I beg to move,
That this House
notes with alarm recent evidence showing a fourfold increase in the use of payday lending since the beginning of the recession and that high cost credit lenders advanced approximately £7.5 billion to low and middle income consumers in 2008 alone;
recognises the problems of financial exclusion, lack of financial and debt management education, lack of price competitiveness in the unsecured lending market and the near monopoly positions of many large lenders which contribute to the high costs of borrowing;
considers that without action these factors could worsen family debt, poverty and financial difficulties to the detriment of the economic recovery;
therefore calls upon the Government to introduce, alongside measures to increase access to affordable credit, regulatory powers that put in place a range of caps on prices in areas of the market in unsecured lending which are non price-competitive, likely to cause detriment to consumers or where there is evidence of irresponsible practice;
and believes that such caps should take account of the desirability of maintaining access to affordable and responsible credit, the likely impact on the supply of credit and the cost of enforcement, that they should be regularly reviewed and that they should use the total cost of credit, calculated on a yearly basis, to ensure that lender avoidance and distortions in price are prevented.
It gives me great pleasure to present to the House today an opportunity to put on record its support for the introduction of caps on the total cost of lending, and so protect Britain's poorest consumers from the practices of so-called legal loan sharks. My introductory remarks are set out in three sections. I shall address, first, the problems; secondly, how the proposals would tackle them; and thirdly, in seeking people's support for the motion, the concerns that they might have about the proposals.
To begin with, however, I shall tackle what we are not talking about today. The proposal is not about a usury law or about setting a single cap for interest rates. Previous Governments rightly concluded that that would not be the right thing to do. All the briefings that Members have received from industry lobbyists have been about such proposals, and the often cited Office of Fair Trading research is also about such an idea, but let me stress that there are flaws in that proposal, which is why we suggest that something different needs to take place. I shall also be clear that this is not a debate about how we abolish the high-cost lending market, or about stopping people borrowing. Credit is a vital part of the economy and, clearly, a part of the UK lifestyle. Indeed, one challenge that we face during our economic recovery is to encourage people to take a sensible and sustainable approach to credit, because, given how we live in the UK, it is a key part of our future.
Debt and credit is a much greater part of the UK's psyche than any other country's. As Third Sector Foresight points out, Britain has double the debt of continental European countries, and personal savings are at their lowest levels since the 1940s. In April last year, private debt in the UK stood at a whopping £1.4 billion, and living that way has its own consequences. Surveys by PricewaterhouseCoopers show that debt levels in our society mean that the average household is paying 15% of its net income purely on the interest it owes to service such debts.
Our focus in this debate is on a very specific aspect of credit provision. The high-cost credit market is very different in its practices in comparison with other, more mainstream forms of lending. We are talking about the payday loans of £100 until the end of the month that keep getting repeated, the doorstep lending of £200 that is offered to people so that they can buy a new sofa, and the hire purchase agreements offering deals that people sign so that their kids can have a new TV.
Above all, this debate is about the spiralling costs at the heart of such loans, because it is the rates that people charge that make this a billion-pound industry. It is all legal, and it is all growing. While some forms of high-cost lending have been with us for generations, we have also seen in this country a rapid expansion in the scale and use of these forms of credit in the past few years alone. That is driven in part by the drying up of mainstream credit. PricewaterhouseCoopers reports a staggering 79% drop in secured lending in the past year. Research by Consumer Focus predicts a rise in payday lending alone of 40% to 45% in the next few years. There has also been a fourfold increase in payday lending since 2008.
I see for myself the impact that this has on my community in Walthamstow. Our high street now has a large number of shops offering short-term loans, hire purchase agreements and credit deals. That is a badge of poverty. These companies see our fragile economic conditions as fertile ground. The aptly named Mr Crook, who is the chief executive of Provident Financial, the largest home credit company, says that he expects a growth in his target market as a direct result of the comprehensive spending review. Who does he mean by that? He means those with poor credit histories and those with no credit histories. In my cosmopolitan corner of London, one of these companies employs only people who speak more than two languages, so that they can target newly arrived residents who do not understand or know the British banking system. He also means those who are facing redundancy or are newly unemployed.
Indeed, as we see higher levels of unemployment, the need to act quickly becomes even greater. As a lady from Leicester who recently contacted me pointed out, as a public service employee on a redundancy notice she could not borrow from either her bank or her local credit union, so what other option does she have? That is when this kind of lending becomes a problem. Some can manage such credit, but the toxic mix of low incomes, perpetual interest payments and no choice affects too many people in our country.
My hon. Friend is making her case most eloquently. My constituency also has shops where people pay possibly three times as much for white goods, furniture and so forth. Is she aware that, although the problem is intensifying, it is not new? I wonder whether she has read Proverbs 22:
"If you have nothing with which to pay, why should your bed be taken from under you?"
When people cannot pay, their beds and their fridges are taken from them.
My hon. Friend makes an eloquent point. Indeed, I am grateful for the support that we have had from Church Action on Poverty for the campaign and for the proposals before the House.
Does the hon. Lady agree that the Bills of Sale Act 1878, which enables lenders to go into people's homes and take property, should be reviewed, because that is an unintended consequence of the Act?
The hon. Gentleman raises an interesting point which Members might want to cover during the debate.
Most importantly, we are looking at the principle of how we could stop people getting into such high levels of debt because of the rates they are charged for the borrowing that they undertake.
Has my hon. Friend noticed that these businesses and shops are advertised on television? Does she have anything to say about that?
I do indeed, but I will leave that to my much more eloquent colleague, my hon. Friend Mrs Chapman, who has done some sterling work in introducing proposals on how we might address some of the problems caused by advertising.
It is the captive nature of this market that makes intervention so key. The lack of competition for these products keeps prices artificially high, along with profits. The Office of Fair Trading says that there is not enough of what it calls "substitutivity". Let me put it more simply. As the industry itself admits, 25% of home credit users and 23% of payday users have no other credit option. Consequently, these companies can extract what might be termed an economic rent. They set the terms of the trade in what they will lend at a risk that is much too high for consumers. In this context, I pay tribute to the work of Grant Shapps, who is now a member of the Government, and who published a report in 2009 highlighting the lack of competition in this market and its consequences. As he said,
"We think it is obscene that anyone should end up paying 10,000% APR, particularly when the evidence suggests that these loans are targeted at some of the most vulnerable members of our society".
These are people for whom such repayments become a weight on their finances and their families-people who do not have large amounts of disposable income and for whom any change in circumstance, be it divorce, job loss or increases in rent, can tip them into destitution. The Consumer Credit Counselling Service says that one in eight people who contacted it for help with such unsecured debts in the first half of last year were on jobseeker's allowance. Contrary to what might have been suggested this morning on the "Today" programme, one in 10 payday loan customers is on £11,000 per year or less. These are people like the man who contacted me because he currently has nine payday loans that he is trying to pay off. One company, Wonga, is chasing him for £1,600 for an £800 loan that is 40 days overdue. The first loan was meant to be a stop-gap to bridge the gap between one job and the next pay cheque, but the interest in itself quickly becomes the long-term debt.
If those are the problems, what are the solutions?
I am grateful to my hon. Friend for the very powerful argument that she is making. Does she agree that part of the problem is that a vicious cycle develops, whereby companies use the rate of default to justify the increasing percentage that they are charging on the loans? That is a completely fallacious argument, but one that they always advance to the regulator.
I strongly agree with my hon. Friend. Few companies have been able to explain to me precisely how they manage to set their rates; they seem to pick a number out of the air and go with that. However, I will return to that point in some of my suggestions for solutions.
There is a new proposal that we, as a House, can take forward to address this phenomenon, and that is what the motion is about. It is based on new evidence about what would work in addressing the impact of such loans on our constituents. That is why I come to the House today not to speak on my own but to speak with the backing of many different organisations from a wide range of sectors. I want to put on record my thanks to Citizens Advice, which has opposed other measures such as interest rate caps, but in contrast believes that these proposals could offer a way forward; to Consumer Focus, who says of this motion that it is
"a different, and more considered, approach than the blanket application of a blunt interest-rate-cap";
to Martin Lewis, a passionate advocate for financial education, as many Members may have found out earlier this week, who had also opposed interest rate caps but supports these proposals as "much more sensible"; and to the Better Banking campaign, London Citizens, the Co-operative movement, Compass, the GMB, Unison, Church Action on Poverty, the New Economics Foundation, the Centre for Responsible Credit, and countless others, especially those on Twitter, who have supported these proposals.
All those people agree that we can have an effective, evidence-based policy, and that we can learn about what works from other countries where such measures have been introduced. Nothing that I am proposing today is rocket science or untried or tested. When we talk to those people outside the UK, we find that they are surprised that we have not dealt with the problem so far.
We, as parliamentarians, should congratulate my hon. Friend on this debate. Is she aware that today is the centenary of the death of Robert Tressell? I am sorry that I am unable to stay for the whole debate because I am going back to Liverpool-where he was buried, unfortunately in a pauper's grave-where there is a series of events. A hundred years on, people are still being exploited. Does my hon. Friend agree that this issue should garner cross-party support to stop the exploitation of ordinary working families?
Indeed, in the spirit of cross-party support, I was delighted to hear the Mayor of London say that the rates that these companies charge are extortionate. I hope that I can convince him to take more action on the matter for Londoners.
I have been struck by the response to our market from people from other countries. As a local MP, I regularly leaflet for my local credit union outside the premises of the legal loan sharks in my high street. Last Friday, I spent 20 minutes trying to explain to an outraged Polish woman that the companies could charge her such rates; something that does not happen in her country. As her English was not great and my Polish was even less so, my gesticulations about where the credit union could be found were perhaps unclear. However, her anger and amazement that this was legal in Britain was easy to translate.
I am not asking hon. Members to come and stand on a chilly high street in Walthamstow with me. Recent European Commission research shows what we should do and what we should not do. Members may have been told the edited highlights of that 500-page research document. Having read the whole thing, I will offer them some more. It says that we should learn from the experience in America, where interest rate caps that were set too low have caused problems for lenders and consumers. By contrast, it highlights the benefits of a European model. Perhaps that is not a winning proposition for some Government Members, but I hope that they will bear with me.
The document shows that many ways of capping are used in different countries. Britain is increasingly isolated in not dealing with this market in the same way. Fourteen European countries have a form of capping system or a ceiling on charges. In France, the cap is a third over the market average. In Slovenia, there is a spread of caps, with 13% for a long-term loan and 453% for a shorter-term loan. In Belgium, the cap is based on the amount that is lent, rather than on the rate. There are different levels for loans below and above €1,250. Some countries, such as Ireland, cap only part of the market, whereas others, such as Germany, have limits on all forms of lending. The motion draws on what has been learned from the examples of what works and what does not. It calls for a regulator to introduce a series of caps in the areas of the unsecured lending market in the UK that are not price competitive and where there is evidence that not doing so would cause consumer detriment.
