Business secretary Vince Cable has backed proposals from the Archbishop of Canterbury to offer viable alternatives to payday loan companies charging high interest.
The Most Reverend Justin Welby met with one of the industry’s biggest firms, Wonga, in which he vowed to “compete them out of existence” through creating lending capacity for church-based credit unions.
His comments come as the payday loan business, which is now worth several billion pounds a year, has been referred to the Competition Commission after the Office of Fair Trading ruled that it had uncovered “deep rooted problems” with the industry’s regulation.
However, archbishop was forced to clarify his initial criticism after it emerged the Church of England had around £1million of its £5billion pension fund in American investment firm Accel Partners – which is in fact one of the biggest investors in the leading UK payday lender.
Despite this, Reverend Welby re-asserted his view that firms such as Wonga, which has a reported annual interest rate charge of 5,853 % should face far stronger competition from community credit unions. In response, the company, which offers loans of up to £1000, has defended its approach in claiming actual interest rates paid by the majority of its shorter-term borrowers are in fact far less than its twelve-month figure.
But in addition to criticism over its lending, the company has also dropped an appeal to the OFT over concerns on its debt collection practices. The firm had reportedly written to customers struggling with payments warning them they could be committing fraud and would consider contact the police, which it has been warned against doing.
Business secretary, Dr Cable, who met with the archbishop at Lambeth Palace to discuss options for tackling the issue, said Rev Welby had been correct in condemning abuses within the industry and identifying a clear need for alternative sources of loans that were considered more ethical.
While a growing number of MPs have been critical of the payday industry, previous calls for a cap on lending interest rates have been rejected by successive governments on the basis it could drive vulnerable people into seeking finances from unregulated loan sharks.
But critics have demanded action on the basis that payday loan debts can quickly add up if customers fail to make payments on their accounts, incurring charges far in excess of those levied by high street banks.
Speaking on payday lending, chief executive of the OFT, Clive Maxwell, said that within the industry there had been “evidence of financial loss and personal distress to many people” that had caused considerable concern.
Among the areas that the OFT believed needed most addressing was the fact it was difficult for customers to compare full costs of payday loans. In addition, it has been identified that many of those using payday loans had poor credit histories and limited access to other more conventional forms of loan.