Call for windfall tax on payday loan companies

17 Apr 14
The government should levy a windfall tax worth around £450m on payday loan firms and use the money to support an expansion of other forms of credit, the Institute for Public Policy Research said today.

By Richard Johnstone | 21 April 2014 

The government should levy a windfall tax worth around £450m on payday loan firms and use the money to support an expansion of other forms of credit, the Institute for Public Policy Research said today.

In a report examining the industry, the IPPR said that in addition to a cap on the interest rate of payday loans – which is being introduced by government although the level has not yet been set – more action was needed to counter payday loan firms.

A new range not-for-profit affordable lenders with enough capital liquidity and geographic coverage to compete with firms like Wonga, Quick Quid and Payday Express should be supported, the Jumping the shark report stated. These could be run by credit unions in Post Office branches or through partnerships with Church of England parishes.

Lenders benefiting from the levy funding – which could support over one and a half million loans of up to £250 at any one time – could charge a maximum of 3% interest a month, or 42.6% APR. By contrast, the report calculated Wonga’s representative APR to be 5853%.

IPPR research fellow Mat Lawrence said payday lenders have grown because of a gap in the credit market that mainstream banks are unwilling to fill.

‘Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit,’ he added.

The report also suggested a new government-backed ‘match saving’ incentive be created for people on low incomes, in a bid to reduce demand for payday loans. Government could provide a 20p bonus for every £1 saved in new accounts, up to the first £20 deposited each month. If such a saving incentive were targeted at those in receipt of benefits or tax credits, and half of them were to take maximum advantage of it, 3.5 million people would gain £48 a year, at a cost to the taxpayer of just under £170m.

This would help people to build up a stronger asset base of their own to reduce reliance on credit, Lawrence added.

‘We need a strategy for spreading capital, building the assets of communities, and engaging citizens in forms of local democratic finance in which power and control resides with them, rather than with government agencies or unaccountable financial institutions.’

Spacer

CIPFA logo

PF Jobsite logo

Did you enjoy this article?

AddToAny

Top