Loan sharks: the government’s gonna need a bigger boat

by Stella Creasy

For 18 months now, many of us have been trying to sound the alarm about the legal loan sharks who infest Britain’s consumer credit market. These companies now lurk in every high street and across every web banner. Their increasing presence indicates not only the desperation of families who find too much month at the end of their money, but a systemic failure to tackle our financial culture. Britain has always had a credit habit much bigger than our European neighbours. But those who blame our current consumer credit crisis on a public living beyond its means fail to understand the pressures now driving millions into debt – or the importance to our economy of doing something about it.

For more and more Britons, debt is a fact of life, as food, energy and transport costs soar. Aviva has revealed 52% of UK families owe £10,500 on average, on loans, credit cards, overdrafts and other unsecured debts, a figure equal to half the average annual UK household income. The consumer credit counselling service identify 6.2 million households as financially vulnerable. Half of these are already either three months behind with a debt repayment or subject to some form of debt action such as insolvency.

For many, it is that very willingness to borrow for the future that has made them so vulnerable. New analysis of financial services authority figures estimate that the total number of mortgages in arrears, in possession or subject to forbearance is 1.2 million. This equates to nearly 11% of total outstanding loans in some form of financial distress.

In the past year household debts – excluding mortgages – have risen by over £5 billion, the biggest annual increase since the recession. And in the last month alone, Britons have increased their debts by £629 million. The office of budget responsibility predicts that by 2015 UK households will have amassed over two trillion pounds worth of debt. These figures sound frightening – but it is worth noting the OBR recently revised its estimate for personal debt levels in 2014 upwards by £245bn. There is thus no guarantee these numbers are not a low prediction of the debt mountain we face.

It is now very expensive to be a member of the squeezed middle in this country. Vince Cable once accused the high street banks of “ripping off” their customers. But given the chance to do something, the government has instead today reneged on previous coalition commitments to act on “unfair” bank charges and cap the excessive costs of credit cards and store cards.

In 2006 an OFT study showed a third of all bank profits from current accounts came from “unauthorised overdraft charges”. The government claim that the situation has improved since then as industry pressure has seen charges reduced – from £35 to an average of £14. This is small consolation to the millions of people now regularly going into the red. The numbers who say they are likely to use an unauthorised overdraft has nearly doubled this year, from 900,000 to 1.6 million. Even with downward pressure on charges, research showed that customers are being charged an average of 167% a year on unauthorised overdrafts, once fees and penalties are taken into account. Little wonder the legal loan sharks claim justification for their activities, by arguing that they are cheaper than relying on your bank.

Those servicing credit card debt are also to be let down. Rates have soared by up to 2% in the past four months, taking the average interest rate to its highest level in 13 years. Despite the bank of England base rate remaining at 0.5% for 25 months, the rates on 18 credit cards have increased by between 0.6% and 2%, taking the average credit card interest rate to 19.1%. To those just making the minimum payments, this extra interest is adding years of debt to their bill. To the coalition, just another broken promise to add to their tally.

Little wonder legal and illegal loan sharks scent blood, as the government does nothing to stem this financial food chain pushing a debt laden public their way. Britain is increasingly isolated in not regulating the costs of consumer credit. As well as America, Australia and Canada, 14 European countries have a form of capping system or a ceiling on charges. Some countries, such as Ireland, cap only part of the market, whereas others, such as Germany, have limits on all forms of lending.

Here our government remains oddly stubborn, despite the evidence of the problems being faced by millions. Citizens advice report a fourfold increase since 2009 in the numbers of people coming to them with debt problems after taking out payday loans. These are not people borrowing for luxuries: the debt advice foundation detail how one in four people who take out a payday loan need the money to buy food or essentials for their household, with 44% using them to pay off other debts.

The question of credit costs is no longer a debate about acceptable APRs, but the principles of how to ensure money is lent and repaid in a way that doesn’t leave our citizens with a legacy of inescapable debt. The government is doing the bare minimum; demanding consumers are given more information about borrowing costs, banning point of sale store cards and asking the OFT to be tougher on those who make a selling point of the fact they do no credit checks. Under pressure they’ve grudgingly agreed to commission research into capping the cost of credit- research that won’t report until late next year with no guarantee of action at the end.

Regulation is not a panacea; we have to build the resilience of the British public to debt. Financial education must be part of the curriculum. We should tighten the laws around advertising to improve the transparency of costings all forms of credit. Debt advocacy services must be available to all – with those lenders who cause debt funding them, as well as providing them at the point of lending. And we must do more to increase access to affordable credit through fast tracking the growth of credit unions and social finance in our communities.

But these measures alone will not be enough for the families facing a Christmas fraught with financial worry. With the profits to be made from lending to those made desperate in austerity Britain, this surge of toxic credit in all its forms will continue unless the government acts. Caps and tougher regulation of the way this market impacts on the financially vulnerable are required not just for high cost credit, but all forms of credit.

In the film Jaws, the mayor urges Roy Schneider not to tell anyone of the dangers ahead saying, “It’s all psychological. You yell barracuda… everyone yells “Huh? What?” You yell shark, we gotta panic on our hands”. Whilst this government claims barracudas and pretends the credit crunch hasn’t created a credit crisis, the British public don’t stand a chance. We can and should do more to stop them becoming the chum for the legal and illegal loan sharks.

