Caution On Payday Loans Cap: It's A Midata Problem

The government is right to resist automatically capping interest rates for short term or 'payday' loans, and to insist on an evidence-based approach to the market which takes account of unintended consequences. Powers to cap rates, prevent endless renewals and aggressive, unsupportive collections activity are important. But it's critical to understand the real problem confronting the payday borrower before leaping to solutions.

Until now, the popularity of short term loans has been positioned in Parliament as a moral problem (rich for MPs!) for which an interest rate cap is the solution. 

But the annualised percentage rate (APR) for short term loans is misleading and unhelpful for borrowers in context. It only enables comparison of one short term loan against another. And it produces such a strange result against longer term loans that borrowers ignore it - especially, as those loans may not be available to short term borrowers anyway.

Typically, a short term loan is applied for when other debts are due, fees are about to be incurred and other consequences are biting or about to bite. The relevant data points include the cost of unauthorised overdrafts, default fees on card accounts, the consequences of missing the rent, failing to pay a phone or energy bill, and so on. Borrowers react to the worst of the known consequences when borrowing, but may not be aware of them all, let alone take them all into account when assessing the best option.

This is a data problem, not an interest rate problem associated with just one of the options available to the borrower.

What would be helpful is a tool that enables comparison of all the options facing a short term borrower in the borrowing context.

Such applications are evolving, and it's important to note that the government is also playing a role to foster that evolution.

The Midata initiative, for instance, is aimed at producing solutions to meet exactly this kind of challenge. It aims to drive the development of simple applications that will access a person's own transaction data (including fees) to enable that person to make better purchasing decisions. Initially, the government is targeting suppliers in markets for energy, mobile phones, current accounts and credit cards. But it has issued a warning to others. 

If only we could get our MPs to focus on proportionate solutions to the root causes of society's problems rather than embarking on populist moral crusades and fiddling their expenses!

Warning Shot Fired Over Midata

The government is preparing the way for regulations to enable consumers and small businesses to request all their transaction data related to energy, mobile phones, current accounts and credit cards. If considered necessary, regulations could be in place in 2013, and may target other markets where certain factors point to consumer detriment.

The decision follows a consultation in the summer, and the full  response is here.

The proposals should add momentum to the voluntary Midata programme fostered by the Department for Business Innovation and Skills to help industry and consumer representatives resolve some of the key challenges in the 'core' consumer markets.

The Information Commissioner’s Office would take the lead role in enforcing any regulations, while concurrent enforcement powers could be given to sector-specific regulators.

The 'transaction data' at stake are the records of a consumer’s own purchases or consumption from a supplier - what the consumer bought, where and how much they paid for it - not the supplier's subsequent analysis. The data would have to be released in computer-readable format to enable it to be analysed by the consumer or a service provider of his/her choosing. This would help prevent suppliers gaining an unfair pricing advantage over consumers, for example, and make it easier for consumers to figure out the product right for them.

Factors the government might consider when deciding whether to expand the programme to other sectors include: 

• the market is not working well for consumers, e.g. consumers find it difficult to make the right choice or their behaviour affects pricing it's difficult to predict that behaviour;

• there's a one-to-one, long-term relationship between the business and the customer, with a stream of ongoing transactions;

• consumer engagement is limited, e.g. low levels of switching or competition; and

• suppliers don't voluntarily provide transaction/consumption data to customers at their request in portable electronic format.

I should add that I am involved in the Midata programme, as a member of the Interoperability Board, and on working groups considering issues related to data transmission and law/regulation.

Crowdinvesting, JOBS and The AIFMD

Interesting to consider the extent to which the implementation of the Alternative Investment Fund Managers Directive provides an opportunity to introduce some certainty and proportionate regulation for direct finance platforms via the small firms registration option - perhaps along the lines suggested in the submission to the Breedon Taskforce and subject to criteria of the kind referred to in Title III to the JOBS Act designed to enable crowdinvesting.

Is it too much to expect Business Innovation and Skills and the Treasury to have already considered and discussed this?

Counter-Regulation And Consumer Empowerment

In 2006, I speculated in an article for the Society for Computers and Law, entitled "Counter-regulation", that the government would one day require offline businesses to implement the benefits of successful online business models. They would do this, I suggested, because successful online businesses "will have demonstrated to most consumers the inadequacies in the business models of their offline counterparts" whose customers will realise they're at a disadvantage compared to consumers dealing online.

That day certainly arrived in April, if not before, when the UK government announced its "Consumer Empowerment Strategy". The policy "aims to put consumers in charge so that they are better able to get the best deals for themselves, individually and collectively." As part of the strategy, "the Government wants to work with [service providers and retailers] to come up with a solution that allows consumers to access [purchasing] information, analyse it according to their own preferences and make better choices."

However, in Better Choices: Better Deals, the Government makes it refreshingly clear (at p.5) that a new legislative programme is not the best way to achieve consumer empowerment. Instead, it is relying on "a wide range of new programmes that have been developed in partnership with businesses, consumer groups and regulators" against a background of normal regulatory enforcement.

It is also refreshing to see that the Government has gone to considerable lengths to try to understand the overall context before announcing policy. As a result, Better Choices: Better Deals is a treasure trove of statistics, behavioural insights, and research - and an inspiring read, rather than an irritating one. There are numerous proposals (see pp.6-7 and Annex A of Better Choices: Better Deals), some of which are the product of thematic regulatory work and some of which go beyond the way many online businesses operate today. Indeed, the semantic web is central to the Government's vision. Of course, the list is not exhaustive - the document is step one in in an attempt to foster collaborative effort across the community, not a creaking regulatory panacea of the kind favoured by the European Commission. These proposals include:

• the 'mydata' [since renamed 'midata'] project to enable consumers to access information about their purchases, analyse it according to their own preferences and use that information to make better purchasing decisions;

• e-statements for credit cards, to provide the last 12 months of transaction data in a portable electronic format;

• clear information about the lowest energy tariff on energy bills;

• changes to Energy Performance Certificates and how they are presented;

• improving the provision of product information about cars and other products from a health and environmental standpoint;

• encouraging local collective purchasing deals;

• making available more complaints and performance data about businesses, regulators, government departments and public service providers;

• figuring out how in-store shoppers can access consumer feedback normally only available online;

• a new resolution scheme for e-commerce disputes;

• a review on how to empower very vulnerable consumers.

Of course, our day-to-day consumer activities tend to require combinations of data held by both public and private sector organisations. So it's encouraging that great progress is also being made on the Open Government data initiative.

Image from 1Million1Shot.