By Karen Rowlingson, Professor of Social Policy
Department of Social Policy Sociology & Criminology, Centre on Household Assets and Savings Management, University of Birmingham
The collapse of Wonga in August 2018 may be celebrated by many and mourned by few but, as Michael Sheen has reminded us, there are many other types of high cost credit still available in the marketplace so further action is needed if we want a post-Wonga world to look significantly different from what went before.
The first action we need is to end austerity. Austerity policies such as Universal Credit, the benefits freeze and other tax/benefit changes are a key driver of the demand for high cost credit by causing poverty and insecurity both in and out of work. Austerity policies have been in place since 2010 but are beginning to bite ever more deeply into people’s purses and wallets as basic benefits increasingly fail to cover the cost of the essentials people need. Poverty is increasing among all groups including families with children (in and out of work) and pensioners.
Latest financial inclusion report highlights unsecured credit is rising
The University of Birmingham’s latest financial inclusion monitoring report highlights the fact that unsecured credit is still increasing, such that almost half of the population were in debt in this way in 2014-16. And the number of individual insolvencies increased to nearly 100,000 in 2017. Our economy is built on private debt rather than public investment with devastating consequences for many. We need a new, more ethical foundation for our economy as the IPPR have recently argued and austerity must end.
Of course, not everyone who uses high cost credit is borrowing to pay for essentials as a result of austerity. Some people struggle to resist the widely-advertised lure of quick, easy money and then find themselves in a vicious downward spiral of debt. It is therefore crucial for government to continue to reform this type of credit to reduce its negative consequences. For example, the price cap which currently applies to payday lending (and has led to a reduction in such lending since its introduction in 2015) should be extended to other forms of credit such as rent-to-own products. But we should not be focusing solely on so-called ‘sub prime’ credit. Other forms of credit are much more pervasive and equally pernicious.
For example, according to the FCA, 52 million people in the UK have a personal current account and 37% of this group use an arranged overdraft, with 25% (approximately 10 million people) using an unarranged overdraft each year. The FCA’s own Feedback Statement, highlighted the fact that unarranged overdrafts fees can cost ten times more than a payday loan. Furthermore, Stepchange have found that 2.1 million people spent the whole of 2016 in a permanent overdraft. Wonga may have gone but other forms of high cost credit, including overdrafts, remain.
So how do we win the campaign against all forms of high cost credit?
First of all, we need the highest level of commitment from those in power, including those in parliament and government but also those in consumer groups, academics and the media to call for appropriate legislation and then support the FCA to enforce it rigorously. Michael Sheen’s Alliance to End High Cost Credit, launched in March this year aims to bring these groups together with a focus on five areas of change: public debate on the kind of economy and society we want; changes in regulation, law and practice; wider training for employees; and community-based financial education.
The final area is to provide better support for alternatives to high cost credit, for example, in working with credit unions, microfinance institutions and community interest companies like Fair For You who provide an alternative to rent-to-own companies like BrightHouse.
We are seeing some very positive signs as a result of all this work, for example with Labour’s pledge in 2018 to cap overdraft fees or interest payments. And in May 2018, Which? sent a letter to the FCA calling for action on overdrafts signed by 84 MPs from different parties. The campaign is also gaining some traction within government with the announcement made in its civil society strategy that it will use £55m from dormant accounts to help support the increased use of fair, affordable and appropriate financial products. These are all helpful steps forward but they are still relatively small steps if we really want the post-Wonga world to be one in which people can live their lives without resorting to the use of high cost credit and falling into a vicious spiral of debt.