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The Institute of Local Government Studies (INLOGOV) at the University of Birmingham is the leading academic centre for research and teaching on democratic local governance and strategic public management in the UK.  As well as undertaking research and consultancy, we also deliver in-house and campus based professional development and postgraduate degrees. We also contribute ideas, opinions and theories to help public servants with their roles and to help them shape the future of public services too.

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“Birmingham City Council Bans New Payday Lending” – that’s Birmingham, Alabama, of course

Chris Game

I was reminded recently, as the Archbishop of Canterbury was skirmishing with Wonga, and Plymouth City Council banning payday loan advertising on bus shelters and city centre hoardings, of an internet headline from a couple of years ago: “Birmingham City Council Bans New Payday Lending”.  It naturally got my attention, if only for the few seconds it took to realise that, regrettably, it simply had to be the ‘other’ Birmingham, the one in the southern American state of Alabama.

Our Birmingham is its country’s second largest city; theirs is 100th. Our council serves a population nearly five times theirs, with a revenue budget, even after cutbacks, nine times the size. Yet, as both it and Justin Welby are all too aware, it is only the much smaller council that has the legislative and zoning powers to create that kind of headline.  Ours has to confine itself to worthy but more modest initiatives, like this week’s announcement that it was joining the growing list of councils planning to block payday loan websites on public library computers.

Money lending, usury – the charging of extortionate (or, in some cultures, any) interest rates – and their regulation are as old as religion, predating by millennia Shakespeare’s Merchant of Venice. In the US all 13 states in the original 1776 Union adopted usury laws specifying maximum annual interest rates of between 5 and 8%, and, while most states significantly relaxed these maxima in the early 1900s to enable mainstream banks to compete with ‘salary lenders’ or ‘loan sharks’, state-regulated usury limits remained the basis of consumer protection law until the arrival of the modern-day payday loan industry in the 1980s.

In fact, the US industry is a two-pronged one – payday and auto title loans – although the prongs are essentially similar: small, short-term high-interest loans, secured on the borrower’s next pay cheque or car value, and repayable in full on the next payday or after two to four weeks. Non-repayment or rollover can quickly create a debt treadmill amounting to, in the US, a three-digit annualised percentage interest rate (APR), and here a four-digit rate like Wonga’s ‘typical’ 5,853%.  Between 1985 and 2002 this hitherto fringe part of America’s financial services industry mushroomed into more than 25,000 loan stores, outnumbering McDonald’s and Burger Kings combined, and frequented by a sixth of all households.

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As in this country, these numbers are the industry’s most powerful self-justification. Loan stores claim theirs is a necessary service, extending credit to low-income households, for whom the alternative would be even less scrupulous door-to-door loan sharks. They’re more convenient and less bureaucratic than banks, while the extortionate APRs are an incentive to repay on time and actually applied in only small numbers of cases. In short, they are unfairly vilified.

As last week’s YouGov poll showed, they are not all wrong. Few of the UK respondents (7%) said they’d consider taking out a payday loan themselves. But well over half (56%) agreed there would always be times when some people needed to, and a quarter (24%) felt loan companies offer a useful service. The really big figures, though, were on the other side. 88% thought they encouraged people to get into more debt, 89% that they exploit the most vulnerable in society, and 90% that limits should be introduced on the amount that payday loan companies can charge.

This capping of APRs was the key power reluctantly conceded by Ministers to the new Financial Conduct Authority (FCA) when it takes over regulatory responsibility next April from the ineffectual Office of Fair Trading (OFT), but which they don’t want actually used.  Apparently, they consider it ‘overly simplistic’ to suppose that lower interest rates are in borrowers’ best interests. So, to mangle the old cliché, it’s a case of Britain possibly or possibly not doing tomorrow what America was doing yesterday – or, in that most federal and diverse of nations, what some parts of America were doing, along with Canada, France, Germany, Japan and numerous other countries.

The 50 states, not surprisingly, responded in varying ways to the payday lending explosion. The most restrictive require all licensed short-term lenders to comply with the same state usury laws and APR limits as banks, which amounts in practice to a ban. No payday lender in Georgia, for example, can loan less than $3,000 at more than 16% APR. Other states, slightly more subtly, exempt short-term lenders from usury laws but cap APRs at around 36% or lower, which, unless they’re permitted to charge an additional fee, makes it similarly almost impossible to compete with the banks.

There are about 18 of these restrictive states, but considerably more around the permissive end of the spectrum – like Alabama, whose state law allows payday lending up to $500 for up to 31 days, at an APR of up to 456% for a 14-day loan of $100.  But note: 456%, not 4,560%, as it could be here. Permissive in this US context does not generally mean that anything goes. Americans culturally are highly critical of predatory lending practices, and states have plenty of regulatory instruments available short of APR-capping: restrictions on loan terms, fees, rollovers, multiple loans, and much else besides.

Moreover, if city councillors feel their state legislature is heedless of the detrimental proliferation of short-term loan businesses in their particular city, then, as in Birmingham, they can take the law into their own hands – in this case by imposing a moratorium on the establishment of any new loan businesses, while devising new zoning ordinances limiting the number of such businesses in any given area.

More surprising, for a nation with such a deep-rooted suspicion of almost anything emanating from Washington, is that the federal government too has entered this previously almost exclusive preserve of the states. So spooked was the US Congress by the 2007-08 financial crisis and Great Recession that it established a Consumer Finance Protection Bureau, a powerful regulatory federal agency with a jurisdiction covering pretty well all financial products and services in the US, including payday lending. True, the Bureau can’t cap interest rates, but it has plenty of other powers to control abusive lending. At present, therefore, in this important and increasingly controversial policy field, not only do America’s states have far more regulatory powers than our local governments, their national government easily trumps ours too.

