by Stella Creasy

For some time now I’ve been challenging this government to take action on the cost of credit, highlighting the urgency of doing so as many families in Britain now find themselves turning to high cost credit lenders to make ends meet. We know the market is stacked against the consumer, and as it strengthens in Britain we are starting to see the consequences. This month R3 found that of the 46% of households that cannot cover their outgoings with their incomings, 10% are falling into debt directly as a result of repayments on high cost credit products.

This is no longer an issue solely affecting the poorest areas of Britain. Whether payday loans, hire purchase agreements or doorstep lending, the high interest rates and penalty charges these firms charge are hurting families in every constituency. These so called legal loan sharks are rapidly expanding their operations in the UK, taking advantage of the lack of regulation and growing demand for finance as the cost of living climbs and wages are frozen.

Ministers from both the treasury and the department for business, innovation and skills agree the way in which this market operates is a problem, but reject calls to introduce caps on the charges these companies can make. Instead they’re hoping the market will reconfigure itself through a growth in credit unions and increasing information on the costs involved to consumers. It would be easy to dismiss them out of hand as uncaring, blind to the plight of families caught in a cycle of debt to these companies.

That is not my view. Instead we should be explicit that this represents a more serious and deep seated limitation for this government, as its political value system restricts their capacity to not only see but act in the interests of all consumers. For them, such regulation falls into an ideological blindspot; something they cannot envisage the potential of with disastrous consequences for our increasingly debt-laden public as a result.

While 85% of us live in areas covered by credit unions, only 2% of Britons actually use them. Membership is growing by around 8% a year, but the payday lending industry alone is three times as big as it was two years ago and is now estimated to be worth a staggering £8.5bn. For nearly a quarter of their customers this is the only form of credit they can access, with more and more people using it to pay for basic essentials like rent, food and travel. If we want to avoid a nation living permanently in arrears we simply don’t have the time or indeed the culture to wait for this imbalance to change at the behest of the market.

This dogma also shapes their interpretation of the experience of how caps in other countries have affected consumers. It makes them fear that borrowers will be driven into the arms of the illegal loan sharks and so used to justify inaction. Yet as many point out, such logic is based on economic orthodoxy rather than robust research. What evidence does exist shows how the rate at which the caps are set is critical. Indeed, the real world tells a different story to the textbooks, as countries that have caps on credit also still have payday lending. Regulation doesn’t kill such a profitable industry, it just makes it fairer for the consumer.

These debates echo those in the 1990s around a minimum wage. Labour countered conservative philosophy then with calls for both economic and social justice. We said it was morally wrong to expect someone to live on 50p an hour. We also showed it was counterproductive to have such high levels of labour turnover. Back then our Tory opponents cited their philosophical conviction that a minimum wage would cost jobs and argued “it is quite wrong to interfere in money that people come by legally in a private marketplace”.

So too then we were out of kilter with most European nations and America in not having a minimum wage – just as today we are alone in not having a cap on the cost of credit. Introducing the minimum wage instantly gave a million workers a pay rise of 10-15%.  Capping the cost of borrowing could also help make manageable the repayments of the 5 million people who use these forms of credit.

Then as now, those of us who argued for a minimum wage didn’t say it was the only way of tackling poverty, but part of an approach to incomes rooted in the recognition that economic prosperity and social justice are not competitors but intertwined. A cap will not end financial hardship, but as part of a package of other measures including increasing access to affordable credit and tackling inflation it is key to deterring the growing crisis of personal debt now engulfing our local communities. Acting on this isn’t just about preventing the human misery living in debt creates – it’s also good for a recovering economy to have consumers able to borrow and spend money without fear of being trapped in poverty.

Recently I listened to a Conservative minister claiming the minimum wage was part of the government’s strategy to “make work pay”.  If we continue to press our cause and our case, we may yet hear them supporting a cap on the cost of credit as essential to helping families make ends meet. To help make that happen, there is a vote in Parliament today on how to regulate high cost credit. It’s a chance to challenge this government’s plans to cross their fingers and hope for competition rather than step in and protect vulnerable consumers in Britain. Please take five minutes to send an email to your MP to ask them to vote yes. Be part of helping win the battle not just with individual ministers but for the ideals at the heart of progressive politics.

Stella Creasy is Labour MP for Walthamstow.

Tags: credit cap, high cost credit, Stella Creasy

This entry was posted on Tuesday, June 28th, 2011 at 2:30 pm and is filed under Uncut. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.