The Principle, Practice and Policy of Pricing Payday Loans: Why? And why now?
The Chancellor’s decision to legislate to cap the costs of payday loans is quite peculiar.
To begin with, its launch does not have the characteristics of a long-planned policy. Announcing something on the morning air but not doing a pre-briefing in the papers suggests a rather short notice decision.
The Financial Conduct Authority says it has not received any prior warning, adding weight to the impression that this is an instant call.
The implication for the future of regulators is also quite confusing. The FCA has the power to intervene on prices if it wishes, but it has chosen not to do so.
George Osborne obviously decided that the muscles need to be flexed, and therefore outshines them. What is the point of the much-vaunted “independent regulator” system if it becomes common practice? There is now a risk that other regulators will crack down on practices just in case the Treasury thinks they should, rather than on the basis of their honest assessment of the facts.
It is also unclear what political opportunity the government is seizing. It may be a cost of living issue, or a question of market morality, but if so, are Wonga and his ilk the most important part of either issue for those who care? Even if they were, would cap their charges be a gain in votes? Lynton Crosby, it is reported, don’t think so, raising further questions as to how and why this policy emerged.
Stella Creasy and others have garnered a lot of attention campaigning on payday lenders, but it’s hard to see them giving credit to the Chancellor for their campaign success. If anything, it’s just likely to add fuel to the fire – Creasy is already, predictably, initiating new requests for further intervention.
This is the real risk involved in this step: the weakening of the argument against Labor’s proposal to intervene in every market imaginable.
I have no particular love for payday lenders – borrowing what you can’t afford is as ruinous for an individual or family as it is for a nation – but the broader implications of limiting their charges by the government disturb me deeply.
If overvalued payday loans were to be capped, why not overvalued DVDs, sandwiches or, uh, energy bills?
Our answer to these questions would normally be that competition, deregulation and low taxation provide a better answer to high prices than top-down intervention. On energy, the Conservative Party goes further and calls price fixing a “scam”.
I find it hard to see the difference between what Osborne calls a scam when the Labor Party proposes it, but what he now supports makes sense and is justified when it is his idea.
On the Today program this morning, he attempted to suggest that this was simply a form of regulation compatible with free market principles. It’s not – there’s a distinct difference between regulating restaurants saying they shouldn’t poison people with rotten food, and having a man in a ministry setting the prices on their menu.
Today’s announcement weakens our defense against upcoming pricing or the Labor Party freeze. Deliberately opening such a rift in our own armor, as Labor intends to make the cost of living an election battleground, is a problem.
The sad irony is that this news comes only a few months after the arrival of a truly free market response to fraudulent payday loans. In July, Archbishop Welby announced that the Church of England is poised to compete with Wonga and others, breaking with a tradition of calling for regulation and choosing instead to use reasonable market forces to achieve its goals.
At the time I wrote this:
“It looks like Justin Welby, unlike his predecessor, actually understands how the markets work – and removed the jerky knee that Williams used so regularly.”
I fear that in the testimony of this morning, the jerky knee was not removed, but lent to the government (who knows on what interest rate…).