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.
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 IPPR publication argues 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% 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 IPPR 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 half 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 nine 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.”