It is worth considering the nature of the UK high-cost lending market. A range of products is available from short-term payday loans, to complicated hire purchase agreements and home credit arrangements. Because there are no caps in our system, the rates can range from 271% and 440% to an eye-watering 4,000% or more. None of the companies can provide pricing data to explain why it has arrived at such rates. Under the proposal, the regulator would step in and look carefully at these markets to determine, on the basis of the evidence, how best to proceed.
Competition is a clear challenge. Just six companies operate in the home credit industry, one of which owns 60% of the market. The motion calls for intervention where there is evidence of a lack of competition. It also highlights the need to intervene when there is evidence of consumer detriment. Consumer detriment is littered throughout the practices that the companies get away with: the rolling over of loans and the compound interest that that generates; the administration fees; and setting the level of loans well beyond the realistic reach of their clients' incomes so they cannot pay them off. Friends Provident today admitted that 29% of payday loans are refinanced, and that on average the refinancing rolls over twice. Some 15% of home credit loans are refinanced and rolled over into a new loan before the end of the term. Those practices are designed to ensure that consumers pay, but that they never end the relationship. Instead, they are caught in a never-ending cycle of payments and loans.
The hon. Lady keeps mentioning these companies. She may not be aware that in my constituency, it is national banks that have exploited migrant workers. The advantage, which we secured, is that they have a regulatory body that called them on it and got the system adjusted.
The hon. Gentleman makes a good case for regulation, which is what the motion would introduce. However, it would be considered regulation that takes account of the market and of how it affects consumers. That is why I have confidence that the proposals would be effective if they were taken forward by the Government.
Markets change and the motion is about being responsive to that. It takes into account how consumers and lenders interact with the market. It draws its effectiveness from an evidence-based process. It is regulation at its best and boldest. Crucially, the proposals overcome the problems associated with previous proposals, which calculated the interest rate. Instead, the total cost of credit would be considered. That difference makes all the difference.
There is strong evidence from countries with caps that lenders have tried to avoid them or to compensate for their profit loss by applying higher charges. In Poland, following the introduction of caps, lenders introduced a mysterious convenience fee to make up the difference. The European Commission report shows that there is support-although not from providers, of course-for capping all the costs associated with loans to tackle such behaviour across the sector. The key to that measure will be how the caps are calculated. We have proposed that they should be annualised for ease of comparison and based on the total cost of the loan, rather than the interest rate alone. Calculating on the total cost makes it clearer to consumers what they will actually pay. There would be no small print and no nasty surprises that undermine people's attempts to budget for repayments.
The motion is deliberately open about who would regulate. That is because changes have been proposed that would involve a number of bodies in the process, including the Office of Fair Trading and Consumer Focus. The Members who tabled the motion are open on how the regulatory process should be taken forward, but we want it to be taken forward.
The regulator would work with all stakeholders in the industry, including the lenders. I know that the industry is frightened by the proposals because of the amount of spin that they have sent to hon. Members. That is a pity because if they had been involved, we could have learned from their experience in considering the appropriate levels of capping. Their churlish opposition to any form of price capping and their attempts to conflate concern about interest rate caps with this matter highlight a disgraceful attitude towards vulnerable consumers. That is why self-regulation is not an option and why we as politicians must move towards intervention.
We have seen in other industries that where there is a lack of competition, regulators can work with consumer representatives and providers to set effective frameworks. That has happened in the water industry, the energy industry and the financial services industry. The proposals therefore build on the best practice in market intervention. I believe that British consumers deserve the best practice.
Having set out the proposals, I will take on some of the arguments that have been made against them. In doing so, I urge hon. Members to learn from that most famous of Dickensian characters, Gradgrind, who argued:
"Facts alone are wanted in life. Plant nothing else, and root out everything else."
Some people have argued that capping the costs of credit would cut lending in the industry and put firms out of the market-a market that Consumer Focus estimates is worth £35 billion a year. I urge hon. Members to read the European Commission research that investigated that very point and found no evidence to support it. Indeed, the OFT research that is often quoted is based on an industry study, which says that people could end up borrowing from friends and family. Furthermore, the EU research found that countries with no caps had higher levels of illegal lending than those with some form of cap.
Some people fear that if caps were set, there would be a race to the top for all lenders. That suggests that caps would encourage all banks and building societies to start charging 4,000% interest rates. When Policis considered the matter in 2004, it found no evidence to support that concern. The motion calls for a range of caps to reflect different types of loans. That reflects the fact that mainstream banks would not compete with lenders in the unsecured market.
"Government carefully considered the case for a cap on interest rates following research carried out by Policis in 2004. The research showed that imposing a cap on interest rates could result in lenders withdrawing from the riskier end of the market, including the home credit market, denying vulnerable consumers access to legitimate sources of credit".-[ Hansard, 22 March 2010; Vol. 508, c. 149W.]
It is a pity that the hon. Lady was not here at the start of the debate when I set out clearly that the proposal is not for an interest rate cap, but for a cap on the total cost of credit. As I said, that is a difference that makes all the difference to the efficacy of the proposals. That is why many groups that share the concerns in the research that the hon. Lady has set out, are not concerned about these proposals. I urge her to look closely at that distinction. I will press on now because many hon. Members wish to speak and I know that the Minister will have a substantial amount to say.
Another point that has been raised is that new provisions in the Consumer Credit Act 2006, which came into force recently, may well change the market. Although those provisions are welcome, the protection that they offer presumes that choice is open to consumers and that if they are simply equipped with clearer pricing and the chance to rethink loans, that will resolve the problems that we have discussed. Customers with no alternative, struggling to make ends meet, cannot exercise choice or avoid borrowing. If someone is tied to the train tracks, knowing when the train is coming makes only a limited difference to their chances of survival. Until we give consumers a level playing field by producing powers to cap costs, we will not change the dynamic of the relationship.
Others have argued that the powers needed already exist, and that the Competition Commission could investigate and act. Indeed, the Office of Fair Trading referred the home credit market to the commission in 2004, as Lorely Burt pointed out, and came up with various remedies. Here I turn to the views of Citizens Advice, which argues that the problems are getting worse, not better. That shows that those powers have not worked, so it is time to strengthen the intervention that we make in the market.
Order. The hon. Lady has already indicated that a lot of Back Benchers wish to get in. It was recommended that her speech should last 15 minutes, and she is way over that. Could she please bring her remarks to a close?
I will, Mr Deputy Speaker.
Finally, people have suggested that we need to introduce more competition by encouraging affordable lending, and I agree, but I do not see that there is a choice to be made between capping the costs of credit and supporting credit unions. Furthermore, it will take a long time for credit unions to become a serious, affordable alternative. In contrast, cutting rates would have an impact on people's debts now.
I know that some people are concerned about the concept of regulation, but in the motion I simply urge the Government to close the loophole that they have created by saying that they will commit to regulation on the costs of store cards and credit cards but leave this vulnerable market untouched.
The weight of evidence means that I will hold firm in not accepting the amendment, as much as I welcome the strong cross-party support for the proposals. We all know that that support exists, and in these days of new politics I want to celebrate it, but I fear that the warm embrace of consideration could turn into the slow of death of progress without firm direction from the House. The longer we delay affirmative action, the longer our constituents will pay high rates.
Make no mistake, the problem will get worse, not better. As Uriah King of the American Center for Responsible Lending points out,
"payday lenders are aggressively seeking new markets because they are being curtailed here in the US".
We can all see the consequences in our communities. One example of this is the uncle who came to me last year because his 16-year-old nephew had been given a £300 loan by a home credit agency. His family will struggle to repay that debt. He is angry, you bet, but he knows that it is all legal. What chance for the next generation if we do not act now? Mr Crook will be licking his lips at their predicament.
Let us not delay. There is evidence to support my proposals, and there is political will in the House for this to happen. Let us consider the motion a belated submission to the credit review, giving the Government a clear and urgent message that the time for capping costs has come. Voting for the amendment would dilute that message. The clock is ticking. Research by R3 shows that 44% of people in this country now struggle to make ends meet until pay day, and the problem will only get worse. Those people are our constituents, and they are our responsibility. I ask Members to please give them more than consideration-please give them action. Support the motion and protect the poorest consumers above the needs of loan sharks.
Order. As hon. Members can see, this is a popular debate and a five-minute limit has been introduced, with the usual injury time for the first two interventions. Members do not have to take the full five minutes-if they do not it will mean that more people can get in-and they do not have to take interventions.
It is a great pleasure to speak in this debate and to follow Stella Creasy, who made her case with great passion, as I think all Members would agree. It is important that we consider the whole issue of indebtedness, which has become a plague on our country and will only get worse as time moves on. We all want appropriate measures in place to protect those who rely on credit from the activities of unscrupulous lenders. I bring some knowledge to this subject, having worked in a previous life as an adviser to the Financial Services Consumer Panel. We have long been concerned about the inadequacy of the current framework of consumer credit regulation, so now is clearly the appropriate time for change.
Although I fully support the objective behind the hon. Lady's motion-ensuring that there is adequate regulatory protection for consumers and that regulators have adequate powers to intervene as appropriate-I am not sure whether the caps that she describes are necessarily the answer. However, it is appropriate that we consider the whole breadth of how credit is regulated as part of the credit review. We should leave no stone unturned in ensuring that the regulator has the appropriate tools and, more importantly, the appetite to take enforcement action where poor practice is identified. I was therefore happy to put my name to the amendment.
What the Whips choose to do is entirely a matter for them, but I wish to support the amendment rather than the motion because the motion is too prescriptive. We have seen credit providers be very innovative in finding their way around regulatory obligations, so we should not be too prescriptive. If we introduce obligations on providers to treat their customers fairly and lend responsibly, and obligations on the regulators to be prepared to use their judgment to intervene, we will not need to rely on price-prescriptive caps, which might impede our ability to take action against bad providers.
Does the hon. Lady agree that the nature of the problem means that urgent action is needed? Her point that providers are good at getting around obligations means that a very strong signal from Government is needed, which suggests that we should support more prescriptive measures.
I believe that that actually makes the case for the early introduction of the consumer protection and markets authority proposed as part of our reforms to the tripartite regulation system. At the moment, we have a consumer credit system regulated by the OFT, in which the tools available are not very effective. With the reforms to the tripartite system, we have a great opportunity to state that we expect the new authority to take real action. In the past there has been a lot of, "Oh dear, isn't this terrible?" and a lot of wringing of hands from regulators, but they have had no real ability to stop poor providers doing business or to give them appropriate penalties. That is what we want to see from the reform of the regulatory system.
