A new report from Damon Gibbons, Director of the Centre for Responsible Credit, examines the Japanese experience of tightening money lending regulation beween the late 1970's and the present day, including the package of measures introduced by their Money Lending Law in 2006.
Those measures included reductions in the cap on legal charges and the introduction of an 'Aggregate Debt Control'; a limit on the total volume of money lending to one third of the borrower's gross income.
Some UK commentators have argued that these measures created a 'credit vacuum' and led to an increase in illegal lending. However, the CfRC reports no evidence of this, in fact quite the contrary. Illegal lending in Japan grew alongside an expansion of legal money lending until 2003, since which time both have reduced considerably.
The report draws on the Japanese experience to make five recommendations for the UK as follows:
- That the Office of Fair Trading review the affordability assessment requirements of lenders contained in its Irresponsible Lending Guidance, and consult on a proposal to establish a total borrowing limit based on a set ratio of the borrower’s income. In order to ensure that the borrowing limit is enforceable, all high cost lenders should be required to register their loans on a national database;
- That Government increase the criminal penalties for unlicensed lending to at least 5 years imprisonment and substantially increase the maximum fine that can be imposed for this offence;
- That the Department for Business, Innovation and Skills commit to introducing a cap on the total cost of consumer credit agreements, and establish an independent commission to advise it on the structure and level of this cap and, on an ongoing basis, to monitor its impact;
- That the Department for Business, Innovation and Skills commission further research to examine the potential links between legal money lending growth, over-indebtedness and illegal lending;
- That the Financial Services Agency investigate and report on the extent to which banks and other financial institutions have been funding the expansion of money lending in the UK. Such an investigation should also consider whether the level of this investment outweighs the investments made by banks in financial inclusion initiatives to provide people on lower incomes with access to affordable credit options.
The report is available at http://bit.ly/XgeTjc
Searching Finance is soon to publish Damon's ''Solving Britain's Personal Debt Crisis''.
Some more about Damon:
Damon Gibbons has over twenty years experience of dealing with Britain’s debt problems.
Starting his career as a debt advice worker in 1990 as mortgage repossessions hit an all time high, he has been involved at the sharp end - providing court representation to help people keep their homes and avoid bankruptcy. Following a move to local government in 1997,where he managed anti-poverty and money advice services for nearly a decade, he also witnessed at first hand the impact of Council cut backs on the ability of people to access advice.
He has also had major impact on national and international policy making.
In 1999, Damon co-founded the national Debt on our Doorstep campaign which highlighted the scandal of high cost money lending to those on the very lowest incomes and in 2003 he successfully identified the grounds for a Competition Commission inquiry into the industry. In 2005, Damon co-founded the European Coalition for Responsible Credit, raising the need for much better regulation of our banks and credit lenders some three years before the onset of the current debt crisis.
Now the Director of the Centre for Responsible Credit, Damon’s research findings and policy recommendations are often taken up by Members of Parliament and he is frequently asked to comment on credit, debt and financial exclusion issues in the national media.”