair to lump all loan companies together, the facts speak for themselves. Around half of revenue in the payday market comes from extensions or rollovers and nearly 20% from loans rolled over four times or more. As Citizens Advice Scotland warned this week, sadly there is ample evidence that despite a new code of conduct, many of these companies are still lending irresponsibly, failing to properly explain interest rates and charges and hounding people for money they do not have. Predatory lending is leaving vulnerable people with out-of-control debts.
Mrs Hodge lays much of the blame for what she calls "disgraceful practices by the shabby end of the credit market" on the passivity of the Office of Fair Trading (OFT), which has never fined any of the 72,000 firms involved in it and seems to have revoked a few licences only after her committee began its scrutiny. In March the OFT finally challenged 50 payday lenders to demonstrate good behaviour or lose their licences.
This is far too little, far too late, given the OFT's own probe showed these companies rely largely on customers who are already struggling.
There is a place in the market for short-term loans but tougher regulation is required to ensure the more responsible lenders thrive at the expense of the predators. Rather than annual percentage rates, which are poorly understood by customers, Mrs Hodge recommends clearer statements of the total amount repayable over various terms, including both charges and interest. That would enable customers to compare like with like.
When the Financial Conduct Authority replaces the OFT as the consumer credit regulator next year, it must be tougher. The fact that its brief will include the power to impose interest rate caps, like those operating in Australia and the US, will be a handy stick if carrots prove ineffectual.
Meanwhile, high street banks must be chivvied into offering more micro-loans as an alternative to the payday market. (The exemplary Airdrie Savings Bank introduced such a scheme this week.) Secondly, credit unions need more encouragement to expand. It is disappointing that of the 31 credit unions that will benefit from the UK Government's £35.6m investment programme, only two (First Alliance Ayrshire and Pollok) are in Scotland. Until more is done, those on the lowest incomes will continue to pay a poverty premium for loans.
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