One reason why many consumers find themselves in punitive agreements is that often, deals are marketed in terms of the cost per week, so they do not necessarily understand exactly how much they will pay for their credit. That practice is not just restricted to doorstep lenders and loan sharks, because all too often we see it on our high streets, as the hon. Member for Walthamstow mentioned.
I wish to draw attention to one particular organisation, a company called BrightHouse. There is a branch on High street in Grays, and I thought I would do a bit of price comparison. At the moment, it is advertising a nice, attractive 46-inch LED television that currently retails at £849 in Currys. BrightHouse is retailing it at £1,478.11, but it quotes a weekly payment of £13.64. On the face of it that sounds affordable, but ultimately the customer will pay a total of £2,127.84 for the product-two and a half times the price that they would pay in a normal high street store. That is why we need to consider extending affordable credit provisions more widely, so that consumers are not ripped off by such companies.
Does my hon. Friend agree that in such rent-to-own cases, the annual percentage rate advertised may well be shown as 29.9%, which is in fact the cost of the credit, but the grey pricing means that the sticker price is elevated? That highlights exactly how companies try to get around whatever measures are put in place, even if they are very sophisticated.
That is why we must avoid being prescriptive about how we tackle the problem. We can make rules, but firms will find ways of getting around them. We could put in place an overarching obligation for the regulator to say, "We will take action when we think something is not fair", and we will be able to point out that such practice is not fair by any stretch of the imagination. However, we need to set that expectation for the regulator-that it will take action when unfair activities take place.
The hon. Member for Walthamstow mentioned affordable credit. Ultimately, we will not tackle the problems until more affordable credit is available. With that in mind, I should like to ask what more the Government can do to establish and foster the growth of credit unions and to think in a big society way.
In the light of the hon. Lady's support for affordable credit, will she put pressure on the Government to extend the life of the growth fund?
I was about to say that I am asking the Government to think in a big society way about what they can do to encourage the growth of credit unions. It would be nice if Opposition Members allowed Government Members to make our case, because we have as much to advance on this subject as they have.
I pay tribute to my local borough council, which has welcomed Essex Savers credit union into its civic offices and other properties that it owns and manages. I encourage the Government to consider what facilities it could offer to credit unions-post offices were mentioned, but we could also use jobcentres. That would give credit unions access to more savings, and they would therefore be able to make more loans. I have now run out of time, but I hope the Minister takes that on board.
I pay tribute to my hon. Friend Stella Creasy for her sterling and tireless work. I also pay tribute to the cross-party support for her motion and the widespread support from groups that I do not believe have ever spoken to each other before, which shows the strength of feeling.
I am speaking today because of a constituent on income support who went to BrightHouse and was told it was fine for them to buy any item, however expensive it was and whatever the rates they would have to pay back. I am here for the couple with children who lost their house through redundancy. As well as very large mortgage-related debts, they must pay 10 other debts, including five from credit cards, all of which are spiralling out of control, to a total of £37,000. That is the tip of the iceberg in just one constituency. Citizens Advice informs me that in my constituency-just one constituency in one part of the country-it is dealing with work relating to debts in excess of £2 million. That cannot be right, which is why I believe we have such a consensus.
Just before Christmas, I received a nice, handwritten card in the flat that I rent in Vauxhall. The nice person who signed it told me that I could get £300 immediately. The only problem was that the annual percentage rate was 272%, which would mean that I would have to repay £546. Six companies control 90% of that market in the UK. That is scandalous. New Members received £4,000 loans for office items. What would they think about paying back £7,280? Perhaps I should not have said that quite so loudly-people writing about this debate might think that it is an excellent idea. Seriously, however, that is the problem facing the poorest communities in our country today.
Jackie Doyle-Price compared prices between an electronics supplier and BrightHouse. In Argos it is possible to buy a 60 cm double oven for just under £280, but the total after interest for the same item in BrightHouse is almost £590. That is nonsense-it is immoral and it must be stopped.
I should like to deal briefly with credit rates, which hon. Members have mentioned. Some say that if we act, there is a possibility that people might go elsewhere to access credit. I understand that, but I cannot see too many of my constituents in north Wales heading to Manchester airport to take the next flight to New York on the off chance that they can get cheaper credit there.
The movement for action is growing globally, including in this country. It is tremendous that we are seeing widespread, cross-party support, and support throughout business and civic society. I commend the motion and hope it wins support. I also hope the Government put behind them whatever qualms they may have had, because this matters in our constituencies, whatever parties we represent, and whatever part of the country we come from. The motion will make a difference to the poorest members of our society. It is right and moral, and we should take action.
Thank you for your brevity.
I should first declare an interest as a member of the West Wilts credit union.
I congratulate Stella Creasy, who has done so much to raise the profile of this issue in the matter of months since we have been in the House, and all Back Benchers who helped to secure this timely and important debate. I also acknowledge that my hon. Friend the Minister has an admirable track record on financial inclusion that is far longer than mine.
I understand that the Government seek to make policy on the basis of strong evidence and wide consultation, and that my hon. Friend must properly consider all the submissions that his Department receives. However, I have long been clear in my mind as to the moral imperative for action, as well as to the practical case for certain caps on the total cost of borrowing.
Back at the hustings meeting at which I was first selected as the Liberal Democrat candidate for Chippenham, I was asked this popular and well worn question: "If you could make any new law, what would it be?" I said that I would cap the cost of consumer lending. I am not generally inclined- [ Interruption. ] Opposition Members who are looking to establish some consensus in the House would do well to welcome those who support the motion. As I said, I am not generally inclined to rely on new laws and regulations, but it seems to me that capping the cost of consumer lending would be a suitable exception.
High-cost consumer credit works for some people. It can provide a useful bridge across a difficult period. Some consumers use such services in a fully informed and responsible manner and derive benefit from them. However, I also see too many of my constituents caught up in vicious cycles of debt and trapped by unscrupulous and irresponsible lending.
It can be particularly difficult for people to resist taking on further unaffordable borrowing when a representative of the lender is in their home, seemingly innocently chatting about what will get them through Christmas or a child's birthday. Those tactics will be familiar to colleagues across the House from their surgeries and casework. In my view, they are exploitative.
In advance of this debate, I was contacted by Glenis Ansell, a financial inclusion officer from Wiltshire's Community First, who works with constituents of mine in Chippenham. Through the Wiltshire Money Line, she works closely with the county's four credit unions and its housing associations to deliver responsible and reasonable lending to local people. That is an excellent example of efforts to expand access to affordable credit, which we are calling for in both the motion and the amendment. Last year, they saved £250,000 in interest payments alone, and I commend them for their work.
In her work, Glenis sees first hand the appalling toll taken on some vulnerable people, who are targeted by doorstep lenders. She reports cases in which vulnerable adults become too scared to open their own front doors for fear that they will be confronted again by agents demanding repayment. She put to me this perfectly straightforward question: what protection is there for vulnerable people who are targeted by legal but unscrupulous lenders? I hope the Minister answers that for her today.
A range of caps on the total cost of loans would go some way to addressing that very point. I am aware that the Government have some anxieties about prejudging the outcome of their consultation, but I would not want those anxieties to prevent the House from taking a positive view towards the proposed cost-of-credit caps. I therefore intend to support the amendment tabled by my hon. Friend Mr Walker.
I too congratulate my hon. Friend Stella Creasy on bringing this important issue to the Floor of the House. I welcome the opportunity to participate in this debate today. There can be no doubt that there is a real need to tackle the uncompetitive nature of this market and protect individuals and families from excessive interest rates and charges by increasing access to affordable credit. The Consumer Credit (Regulation and Advice) Bill will provide an opportunity to make progress on these matters.
Like many other areas of the UK, my constituency of Wansbeck is suffering greatly from the effects of the worldwide global recession. Since the start of the recession, mainstream lenders such as high street banks have been much less willing to lend money. It is estimated that approximately 5 million to 7 million people in Britain are denied credit either because they do not have a bank account or because they have no credit history. This leaves more and more people in Wansbeck and beyond with only the option of unsecured lending such as payday, doorstep and hire purchase lenders. It is estimated that more than 1.2 million people use the payday lending market-a staggering fourfold increase since the start of the recession-and more than 3 million use the home credit market. Furthermore, rising unemployment, housing costs and VAT could leave numerous families struggling to make ends meet, which would add to the problems they face.
However, it is still relatively easy for anyone to run up substantial debts, and tragically people end up with debts they cannot deal with or service. It was recently reported that the people of the United Kingdom are well over £1 trillion in personal debt, and personal insolvency in the UK has reached record levels.
Will my hon. Friend give way?
I would prefer not to, as I have only five minutes.
As always, the most vulnerable members of society are hit the hardest, and people on low incomes or in receipt of benefits are left to the mercy of non-mainstream loans- payday, home credit or pawnbroking. Currently, six lenders account for 90% of the home credit market and there is little competition to drive interest rates down. The lack of competition keeps rates artificially high, with the most vulnerable having to pay the price-literally. The APR for payday lenders often begins at 600% and can escalate to 2,500% or more. Home credit lenders, who make home visits in order to collect repayments for their short-term loans, can charge £82 in interest and collection charges for every £100 lent.
It is not surprising that families turn to illegal loan sharks for help to tackle their immediate financial problems. At this stage it is worth remembering that the coalition Government's solution to the heinous problems with loan sharks in the north-east was to scrap the north-east illegal money lending team. In addition, the coalition shows no appetite to clamp down on excessive interest rates and loan costs-it is clearly out of touch with ordinary people and their problems.
In Wansbeck, the local citizens advice bureau is doing its best to provide good quality debt advice services, but the withdrawal of finance and the reduction in staff numbers are causing real problems. There are some 900 clients in Wansbeck alone, dealing with £10 million of debt. The casework is increasing as the manpower reduces.
If we are to help and protect my constituents and others like them we need to make progress on two fronts. We have to tackle both illegal and legal loan sharking. At the same time, we need to increase access to other, more affordable forms of credit. We need to improve access to credit unions in Britain, but credit unions in Wansbeck have had their funding reduced. I remind the Deputy Prime Minister and his fellow Ministers that they signed an early-day motion in 2005 that called for action on interest rates charged by doorstep lenders, but they have taken no action now that they are in government and in a position to do so.
I thank the Backbench Business Committee for agreeing to the request from Stella Creasy and me for this debate. There is true cross-party support for this-more than 40 Members from different political parties supported us-and we were delighted to secure this three-hour debate. I am pleased that so many want to speak, which shows a real desire to make a difference on this crucial issue.
