Freedom to choose payday lending companies

Professor Sean Coyle, Birmingham Law School

Recent campaigns by Which? and #Sharkstoppers (championed by the Labour MP Stella Creasy) have helped to highlight the issue of payday lending companies.

#smartspenders: Reforming Britain’s Consumer Rights Legislation

Which Campaigns | Payday loans and overdrafts

As Government moves to cap the cost of these loans, I will consider some aspects both of this problem, and the broader political questions it raises. First is the propensity of established legal and political discourses to remain anchored in the conception of individuals as ‘autonomous subjects’, formally free (by right) to choose and pursue their own ends in their own way with the minimum of interference. This ethos serves not only the market, but also many individuals very well: it has never been more possible to contract and bargain one’s way to a better position in life. Social mobility is for everyone. But the market is much less reliable at responding to the situation of the vulnerable: those in poverty, or lacking skill-mobility, those with caring obligations, health problems, etc. who although formally as ‘free’ as anyone, lack the means or opportunity that make that freedom a reality.

 
Historically, consumer credit laws in the UK have assumed this model of individual autonomy. Until now, there were no restrictions on the interest that loan companies could charge. Under the Consumer Credit Act 1974, lenders require a licence from the Office of Fair Trading to offer consumer credit, and the Consumer Credit Act 2006 adds a requirement for the OFT to assess whether the lender is lending ‘responsibly’ in deciding whether to grant a licence. But assessments of responsibility give no credence to the exploitation of vulnerable persons specifically targeted by consumer credit companies (those on low incomes, or with expensive addictions etc.) The focus is upon the clarity with which the terms of the contract are advertised to the consumer. In the context of loans, the only requirement is that the ‘typical’ APR is clearly and prominently displayed in advertising (policed by the Advertising Standards Agency). Again, the underlying model is of the contracting party who is fully rational, capable of making an informed decision when in possession of the facts, and free to determine their own course of action.

This underlying model is captured explicitly by Bentham in his Defence of Usury (1787): ‘no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit; … nor anybody hindered from supplying him, upon any terms he thinks proper to accede to.’ It is easy to see Bentham’s standpoint as a typical outpouring of Enlightenment rationalism. But Bentham is to some extent correct in pointing out, in Letter II, that the practice of lending throughout the history of Europe and the Middle East had known all sorts of variations in what was deemed an acceptable rate of interest. It was true that Biblical sources had condemned the practice of usury, so that throughout the medieval period, usury was deemed to stand opposite the Christian virtues of iustitia, caritas and humanitas, but these condemnations were in fact against the charging of any interest. Drawing on various historical examples, Bentham easily establishes that ‘usury’ had at various points in time been conventionally associated with widely differing rates of interest. In the absence of any objectively agreed understanding of usury, as a moral principle, why indeed should not the man of sound reason make up his own mind as to what he deems acceptable, and sign his agreements on the basis of this understanding?

Recent reports both by the OFT and newspapers on the rise of payday loans adhere to precisely this image. A key recommendation of the OFT’s Review of High-Cost Credit (June 2010) was ‘that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be  undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area.’ (my emphasis).

The Financial Times (11 December 2010) called for ‘greater transparency’ in order to stimulate competition between lenders and bring prices down. Are the assumptions underlying these suggestions adequate to our
times?

Further useful links:

Shrewd Business or Predatory Lending?

Review of high cost consumer credit (OFT) 

George Osborne moves to impose cap on cost of payday loans

 Is payday lending really wrong?

Financial times: Payday Lenders Topic Section

Payday lenders: Endangered Sharks

Reponses to Defence on Usury

Image Source : Shark: Pterantula at the English language Wikipedia [GFDL (http://www.gnu.org/copyleft/fdl.html), CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/) or CC-BY-2.5 (http://creativecommons.org/licenses/by/2.5)%5D, via Wikimedia Commons