Wonks and Wonga: Payday lending, policy theory, and time-poor politicians

As somebody who works for a debt advice charity, I was interested to hear George Osborne’s announcement that Government intends to cap the interest rate payday lenders can charge. The harm caused by this type of high-interest lending was first highlighted by consumer organisations such as mine, and many third-sector bodies contributed to the high-profile campaign on the problem run by the Labour MP Stella Creasy.

However, the announcement was a little confusing. After all, the concept of an interest rate cap had previously been rejected by Government on multiple occasions. Why the sudden change of approach? It seemed unlikely that the Chancellor had, Grinch-like, experienced a sudden change of heart.

Revisiting a previous blog on this site may give me a clue. In October Leonora Merry brilliantly explored an occasion when academic policy theory seemed to play out in real-life politics. To me, George Osborne’s unexpected reversal demonstrated another such collision between theory and practice. In this case, the Chancellor’s sudden change of policy on payday appeared to be a real-world example of Baumgartner and Jone’s ‘Punctuated Equilibrium’ theory.

The theory rests on two basic principles. One, politicians have limited time and intellectual resources, and must prioritise. Therefore policy often stays static for long periods. Two, taking this into account, policy on an issue can change rapidly if it starts to attract a lot of attention, especially popular opinion conveyed by the media.

The argument goes like this. Politicians are assailed by so many different issues they can only concentrate on the most pressing. Therefore, as long as something is contained in a policy ‘sub-system’ (often comprising regulators, consumer groups and industry), where there is common understanding, they can effectively ignore it.

However, the theory continues, if an issue “breaks-out” from this policy sub-system and becomes high-profile, if a ‘feedback loop’ is created by multiple actors all discussing a subject, with the weight of opinion all on one side, then decision makers may be forced to attend to it. They must at least pay attention to an issue that is constantly thrown across their desk by newspapers and this can drive seemingly rapid policy change.

How does this apply to payday loans? Well, it appears we have seen this exact theoretical circumstance play out in the payday loan debate. Initially it was low profile because relatively few people were affected. In 2009 only 2% of people in financial difficulty had a payday loan and, crucially I think, there were far fewer payday lending shops on the high-street. The media wasn’t particularly interested. Therefore decision makers could ignore the subject and leave it to a policy sub-system comprising regulators such as the Office of Fair Trading (OFT) and consumer groups like Citizen’s Advice. Lenders could remain lightly regulated, no far-reaching policy solutions need be considered, nothing to see here.

But then, over time, the situation changed. Fundamentally this was driven by the continuing personal financial hardship caused by the economic crisis. Unemployment and part-time work increased, wages declined and for millions making ends meet became harder and harder. This led to the rise of the payday lender, people running out of cash at the end of the month turned to them for crisis loans. By 2012 the Competition Commission reported 1 million people were taking out payday loans every year. This growth, accompanied by a higher visibility on the high-street, got MPs and the media interested, and not just interested but vocal. So, using extensive data provided by consumer charities, MPs and the media made sure that the payday debate dominated the consumer finance agenda. Debate after debate, news story after news story brought it up. Eventually the concatenation of voices started to force the issue from its policy sub-system onto the desk of decision makers.

First the competition commission was dragged-in, then the new, high-profile, financial regulator the Financial Conduct Authority. Eventually the pressure seems to have became too much and the sub-system membrane split, the equilibrium was well and truly punctuated. The Chancellor acted, and reached out for the most popular suggested policy solution, cost capping. Of course, it helped that the issue overlapped with another the Government felt weak on, the declining standard of living, and therefore action on one could be spun also as action on the other.

So there we have it. I’d argue a pretty good example of the intersection of theory and reality. But what lessons can it teach us? I think three.

One, campaigning organisations shouldn’t be afraid to move into already well populated issue areas if they have new information and /or perspectives to bring. Weight of data can push an issue from a policy sub-system onto the national agenda, like a straw incapacitating a camel.

Two, never underestimate the importance of the visual representation of a problem on decision makers. Yes, payday lending merited action on the basis of hard evidence on paper, but the fact that most MPs now see dozens of payday shops on their local high street shouldn’t be underestimated.

Three, issues that touch on multiple Governmental concerns, that are cross-cutting, have more of a chance of escaping the policy sub-system. If organisations can find an issue that is sensitive for many Government departments, and policy makers, for many different reasons, then success is more likely.

Of course, I’m not going to pretend these lessons don’t reinforce what campaigning professionals already know. But at least now we can use long words and quote fancy theories when putting them into practice.

I work in policy for StepChange Debt Charity on a wide range of consumer issues. Outside of the office I'm (for some mad reason) also an MSc student at Birkbeck, studying politics. If I find the time I pretend to know something about film, books and the theatre.

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