Many hon. Members will set out compelling reasons for the importance of this issue from their individual casework. Organisations such as the citizens advice bureaux say that 60% of their work is dealing with financial difficulties. It is surely better to tackle the problem at the source, but all too often consumers are simply not equipped to make informed decisions. It is the high-cost lenders who take advantage.
My hon. Friend and I organised a debt awareness day in Swindon, where we found an alarming lack of knowledge, including people thinking that the APR was the be-all and end-all and not realising that the total package could be dramatically more expensive. The motion addresses that problem.
My hon. Friend is spot on, and all too often we find that consumers are simply not equipped to make informed decisions.
It is suggested that total cost caps are the solution, and I support the principle. Surely there is an unequivocal case for saying that for borrowing X amount, there should be an absolute limit on the sum to be paid back. We should protect consumers from the very worst.
The motion is 99% there, but the amendment expresses a slight hesitation. There is still a nervousness, because whatever we do will have consequences. When organisations such as Consumer Focus and MoneySavingExpert, which is run by Martin Lewis, say that we must be mindful of possible consequences, it is right and proper that we should take a measured and detailed look at the issue to ensure that the consequences are thought out. The evidence is inconclusive-
I take the hon. Gentleman's point about the consequences, but the evidence from Members on both sides of the House suggests the problem is with the difference between voluntary and mandatory regulation. Unless enforced, the regulation just will not happen.
That is why I support the principle, but-as the hon. Member for Walthamstow said-it is essential that we make things better, not worse. We should not rush in if we have not considered all the consequences. However, we need to act urgently and, crucially, with a desire to find a workable form of total cost caps. For those people who say that additional regulation would push people into the hands of the illegal loan sharks or that extra action will damage our case for protecting vulnerable consumers, I point out that we have just seen significant changes to the credit card industry that have not affected people's access to credit cards. We should not fear that the market would collapse.
I urge the Minister to look into the sales techniques of doorstep lending. They include nudge-nudge techniques that encourage people to take on expensive, long-term debt. Such lenders concentrate on having relationship managers who go into the homes of the consumers. They argue that that helps them to assess whether the consumer can afford to borrow more money. The relationship manager has a cup of tea and a chat. They might ask, "Christmas is coming up, have you made plans for that?" The consumer says that her children want the latest expensive toy, and the representative offers to lend some money-at a high cost. The consumer is nudged into a long-term cycle of debt, and that is one of the most important areas to consider.
My flagship issue is financial education, which is included in the motion. I launched the all-party parliamentary group on financial education for young people on Monday, with my hon. Friend Duncan Hames and the hon. Member for Walthamstow as vice chairs. Some 171 MPs have signed up and it is supported by the Personal Finance Education Group and Martin Lewis of MoneySavingExpert. I am grateful for that support, as it is unbelievably important that we have savvy consumers who understand that they can shop around and are equipped to make informed decisions.
There is an incredibly strong case for making the costs more transparent, and it is another reason why total cost caps are so important. All too often, people judge a debt on the APR. There are many issues with high APRs, but there are extra charges as well, which is why the crude cap on interest rates alone was previously rejected. There should be a cap on everything. That would also allow consumers to make good comparisons.
I know that some hon. Members will criticise organisations such as Wonga.com, but I have to give it some credit, because of all the organisations that have lobbied me, it is the only one that has said, "We will work with whatever changes are put in place." That should mean clear, understandable and transparent costs-I would support that. However, we cannot just look at APR. Part of Martin Lewis's financial training for me was the following good example: if someone takes out £3,000 on a credit card at the age of 19 on a typical APR of 17.9% and makes only the minimum payments, they will not clear that debt until they are 60 years old. Although the 17.9% does not look too bad, there are long-term implications, which again supports the principle of total cost capping, showing all the costs, including what it will really cost over the lifetime of the debt.
I fully support any measures to give greater access to credit unions. Being conscious of the time, I will simply bow to my hon. Friend Damian Hinds for championing this subject in Parliament. I urge the Minister to take that on board, as well as the need to make available greater access to social funds, in particular by allowing greater flexibility in emergencies. All too often, the need to acquire debt is a result either of consumers wanting something now rather than later or of sudden changes in circumstances. We need to be in a position to help out those in the latter situation.
Finally, I want to address the principle of the savings culture in this country. The hon. Member for Walthamstow talked about how we have the lowest savings rates and the highest levels of debt. That is this nation-we have an insatiable appetite to buy now and pay later. Over the long term we need to change that, because where possible people need to have a savings buffer for changes in circumstances. So I urge the Minister to consider all the different options proposed. We have cross-party support for the principle. I am sorry that there is an amendment to the motion, because it will take up time in the Division Lobbies, but we are 99.9% there. The question is how we do this. However, we need to consider all the consequences, and I have every faith that we will be able to make a difference for the people who need our help the most.
I rise to speak in favour of the motion. As a former policy officer for Citizens Advice Cymru-before my election to this place-I was able to see how the nature of the advice issues dealt with by the citizens advice bureaux in our communities changed dramatically during the second half of the previous decade. Although welfare benefit issues had previously been the staple diet of bureaux, personal debt cases rapidly became the largest single issue dealt with by advisers, totalling well over a third of all client issues. Citizens Advice client figures offer a detailed insight into the social problems faced by communities across the UK, and the latest quarterly figures for Wales are sobering. Total client inquiries over the year totalled nearly 390,000-a year-on-year increase of 19%, of which debt-related cases totalled more than 134,000, which was an incredible 37% of all cases and an increase of 14% on the previous year.
There is always a lag between the true human cost of any recession and a return to economic growth, and things will certainly get much worse before they get better. The current fiscal policy of the UK Government will, I am afraid, only exacerbate matters. The economic record of the previous UK Government has rightly been criticised for the manner in which the public finances were allowed to run out of control, but the manner in which consumer debt was allowed to rocket has received little attention. Consumer debt in the UK lies at around £1.4 trillion-a sum equivalent to 100% of the UK's total annual economic output. To put this in context, in 1997 combined personal debt stood at about £500 billion. It is an incredible figure that will be a significant economic headwind for the future.
There is a great social crisis facing communities across the UK, and the UK Government cannot stand idly by. We need a comprehensive solution involving regulation of the high-interest lending market. However, central and devolved Governments also need to work together to put in place a package of support and educational services to deal with acute debt problems as well ensuring that financial capability is increased among the wider community. We welcome the decision of the UK Government to regulate the excessive interest rates of credit and store cards, but there are no plans to intervene in the high-interest lending market involving payday loans, pawnbrokers, doorstep lenders, mail-order cheque-cashing agencies and high street alternatives such as Oakam.
My predecessor, Adam Price, introduced a ten-minute rule Bill-the Interest Rates (Limits on Charges) Bill-that would have introduced a capping structure with the aim of achieving the ambitions of the motion we are debating today. People who rely on these sorts of products are often extremely vulnerable and on low incomes, and face interest charges of up to 2,500%. It is exploitation at its worst, and the lax regime that currently exists in the UK is indefensible. These sorts of business models were pioneered in the US, but in the land of the free there has been a backlash: 15 states have prohibited payday lending, and 35 states have introduced interest caps. Furthermore, in Europe, as we have heard, 14 countries have some sort of capping structure.
I would like to touch briefly on the issue of debt management plans, and the need for the sector to be subject to robust statutory regulation, including-at the very least-a cap on fees for the debt advice they offer, and subject to an independent audit funded by themselves.
Why is the hon. Gentleman's party attacking Communities First, which has done some very good work on providing debt advice? Why is it suggesting that it should no longer receive funding from the Welsh Assembly Government?
I am afraid that I have no idea what the hon. Lady is talking about-perhaps we can discuss it another time.
One of the growth industries of the recession involved advice sharks, who exploit the human misery caused by the downturn. On a fee basis, individuals and families find themselves signing up for expensive debt management schemes, which only increase their problems. It is estimated that in 2010 companies would have amassed fees in excess of £250 million, often on an up-front basis and with consumers encouraged to take out further credit to pay for these fees. These matters are being considered as part of the consumer credit and insolvency review. However, we need urgent action now to protect consumers, and I would urge Ministers to act with haste.
To close, I would like to congratulate the Welsh Government on some of their exciting initiatives. The creation of the Welsh financial education unit is a step towards ensuring that future generations are more financially literate. The all-Wales lending unit is at the forefront of the fight against illegal lending in my country, and an all-Wales coverage of credit unions to provide alternative affordable lending is much to be welcomed. However, I would urge more ambition in my own country-by rolling out interest-free JAK-banking-like products in our credit unions, and through the creation of a national money advice service made up of existing providers and based on the excellent money advice and budgeting service in the Republic of Ireland.
I support wholeheartedly the principle of this debate. As the world changes, so does the way we do many things-and none more so than the way we can borrow money. In days gone by, there were usually only two ways of borrowing money-through a bank or, for a mortgage, a building society. Things are very different nowadays.
Anyone who has spent time watching daytime television-I had the misfortune to do so when I was ill several years ago-will be struck by the number of adverts offering quick and easy solutions to money shortages. They are everywhere, whether it be the array of "where there's blame there's a claim" law firms offering redress by way of riches, which is something about which I have a strong view-but that might be for another day-cash-for-gold schemes or guided bankruptcy proceedings to escape debts that are already out of control. However, the most prevalent are the offers of loans. Pictures of happy smiling families delighted by the consolidation of their debts under increasing finance are rife. Loan companies with their own television channels promise untold happiness if a person calls them to borrow more and more money. Indeed, some adverts only just stop short of saying, "You can now borrow enough money to get completely out of debt."
The latest method of debt marketing is the provision of payday loans, lending money at over 1,000%, and companies offering this type of loan are flourishing-they are everywhere. As the motion states, £7.5 billion was lent to low and middle income earners in 2008 alone. It is easy-to-obtain credit, but is frighteningly expensive to service the debt. These company names are becoming as familiar as the old banks and building societies, as they appear not just on televisions but on premier league football shirts, advertising hoardings up and down the country and in various newspapers. I am sure that we have all received many emails offering us loans.
I trust, Mr Deputy Speaker, that you will be unlikely to need a payday loan, but if you did and you did a Google search for UK payday loans, your search would yield some 9.8 million hits. If you wished to spare yourself the inconvenience of a credit check, you would still have almost 2 million hits from which to choose.
