We must help those in financial crisis – but loan caps won’t work

Allister Heath

SOMETIMES I really do wonder who is in power in this country. Is it a Tory-Lib Dem coalition, dedicated to ensuring the UK is open to business, or is it the Labour party? Whenever the opposition starts to campaign on an issue, especially one with cost of living or emotional undertones, the coalition eventually caves in, albeit only after first running around like headless chickens.

The coalition seems unable to develop policies compatible with its own values to address the problems facing this country: high energy prices are crippling families, as is the fact that some people run out of cash at the end of every month. But every problem has a good and a bad solution.

Statist, top-down or downright socialist answers should not be acceptable to this government; it would make far more sense to focus on pro-market solutions based on increasing competition, productivity and cutting tax. Sadly, we are merely seeing endless U-turns and hypocrisy instead. Price caps, apparently, signal the end of civilisation if they are embraced by Labour for the energy markets – but are a great tool to help “hardworking people” when backed by the coalition in other spheres. What, exactly, is the difference between the parties?

The problem stems from lack of courage: the government is too intellectually and strategically timid to fight for market solutions to social problems; it finds it easier to jump on bandwagons and to endorse tactical solutions that feel good in the short-term, even if they cause far more harm to the very people they are seeking to help in the longer-term.

Take payday loans caps: the agenda was set by Labour. The coalition objected – until suddenly changing its mind overnight, and embracing the Labour policy. The reason? New “evidence” from Australia, where a cap was introduced by – yes, you’ve guessed right – the previous Labor administration.

Just two months ago, the Financial Conduct Authority (FCA) examined the “very intrusive proposition” that are price caps. It argued that they “could lead to prices increasing”; that they could trigger “a significant reduction in lenders exercising forbearance” as they sought to make up reduced interest rates by cutting down on defaults; and that “neither of these ... would be beneficial for consumers.” It clearly wasn’t keen. But who cares about reasoned arguments – George Osborne knows best, and wants to out-left the Labour party on this issue, so the FCA has been ordered to impose a cap.

I’m not defending bad practice, incompetence, fraud or dishonesty in any industry. That should never be tolerated. Information needs to be clear – if it isn’t, that should change. People who break the law should be jailed. But price caps have nothing to do with this. By reducing how much can be charged in an industry with high default rates, they will make lenders even more sniffy about whom they lend to. Tragically, many people face profound financial difficulties; they already have no hope of borrowing from banks. Payday lenders were their last chance. Now some will turn to nasty, illegal loan sharks in desperation. Sometimes – not always – being able to borrow £150 for a few days, even for a fee of (say) £33 is the least bad option, especially from a company like Wonga which doesn’t allow the loans to snowball. If the fee were now capped to (say) £10, far fewer people would be offered the loan, and all the riskiest people would be excluded.

Many borrowers are actually people in work with temporary cash flow problems. The penalties on banks’ unauthorised overdrafts are higher, if converted into a comparable interest rate, than what payday lenders charge; ditto buying a pint for your friend who lent you £20 for a couple of days. The use of APR as a measure of cost for short-term borrowing makes no sense. The coalition and Labour are right to seek to help those in financial trouble, but this is not the right way.

Follow me on Twitter: @allisterheath

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