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Archbishop Welby: "It was very embarrassing, there's no two ways about it"
The Archbishop of Canterbury said he was "embarrassed" and "irritated" that the Church of England invested indirectly in online lender Wonga.
It comes after the Most Reverend Justin Welby told Wonga the Church would try to force it out of business by helping credit unions compete against the firm.
But the Church later said it invested in funds that provided money for Wonga.
Archbishop Welby told the BBC he wanted the Church's investment rules to be reviewed following the row.
Lambeth Palace said an independent inquiry would be launched into how "this serious inconsistency" occurred.
The amount of Church money indirectly invested in Wonga was about £75,000 out of investments totalling £5.5bn, according to the archbishop.
"It shouldn't happen, it's very embarrassing, but these things do happen and we have to find out why and make sure it doesn't happen again," Archbishop Welby told BBC Radio 4's Today programme.
He said Church investment managers "didn't pick up" that they had put funds in a "pooled investment vehicle" which, through its investments, had bought into Wonga.
Real worldAnalysis
Archbishop Welby said that he was going to compete Wonga out of existence: those words hung in the air.
The audacious plan to counter what he sees as a social ill received a warm welcome from Anglicans and won praise from senior politicians. The implication was that these interest rates were sinful.
So it's an awfully long way to fall. The embarrassment is severe and acute.
But Justin Welby has responded by repositioning the Church in a very interesting way. He said we can't tolerate bad things, but we have to live in the real world, and living in the real world means we have to tolerate complexity.
He has acknowledged that it is a lesser sin to allow credit unions charging annualised rates of 70% - 80% to operate on Church premises, steering people away from lenders charging almost 6,000%.
This is quite a Rubicon for the Church to cross, and the archbishop is now under even more pressure to make this project work.
The Church's Ethical Investment Advisory Group "recommends against investment" in companies which make more than 3% of their income from pornography, 10% from military products and services, or 25% from other industries such as gambling, alcohol and high interest rate lenders.
The Church also "reserves the right" not to invest in companies with "unacceptable" management practices, according to its website.
Archbishop Welby said the 25% level for firms which deal in high interest rate lending was "probably too high" and he would ask the advisory group to review it.
"I think we have to review these levels and make sure that we are consistent between what we're saying and what we're doing," he said.
But he said it is difficult to decide exactly which businesses are unethical, giving hypothetical examples of a clothes company which makes socks for the military or a hotel which provides pornography through the TVs in its rooms.
He said the Church had to operate in the "real world", adding: "If you exclude any contact with anything that directly or indirectly at any point gets you anywhere bad, you can't do anything at all."
Payday firms offer short-term loans, often at high interest rates, and have been accused of leading people into more debt.
Archbishop Welby said he did not want to "drive legal payday lenders out of business" if that left people in deprived areas with no choice but to use "loan sharks".
This week, Archbishop Welby told Total Politics magazine he had met Wonga boss Errol Damelin and had "bluntly" told him "we're not in the business of trying to legislate you out of existence; we're trying to compete you out of existence".
Religious views on usury
Dr Alastair McIntosh Centre for Human Ecology
Several passages in the Old Testament condemn usury. This meant that lending money at interest was forbidden within the Jewish community and to the poor, but was permitted to outsiders.
As for Christianity, there is a passage in the Gospels (Luke 6: 34-35) where Jesus says that if you lend, you should not expect anything in return. This was taken by the medieval Roman Catholic Church to mean that usury should be forbidden among Christians.
But in the 16th Century, with the Protestant Reformation, John Calvin of Geneva proposed reinterpreting the Gospel's passage to mean that money lending should be allowed, as long as the rate of interest was not excessive.
Islam holds a firm line against usury, as it forbids charging interest to anybody. This means that Islam favours equity (or shared) financing over debt.
Mr Damelin, in response, said he was "all for better consumer choice".
But, after the archbishop's comments were widely reported, Financial Times journalists looked into the Church's own investments and discovered links with Wonga.
The paper reported that the Church's pension fund, which claims to explicitly ban firms involved in payday lending, had invested in US venture capitalists Accel Partners - a company that led Wonga fundraising in 2009.
Archbishop Welby, a former oil industry financial executive who sits on the Parliamentary Commission on Banking Standards, has previously lobbied for a cap on high interest rates charged by loan companies.
BBC religious affairs correspondent Robert Pigott said the archbishop accepted that taking on payday lenders was a risky project which might not work.
But our correspondent said news that the Church had invested in funds that provided money for Wonga had "raised the stakes even further" and meant Archbishop Welby's plan "has to succeed".
Jonathan Bartley, of religious think tank Ekklesia, said the Church's policy was to make the most of its investments while "minimising harm".
"A better way of doing it would perhaps be to see the investments as part of the Church's mission, rather than an add-on, and saying actually we'll try and do good with our money," he said.
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