Press Story

A one-off levy of £450m on Britain's £180bn consumer credit industry could create enough affordable lenders to take on Britain's legal loan sharks, according to a new report from the think tank IPPR published today (Mon). The report says that as well as a new legal cap on the total cost of credit, Britain needs a new generation of not-for-profit affordable lenders with enough capital liquidity and geographic coverage to compete with firms like Wonga, Quick Quid and Payday Express.

The new report is the latest in a series from IPPR's flagship 'Condition of Britain' project on social policy. The final report from the Condition of Britain project will be published in June.

The report says that local, not-for-profit lenders and credit unions could be hosted in Post Office branches or partner with Church of England parishes. It says that £450m of capital could support over one and a half million loans of up to £250 at any one time. The report says that lender should charge a maximum of 3 per cent a month, or 42.6 per cent APR. This would mean borrowing £100 for one month under this new plan would cost just £3 but currently costs over £30 with a similar loan from Wonga. The report shows that Wonga's representative APR is 5853%.

The report argues that the £450m 'windfall tax' should be levied across the consumer credit industry, structured on a 'progressive polluter pays' principle, with firms with the largest turnover and doing the most harm paying the highest price. This level is equivalent to the amount of direct consumer detriment caused by this industry in just one year. The report says government and regulators should assess the harm that each lender causes and design the levy appropriately, so as to raise up to a total of £450m.

The report also argues payday lenders should:

Provide a clear 'pounds and pence' cost for any potential loan, plus the payment rate and the term length.
Make affordability checks mandatory before a payday loan can be agreed.
Enforce a 24-hour 'cooling off' period between a loan request and that cash being paid, giving borrowers the chance to think again and firms the chance to conduct proper affordability checks.

And the report recommends, new responsible lenders should:

Cap the maximum loan at £250 (mirroring the average size of current payday loans).
Limit people to one loan at a time and prevent lenders from 'rolling over' loans.
Allow a backstop reclaim mechanism through the benefits system, as a last resort to reduce the risk of default and bring down the cost of loans

The report also suggests new government backed saving incentives for people on low incomes, to support asset-building and reduce demand for payday loans. It says that 20p could be 'matched' by the government for every £1 saved up to the first £20 deposited each month. The report says, if such a saving incentive were targeted at those in receipt of benefits or tax credits, and third of them were to take maximum advantage of it, 3.5 million people would gain £48 a year, at a cost to the taxpayer of just under £170m.

The report shows that two-thirds of low-income households have less than one month's salary in savings at any one time, and 3.9 million families have insufficient savings to cover their rent or mortgage for a month should their income disappear. Almost 9 million people already consider themselves to have 'serious' financial issues, with half of the 'over-indebted' population living in families on incomes under £20,000.

Mat Lawrence, IPPR Research Fellow, said:

"A return to rising living standards will reduce households' reliance on debt, but it will not eliminate their need for it. The payday lending industry has grown in large part because of a gap in the credit market that mainstream banks are unwilling to fill. Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit.

"Britain needs an initial capital injection to expand the provision of affordable credit and new 'match saving' incentives for people on low incomes to enable people to build up a stronger asset base of their own and reduce their reliance on credit. We need a strategy for spreading capital, building the assets of communities, and engaging citizens in forms of local democratic finance in which power and control resides with them, rather than with government agencies or unaccountable financial institutions."

Notes to Editors

IPPR's new report – Jumping the shark: building institutions to spread access to affordable credit – will be available from Monday 21 April from: http://bit.ly/IPPR12128

IPPR's Condition of Britain interim report is available from: http://bit.ly/IPPR11645
The final report from the Condition of Britain project will be published in June.

The payday lending industry now supplies over 8 million loans annually, expanding from an estimated £100 million worth of loans in 2004 to over £2.2 billion in 2012/13.

Two-thirds of those who take out a payday loan have a household income of less than £25,000.

IPPR polling shows that more than two out of five borrowers (41 per cent) are using payday loans to pay for everyday expenses such as groceries. Almost a third of borrowers (32 per cent) are using payday loans to pay utility bills, like gas and electricity. While one in five borrowers (22 per cent) have funded Christmas presents and food. The polling also shows that more than a third of borrowers (35 per cent) use payday loans in an emergency.

Nineteen of the 50 companies that were given 12 weeks by the Office of Fair Trading to address areas of non-compliance chose to exit the market rather than attempt to comply with regulation. The OFT says:

Fifty leading payday lenders, which account for 90 per cent of the market, were found to be non-compliant with OFT guidelines.
Over a quarter of lenders were found not to conduct affordability checks for new customers, while a third did not conduct checks for each loan.
Too many lenders make it difficult for consumers to identify or compare the full costs of a loan.
Nearly three in 10 loans were found to have been 'rolled over' or refinanced, accounting for nearly half of all revenues.
Lenders were found to have promoted rollovers in order to maximise profits, when customers should instead have been declined rollovers due to their inability to pay (one lender even included this practice in its training manual).

Contacts

Richard Darlington, 07525 481 602, r.darlington@ippr.org

Sofie Jenkinson, 07981 023 031, s.jenkinson@ippr.org