The thinktank Centre for Social Justice (CSJ) is calling for regulation to be relaxed in order to allow for the creation of a network of ethical community banks. The organisation argues this could prevent millions turning to high cost credit.
The comments come after the government proposed plans to cap the charges payday loan companies can implement on debt. The Financial Conduct Authority put forward a cap of 0.8%, which aims to prevent abuses within the market. However, the CSJ has criticised the plan, arguing that it could push more people to use loan sharks.
Instead, the organisation proposed cutting red tape that is holding back successful credit unions so they can be “reborn” as ethical community banks. These institutions would be able to offer stable loans and banking services at cheaper rates and on better terms, it adds.
In the UK, household debt has almost doubled in the last decade, reaching £1.44 trillion. Additionally, around seven million people use high-cost credit, such as payday lenders. CSJ stated that a lack of competition within the finance sector means that many poor people suffer from excessive charges.
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Credit unions are highlighted as a potential solution to this, but the thinktank explains that current regulation means unions are often limited and unable to serve the poorest in society, which would benefit the most from their services.
Christian Guy, director of the CSJ, said, “There is a growing group of people under intense pressure as a result of problem debt. This debt rips into families and traps people on the edges of our society. Many of them don’t know where to turn.
“Worse, people in poorer communities are effectively excluded from mainstream banking – hit hard by punitive fees, penalties and crippling debt.”
The proposed community banks would offer smaller loans, similar to those handed out by payday lenders, but with lower interest rates and better conditions.
The CSJ proposes relaxing membership rules of credit unions, removing interest rate caps for small loans and allowing credit unions to invest members’ deposits to generate income as a way of achieving this.
“The time for quick political fixes is over,” added Guy.
“A new government should focus on preventing problem debt, creating a savings culture and a new market for community banks. It should also ensure more help and advice reaches people already struggling with toxic debt.”
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