ED MONK: The payday loan party is finally over - now it's time to look back and ask 'what were we thinking?'
There will be plenty of sore heads for a while to come, but Britain's payday loans party is finally winding down.
There's good reason to believe that the controversial industry has now peaked and that there will be fewer payday loans from here on, with borrowers who are granted them better equipped to pay them back.
A crucial moment was reached last week when Wonga agreed to forget the debts of 330,000 borrowers because loans had been granted without establishing if they could be paid back.
The party's over: Millions will have to live with the hangover of payday loans - and regulators should ask if they could have done more.
Even before that, Wonga, by far the largest payday lender, told its investors that it just wouldn't be the same business anymore. FCA regulation, which began in April and is getting tougher, means it won't grant as many loans and they won't be as profitable.
And Wonga's retreat is nothing compared to those of its competitors. Last year, when the 50 largest lenders were asked to show they were sticking to softer Office of Fair Trading rules, almost a third of them simply decided to shut up shop.
The FCA estimates that its tougher requirements will now put all but the largest lenders out of business. These firms can't stick to the rules and make money, it seems.
Payday lending, then, is on the way down but its rise and fall holds lessons for the authorities, and the rest of us too. As with all the worst hangovers, a period of self-reflection in necessary - what were we thinking?
It's hard not to conclude that regulators have been simply too complacent.
As far back as 2010, debt charities and individual MPs were reporting the stories of ordinary people coming to them having been caught in a trap of payday loans. One loan was taken to pay another, and enough money was handed over in fees and charges to have cleared the original debt, yet this remained untouched.
That year the OFT looked at payday loans in a review of high-cost credit and made a series of recommendations that now look tissue-soft.
Government financial literacy programmes should mention payday loans, it said, while payday lenders should volunteer to list on a comparison website.
The Government should 'explore' whether paydays lenders could be made it include 'wealth warnings' on their ads.
Voluntary codes of conduct, the last refuge of all mis-behaving industries, were also suggested.
Meanwhile, proper price controls were rejected on what now look exceedingly shaky grounds.
The 2010 report includes the zinger that: 'The imposition of price controls in high-cost credit markets creates a risk for suppliers that they would generate lower profit levels.
'It would be reasonable to expect these suppliers to respond to the imposition of a price control by seeking to regain such lost profit by restricting the type and risk of consumers that they are willing to supply.'
And they say it like it's a bad thing.
Two years later and MPs had another chance to cap costs, but reforms were voted down. In a written answer to Parliament at the time Jo Swinson, Minister for Employment Relations and Consumer Affairs, said: 'We... recognise that a voluntary approach can deliver real improvements in consumer protection more quickly than Government regulation.'
It couldn't, and hundreds of thousands of payday loans were subsequently granted that should not have been.
Wong turn: Jo Swinson (left) predicted in 2012 that payday lenders such as Wonga would get their house in order without price controls.
Central to regulators' failure were assumptions that have proven to be disastrously wrong. One was that top-down restrictions should be avoided at almost any cost and that all problems can be solved as long as you get consumers more engaged.
To this end, solutions invariably focused on giving people more information and transparency so that they could then make better, more rational decisions.
This ignores the fact that people deciding to take a payday loan are not being rational, they are being tempted into instant gratification.
Wonga boasts on its website that 77 per cent of its borrowers could borrow via a credit card of bank overdraft if they wanted. But those take time and paperwork and possibly interacting with another person who may tell you the consequences of borrowing the money.
A payday loan is anonymous and almost instant so there is little opportunity for the rational part of the brain to kick in.
The truth is payday borrowers do not always need the money. Sometimes they just want it, and no amount of warnings or comparing of prices is going to dissuade them. This is a hard thing for the surveys and statistics of officialdom to take account of.
Another mistake was to fail to understand that lenders can get money back from almost anyone if they are allowed to dip into their bank account whenever they want.
A key defence used by the payday lenders has been to ask 'why would we lend to someone who can't pay us back?'. But continuous payment authorities have allowed them to take back what is owed no matter whether the borrower can afford to pay or not.
The Financial Ombudsman Service reports that a common theme of the complaints it sees are borrowers being unable to pay other essential bills after payday lenders have taken back their repayments.
These issues are finally being addressed and, if policed properly, it is reasonable to think the new rules will bring the worst excesses payday lending to an end.
A price cap, encompassing interest and fees, will mean borrowers never pay back more than twice the sum they borrow, and lenders will be limited to using CPAs just twice. The comparison service that was recommended on a voluntary basis in 2010 has today been made compulsory.
These measures were unthinkable just a few years ago. Untold thousands have been granted inappropriate payday loans in the time its taken the authorities to wake up.
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