New Clause 11 — High cost credit lending
Finance (No. 3) Bill
Christopher Leslie (Nottingham East, Labour)
My hon. Friend makes an important point. In addition, it does not necessarily address the face-to-face advice that is given by many citizens advice bureaux and other agencies that have been reliant on the financial inclusion fund. The Minister says sotto voce that it will do face-to-face advice as well; I will be interested to see whether the £26 million of investment is maintained. No doubt he will want to clarify that when he addresses the new clause.
I pay tribute to my hon. Friend Stella Creasy, whose tenacity is to be commended for the fact that this issue remains front and centre on the political agenda. The Back-Bench motion that was passed last February called on the Government to introduce measures to increase access to affordable credit and to take regulatory action to control non-competitive examples of excessive charging, but we still have not seen any action since then. That is another reason why it is important to move forward and get a sense of priority and urgency into this issue, and this Bill is a good opportunity to consider these matters.
My right hon. Friend Mr Blunkett spoke earlier about why some of this action is needed now. The changes to the social fund and crisis loans that were announced in March—after the Back-Bench motion was passed in February—mean that social fund crisis loans will no longer be available to pay for basics such as cookers and beds, and the living expenses rate is being cut from 75% to 60% of the benefit rate, thereby limiting the number of loans that can be applied for. In addition, there is a backlog of unprocessed claims and the Government are planning to cut the discretionary social fund from £872 million last year to just £183 million this financial year—all under the axe of a Liberal
At the same time, thousands, if not hundreds of thousands, are being disfranchised from access to credit. After the credit crunch, as the banks recapitalise, we see withdrawal from anything vaguely “sub-prime”, as it may be categorised. However, it is also known that there is money to be made from vulnerable customers. Many hon. Members will have experienced pushy sales calls, which are randomly generated, and text messages, which many people are receiving. It is about the desperate customers that I worry most and their responses to some of those apparent offers of help and assistance. It is all part of the allure of high-cost credit, which we need to regulate far more effectively.
It had been hoped that the promises of mutuality and support for the credit union movement in the coalition agreement would by now have tried to make some inroads into this problem, but despite the promise in the coalition agreement that
“detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry”
would be brought forward, all we have seen from the Government so far is the Northern Rock trade sale, local authority discretionary help for credit union squeeze because of the cuts to their budgetary position and, of course, the Treasury’s pre-emption of the Lloyds banking group disposal. The Vickers commission was looking at how to handle that particular issue, but Ministers have pressed on with the disposal of 620 branches rather than pausing and waiting for that report.
At the same time, funding for advice and financial education is falling away, as we have been discussing, as local authorities cannot pick up the tab. The basic problem is that not all customers are informed and logical when it comes to financial issues. The Money Advice Service, as my hon. Friend Yvonne Fovargue mentioned, may well be there as a guide for people who have the time and space to make those decisions, but many of our constituents are not only busy but are often confused about financial services. They can be distracted and stressed and in many cases they have an aversion to small print. Coupled with that, there is massive inertia in credit services.
There are some fantastic charities, such as Citizens Advice, which I have mentioned, and the Consumer Credit Counselling Service, of which I was a board trustee for five years. They pursue a number of ways to help those in most distress. Creditor-funded consolidation is a very good approach, but we need other reforms in the sector; facets include, for example, the fee-charging, customer-charging debt management plan providers. Charging customers rather than looking to the creditor to cover the administrative costs is an unacceptable business model in this day and age. The practice should be phased out and I hope the Minister agrees.
Unfortunately, the consumer credit regulation changes the Government propose still involve too much confusion. There is still no clarity—[ Interruption .]—as I understand it. The Minister may know because he may be able to
look into what will happen in the future, but we still have no clarity about consumer credit regulation and the powers that may transfer to the financial conduct authority. It will not be a champion of the consumer in its objectives but will have regard only to the
“appropriate degree of consumer protection”,
which in my view is too open to interpretation.
On the prudential regulatory changes, the Bank of England Financial Policy Committee and the Prudential Regulatory Authority have insufficient consumer focus. There will be no PRA consumer panel. There is no voice for the consumer on the Financial Policy Committee. Indeed, it was interesting that the first of the FPC’s reports talked about the risks of forbearance, which may indeed be something the committee needs to deal with, but the fact that it did not even address the point that sometimes forbearance and flexibility are in the consumer’s interest gave me the sense that there was not yet an adequate balance in the composition of that board. The PRA’s duty to consult the financial conduct authority is too weak and, as the Minister knows, I have criticisms of the lack of parliamentary accountability of the new apparatus he is proposing. That too is an area where the consumer voice is being fettered.
I acknowledge that there is no single easy answer to the high-cost credit regulation issue and that there are different approaches to regulation. Caps on usurious interest rates—to use the biblical term—have often been suggested, but there could be consequences. Should we control things geographically, for example where there is inadequate competition? Sometimes deserts emerge, even among doorstep lenders, who have scaled back their activity in recent years, and the illegal loan shark has filled the gap voraciously.
There are cases when taxation of demerit activities might be appropriate, to discourage punitive charges and rates. We need detailed regulation to protect not just the percentage interest rate charged, but also the admin fees and product fees that put such a squeeze on the unsuspecting consumer. One of the best ways to look at the regulation of high-cost consumer lending is to consider time limitations on the use of payday lending. Should we say that such lending is absolutely for emergency circumstances and it should have only short-term availability? Unfortunately, we see people go back to payday lenders month after month, and even year after year. Excessive long-term dependency on payday lending needs to be addressed.