"Neither a borrower nor a lender be" was, in days gone by, an idealist maxim, but most of us incur debt in some form or another over our lives. At this point, I will resist chiding Labour over its policies on national debt. The ability to repay should be the first consideration for anyone entering into any credit agreement. For the man in the street, however, that is becoming harder and harder to do as the lending methods become ever more varied and complicated. Working out exactly how much has to be paid back on any loan is becoming more and more difficult, as is being able to compare it to other offers.
I agree with an awful lot of what the hon. Gentleman is saying, but I wonder whether he shares my concern at the Government's scrapping of the financial inclusion fund. Around 50% of the advice that my citizens advice bureau gives is on debt management, and it tells me that that will stop as a direct result of the Government's policy.
I thank the hon. Gentleman for his intervention, but I think that we are trying to get some cross-party agreement here. Can we try to deal with the issue of debt and work together on this instead of indulging in political arguments?
I would like to talk about financial education in schools, which my hon. Friend Justin Tomlinson has also mentioned. A good education teaches children about the past and prepares them for their future. In a world where debt has become vital to so many important milestones in life, it is right that we should help our children to understand how to budget and how to negotiate their way around credit agreements. I was at the launch event for the all-party parliamentary group on financial education for young people, and I would like to pay tribute to those who set it up. A huge number of MPs were present. Teaching financial matters in schools could be the saviour of many people in years to come, but it will not help adults today. At the launch of the all-party group, Martin Lewis of moneysavingexpert.com spoke with eloquence and passion about his concern at the mountain of debt that people are accumulating, unaware of the consequences of their actions and with little or no comprehension of their total debt liability. Mr Lewis's concerns are supported by a constituent of mine in the High Peak, who wrote to me about a loan that he took out eight years ago. After eight years of making all payments in full without a single default, he has still not paid back a penny of the principal sum. Indeed, to discharge the loan after eight years, he still had to pay more than 100% of the original amount that he borrowed.
I am not an advocate of legislating at every opportunity. I believe that, through education, we can help people to make informed choices. I support the amendment urging regulators to consider putting in place certain regulatory powers, which would give them the chance to act. However, we too might eventually have to consider taking action against those lenders who operate in a way that is unfair and exploitative, and who offer seductive products in a way that does not explain their consequences for those who sign up to them. A requirement to publish a total lending cost figure for each loan, which could be used as a yardstick by which a lender's offer can be judged, is in my view a sensible step. In that way, the high-cost credit lenders would flounder because the market would send them down, and the sensible, sustainable methods of credit and the people who offer them would survive, for the good of all.
The United Kingdom is lagging behind on the regulation of consumer credit. The UK's poorest borrowers pay the highest price for credit in Europe. Fifteen American states have now dealt with payday loans, and the cost of credit is also capped for all US servicemen and women. Even President Bush could see that his soldiers needed protecting from excessive interest and administrative charges. In the United States, the Centre for Responsible Lending estimates that credit regulation saved consumers $2 billion in 2009. We know that payday loans frequently leave borrowers unable to pay other debts.
Much is made by the industry of the possible unintended consequences of regulating payday loans, but research such as that from the university of North Carolina shows that restrictions on payday loans had no significant impact on the availability of credit for households in North Carolina. In fact, more than twice as many former payday borrowers reported that the absence of payday lending had had a positive rather than negative effect on their household. The state's regulation helped more households than it harmed.
My constituent, Mark Billard, wrote to me recently. He said:
"Most US states and European countries have a legal limit to stop lenders charging whatever they want."
That point has also been very well made by my hon. Friend. Does she agree that the danger of the amendment is that it would reduce the chances of such legal protection for those most in need of help?
My objection to the amendment is that this is a Back-Bench debate, and it should be an opportunity for Back Benchers to express their views.
The New Economics Foundation published a report in 2008 that included evidence that restricting payday loans did not push people into illegal borrowing. Rather, the market for affordable loans actually strengthened in such circumstances. In America, small mainstream loans for less than $600 became more widely available following a clampdown on payday lending, as aggressive marketing by payday lenders disappeared.
We have heard it argued that caps on credit in France and Germany have led to reduced access to credit for the least well off, but that argument rests on evidence from a narrow base of research. In fact, restrictions on access to all kinds of credit vary between Britain and other European countries. It is argued that borrowers know what they are doing and should jolly well live with the consequences, but the individuals getting into trouble with these loans are desperate. They are not in a position to shop around. Their problems, as well as their credit, are compounded until they are no longer able to cope.
The hon. Lady is making an interesting case. Does she agree that borrowers often do not know what they are doing, and that it is our job, as elected Members, to protect not the moneylenders but our constituents? Does she also agree that the motion, for which I have a lot of admiration, and the amendment suffer from one problem-namely, the assumption that the regulator will be able to solve the problem? Does not the evidence from a whole variety of regulators, including Ofcom, Ofgem, Ofwat and the Charities Commission, suggest that regulators are far too often wet and useless? Would it not be much better to put these powers-which should be draconian, but exercised with the judgment of Solomon-in the hands of a feisty Back Bencher? May I suggest Stella Creasy for the role?
The only kind of regulation that is really going to get to the nub of the problem is the one that caps the cost.
To argue that high-cost loans are necessary simply cements the market dominance of high-cost lenders and, worse, cements endemic poverty. The industry is seeking asylum in the under-regulated UK market, having been forced out of certain American states and parts of Europe. Other countries are getting a grip on the problem. The debt industry is resisting regulation, claiming that it has the best interests of its customers at heart. I am afraid that that simply will not wash.
The motion before the House does not propose to outlaw short-term lending or impose a cap on APRs. It simply asks the Government to agree to curb the worst excesses of the credit and debt industry. The Office of Fair Trading recognises that there are problems with this market, and it is beginning to regulate more closely. But the regulation that counts, the one that will actually make a difference, is the one that cuts the cost. There are many problems with this market, but the biggest problem for consumers is the spiralling cost of the loans. Loans are rolled over and charges are added until they become not an occasional crutch but the only means of getting by. Consumers become trapped in a cycle of debt. How different this reality is from the fun, free-and-easy way in which high-cost lenders and debt management companies market their products.
My hon. Friend Stella Creasy has explained carefully that the motion attempts to bring about a cap not on the APR but rather on the total cost of credit. The motion does not prescribe a particular cap or propose anything that might cause credit to be unavailable to those who need it. The motion has been carefully crafted to bring about a limit on the overall costs. It does not propose a requirement for a new regulatory body and it will not close down short-term lending.
The motion does not condemn debt. Debt is a necessary part of modern life. It enables us to get married, to go to university and to buy a house or a car. It gets many people through life's emergencies, such as a broken washing machine or unexpected travel, but it is not right that those least able to afford high charges, those who are in desperate situations and unlikely to shop around, should have to pay the most.
We know that people are deliberately targeted by high-cost lenders in their marketing and are enticed into taking loans they cannot afford. These are the people for whom the normalisation of high-cost lending has the cruellest consequences. Time is up for the worst of these expensive loans. It is up to this House to tell the Government it wants to change the rules.
Finally, I would like to pay tribute to the sterling work of my hon. Friend Stella Creasy on this issue. She has demonstrated how the at times confusing procedures of this House can be effectively used to bring forward an important issue and, if good sense prevails, to make a difference. Her tenacity goes to prove that it is always a mistake to confuse gentleness with weakness.
Our concern for this issue is not borne of soft naivety, but from seeing first hand the effects on the lives of our constituents of these exploitative charges for borrowing. I commend this motion to the House.
I beg to move amendment (a), to leave out
"alongside measures to increase access to affordable credit, regulatory powers that put"
"measures to increase access to affordable credit; urges regulators to consider putting".
The amendment stands in the name of more than 20 other Back Benchers, and I am grateful to the many distinguished Back Benchers from different parties for their support and to the Backbench Business Committee for the opportunity to speak in this debate.
I move this amendment in support of the excellent motion of Stella Creasy, and I congratulate her on the passionate campaign she has led to secure this debate and on the meticulous research that underpins her motion today and her speech. I support her campaign for better financial education, and I was delighted to become a founder member of the all-party parliamentary group on financial education for young people, along with her and many other Members, when it was launched by my hon. Friend Justin Tomlinson, who has seconded this amendment.
We are debating a motion that I personally would be prepared to support in its entirety, but which, through a small change, I hope will win even greater support from both sides of the Chamber. The purpose of the amendment is to set forth clearly the opinion of this whole House-and in particular of Back Benchers from every party-on such an important matter and to support the call for action on the cost of credit and the means by which the hon. Lady has called for action with a range of caps, but also to clarify that the answer is not necessarily new regulatory powers. I move this amendment as a result of concerns raised with me both by constituents and by fellow Back Benchers that one aspect of the motion could see it defeated were it left unchanged. I think this is too important a matter to allow that to happen.
The amendment protects the wording that calls on the Government to increase access to affordable credit. It is absolutely right that the Government should act in this area; that is a point from which I think few would demur. I have had some involvement in two significant initiatives that the Government are already taking on this front. They are initiatives that benefit many people in my constituency of Worcester. I have spoken in this House before about the importance of the move to bring credit unions into the post office network, and I know that the Black Pear credit union in Worcester is anxious that this measure be brought forward as soon as possible. Like the hon. Lady, I have campaigned on my high street, in my case leafleting for this credit union. I am glad to be able to say that Labour councillors in Worcester do the same. I would like to take this opportunity to remind the Government of the urgency of the need for progress on this matter and of the revitalising effect that this step could have for both our credit unions and our post offices.
The second organisation that I wish to mention in this context is My Home Finance, whose shop in Worcester I was delighted to open just before Christmas. It is supported by local housing associations including Sanctuary Housing, Nexus Housing and Worcester Community Housing, and it is backed by the Department for Work and Pensions and the Royal Bank of Scotland. This great new initiative provides loans directly to people's bank accounts at an APR of 29.9%, compared with typical doorstep loans of 272% or loan shark rates with APRs in the thousands. Moves such as these that are already under way reflect the priority which the Government are already giving to increasing access to affordable credit, but I have no reservations in calling on the Government to do still more.
What I and many other Back Benchers on the Government Benches feel uncomfortable supporting is the call to create new regulatory powers at this moment in time. We will hear many arguments in this debate about the effect of capping rates. Some will argue, as I do, that some form of flexible capping is not only attractive but morally right, while others will warn of the perils of driving people out of the regulated market altogether and into the hands of loan sharks. The hon. Member for Walthamstow has suggested an elegant solution in her form of words in the motion, taking account of the need to balance access with price and providing a degree of flexibility, but even this formulation requires the Government to introduce new regulatory powers.
