Can we have a UK where “people can live their lives without resorting to the use of high-cost credit like payday loans and falling into a vicious spiral of debt”?
On Tuesday, Professor Karen Rowlingson of the University of Birmingham spoke a panel at the UK Labour Party Conference about “How do we win the campaign to end high cost credit?”.
She writes for the Birmingham Business School Blog:
The collapse of the UK payday loan company Wonga in August may be celebrated by many and mourned by few but, as Michael Sheen has reminded us, there are many other types of high cost credit still available in the marketplace. Further action is needed if we want a post-Wonga world to look significantly different from what went before.
The first action we need is to end austerity. Policies in the UK such as Universal Credit, the benefits freeze, and other tax/benefit changes are a key driver of the demand for high-cost credit by causing poverty and insecurity both in and out of work. In place since 2010, these policies are beginning to bite ever more deeply into people’s purses and wallets as basic benefits increasingly fail to cover the cost of the essentials people need. Poverty is increasing among all groups, including families with children (in and out of work) and pensioners.
Unsecured Credit is Rising
The University of Birmingham’s latest financial inclusion monitoring report and infographics highlights that unsecured credit is still increasing, without almost half of the population in debt in 2014-16. The number of individual insolvencies increased to nearly 100,000 in 2017.
Our economy is built on private debt rather than public investment with devastating consequences for many. We need a new, more ethical foundation for our economy and austerity must end.
Of course, not everyone who uses high-cost credit is borrowing to pay for essentials as a result of austerity. Some people struggle to resist the widely-advertised lure of quick, easy money and then find themselves in a vicious downward spiral of debt. It is therefore crucial for government to continue to reform this type of credit to reduce its negative consequences.
For example, the price cap which currently applies to payday lending (and has led to a reduction in such lending since its introduction in 2015) should be extended to other forms of credit such as rent-to-own products. But we should not be focusing solely on so-called “sub-prime” credit. Other forms of credit are much more pervasive and equally pernicious.
According to the Financial Conduct Authority, 52 million people in the UK have a personal current account and 37% of this group use an arranged overdraft, with 25% (approximately 10 million people) using an unarranged overdraft each year. Unarranged overdrafts fees can cost ten times more than a payday loan, and 2.1 million people spent the whole of 2016 in an overdraft. Wonga may have gone but other forms of high-cost credit remain.
How Do We Win the Campaign?
We need the highest level of commitment from those in power, including those in Parliament and Government but also those in consumer groups, academics, and the media to call for appropriate legislation and then support the FCA to enforce it rigorously. Michael Sheen’s Alliance to End High Cost Credit, launched in March this year, aims to bring these groups together with a focus on five areas of change: public debate on the kind of economy and society we want; changes in regulation, law, and practice; wider training for employees; and community-based financial education.
The final area is to provide better support for alternatives to high-cost credit, for example, working with credit unions, microfinance institutions and community interest companies like Fair For You who provide an alternative to rent-to-own companies like BrightHouse.
We are seeing some positive signs as a result of this work, for example, with Labour’s pledge in 2018 to cap overdraft fees or interest payments. In May, Which? sent a letter to the FCA calling for action on overdrafts signed by 84 MPs from different parties. The campaign is also gaining some traction within Government, with the announcement in its civil society strategy that it will use £55m from dormant accounts to help support the increased use of fair, affordable, and appropriate financial products.
These are all helpful steps but they are still relatively small — if we really want the post-Wonga world to be one in which people can live their lives without resorting to the use of high-cost credit and falling into a vicious spiral of debt.
Britain is much richer than it was 100 years ago. We can now afford old age pensions for all, unemployment and sickness benefits, a free National Health service, motorways, free schools, etc — all paid for out of taxes. None of this was possible in 1918.
In another hundred years, it may be possible to pay out “benefits” enough to allow people to live in greater comfort than now. It all depends on how the economy grows.
But right now, the taxes are stretched to the limit, and poor people can’t have everything they might want. In absolute terms, they are much better off — most have mobile phones, for instance. In relative terms, they feel (and are encouraged to feel) hard done by.