Our councils, at least the more pro-active ones, recognise the urgency of the problem, want to intervene, but can do relatively little. The Coalition behaves almost as if there were no problem, let alone an urgent one, also does relatively little, and slowly. The only fast movers seem to be the branches of Money Shop, Cheque Centre, Cash Generator, Kash Kwik, Loans 2 Go, and the like, rapidly taking over our high streets.

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Chris Game is a Visiting Lecturer at INLOGOV interested in the politics of local government; local elections, electoral reform and other electoral behaviour; party politics; political leadership and management; member-officer relations; central-local relations; use of consumer and opinion research in local government; the modernisation agenda and the implementation of executive local government.

Fracking: the latest challenge in the Tory heartlands

Martin  Stott

The hot days of July finally saw the debates around the implications of ‘fracking’ of unconventional hydro-carbons in the UK reach out and grab the attention of the national media. As Tory grandee Lord Howell called for the process to be focussed on the ‘desolate North’ (he corrected the initial impression that he was referring to the North East by saying that he really meant the North West) and  Energy Minister Michael Fallon was reported in the Mail on Sunday as warning that fracking was likely to face fierce resistance from the middle classes in Conservative heartlands, as if to prove his point dozens of protesters were arrested at an exploratory drilling site near the village of Balcombe in West Sussex.

Hydraulic fracturing or fracking – the process of drilling and then injecting fluid into the ground at high pressure to  fracture shale rocks to release natural gas, has caused a revolution in energy policy in the USA where gas prices have dropped dramatically as gas from fracking particularly in North Dakota, and more controversially Pennsylvania, has come on stream. Coal has suddenly seemed a dirty and expensive option and as a consequence carbon emissions from the world’s biggest economy have dropped significantly.

Can the trick be repeated in the UK? The Coalition Government is betting the farm –  quite a  few farms actually – that it can. Chancellor George Osborne announced in this year’s Budget that fracking companies would receive tax allowances for developing gas fields and would be able to offset expenditure on exploration against tax for ten years.The next tax avoidance scandal perhaps. Best known and a pioneer in the field is Cuadrilla (referred to by some opponents as ‘Godzilla’) whose explorations in Lancashire have amongst other things led to a couple of minor earthquakes near Blackpool in April and May 2011. But there are quite a few other companies across the country as the official estimate for UK reserves is 37 trillion cubic metres of shale gas in the north of England and geologists have yet to quantify reserves in the south.

But it is Balcombe in rural West Sussex which is becoming the test bed for what this means for energy experts, planners, campaigners and politicians. Campaign group Don’t Frack with the Fylde certainly raised the issues and those earthquakes, 1.5 and 2.3 in magnitude respectively, shook confidence in the safety of the technology (let’s face it: who notices in North Dakota where the  nearest house is 60 miles away?) but the opposition in southern England is having a greater impact on politicians and opinion formers. The Mail on Sunday’s  report of Sevenoaks MP Michael Fallon’s private briefing on fracking reported him as saying of potential well-heeled protesters ‘We are going to see how thick their rectory walls are, whether they like the flaring at the end of the drive.’ He admitted that exploratory drilling was likely to spread the length and breadth of southern England saying ‘The second area [after the North West] being studied is the Weald. It’s from Dorset all the way along through Hampshire, Sussex… all the way a bit into Surrey and even into my own county of Kent.’

This focus on the lusher parts of the South East which has started at Balcombe is going to be a real concern for Conservative strategists. The ‘Noting Hill set’ has repeatedly been accused of ignoring its rural base as proposals ranging from the sell-off of forests, to wind farm policies, changes in planning laws, opposition to which has been championed by the Daily Telegraph, and the HS2 rail route through the Chilterns have all been seen as a slap in the face for this rural base, many of whom have gravitated towards UKIP. But the Greens too have a presence in the South East, with their charismatic MP Caroline Lucas representing a Sussex seat, an MEP for the region and their only council, Brighton and Hove, only a few miles away.

Meanwhile up in Whitehall, the Department for Communities and Local Government has been ruminating on what to do about the planning and land use implications of promoting the fracking revolution and on 19 July it spoke,  issuing guidance  to local planning authorities. The guidance stresses that fracking could be a vital source of energy, saying ‘Mineral extraction is essential to local and national economies… minerals planning authorities should give great weight to the benefits of minerals extraction including to the economy when determining planning applications.’ It goes on to explicitly exclude any attempts by planning authorities to trade off fracking with renewable developments saying, ‘Mineral planning authorities should not consider  demand for or consider alternatives to oil and gas resources when  determining planning applications.’ Because of the scale and strategic nature of minerals planning applications these have remained a planning function of county councils, still Tory controlled in southern England.

It  remains to be seen if DCLG will allow a level of discretion in determining these applications by county planning authorities which could well limit or even stop fracking in its tracks in the south, or whether  as would be possible using potential secondary legislation  under the Growth and Infrastructure Act, it could take applications for  fracking for shale gas  out of the hands of county councils and instead have them decided by the Secretary of State as  part of the regime for nationally significant infrastructure projects. On the one hand it could bow to Tory pressure in the shires and allow all the developments to happen ‘up north’ by default as counties refuse most if not all applications. On the other, it may decide to take the risk, strip counties of their power and pull shale gas development permissions back into Whitehall. Only time, and a bit of local politics in the home counties, will tell.

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Martin Stott joined INLOGOV as an Associate in 2012 after a 25 year career in local government. He is National Policy Adviser on minerals planning for the Royal Town Planning Institute.