Many of my colleagues on the Government Benches are allergic to increasing regulation, and all of us would like to see better, rather than more, regulation accepted as a general principle of government. I and many other Members fear that for the Government to create new regulatory powers in this area at this moment could be a mistake. To regulate without a very careful analysis of the market would carry great risks and, as so often happened in the past, such regulation could have unintended consequences.
I noted the wording in the hon. Gentleman's amendment. If we are to introduce further regulation, is now not the time to do it, given the Government's current big reforms of financial services in general in this country, some of which I support? I accept that regulation is not necessarily always the answer, but one of the problems with the financial services sector is that it can be very short-termist and has to take account primarily of maximising shareholder value through dividends and increasing share prices. To my mind that is precisely why, in this case, we need to have regulation. Perhaps the hon. Gentleman can enlighten us about why he thinks the sector can in this respect voluntarily bring itself to heel.
I am very grateful for that intervention as it gives me time to make the next part of my speech, which is on that very subject. I am certainly not calling for self-regulation in this area. I am calling for the regulators to look at this.
It is important to note that the Government have announced plans to create a new consumer protection and markets agency, whose focus will be squarely on protecting individuals and consumers. That will be a refreshing change from the vast and fragmented scope of the Financial Services Agency. Such an agency would be ideally placed to consider this matter and to work closely with consumers and the industry to find the best way to deliver a range of caps on prices, balancing the needs of access to credit with those of price. Without that regulator in place, I believe it would be a mistake to create new regulatory powers subjecting such an important matter to the change and disruption inevitably entailed in a handover of responsibilities: far better that we clearly indicate the will of this House that regulators must consider these matters and take them seriously.
I return to the fact that I support this motion. Like many other Back Benchers of all parties, I want to see action taken to cap the cost of credit. I am deeply concerned about the levels of interest charged for payday lending and want to do everything I can to protect my constituents from loan sharks.
The constituent who came to see me at my surgery last week because she could not sleep at night because of the payday loans and the interest rates charged urged me to vote for today's motion. She will see no benefit from urging the regulator to consider introducing caps. She will see benefit only from those caps being introduced.
I am afraid I disagree. The caps have to be introduced in the right way. The best way for the Government to take action on this is to drive forward access to credit, improve financial education and encourage a genuinely competitive market in affordable credit. I support the suggestion that a range of caps should be given serious consideration but, in common with many other Back Benchers, oppose the creation of new regulatory powers at present. By accepting my amendment, the House can send a clear message of intent without sacrificing this worthy motion to complex arguments and ideological disputes on regulation. I believe that the amended motion would represent a clear expression of Back-Bench opinion from across the whole House, and I therefore commend it to the House.
I congratulate my hon. Friend Stella Creasy on securing the debate. I agreed almost entirely with the comments of my hon. Friend Mrs Chapman apart from the use of the descriptive term "gentleness". I think the emotions of passion and commitment were more apparent in the contribution of my hon. Friend the Member for Walthamstow.
This is a timely debate, because we are still experiencing the effects of the worst global financial crisis in over 70 years, which plunged the global economy into its deepest recession. As a result, the finances of households throughout our country, especially those on low incomes, are balanced on a knife edge. Four out of 10 people in the UK are worried about their current level of debt, and with household debt set to increase according to the Government's own Office for Budget Responsibility, we need to do all we can to make sure that they do not go over the edge due to irresponsible and unfair lending.
I am a supporter of both the Consumer Credit (Regulation and Advice) Bill and today's motion, because they seek better regulation of unfair lending practices in the marketplace, where disproportionately high interest rates or charges, and sometimes a combination of both, can be levied. Such a move would bring a welcome stop to short-term lenders charging wholly excessive APR rates, which people are often so shocked to read about. The highest I have found was on an infamous website only a couple of days ago that was providing a very modest APR of 4,200%. People often say that it is unfair and misleading to quote annualised rates for short-term credit, but even if we break it down to a weekly or monthly rate, they are by no means cheap. We also have to question what happens when a person experiencing financial hardship finds him or herself in an even more difficult situation and cannot make the agreed repayment date.
No one is arguing for credit to be withheld from people who need it; what we are calling for is responsible lending, coupled with protection for vulnerable consumers, and an open and fair market. It is important not to single out short-term credit when dealing with unfair practices, but to deal with the market as a whole. That is another reason why I support the motion, as it encompasses all forms of lending and would include, for example, credit cards and store cards, the regulation of which the Government have already committed to. Quite significantly, what we are calling for would bring the situation in our country in line with what is increasingly becoming the position in other countries around the world, for example those in Europe and the United States, and even in some parts of India.
I am also extremely pleased to see that the motion addresses the important issues of financial literacy and financial exclusion, which are the other half of the problem. In a recent Westminster Hall on bank account provision in Scotland, I illustrated the problems that financial literacy and financial exclusion can create. In a former life I was a dental practitioner-I am a glutton for punishment; what can I say? Our practice employed a new dental nurse who had no credit history at all. She did not have a driving licence, she was straight out of school and she had sadly lost her birth certificate, as her parents had had a messy separation. She was not able to open a simple bank account. Instead, every week she had to take her cheques to one of the local pawn shops and pay £3.50 just to get her weekly salary. That is a simple story, but the same situation affects a great number of people across the UK, and when they find themselves in need of credit, they often turn to short-term lenders. According to research, 5 million to 7 million people are denied credit either because they do not have a bank account or because they have no credit history.
I admire credit unions, and I am a great believer in their work. Indeed, Glasgow has more credit unions and members than any other city in the United Kingdom, with 34 credit unions in total and more than 120,000 members, and financial asset portfolios of more than £170 million. Credit unions are grass-roots organisations that are truly community-led. However, what I admire most about them is that they actively work to improve the financial literacy of their members and tackle financial exclusion. It is in that context that they have an invaluable role to play in our country, because not only can they offer accessible financial services, but they could provide some of the financial education and debt management advice that so many need. I hope that the Government will look to invest more to expand the work of credit unions in the coming months.
The Consumer Credit (Regulation and Advice) Bill and the motion before us represent an excellent opportunity to show that, during these tough economic times, we will look not only to protect the most vulnerable, but to bring about a cultural change in this country in our approach to savings and debt. I sincerely hope that hon. Members in all parts of the House give the motion and my hon. Friend the Member for Walthamstow the support that they deserve.
Let me begin by congratulating Stella Creasy and the excellent way in which she has promoted her cause today. Everyone here wants to see a fair and accessible system of credit provision. No one in the Chamber today wants to see loan sharks or other unscrupulous lenders continue.
The coalition Government have begun a consultation on the best ways of achieving that. Personally, I am absolutely in favour of some form of regulation. There is no question about that. However, the problem is that calling on the Government to adopt caps now would pre-judge the outcome of the consultation, and I should know, because I withdrew my private Member's Bill on unfair charging for unauthorised overdrafts, as, although the Government were minded perhaps to support it, continuing with it would have prejudiced the outcomes. Therefore, although caps would ostensibly seem to be a reasonable way to stop excessive charging, we should examine them in the light of the evidence brought forward by the charities that support vulnerable people.
I have spoken to debt advice agencies and charities that do not think that caps will work. Some warn that the imposition of caps would remove many lenders from the market and drive people who are desperate for cash into the arms of illegal loan sharks. The chairman of the Consumer Credit Counselling Service has said:
"Interest...caps can harm people seeking this type of credit more than they help them."
Another organisation, the Centre for Responsible Credit-one that I had not heard of before-has written to me to say that it disagrees, bringing to light a new European study. All those points must be looked at objectively. We have to think with our heads, not our hearts.
My hon. Friend makes some important points, and I completely understand the strength of opinion and the aim of trying to ensure that we have affordable credit. However, when I questioned Martin Lewis during his appearance before the Select Committee on Treasury, he said:
"The main thing we could do to improve your regulations-to stop mis-selling, to have better informed consumers, to have more responsible borrowing, to penalise irresponsible lenders-would be to teach every child in school how finances work."
We need to get the balance right in this debate when it comes to education, not just about credit, but about the importance of savings. Does she agree with those sentiments?
Yes, I totally agree with my hon. Friend.
Many Opposition Members who have spoken in this debate are new, so I wonder whether I could gently remind them that the previous Government launched three inquiries into the problem, all of which cautioned against using caps.
I thank the hon. Lady for her intervention, but no, I do not entirely recognise that, because I am not sure that she is distinguishing between what the two actually mean. I am not against what the hon. Member for Walthamstow is promoting, but I question her position. After 13 years-13 years in which her Government gave the matter due consideration and in which her party had an unquestionable desire to help-she seeks to introduce something now, in the middle of a Government consultation, when she knows that the Government cannot commit themselves in case they prejudice the consultation.
I will, but the hon. Lady should please be brief.
I just want to check that the hon. Lady understands that this is a Backbench Business Committee debate, so in theory Back Benchers could take a position that is different from that of the Government. If the Government were concerned about the consultation, they could abstain from the vote, thereby protecting themselves against any question of judicial review, whereas Back Benchers are free to express an opinion. Does she not agree?
Back in the real world, we do not want to abstain. We-the Government-want to support her proposition, so I am disappointed that she is taking the view she has.
We cannot accuse the Government of doing nothing. This week the consumer credit directive came into force, enforcing a 14-day cooling-off period. We have also increased the money going into catching, prosecuting and imprisoning loan sharks-these pariahs who feast on the misery of the desperate. The illegal money-lending teams are doing a great job and have been very effective, and we have also launched the consultation-the one that the hon. Lady does not seem to be interested in acknowledging.
I am sorry, but I cannot any more.
I, too, am impatient to see help for vulnerable indebted people, but there are other things that we could be doing. When the Financial Services Authority and the Office of Fair Trading merge into one regulator, one option could be to give that newly-formed body the power to introduce caps if it felt them to be appropriate. Another option that I should like my hon. Friend the Minister to consider is the use of the post office network as a method of access for credit unions, especially as the Government have halted Labour's closure programme.
The amendment, which I tabled along with Mr Walker and other Back Benchers, retains all the good aspects of the motion without committing the Government to any course before the end of the consultation. I urge Opposition Members to support the amendment, so that we as a Parliament can work together to end this scourge, with our heads as well as our hearts.
Thank you, Mr Deputy Speaker, for allowing me to contribute to this important debate. I also thank my hon. Friends the Members for Walthamstow (Stella Creasy) and for Darlington (Mrs Chapman) for tabling the motion.
Let me begin by putting the record straight. Lorely Burt said that my hon. Friend the Member for Walthamstow was not interested in consultation. In fact, she took part in this consultation.
