Capping payday loans: from light touch to strong arm

Extraordinary, unexpected move from George Osborne this morning on capping payday loan costs. Why extraordinary?

The idea of government intervention in a market with absurd APRs has always been perfectly plausible. But just weeks ago the new independent regulator of this market expressly suggested that this type of measure was a “very intrusive proposition”, which could end up raising the cost of credit to the cap, which very specifically, it would only ponder and research after it takes up the role of payday regulator in April 2014.

That was the position last month (it’s paragraph 6.71 in this document).

There is also an ongoing Competition Commission investigation, due to report by 2015.

Treasury ministers were also quoted sounding sniffy about rate caps (though Mr Osborne himself was rather stronger, talking to me over the summer). So why has the chancellor moved so strongly to cap the cost of payday credit now?

Well there’s clearly some politics here. It fits into the war for living standards for “hardworking” people. Let’s see if this is ballast for a less poor-centric autumn statement. But the chancellor’s people say they have informed the FCA that new powers will be included in the Banking Bill.

The experience in Australia is key here, apparently. Australia’s Gillard government brought in a cap of 4 per cent a month (with upfront charges of 20 per cent) last year.

Let’s compare this to Wonga’s famous business model of a 1 per cent interest rate per day. On an average loan of 17 days, that is 17 per cent. In theory that would be less than the upfront fee allowed under the Australian model.

The key here is that the upfront fee, in theory, should change the behavioural finance of consumers around taking the loan in the first place (there are ways around this though). So this is an intervention based not on lack of competition, but asymmetries of information in consumer finance.

One might stretch such interventions to, say, energy bills. As I pointed out the other day, a Yougov/CLASS poll showed a majority of the UK public believe in price caps for energy, rent and transport, and 35 per cent for groceries!

After the Miliband energy cap announcement I pointed to a new cross party agenda for a stronger state intervening in dysfunctional markets. This is yet more evidence. It won’t be the last.

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