Payday lending offers small sums for short periods of time at very high interest rates. Society would be a better place if people learnt to manage without these facilities. But human frailty is such that they never will. As with prostitution, gambling, the supply of recreational drugs, and the consumption of alcohol and tobacco, payday lending is undesirable but inevitable.

Last week the Financial Conduct Authority announced details of a clampdown on payday lending, capping interest rates, limiting the number of times a loan can be rolled forward, and requiring more effective checks on affordability. The Authority claims that these curbs will put almost all payday lenders out of business, Last week Wonga, the highest profile lender, was required to write off a collection of loans which should never have been made.

Payday lending refutes the proposition that if you give consumers enough information, rationality will guide them towards wise choices, a claim central to financial regulation for decades. Insistence that lenders give prominence to the effective annual percentage rate of interest they charge, which is typically several thousand percent, has not checked demand.

The  business has expanded because the Internet has made application and  assessment quick and easy while social media have supplemented conventional sources of credit information.  Once, you might have been refused credit if you did not have a bank account: now you might be refused credit if you do not tweet or tweet inappropriate things. It is a world apart from time when the only route to a loan was an interview with a stern faced bank manager would offer money only if you did not need it.

Policy approaches to socially undesirable activities range across the spectrum from an outright ban to a free market with heavy taxation. Both approaches have been applied to alcohol. America’s failed experiment from 1921 to 1933 is  the classic demonstration that prohibition does not work. Today we are learning, though it seems very slowly, the same lesson in relation to hard drugs. 

The more determined are attempts at law enforcement, the more organised and menacing the criminal activity which continues the supply. In both the prohibition era and today’s war on drugs, the elaboration of criminal organisation reached levels which threatened the  legitimate authority of states. The criminalisation of users not only fills prisons with people guilty only of lack of will power, but also stimulates other petty crime.

But the application of the opposite approach to tobacco- legal but taxed business -has allowed smoking to remain a major cause of death, The results are both fiscally and socially regressive

So much regulation is desirable? The trick seems to be to allow enough legal leeway to keep both  crime and social harm at  modest levels – a pragmatic approach which leaves no room for the moral fundamentalism which motivates many campaigners.  Gambling in Britain illustrates the issue well. Liberalisation in the early 60s went too far and encouraged ‘the mob’ to cross the Atlantic.  A tightening of regulation in 1968 centred on rigorous control of  the integrity of business and individuals and introduced the interesting concept of ‘meeting unstimulated demand’. Recent further liberalisation was driven more by ideological commitment to deregulation than a spirit of cautious compromise and may have given too much freedom to problem gamblers.

So what are the lessons for the regulation of payday lending? Financial services regularly fails  to draw on experience of regulation of other industries . Change should always be incremental. Payday lending changed its character in Britain because technological changes made it possible to target a new demographic profile. A genie has escaped the bottle, and it has to be coaxed back gently; attacked directly, it is likely to prove slippery and evasive. The FCA has ample experience of regulation which fails for these reasons.