Incomes in my constituency are, on average, lower than those in other parts of London. Unemployment is higher, and the dole queue is lengthening. My constituents are only too well aware of the exploitative practices of the payday and door-to-door credit lenders, for they are the target audience of firms hoping to cash in on other people's misery. I believe that now is exactly the right time to propose a cap on the cost of credit. The recession means that mainstream banks are not lending, everyday costs are rising, wages are being pushed down, and the ranks of the unemployed are growing. Increasingly, payday and home credit lenders are becoming the only option for people who are struggling to make ends meet, but that option comes at a terrible price-a price that people may be paying year after year after year.
The speech of Justin Tomlinson reminded me of an experience that is not part of my casework, but an actual case of mine. I recall that, when I was 21, my three-year-old daughter and I spent our first Christmas in decent housing after three years living in a slum dwelling with no bathroom. I wanted to buy a Christmas tree and some decorations, which would have cost about £10. It might as well have been £100, because I did not have £10.
I have to ask myself this: if a door-to-door lender had offered me a £10 loan, would I have taken it? I probably would. Would that £10 have involved me in years of loan payback? It probably would. Would that have become a spiral of debt which would have meant that I would not be here now? Yes, it probably would. When people are living from week to week to the edge of every pound and penny, their lives can be thrown into crisis for the want of a new pair of shoes. It is such tipping points that can send their lives up or down. It is the ultimate game of snakes and ladders. I believe in giving people a ladder, and I think that the motion provides a key rung to help people out of the despair that comes with endless debt.
Oakam and Wonga.com have stores and billboards across London offering payday loans, longer-term loans and emergency loans to people with poor credit ratings. The rates on those loans are staggering. Many of the companies that provide those loans hire only staff with second languages so that they can cynically and specifically target immigrant communities.
It is the most vulnerable people who would be helped by a cap on the cost of credit. One in 10 UK payday customers has an annual income of less than £ll,000, and according to the UK's largest debt charity, the Consumer Credit Counselling Service, one in eight of the people who asked it for help in the first half of last year was receiving jobseeker's allowance. I believe it is our responsibility to legislate, on behalf of those who sent us here, to protect people in such circumstances, and I hope that today we will see the political will that is necessary if we are to crack down on the companies who exploit them. I support the Consumer Credit (Regulation and Advice) Bill tabled by my hon. Friend the Member for Walthamstow, and I hope that it will be given its Second Reading in the House tomorrow. It seeks to improve access to more affordable versions of credit through, for instance, credit unions and the post office network.
I am pleased that the motion recognises the problems of financial exclusion and the lack of financial and debt management education in this country. Along with more than 200 other Members, I recently joined the all-party parliamentary group on financial education for young people, which was mentioned earlier by Andrew Bingham. I hope that, through the work of that group, we can improve financial education in schools, and I hope that all its members will support the motion.
While these measures may help, their impact will be minimal unless a range of non-competitive caps on credit in the unsecured lending market are also introduced. I urge Ministers to listen carefully to the debate, to recognise that the high-cost credit market is exploitative legal loan sharking, and to step in, do what Governments should do, and regulate accordingly by capping the cost of credit for the benefit of the most vulnerable people in constituencies such as mine and many others.
If hon. Members will forgive the pun, may I say that it is encouraging that there are such high levels of interest in this Chamber in this subject, particularly among the new intake? I pay tribute to Stella Creasy and my hon. Friend Justin Tomlinson for their interest, which has been shown not only in this debate, but in the hon. Lady's private Member's Bill and the Westminster Hall debate, and in my hon. Friend's institution of the all-party group on financial education for young people. I commented at the time that, as so many people were crammed into the room, he had managed to make financial education for young people the new rock and roll.
Almost all of us in this Chamber, wherever we are in the spectrum of belief in free market economics, conclude that something else needs to be done to curb the worst excesses in the credit market. A number of us also have examined the other countries in the world, both those in the European tradition, such as France, Germany and Italy, and those in the Anglo-Saxon tradition, such as Australia, Canada and most of the states in America, and asked, "Can they all be wrong?" Perhaps instead they are on to something in having some sort of usury ceiling and sensible credit limit.
Any approach to this matter has to cover all the aspects of education, advice and this country's culture about debt, must include smart regulation that protects the most vulnerable, and must provide for proper alternatives, such as credit unions. They, in particular, have an important role to play, not only in providing affordable credit, but in encouraging the savings that a number of hon. Members have discussed.
There are a couple of problems with the motion. First, it refers to various "caps on prices" without saying what that means. It is not clear whether that would be a cash or a percentage cap. When lenders talk about the total cost of credit, they normally refer to a cash figure, but I assume that the hon. Member for Walthamstow was referring to a percentage.
Does the hon. Gentleman accept that the fact that a definition of the cap is not given would allow the regulator some form of flexibility in the event that it is required to take action?
I am grateful to the hon. Gentleman for that intervention and for being my minute man. That does create extra flexibility but we do need to know what we are talking about. A number of hon. Members have drawn a distinction between an interest rate cap and a cap that includes interest and other charges-that is what the annual percentage rate is; APR includes some other charges. It does not include behavioural charges, default charges and so on, and I do not understand mathematically-I am happy to take an intervention on this for a second minute-how they could be factored into a general cap that would apply to credit products extended to everybody, given that, by definition, behavioural and default charges are incurred only by some customers.
Another problem with the motion is its emphasis on a lack of competitiveness, because that is not the problem in this area. I do not wish to be too pernickety, but I do not think that "many" lenders can be in a "near monopoly" position, as the motion suggests. In many ways, stimulating competitiveness further might end up being counter-productive, but in the three minutes available there is no chance of our discussing that aspect.
This country is both blessed and cursed with a very diverse and dynamic consumer credit market. We are blessed because of the variety, where there is a product to suit just about every need in the market. Even payday lending can be very rational; it could be very rational for someone trying to avoid current account bounce charges to take out a payday loan instead. Very few people are excluded from the legal and, therefore, regulatable market altogether.
We are cursed by this market because of the ubiquity of the messages about credit that people are bombarded with; the emphasis on what people want to borrow, rather than what they need or can afford to pay back; and the complexity involved. Even very highly educated people find it difficult to understand every product and every aspect of every product. I am sure that some Members of this House struggle, as I do, with understanding some aspects of some of these products.
That complexity highlights one of the great difficulties with introducing new regulation, because companies make money in this market in lots of different ways. Rent-to-own companies, such as BrightHouse, which has been mentioned more than once in this debate, would almost certainly not be curtailed by any restriction on the cost of credit, because so much of the money they make is on the sticker price, relative to Argos or Currys, rather than on the charge for credit.
I am running out of time already, so I had better hurry up. The experience in America suggests that where there is effective regulation of cash lending, other sectors such as rent-to-own or good old-fashioned catalogues are stimulated, and if there is a clamp down on interest rate charges, that will stimulate growth in behavioural charges and so on. Everybody in this House probably agrees that a blunt, general, across-the-board APR cap is not a good idea, so the challenge is whether we can come up with a regime that curbs the worst excesses of the market without putting entire segments and entire product categories out of the market, and that protects the most vulnerable. We need a regime that does not push them into the arms of illegal loan sharks-the sort of people for whom the idea of a late payment penalty is a cigarette burn to the forearm.
Does my hon. Friend agree that that is exactly why we should be considering all of the actions that need to be taken as part of the credit review, so that we can get a measured and sensible approach which means that we do not end up, by default, aiding the illegal loan sharks?
I agree with my hon. Friend entirely. The amendment to the motion is very sensible and very welcome.
Having a range of caps on different products in the market is one option for achieving the two aims I have just set out. However, the market is diverse and dynamic; the mention of the growth in payday lending in the motion is a good example of how the market keeps changing. In such a market, the danger of such an approach is that when certain categories are capped, there will be growth in different categories as people try to morph products and move into different areas of the market to avoid regulation.
If caps are to be considered, one idea that I would like to throw into the mix for the Minister to consider is what I call a twin cap. Rather than having caps on different categories, we could set out a formula with a maximum rate of simple interest combined with a one-off percentage of the principal-for example, a 30% interest rate and a 15% arrangement fee. I suggest that structure because it more closely reflects the actual cost of providing loans. Shorter-term loans cost more to provide because there is a fixed-cost element for the initiation and completion of the loan. My own back-of-the-envelope modelling-I stress it is no more than that-suggests that some credit companies may well set their prices in that way. If there were a cap of 50% annual interest plus a 15% one-off charge, just about every segment of the market would survive, but by curbing the very worst excesses over time, we could bring that down.
I do not have time to go through the rest of what I wanted to say, but we should not forget everything else-supplementary charges, roll-over charges, missed payment charges and minimum payments. Critically, lenders should be required to take all reasonable steps to make sure that loans are paid down and that charges never exceed a set percentage of the outstanding loan in any given month.
It is a pleasure to speak in the debate and to follow Damian Hinds. I agreed with many of his remarks. I congratulate my hon. Friend Stella Creasy on speaking not just with passion and power but with the authority of someone who has done tremendous work in this area, and I hope that hon. Members across the House will endorse her proposal, her private Member's Bill and the motion she has moved today.
I have been encouraged by the extent of cross-party consensus today. Whatever our views on the national debt and the deficit, I hope that hon. Members from all parties will agree that this issue is a massive problem. I want to put on record some of the problems being experienced by my constituents. I have the challenge, but also the great honour, of representing the community of Royston, which sits near the heart of my constituency and is one of the most deprived areas in Scotland. There are very low rates of pupil attainment at school and very low rates of schoolchildren moving into college and university. When I contacted North Glasgow advice centre in Royston last week, it told me that debt issues make up nearly half of all its work at the moment. Of the debt issues it manages, consumer debt, including credit and store card debt, personal loans and people dealing with pawn shops, make up 76.4%.
The centre told me the terrible story of a pensioner couple, aged 70, who are still paying off the remainder of their mortgage and who came to the centre last week. The interest on their mortgage is being paid by the Department for Work and Pensions but there is a shortfall. When the centre explored their income and outgoings, it found they were paying £80 a week to a well-known doorstep lender. That type of abuse demonstrates the urgent need for regulation in this area.
Is not one reason for urgency precisely that those in multiple debt are faced with doorstep lenders who visit them regularly so that they are inevitably drawn towards paying those debts above others that would normally be considered priority debts, such as rent and utilities? Allowing those debts to fall by the wayside causes greater problems such as eviction.
My hon. Friend makes an extremely powerful and accurate point. The looming crisis in personal debt was summed up last April by Citizens Advice Scotland, which said:
"The problem is not just the number of people who are in debt.... It's the extent of the debts that those people have."
