THE BLOG
03/09/2013 08:08 BST | Updated 03/11/2013 05:12 GMT

Like it or Not, Payday Lenders Are Here to Stay - They Must be Better Regulated.

This Friday, the High Cost Credit Bill returns to the House of Commons to resume its Second reading debate, following a Backbench Business debate on the same issue this Thursday. Unfortunately, due to the lack of Government support, there is a real risk that it will not be granted sufficient time for debate in this current parliamentary session.

Given the Archbishop of Canterbury's recent pledge to compete Wonga 'out of existence', and the countless column inches devoted to the expansion of that company in recent months, we might as well call it the Wonga Bill.

But that would be a mistake. Payday lenders and alternative forms of credit have grown rapidly over the past few years, capitalising on the ongoing squeeze in living standards, stagnant or declining wage growth, and the rising costs of food, energy, and other basic needs. High street banks have made very plain their lack of interest in providing for this market and instead have toughened credit limits on unsecured loans.

240 companies now operate in the alternative lending space, meaning Wonga is simply a big fish in an equally big pond.

As in many industries, however, it is often the High Street names which attract attention during scandals or other controversies affecting a sector, when the greatest trouble actually lurks below the surface among the lesser-known players.

This is true of payday lending. In August, the Office of Fair Trading confirmed that 19 out of 50 firms they are investigating decided to quit the market altogether, rather than face a further probe into their practices. This is progress, but there is still work to be done in cleaning-up the sector.

In the long run, the Archbishop of Canterbury and others are absolutely right in arguing for an enhanced role for credit unions, but we must deal with the current facts on the ground. With payday lenders firmly entrenched in British society (the market has topped £2bn), we must focus on designing a system of regulation to curb the excesses of an industry that has clearly got out of control.

This is where my colleague Paul Blomfield MP's High Cost Credit Bill comes in.

It makes several sensible provisions. Firstly, lenders would be barred from lending above a certain 'affordability ceiling' which would be determined by the Financial Conduct Authority (FCA). This would be based on credit repayment as a proportion of monthly income, meaning that the Bill would outlaw the totally unrealistic repayments that some forms of alternative lending have been locking consumers into.

Secondly, the Bill would compel lenders to give borrowers three days notice of every withdrawal made from their bank account by Continuous Payment Authority (CPA). The CPA is a controversial power which allows lenders to simply withdraw money from borrowers' bank accounts if payments are not made on time. Borrowers have reported having their entire bank account cleaned-out as soon as their salary payment arrives, leaving them with no money to feed their family or heat their home.

Worryingly, recent soundings from the FCA suggest they are reluctant to impose tougher regulations on the use of CPA's despite this growing body of evidence on the level of distress caused by them. That is why the need for Parliament to directly step in and legislate is now all the more urgent.

The Bill restricts that power, making it clear that borrowers can cancel a CPA directly with their bank, and forbidding lenders from charging administration fees for the use of the CPA.

It also compels the lender to freeze all charges following a loan default, and requires them to put a repayment plan in place for borrowers who get into trouble.

Lastly, the Bill requires lenders to guide customers towards debt advice, halting charges and creating a fair repayment plan for those who seek help, as well as making several provisions around the advertising of payday loans.

Could we go further? Perhaps - the US state of Florida has real-time databases for monitoring consumer credit which stop the accumulation of unplayable debts. These are far more effective than the credit checks lenders currently carry out, which have proven to be totally incapable of judging whether a borrower can actually repay the loan they are taking out. Indeed, Florida has reported a gradual increase in the alternative credit sector in recent years, but it doesn't report the same very high levels of distressed borrowers that we have in the UK.

Other countries show a far more progressive approach than the UK; simply capping the overall interest rate, or the number of loans a borrower can have at any one time, as the Archbishop of Canterbury and colleagues on the Labour benches have also argued for.

Payday lending is currently in its Wild West period. With up to 20% of industry revenue coming from the 5% of loans which are rolled over or refinanced four or more times, the time has come to put an end to the unfair charges and repayments levelled at those who are most desperate. The provisions in this Bill would restrict these practices and reduce the perverse targeting of the most vulnerable 5% of borrowers which pervades the industry.

Will Ministers listen? This Government's aversion to business regulation of any kind means that any kind of intervention would not likely pass the Business department's 'one in, one out' rule for new regulations. On top of that, easy credit seems to be firmly part of the Government's drive to increase spending based on consumer debt, instead of boosting exports or creating more real jobs.

Along with the Chancellor's terribly misjudged Help to Buy scheme, which looks like it's already begun to inflate another housing bubble, this all results in what Ministers hope amounts to a 'feelgood factor' persuasive enough to carry them across the finish line in the general election in 2015. But there is still a chance that the growing consensus across backbenchers from all sides of the political spectrum, faith groups and civic society will persuade the Government to see sense and consider the clear and reasoned provisions in Paul Blomfield's Bill, because the international picture shows that the UK is sitting firmly behind the curve on holding this sector to account.