There’s a real credit crisis happening every day. You just have to be poor to know about it. It is deeply troubling that so many in our country lack the comfort of a financial buffer and have to rely on uncertain and limited incomes. Dogged by poor credit ratings, they find themselves overdrawn and out of luck.
This 20 per cent of the population end up paying the poverty premium: in punitive overdraft fees and high payday loan rates. Worse still, they end up at the mercy of lenders operating outside the law. An estimated 310,000 of our fellow-citizens are using illegal lenders according to a BIS estimate.
I work for London in Brussels, but I’ve always believed that the work I can do at home is just as important as the work I do representing our great city’s interests in the EU. And here, the issue of improving credit for those trapped at the bottom of our society is one that is close to my heart. I was delighted to have been selected as a finalist in this week’s IEA Breakthrough Prize – for which I had to outline a “Free-Market Breakthrough” policy to improve the lives of the least fortunate third of the population in the UK. My own proposal, which was published by CapX, was to improve access to credit for entrepreneurs from among the very poorest.
But the problem of regular access to credit to help manage cash flow and cover unexpected costs is one that deserves more attention as well. And the Centre for Social Justice has continued its important work in this field with a new report on the intriguing suggestion of a back-banking scheme connected to Universal Credit reforms.
The idea is a simple one. Basic bank accounts are designed to serve people with bad credit scores and low incomes. By design they do not allow overdrafts. But to help with cash-flow management, these customers need access to a controlled line of credit at manageable rates. The CSJ has suggested that a back-banking scheme could be set up to provide advances which would be guaranteed by future Universal Credit [UC] income.
Back-banking has the potential to offer the best of all worlds. It would support the poorest with more sustainable access to credit to deal with unforeseen costs. By being tied to Universal Credit income its potential for abuse would be contained, and loan rates could be kept low without banks facing undue risk of default. Most important of all, the proposed model allows market competition and commercial incentives to drive innovation and improvement.
That’s because the idea is to use the existing Universal Credit framework – which, incidentally, will make it cheap to build – and then turn to banks, building societies and hopefully credit unions to offer their own competing back-banking products on top.
We all know too much cheap credit brings its own dangers, for lenders and individuals. But the CSJ report discusses these challenges openly as well as the benefits of the proposal.
There are also concerns over devising a system that may drive out the innovation and commercial competition from the current short-term credit market. While I understand the desire to put payday lenders out of business, they may have a role to play. Whatever we think about them, these companies operate in the legal light of day and have devised new ways to gauge creditworthiness beyond crude scores.
That’s why I believe we should find a way to include payday lenders in the conversation. After all, who knows this market better?
As we take back control of our country, we have a once-in-a-century opportunity to shape Britain’s future so it works better for everyone. But we mustn’t fall into the trap of trying to out-think the concentrated brainpower of a market economy.
Like no other, a commercial society is a society built to serve human needs. It has given me, and so many others of modest backgrounds, opportunities beyond our parents’ dreams. Let’s see if we can find a way to work with innovative companies – who understand their customers – to tackle some of the real problems of poverty. Then, in consumer credit as in every area, there is no limit to what we can do together.