The loan danger: Capping payday lending isn’t enough

George Osborne’s astounding U-turn on a payday loan costs cap was greeted with glee from the left and confusion from the right.

It is a victory for the legal loan sharks campaigners, but it isn’t complete.

The growth in payday lending has not come about because consumers have suddenly felt a need to chuck their money in the bin. It’s a response to a growing cost of living crisis that means wages aren’t going as far as they used to in the face of rising bills.

It’s also a response to an ill-conceived and poorly executed welfare reform programme that has forced some of the worst off into paying charges they hadn’t previously faced, with the bedroom tax and the localisation of council tax support being the two worst offenders. In short, payday lending has thrived because today’s market demands it.

This does not in any way excuse the payday lending companies. They are, in many ways, the worst example of the predatory capitalism Ed Miliband excoriated in his 2011 party conference speech, with the added disadvantage of being clever with it. These sharks are smart, recognising that the ease of acquiring credit is key to success and seeing that being poor today doesn’t mean you don’t have a smartphone or the internet. When faced with a raft of bills of the end of the month, who wouldn’t make their immediate problem go away with the swipe of a finger?

But to simply cap their interest rates and the charges they can levy won’t fix the underlying demand for this kind of credit; George Osborne’s change of heart on its own won’t be enough.

It’s easy to see why you might go after pay day lenders: it doesn’t cost any money, they don’t have any friends (how long does an interest have to exist for it to become vested?) and it is a flagrant slap in the face for the principles of ‘fairness’ that the compassionate Conservatives purport to stand for. In many ways it’s a surprise it has taken this long to act.

But Osborne doesn’t actually care about the cost of living crisis (it’s ‘not salient’ according to Lynton Crosby) and he is now locked into a welfare reform programme that he can’t get out of. The chances of genuine reform seem minimal at best.

It is an oft-repeated mantra in the Labour party these days that opposition should be about more than waiting for the chance to govern but about delivering change. Here at least it is working. This change in government policy has come about, at least in part, by the relentless pressure applied by Labour campaigners and the media interest it has inspired.

And its role out of office doesn’t stop with campaigning. Labour local authorities are already throwing their weight behind credit unions locally, and this can go further. The wider movement already plays a valuable role in supporting credit unions – this kind of work needs to be extended to more places and embedded in the day to day activity of the party and of trade unions. We’ve seen glimmers of this approach to community politics through Labour’s community energy purchasing – why not throw similar weight behind community banking?

When Labour does get into government it must go further and take action to address the underlying causes of the burgeoning short term credit market. But it must also act to ensure that people won’t be frozen out of being able to access finance.

That means strengthening credit unions, not simply by throwing money at them, but by making them easy to access. People will put up with the higher charges of a Wonga or QuickQuid because of the convenience; if politicians want to make obtaining more ‘socially responsible’ credit just as easy they may well need to make an app for that. It may also be time to look more seriously at serious reform of financial institutions as advocated by Anna Turley in the Fabian Review.

The change in government policy is welcome, not least of all because of the message it sends to those struggling to make ends meet in an increasingly difficult world. But let’s not kid ourselves, there’s still a long way to go.