The FCA is right to crack down on the unfair interest rates charged by high street banks and retailers

Andrew Bailey, chief executive of the Financial Conduct Authority, is that rarest of breeds among senior public servants: a man who “gets it”. It, in this instance, being the widespread public concern about the punitive, counterproductive and, to borrow an old-fashioned but apt term, usurious interest rates charged by the banks, so called “rent to buy” consumer goods retailers, “payday” lenders and others involved in the provision of credit to hard-pressed families.

Mr Bailey, a distinguished central banker, could, had he judged the mood badly, have simply declared that retail interest rates are retail interest rates, the price of money that is entirely a matter for borrowers and lenders: “You can’t buck the market,” as we used to say in the days when free market axioms were more fashionable.

But times and the public’s expectations of its institutions move on, and the kinds of astronomic rates charged in some cases – taking into account extra fees and management expenses often larded onto relatively modest overdrafts or short-term loans – are simply unacceptable. The FCA has perhaps surprised many by turning its spotlight on the supposedly respectable high street banks, whose charging structures can be equally unfair to customers, though perhaps not quite as ruinous as the usual suspects in the payday loan trade. At any rate, Mr Bailey has taken his cue and declared his intention to do something about it. Quite right too, but in this endeavour he would be wise to mind how he goes.

In the first place, as he has himself pointed out, past attempts at reform have run into resistance from the companies and banks that stand to lose much income and profit from unsecured lending. Official proposals are always open to lobbying of ministers, to legal challenge and schemes to get around the regulations. So the FCA’s new rules have to be watertight in every sense, and not liable to process failure. That the FCA is alive to these risks is reassuring.

Second, and notwithstanding public opinion, there remains the potential for what are now legal and licensed loan sharks to be replaced by illegal and unlicensed loan sharks. Like one or two other activities, they are as old as money itself, and it is perfectly possible, indeed likely, that the gangsters will try to move in when the licensed doorstep lenders move out.

However, that is a perennial problem for any realtor in any sector of the economy – rules are there to be challenged by the unscrupulous and the dishonest. The second challenge, therefore, is to try and remove the conditions that allow them to thrive and to increase the penalties and detection rates for those involved in loan sharking (which can be accompanied by violence and connections to drugs trafficking and other crime). Better education in personal finance and debt crisis services would help in this regard too.

Mr Bailey’s reforms, if pitched right, would in fact do much to prevent the emergence of a new breed of back-street illegal lenders by making the licensed legitimate trade more affordable, though still profitable and viable for the firms involved. It might be necessary for the FCA, therefore, to actually encourage the lenders to increase the volume of their loans, the better to “crowd out” the illegal trade. In future, then, short-term unsecured lending would be a highly regulated and controlled business, acquiring some characteristics of a tightly constrained utility, but that would be all to the good.

If all goes well, the FCA will help to beat back one of the great social evils of our time, and inject some sense of decency into the conduct of personal finance. Mr Bailey also knows very well that the fundamental problem remains that wages are not keeping up overall with price inflation, and haven’t for about a decade. These are broader economic challenges that are the responsibility of his former colleagues in the Bank of England.