Editorial: Time to crack down on payday lending

Now that the welfare state is no longer sufficient safety net, what was once a last resort in a one-off crisis has become an attempt to keep the wolf from the door

Britain is changing.

Not so much because, in the aftermath of the worst economic crisis for generations, we face “destitution, hardship and hunger on a large scale”, as two charities put it this week. Rather, because the welfare state is no longer a sufficient safety net to guarantee that citizens’ basic needs are met.

Thus, the warning that more than half a million people now rely on food banks raises tricky questions about the kind of country that the frugal, post-crisis UK is becoming. Perhaps a third of cases can be accounted for by delays in benefits payments. But the primary reason that food banks are seeing three times as many requests for help is that squeezed wages and squeezed welfare spending are simply not keeping up with the persistently rising cost of living.

Nor is this unnervingly Dickensian tint to supposedly modern Britain restricted to the spectacle of the country’s most vulnerable left dependent on charitable handouts to ensure they have enough to eat. Hardly less anachronistic is the extent to which high-interest payday and doorstep lenders are stepping into the breach and capitalising on the desperation.

There is, of course, a place for short-term, unsecured loan facilities – in helping those on low incomes meet the cost of, say, a broken boiler. It is also wholly preferable that such lending is provided legally, without the unduly robust collection methods traditionally employed by its illegal counterparts. But what was once a last resort in a one-off crisis has become, in too many cases, an attempt to keep the wolf from the door. Indeed, rising impoverishment and restricted bank lending have sent payday loans ballooning by more than 10 times in the past four years.

The trouble is that the reality of payday lending is a far cry from the easy-come, easy-go promises of their cheery – and nigh-ubiquitous – advertising.

Not only are such loans cripplingly expensive, with annual rates that can top 4,000 per cent. Trickier still, nearly half of the 1.2 million now issued each year are “rolled over” at least once, leaving borrowers at risk of becoming trapped in a cycle of debt that can be difficult to escape. A survey from Which? indicating that about a third of borrowers are left in worse financial straits only underlines the scale of the problem.

Neither does the whiff of sharp practice end there. There is also growing evidence that little effort is made to check that potential borrowers can afford the loans they seek. According to Citizens Advice Bureau research, published this week, as few as one in 10 of applicants may be asked to prove they can afford to borrow. Cases of loans dished out to those under 18 years old, mentally ill or even drunk were also recorded. It is difficult to avoid the conclusion that the sector is dangerously out of control.

MPs are right, then, to be taking an active interest. And Margaret Hodge, the forthright chairman of the Public Accounts Committee, is to be commended for taking the Office of Fair Trading to task for its “ineffective and timid” efforts to clamp down on rogue lenders.

It is not enough either for the OFT to blame legal restrictions for its failure to crack down or for meaningful reform to wait until the watchdog is subsumed into the newly created Financial Conduct Authority next year. In fact, the problem is not a difficult one to resolve. There are any number of measures that might be of immediate effect, from imposing a cap on total loan costs, to forcing lenders to set out their conditions more clearly, to requiring affordability assessments prior to loans being disbursed. More must be done, and it must be done quickly.

With the economy torpid and so many debts still to be repaid – by Government and households – there is no easy answer to the crimp on welfare. But what is certain is that rapacious lenders cannot be allowed to fill the gap.