Events worldwide and in the UK in recent years have shown that the financial services industry cannot be left to ‘light touch’ of self-regulation. The coalition is failing to introduce the regulations of this industry that are needed to protect the economy, consumers and taxpayers. One of the areas in which the coalition is failing to act is in the market for lenders catering to (and often exploiting) people on low incomes.

We all have seen ads for Wonga and similar payday loan companies. The ads reel people in with innocent sounding puppets, but the reality is that individuals who borrow from the likes of Wonga are paying extremely high rates of interest and often quickly get into insurmountable levels of debt. Campaigners like Stella Creasy MP, the Cooperative party and Labour-controlled Plymouth council are doing great work on drawing attention to these practices and encouraging needed reforms. Complementary to these efforts would be a reintroduction of the concept of usury into English law as a means of protecting the vulnerable from exploitative lenders, and as part of a wider effort by the next Labour government to effectively regulate the financial services industry and hold the industry to account.

Usury is the act of lending money at an unreasonably high interest rate. Legal prohibitions on usury existed in ancient China, Greece and Rome and usury is also condemned in various Buddhist, Christian, Islamic and Judaic texts. A legal prohibition against usury was introduced in England during the reign of Henry VIII, but parliament repealed this in the 1850s. Other countries retain usury laws to this day. In the United States, for example, usury is regulated on a state by state basis.

The State of New York’s usury law provides a good example of how a modern usury statute works. Annual interest rates on personal loans of less than $250,000 (approximately £150,000) are capped at 16 per cent per annum. Generally speaking, a personal loan agreement with an interest rate in excess of 16 per cent is not permissible under New York law. Furthermore, personal loan agreements with interest rates in excess of 25 per cent are not only not enforceable, but amount to a criminal act by the lender. To put it another way, the sorts of interest rates that Wonga charges are not only not allowed under New York law, they are criminal.

Usury laws are essentially a progressive concept based on a recognition that vulnerable people will be exploited if markets for personal lending are not regulated by the state. Reintroducing this basic concept into English law could in a single stroke reform the entire UK personal lending market, including not just online lenders like Wonga, but also other players in the financial services industry like doorstep lenders, credit card companies and finance companies.

A new usury law, perhaps modelled on New York’s statute, would work well as a private member’s bill, and would be a strong step towards curbing of the excesses of modern consumer debt markets. Usury laws are an ancient, yet progressive, idea whose time has come again.

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Todd Foreman is a dual English and New York qualified lawyer specialising in banking and financial services regulation, and is also Labour’s prospective parliamentary candidate for North-east Somerset, seat number six in the Frontline 40 seats that will make up Labour’s majority. He tweets @ToddDForeman

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Photo: Magh