Stella Creasy is Labour and Co-operative MP for Walthamstow.


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11 Responses to “Loan sharks: the government’s gonna need a bigger boat”

  1. Nick says:

    What’s missing is the amount of debt that the government has run up.

    When you include the off the books debt such as civil service pensions, its 225,000 per taxpayer.

    Peanuts compared to personal debt.

    And the modus operandi is the same as loan sharks. They get their hands on your money and dish out a token remainder, telling you to be grateful. If you don’t pay up, then violence and threats are executed against the people who protest.

  2. This article rightly highlights a problem that is affecting not just householders but small businesses to. It is incomprehensible to find that the likes of Wonga.com are advertising on national television when their APR can be more than 1000%.

    Vince Cable’s inertia on this is also incomprehensible. He is now in a position to impose regulation that could help the most vulnerable from having their livelihoods destroyed but as yet has been largely silent on the issue.

    Educating people on the perils of unsustainable debt is also a great suggestion. Perhaps governments could make a contribution to this by avoiding it themselves.

  3. Evan Price says:

    As a conservative and barrister who practices in the courts relating to insolvency, I have to say that I have always been appalled by the highest rates of interest that have been legally claimed by some creditors. I have advised clients who have come through the CAB and others and have settled letters to creditors to try to improve the position for debtors in difficult circumstances.

    My instinct is that the creation of a complicated regulatory framework along the lines of Ms Creasy’s private member’s bill would not be the best way – I am a conservative after all.

    What I would prefer to see would be a simple bill that effectively outlaws rates of interest in consumer lending that are over, say 30% above base rate and treats them in the same way as extortionate interest at common law. There may be an additional advantage in that some of the most irresponsible lending in the consumer field would no longer be economic and so it would disappear – but the potential cost is that people who are desparate would then resort to the illegal market and we would have to improve and increase the systems in place to stamp on that.

  4. Julie says:

    You could not make this up! Labour being worried about too much debt and the squeezed middle after 13 years of bleeding us dry.

    I did arrears counselling in the 90s for a large well known bank and they had a policy of getting us to do an income and expense summary if mortgage holders were in arrears. Allowed on this were budgets for cigarettes, alcohol, nights out, childrens activities,holidays and cable television subscription with the idea that if people saw the amounts they actually spent on discretional spending it might make them think and also they would be more willing to admit to still spending in these areas. Many people did not seem to realise even when written down in black and white that if they cut these out or down they may be able to pay their priority debts.

  5. James Austin says:

    Typical of you lot! these loans are supposed to be short term fixes, not for a year! the APR shown is not indicative of the length of time these SHORT TERM loans are based on! Compared to an unauthourised overdraft from a bank they actually work out cheaper. Maybe rather than jumping on the usual bandwagon, the powers that be, who are supposed to work for us, should look at the larger picture? Rather than taking cheap political spin!

  6. william says:

    You had from 1997 until 2010 to put in place measures( not more legislation), agreed with the banks,to limit silly charges.The same applies to the sometimes outrageous margins charged by non bank(but perfectly legal) lenders.The then Labour government did nothing,in this regard.Please try and grow up.

  7. Stephen says:

    “For 18 months now, many of us have been trying to sound the alarm about the legal loan sharks who infest Britain’s consumer credit market.”

    Well what happened 18 months ago to make the difference? Oh there was a general election.

  8. Pat Martin says:

    “Well what happened 18 months ago to make the difference? Oh there was a general election.”

    Um, no – Stella Creasy was elected in 2010. It is rather difficult for a non-MP to introduce a private members bill…

    I do love the Tory Trolls.

  9. Stephen says:

    Pat Martin

    “I do love the Tory Trolls.”

    Look up ad hominem and then try to discuss the issues rather than attacking the person.

    http://en.wikipedia.org/wiki/Ad_hominem

  10. Ollie says:

    I have exchanged emails with Stella and when she thought she had a robust argument she responded quickly. When I posed some more difficult evidence backed questions undermining her argument she ignored me, when I followed up she said that as I was not in her constituency she was too busy to correspond with me. Ask her this question, “why does she always refer to 4000% APR lenders and ignores the emergence of competition in the form of payday loans at 483% APR or £15 per hundred borrowed” h&t. This woman is engaged in a nothing more than a blatant climb up the greasy political ladder and this bill would tick a big box in her CV. The cost will be carried by the thousands of people who would be excluded from any form of legal credit and handed over to illegal loan sharks. Ps will someone please sue her for referring to them as legal loan sharks, her emotive clap trap is a disgrace. Most people think politicians are the sharks, or maybe parasites.

  11. If you need a loan, always go to a licensed lender. There are reputable lenders who’ll consider lending to you even if your income’s low, your credit rating’s poor or you only need a small amount for a short while. You may still have to pay a high rate of interest but the Consumer Credit Act will cover your loan agreement. Always shop around for credit though – just because a lender is licensed it doesn’t necessarily mean you are getting a good deal.

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