James Daley

By James Daley

Payday lending is big business in the UK these days. According to the industry's trade body - the Consumer Finance Association - it's now worth over £1bn, with more than 8 million new loans being issued every year.

Although of course these loans can be a lifeline for families who get hit by the unexpected - a broken car or a faulty boiler - they're also the gateway to a slippery slope of debt for those who don't use them responsibly. I've always thought that a comparison to cigarettes is a fitting one. Smoking one or two won't make you ill, but smoking them regularly can kill you. In the world of short-term credit, it's not difficult to quickly end up in a position where you're reliant on your next payday loan to pay off your last one - leading you rapidly towards financial ruin.

Television advertising for cigarettes was banned in the 1960s, and other non-TV adverts were banned a decade ago. Yet, there seems to be no serious efforts to take a similar approach to payday lending - even though the time that it takes to get from solvency to ruin is much shorter than the road to cancer for smokers.

While there have been various moves to regulate payday loans more tightly over the past few years, most of the action amounts to little more than tinkering around the edges of a much bigger problem.

Today, the Competition & Market's Authority was the latest to publish a report into the sector - concluding after a year of deliberation that a lack of competition in the industry could be costing borrowers up to £60 a year.

Missing the point

I understand that the CMA has a relatively narrow remit - but surely the bright people who led this market study can see that price competition is the least of this sector's problems. Rather than making it easier for customers to compare payday loans - as the report suggests - surely the focus should be on making it harder for people to get their hands on these.

The £60 a year that people are losing out on due to lack of competition is as nothing compared to the cost for those who end up financially ruined by entering a spiral of credit.

I don't believe that this market should be regulated out of existence entirely, but it should be put in the same category as smoking. No adverts - on TV or anywhere else. And it needs to be much harder to get your hands on the cash.

While customers may like the convenience of being able to get loans in minutes - this encourages impulsive behaviour, and does nothing to help people make financially responsible decisions.

Over the next year, we will see a cap on the cost of credit, as well as new rules from the Financial Conduct Authority which will restrict roll-overs and raise the bar around transparency. But none of this gets to grip with the bigger problems around the dangers of instant credit.

While the industry claims that tighter regulation will only open the door to illegal loan sharks, it's impossible to think that 8 million loans would end up in the hands of the black market. The payday lending sector needs to be pared back to a niche market which is only available to responsible borrowers. And if illegal loan sharks spring up to fill the void, the government and police should invest in prosecuting and even imprisoning the offenders.

Today's CMA report brings us no closer to a real solution to the very serious problems that payday lenders are creating.