Posts tagged ‘OFT’

February, 2014

Sean Coyle writes on commutative justice and distributive justice

Image

For many legal and political thinkers, the distinction between commutative justice and distributive justice is a very fundamental one. Those who give a central place to commutative justice tend to regard justice as primarily a matter of property rights, and perceive the role of law as policing such rights and correcting trespasses (or injuries) by mechanisms of punishment or compensation. The sanctity of private property is the highest principle; distributive questions hence only arise insofar as owners of property may want to distribute it. On the other hand, some thinkers have given the central place to distributive justice, and regard legal and political theory as attempting to determine the correct form of the just society. Having established a just distribution of property, opportunities, offices, responsibilities, risks and so forth, issues of commutative justice might arise where the extant distribution has been disturbed by injury, theft etc. Hence commutative justice is aimed at the restoration of the distributively just scheme.

The classical conception of justice (in the works of Aristotle, Aquinas and their followers), denied overall priority to either of these conceptions. Justice remains a matter of what is ‘due’ or ‘owed’ to each person. The breadth of that inquiry takes in both commutative and distributive questions, but these terms remain matters of intellectual convenience: not distinct kinds of justice, but mere dimensions of a single inquiry. This can be seen in contract itself. A contractual instrument is in one sense a voluntarily assumed series of obligations that directly relate to the contracting parties, defining what is due (commutatively) in justice between them. But it is also a mechanism for distributing rights, risks and responsibilities between the parties in relation to some limited joint endeavour, and to that extent invokes distributive justice. Any interpretation of the contract must pay attention to both dimensions of the situation, at least if the situation is to be fully reasoned out in justice.

How should one respond to this situation? The OFT itself places responsibility in the hands of the state: ‘more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist.’ OFT1232 Review of High Cost Credit, Final Report June 2010. But the state’s ability to regulate the market is limited. It is widely understood that the introduction of caps to interest would result in one of two things: either loan companies hiding the costs of borrowing in arrangement fees and other administrative ‘expenses’ (themselves difficult to regulate effectively), or loan companies withdrawing from the market, forcing the poor into the hands of illegal lenders. Thus certain payday loan companies have targeted the UK after facing expensive litigation in the US and Canada where usury legislation limits profitability for firms that adhere to the rules. Nor is it clear that a global effort to eradicate high-cost loans would result in cheaper, more regulated credit for the vulnerable. Payday companies may then withdraw from the market altogether, and put their energies into other ventures.

At the same time, a systematic state response to structured privilege seems unlikely to produce significant fruit. The OFT’s contextualization of the problem is a reference toward a distributional question about which disagreement attaches not only to the question of its resolution, but extends to the very terms in which the question should be posed and understood. It is a context that is understood and represented differently by conservatives and socialists, democrats and republicans. Of course responses cannot await the settlement of every question that lies between conservatives and socialists. In the broadest practical terms, it will involve the redistribution of monetary wealth into the hands of the worse-off in one of two ways: directly, through state benefits, or indirectly through the redistribution of paid offices of employment, the control of labour relations, regulation of the banking sector, etc. But it is necessary to cast the net as widely as possible, investigating the ‘indirect’ or structural factors that lead to or reinforce poverty.

Further useful links:

‘What is commutative and distributive justice?’

Different types of Justice according to Acquinas

‘Consumers “trapped” by Payday Loans’

Image: Justice: By https://commons.wikimedia.org/wiki/User:Lonpicman [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)%5D, via Wikimedia Commons

January, 2014

Payday Loans: tackling the underlying causes as well as the symptoms

Jodi Gardner Research Fellow, Centre on Household Assets and Savings Management (CHASM)

Payday loand

The current economic and political conditions have created a ‘perfect storm’ in the explosion of payday lending in the United Kingdom. Economically, the country is experiencing the longest depression in over 100 years, wages have stagnated or are lowering, unemployment has been rising, and the cost of living continues to increase. Politically, a Coalition government has decreased access to welfare, created a universal benefits cap and dismantled the Social Fund, which was widely considered the ‘lender of last resort’ for vulnerable consumers in desperate need of funds. It is therefore no surprise that increasing numbers of people are turning to payday loans, both on-line and in person, for short-term injections of much-needed cash.

The Office of Fair Trading (OFT) reports that the market was worth approximately £2-2.2 billion in 2011/2012, and that between 7.4 and 8.2 million new loans were given during that year. Whilst the interest rates for these short-term loans vary, rates as high as 16,000% APR are not unknown, particularly for low-income consumers with impaired credit ratings. Additional regulation is therefore urgently required to prevent desperate individuals from being exploited. In April 2014, the consumer credit jurisdiction will be transferred from the current regulator, the OFT, to the Financial Conduct Authority (FCA). The FCA recently published detailed proposals on what it envisions the consumer credit regime will look like under its control. The current proposals are strongly based on the existing protections available, complemented with increased supervision and enforcement powers. The considerable problems currently experienced in the payday lending industry have been recognised, and there are specific proposals directly aimed at removing the most harmful aspects of these credit products. These include:

  • allowing for a maximum of two rollovers of the loan amount;
  • allowing for a maximum of two unsuccessful attempts at Continuous Payment Authorities (CPAs) to pay off the loan in full;
  • a prohibition on the use of CPAs for part payments;
  • requiring a financial warning to be included in payday advertisements; and
  • requiring lenders to provide borrowers who rollover a loan with an information sheet including how to access free debt advice.

The FCA is also required to cap the cost of credit by 2015, and a consultation on this process will start shortly. These are useful steps forward in the fight against unfair lending practices, but it is not enough. Attention must also be paid to preventing the need for these types of potentially harmful loans in the first place.

This can occur in a number of ways including provision of alternative credit products, encouraging a savings culture and state provision of necessities to lower-income families. Firstly, it is important that there are robust, efficient and widely available alternative credit products for low income consumers, such as a strong Credit Union sector, funding of Community Development Financial Institutions and an increased role for the Social Fund. Many consumers turn to payday loans because of a shortage of savings and lack of ‘savings culture’ in the UK. Recent figures paint a disturbing picture; Now: Pensions reports that 28% of people have stopped saving since the recession, 32% of people have less than £500 in savings, and as many as one in five have no savings at all. The need for promotion of savings, especially with low-income individuals, was identified by the previous Labour Government and in response the Saving Gateway Accounts Act 2009 was drafted. Under this legislation the government would give people earning less than the threshold amount 50 pence for every £1 saved up to a total of £25 each month. Unfortunately, this legislation was cancelled when the Coalition Government came into power and instead the amount allowed to be saved tax-free in an Individual Savings Account was increased. The latter initiative is directed at middle-income consumers who are paying tax, and therefore does little to help those who most need access to savings.

The UK is a developed welfare state and there is an expectation that the government will provide a minimal level of support for vulnerable and low-income citizens. The current explosion of demand for payday lending by low-income consumers to pay for necessities is calling into question whether mainstream society is failing low income consumers. In a welfare state with a social security system, it is unacceptable that such a large number of people are forced to turn to payday loans just to get by every month. Let’s remember to address the cause of this issue, as opposed to merely removing some of the most harmful aspects of a potentially dangerous financial product.

Useful links:

Payday Lenders- Heroes or Villains

Landscapes of Predation, Landscapes of Neglect: A Location Analysis of Payday Lenders and Banks

Which? challenges payday lenders over high missed payment fees

Payday loan danger day could hit thousands

Payday lenders and economically distressed communities: A spatial analysis of financial predation

Image: http://commons.wikimedia.org/wiki/File%3APayday_loan_shop_window.jpg

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