Well intended Chancellor, George Osborne, is apparently firm in his belief that he knows better than poor and vulnerable adults who seek to access credit from pay-day loans companies and has announced plans to set maximum allowable prices for credit. The result is that the most vulnerable sections of the population will be banned from accessing legal sources of credit. The condescending premise of the ban is that vulnerable adults are unable to properly judge when an obviously risky deal remains the better option for them in the circumstances, and that these adults are simultaneously predated upon by big name brands in a competitive market. This is insulting to both parties.
The Consumer Finance Association – a trade body – responded:
If the objective of the proposed cap is to drive out rogue lenders the Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem.
The Chancelleor should recognise that when a popular product is made illegal, people will continue to want it and will turn to criminals to get it. Credit is not even as risky drugs, and is a far more constructive decision that many more people will contemplate. Drugs have been prohibited for many years and are still bought and sold in the street.
The effect of drug prohibition has been to increase risks and cause more violence between the gangs that trade in the prohibited industry. Keeping credit costs as low as possible is likely to be easier if the Government ensures that the credit market is thriving, and capping profits is not going to help in that regard. Incumbent credit operators, like Wonga, are likely to retain their lead position thanks to their established and trusted brand names. New entrants already face large marketing costs to establish themselves as trusted companies. Capping their profits means they will have less interest in overcoming the reputation barrier and entering the market, meaning Wonga will be protected from competition.
If Osborne wants to punish Wonga, he is going in the wrong direction.