How do you propose to end legal loan sharking?
We believe the only way to stamp out legal loan sharking is to provide alternative affordable sources of credit (through the Post Office network, local credit unions, CDFIs, co-operatives and mutuals), as well as capping the cost of credit.
Why is it necessary to cap the cost of credit?
There is evidence that the prices charged for short-term credit are not subject to normal competitive pressures both as a result of the near monopoly positions of large lenders and because low income borrowers often have an urgent need for cash which means they can be exploited. The only way to stop this exploitation is to cap the cost of credit and provide alternative sources of affordable credit.
The government has pledged to “give regulators new powers to define and ban excessive interest rates on credit and store cards”, it should do the same for all sectors of the credit industry.
Won’t caps reduce competition amongst lenders?
There is evidence that the prices charged for short-term credit are not subject to normal competitive pressures both as a result of the near monopoly positions of large lenders and because low income borrowers often have an urgent need for cash which means they can be exploited. Providing alternative sources of affordable credit would add competition into the market and drive down prices. But improving levels of competition will take time and it is clear that low income households are being over-charged for credit now. An immediate cap on credit prices combined with action over the longer term to improve levels of competition makes sense.
What sort of cap would you like to see?
We think the government should have the power to intervene and cap ‘excessive’ charges for credit. It would be up to all stakeholders to work with the government to determine what an excessive rate is and how to calculate the cap.
Won’t lending rate caps encourage lenders to recover lost income from increasing charges elsewhere?
We know that some unscrupulous lenders will try to evade a cap, and that any cap will need to be constructed in a way that prevents this. For this reason, we propose a cap based on the total charge for credit not the APR.
At what price would you cap credit?
We think the government should have the power to intervene and cap ‘excessive’ charges for credit. It would be up to all stakeholders to work with the government to determine what an excessive rate is and how to calculate the cap.
Won’t a cap push borrowers into the services of illegal loan sharks?
A cap must be set high enough to ensure lenders can operate at a level which is financially viable. We also need to ensure that alternative affordable sources of credit are readily available through the Post Office network, local credit unions, CDFIs, co-operatives and mutuals.
Do other countries cap the cost of credit?
Caps on the cost of credit exist in a many U.S States, two provinces of Australia, Canada, and eight E.U countries including Germany, France and many others.
The Office of Fair Trading has said it doesn’t want to cap credit charges, why do you disagree?
We think the Office of Fair Trading is wrong, and that the proposals it has put forwards – industry codes of practice and financial education – won’t work, and certainly won’t work quickly to reduce prices for consumers. The OFT wants to see increased competition lower prices, and thinks that better informed consumers will drive this forwards. However, it doesn’t provide any evidence that this will work or indicate how long this is likely to take. We think people need a fair deal now.