The UK and US press have been expressing concern about pay day lending since at least 2009.
The UK’s Office of Fair Trading (OFT) investigated pay day lending in 2010. In its report, published on 15 June 2010, the OFT:
- Noted that the pay day loans market is “typically used by people on low incomes who cannot access mainstream credit”, before adding that the market seems to work “reasonably well”, although it suffers from “deep-seated issues, such as weaknesses in the financial capability of consumers”.
- Recommended measures to “help consumers make informed decisions and increase their ability to develop a documented credit history”.
- Recommended that the Government should “work with industry groups to make information about high-cost credit loans available on price comparison sites, and to ensure that financial literacy programs cover high-cost credit products”.
- Considered the case for price controls, but rejected the idea: “they will not address the problems identified in the high-cost credit sector, which stem from both limited supply options and consumers' lack of ability to drive competition”. The OFT also expressed concerned that “such controls may further reduce supply” and noted “practical problems with their implementation and effectiveness”.
The Government seems to have been disappointed by this response: when it created the new Financial Conduct Authority (FCA), and began to transfer responsibility for the regulation of pay day lending to the new authority, it gave the FCA a power, but not a duty, to cap the cost of pay day loans, if the FCA thought it was appropriate to do so. The FCA also considered capping, and rejected the idea, which it described as “a very intrusive proposition”, before noting that:
- “The benefit of a total cost of credit cap has been looked at by … the University of Bristol. … 17 EU member states have some form of price restriction. Their research was ambiguous, on the one hand suggesting possible improved lending criteria and risk assessments. On the other, prices may drift towards a cap, which could lead to prices increasing or … a significant reduction in lenders exercising forbearance. Neither of these outcomes would be beneficial for consumers”; and
- “Some American states have taken further steps to address inadequate affordability assessments by setting caps on the maximum loan amount, either as a total (e.g. $500) or as a proportion of income (e.g. 25% of income). However, the level of limits chosen in these states has been criticised by … the Centre for Responsible Lending. This is because limits do not take into consideration the borrower’s other obligations and expenses”.
Having made these observations, the FCA said that it would carry out detailed research into the potential impact of caps when it takes over the regulation of pay day lenders in April 2014, and has access to the data it would need to decide whether some form of capping or other price controls might be desirable, after all. It also gave a commitment to keep the issues and options under review.
The Government seems to have been disappointed by this response too: it has just announced the “logical next step”: the Banking Reform Bill will be amended again to remove the FCA’s discretion, and to require it cap the total cost of credit on pay day loans, instead. This seems extraordinary, given the expert research history which points in the opposite direction. I’m sure it’s too much to suggest that this must be what Ayn Rand had mind when she wrote Atlas Shrugged, but if she was alive today, perhaps she’d accept the read across all the same.