HELL, Dante writes, has seven circles, and even these have
sub-circles. In the lowest sub-circle of all - lower even than
violent murderers - the poet places the chargers of extortionate
interest. Once, the Church had a name for it, usury, until the
Protestant work ethic and the rise of capitalism glorified it as
risk-taking, and therefore a legitimate business activity. Wonga
has made us think again about all that.
So it is excellent news that the most infamous name in payday
lending has been forced by the new teeth of the Financial Conduct
Authority (FCA) to wipe away the £800 rolled-over debt of a man who
borrowed £150 to go on holiday - and the debts of a third of a
million other customers who took out loans without the lender's
checking that they could afford to pay it back.
This is something of a victory for campaigners such as the
Labour MP Stella Creasy and the Archbishop of Canterbury, who two
years ago vowed to drive lenders like Wonga out of business by
setting up church credit unions to provide an alternative source of
loans for poor people.
They helped to change the climate of acceptability that Wonga
had attempted to establish, with its jolly cartoon adverts of
unlikely-looking old ladies in twin-sets as typical Wonga-borrowers
- or, more plausibly, its adverts on the football strips of clubs
in impoverished areas such as Newcastle and Blackpool, where one
fan was invited each week to kick a ball through the O in a giant
Wonga advert in the hope of winning a £150 prize.
More directly, Citizens Advice discovered that in half its
pay-day loan cases, lenders had not properly checked to ensure that
borrowers could afford to repay. It was for this reason that the
FCA forced Wonga to write off so many debts.
A failure to make such checks is not always an error. It is part
of the payday lenders' business plan. Legalised loan sharks know
that many borrowers will never repay; so they charge those who do
pay such sky-high interest rates that the profits outweigh the bad
debts. Those who do pay are often badgered into doing so by daily
phone calls, which announce that the interest has taken the total
ever higher. There are other disreputable methods, too: Wonga was
fined £2.6 million for sending threatening legal letters from
fictitious law firms to 45,000 customers in June. "Wonga is not the
bad apple," Ms Creasy said. "The industry is a rotten barrel."
The most effective strategy against loan sharks, legal or
black-market, requires something more fundamental. It means doing
something about the social circumstances of unemployment, low
wages, welfare squeezes, and public-spending cuts. Before the
recession, there were 300,000 people taking payday loans in this
country. Today, there are five million, in an industry - if you can
call it that - that is worth more than £800 million a year. Do the
maths. Loan sharks will not vanish until the deprivation in which
they flourish is addressed. There is something wronga than
Paul Vallely is a Senior Fellow at the Brooks World Poverty
Institute at the University of Manchester.