A Labour government would impose a new tax on payday lenders to fund a multimillion-pound increase in public support for low-cost alternatives, such as credit unions, Ed Miliband announced today.
Details of the rates at which the levy would be imposed on the profits of companies like Wonga have not yet been announced, but Labour said it aims to raise enough cash to double the £13 million currently provided by the Government each year to fund the expansion of credit unions.
Payday lenders, which offer short-term loans to tide over customers who run out of money while waiting for their monthly pay cheque, have been widely criticised for charging vulnerable individuals sky-high interest rates which can top 5,000% a year.
Companies will have to pay an existing levy when they start being regulated by the Financial Conduct Authority next year, but Labour is proposing an additional charge on top of this to boost the credit union market, where loans are available at much lower rates to households unable to access the mainstream credit market.
The party has already proposed a cap on the cost of credit, which was included in the Bill establishing the FCA, but has not yet been implemented.
Prime Minister David Cameron yesterday told the House of Commons that he had not ruled out a cap, saying: “W e must bear in mind what has been established in other countries, and by our own research, about whether a cap would prove effective. It is absolutely right for us to regulate this area properly.”
Labour claims that families across Britain are facing the most sustained cost-of-living crisis since 1870, due to inflation outstripping stagnating wages. Mr Miliband said this was creating a “personal debt crisis” for many households.
Visiting a south London credit union today, the Labour leader is expected to say: “The prices families have to pay keep on rising faster and faster than the wages they are paid.
“And, as a result, the market in payday lending has doubled in just four years. Almost a third of the payday loans taken out in Britain at the moment are to cover the cost of people’s gas and electricity bills.
“For too many families the end of the month is now their own personal credit crunch.
“A One Nation Labour Government would deal with the causes of the cost of living crisis. But it would also act to help prevent people falling into unpayable debt with radical reform of the payday lending market.
“We would cap the cost of credit, halt the spread of payday lenders on our high streets and force them to fund the credit unions that can offer a real alternative for people in desperate need.
“We must protect the most vulnerable people in our society from the worst of exploitation by payday lenders. And it is right that the companies that benefit from people’s financial plight accept their responsibilities to help ensure affordable credit is available.”
Mr Miliband also announced that Labour’s competition and consumer affairs spokeswoman Stella Creasy has been given special responsibility to lead a campaign against abuses by legal loan sharks.
The Walthamstow MP, who has been a prominent campaigner against excessive interest rates, said: “Across the country Sharkstoppers and Debtbusters campaigners are working to address the damage payday lending debt is doing to the finances of millions of families who are struggling to make ends meet.
“Whether helping to increase the capital credit unions have to enable them to lend more, kicking these companies out of their football grounds and shopping centres, or supporting debt advice to those caught in a spiral of debt by the practices of these firms, these are the people dealing first-hand with this Government’s failure to learn from other countries in capping the cost of credit.
“We are determined to see a cap introduced in the UK so that we can see an end to this legal loan sharking and give British consumers the protection they deserve.”
The payday lending market has more than doubled in size since 2008/09 to £2.2 billion, and up to five million families are believed to be planning to borrow money from this source in the next six months, said Labour.
More than 1.5 million households are now believed to be spending more than 30% of their income on unsecured credit repayments, said the party.
Non-profit credit unions limit interest to 26% a year but lack the capacity to make significant inroads into the market.
Miliband unveils payday lender plan
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