Having analysed the problem, it found that
"On average, Scottish debtors have debts that are 50% higher than they were five years ago. And for every £1 they earn per month, the average Scottish debtor owes £28 in debt."
Today, we have the opportunity to begin the process of ensuring that that burden does not rise through this Parliament.
Lorely Burt mentioned the EU consumer credit directive, but in many ways, that has added to the problem facing us today. Previously, providers were required to give two thirds of successful applicants for credit cards the advertised rate; under the directive, that will fall to just 51%. That change will leave millions of consumers paying more than they expected when they applied for credit, and people in that situation will increasingly resort to short-term credit.
Five minutes from my home and my constituency office, in Springburn shopping centre, is a BrightHouse store. I shall share with the House some of the prices that my constituents were being charged for basic goods last week. For a washing machine with a cash price of £703, the payable amount under the BrightHouse credit scheme was £1,558.44. For a freezer with a cash price of £773, the amount payable through BrightHouse was £1,714.44. For a children's bunk bed set, the cash price was £345.69, but the BrightHouse credit charge was £765.96. We have the time to act now. I urge Members to seize the opportunity and to stop my constituents and those of Members on both sides of the House having to experience that sort of abuse from the short-term credit industry.
In the short time left, I shall mention Provident cheques. Provident specialises in lending small sums, typically between £200 and £300, but with borrowers having to take out the loan for the longest borrowing period, we have seen interest rates ranging from 170% to 500%. A customer borrowing £200 over 55 weeks pays £330, equivalent to an APR of 177%.
Members in all part of the House must surely appreciate that markets must have morals. We can act today to begin the process of regulating the industry. I urge the House to grasp the opportunity.
I echo my colleagues in paying tribute to Stella Creasy for pushing this issue and bringing the motion to the House for us to debate. It is incredibly important.
When I first heard about the astronomical APRs charged by the payday loan firm, I was extremely concerned. When I discovered that the precise APRs charged were way beyond what I had feared or even imagined possible, ranging up to 2,000% in some cases, I was absolutely staggered. However, having carried out research over the past few months, I have discovered that the subject is horrendously complicated. Others have talked about that complexity, and I shall do so as well.
We all know that there is one primary factor that maintains the status quo of iniquitous social exclusion for those at the very bottom of the income ladder-one primary factor that stops people from advancing socially and economically. That factor is financial exclusion, as the hon. Member for Walthamstow so brilliantly identified. Many people in disadvantaged areas have no formal savings, access to credit or even a bank account. In 2011, in one of the richest countries on Earth, that is an absolute travesty.
I wrote to a number of the companies that provide payday loans and met their representatives; I also spoke with a number of constituents who have been on the receiving end of those companies' wares. I inquired robustly about their business model. I checked it, went through the process and had my team research it. Frankly, I was surprised by what I discovered: there are not necessarily large groups of our poorest citizens paying through the nose for higher interest loans, and the business model does not necessarily target people who habitually default before their loans are compounded. In the main, I found that lenders-the main suppliers-went to great efforts to ensure that their customers were able to pay back loans by building up trusting relationships with them. That was not the reality that I had expected, so it was a learning experience for me. It is important that debates in this House are informed by facts, and the fact that I have taken on board is that some of those firms play a vital role in certain communities.
Could the hon. Gentleman explain to a constituent of mine who has six loans from payday loan companies, each one borrowed to pay off the other, how that could take place if the companies are targeting people to ensure that they have the ability to pay?
The hon. Lady raises a good point, and an important one. There will be some anomalies, but when I did the research I found that the majority of people who use payday loans pay them back regularly, otherwise the business model would collapse. I hope to be able to explain that as I go through my remarks.
The companies offer credit to those who are financially excluded by larger and seemingly more reputable financial institutions, such as those banks that are now owned by the taxpayer. Although some of those loan companies have been associated with inescapable cycles of debt, as my hon. Friend Duncan Hames mentioned earlier, and with poverty, as noted by pressure groups such the excellent End Legal Loan Sharking, I now recognise that the whole issue is simply not as black and white as it has been painted.
Does my hon. Friend accept that the huge growth we have seen in the sector recently is an indication of how profitable this business is for those organisations?
My hon. Friend is absolutely right. The figures I have show that the sector is worth in excess of £1 billion per annum, and heading towards £1.5 billion, so it is clearly very profitable. That is the point I want to make, if Members will bear with me.
The blunt reality is that many disadvantaged people simply do not have access to high street banks, which we all take for granted, and consequently they are forced to look elsewhere. They have no choice, and there is the rub. It is not simply people with poor credit ratings who seek the services of firms offering payday loans. A reality check is needed, because in modern society across the UK there is a real and present demand for quick, short-term loans to bridge the gaps between when individuals need money and when they are paid.
Those people need the money for quite normal transactions, such as paying for a grocery bill or for an MOT, and they need it for the short term, just a couple of days before they get their payday cheque. The money is for mundane expenses that everyone has experienced, but they can be very different for people who need payday loans, because in that area a failure to find the money can quickly lead to a crisis that will take them from normality to abnormality in the space of 24 hours. That is a problem, because if well-meaning pressure groups are successful and able to see off established payday loan companies or force some of them to withdraw from the market, where will people turn?
The hon. Member for Walthamstow made the point in her Westminster Hall debate that just six companies are responsible for 90% of business in that market. Although I do not necessarily agree that that constitutes an uncompetitive market-six major supermarkets in this country control 90% of their whole sector-I feel that regulating the market further might make it even less competitive. I think that greater monitoring of payday loan providers by the Office of Fair Trading to ensure that they are acting in a moral and responsible way and in the best interests of the consumer would be the right way forward. Financial exclusion is a horrible and vicious cycle, and poorer families can spend an additional £1,000 per year on essentials.
That brings me to our high street banks, which are an integral part of this country's economy and vital to our recovery. All the banks in this country, however, are still in existence thanks to the massive 2008 bail-out at huge cost to the taxpayer-all of them. Yet, those banks continue to ignore a great number of taxpayers to whom they owe so much. In the banks' defence, they claim that such customers are high-risk and unprofitable, but banks are unable to understand their needs and inaccurately assess the risks they pose.
The sector is worth £1.2 billion and clearly profitable, as my hon. Friend the Member for Chippenham said, but it ignores those 6 million people, so they are left to the payday loan companies, none of which I should want to be great friends with. My point is, however, that because the banks do not step in, the payday loan companies have to, and without them the situation might be catastrophic for the many millions of people who need them so desperately.
I, too, congratulate my hon. Friend Stella Creasy. Since we became Members, she has been a stalwart campaigner on the issue, and to have a political issue of such like trending on Twitter-if Government Members would like to look up that term later, they are very welcome to-is a great credit to the campaign that she has run and to her for representing not only her constituents, but the constituents of all of us.
Many people on both sides of the House support the measure, and I was interested to hear Duncan Hames, who is in his place, bring to the Chamber his great deal of experience on the issue. I am disappointed that he is going to put that all to the back of his mind when wandering into the Lobby this afternoon, but I hope that in the next hour he will change his mind and support what is one of the most valuable things that we can do in the Chamber.
The issue affects many of my constituents and constituents throughout the country. Debt breaks up families, demolishes relationships and, all too often, leads to suicide and death, something that has not been highlighted this afternoon. Rarely are high-interest services used as a one-off; the spiral of debt, through chasing the tail of debt as others have said, can lead to families throughout the country becoming caught in a debt trap and, all too often, a death trap.
I have been struck by the APR and total credit costs that we have heard about this afternoon. My hon. Friend Anas Sarwar, who is not in his place, spoke about 4,000% APR, and although I appreciate that the motion is not just about capping APRs, but about the total cost of credit, I think that such figures should send a shiver down the spine of every Member in the Chamber.
Moreover, Justin Tomlinson explained that a mere 17.9% APR can take up to 40 years to pay off if someone makes just the minimum payment, so even small APRs, which attract people to credit, can have significant consequences if there is no education to resolve the issue.
Short-term credit companies advertise aggressively. We just have to walk down our local shopping streets to see posters, advertising boards and window displays publicising payday loans and credit. Many of us know about such aggressive advertising, and Members have already described how lenders can create relationships in a person's own living room, but the main concern about advertising is that many people look for authorities on the issue and then give the adverts credence because of them. Indeed, adverts for payday loans with APRs of almost 3,000% have been carried on the website of the Department for Communities and Local Government-an authority to which people might look and say, "If they're saying it, this must be acceptable."
Rising unemployment, housing costs and the VAT increase could leave families and ordinary people in a far worse situation, pushing them towards higher credit costs when paying for birthdays, Christmas, household repairs or just everyday living.
My hon. Friend mentioned the significance of the personal relationships that firms build up with borrowers. Does he agree that the network of people who are on incentivised contracts with the companies, and incentivised to maintain people in debt, is one of the biggest market barriers to the conventional banks coming into the sector?
I am grateful to my hon. Friend for mentioning that. One would think we had rehearsed it, because I was about to go on to say exactly that. The chief executive of the country's largest payday lender, Peter Crook, recently said that he was likely to see a large increase in his target audience owing to the rising levels of unemployment. That highlights the relationships that are created not only to keep people in the spiral of debt but to keep the people who are pushing the debt in the spiral of commissions and maintaining their own lifestyles. That shows that strict regulation is required, not a code of conduct that could easily be dismissed by some of the more unscrupulous lenders. It also shows that those who are least able to pay are being charged the most at a time when they are least able to pay for this kind of credit.
Of course, capping the total cost of credit is not an idea that has been plucked out of the air. As my hon. Friend the Member for Walthamstow demonstrated, there is evidence from around the world showing that it is perfectly possible to regulate the payday and home credit markets without adverse effects-all it takes is the political will to do so. There are undoubtedly detailed issues that would have to be resolved, but we are elected to this House to find solutions to problems, not to find problems to stop solutions, which is how I read the well-intentioned amendment. The political will is in the Chamber today to do something about this, and we should all grasp the moment and do what is right for our constituents.
Today we have gathered in all parts of the House as the champions of sensible consumer credit for the most vulnerable in our communities. It is interesting that so many of these champions are new Members of this House. Among our company, I pay tribute, as many others have done, to Stella Creasy and to my hon. Friends the Members for North Swindon (Justin Tomlinson) and for East Hampshire (Damian Hinds) who have been leading the way in setting out our concerns about consumer credit.
Teresa Pearce referred to snakes and ladders and concluded that the motion was all about increasing the ladders of opportunity for her constituents. In truth, it is about the other side of the equation: reducing the number of snakes, reducing the amount of credit that is made available through payday lending, and ultimately putting a squeeze on the loan sharks-the one species of fish which we might all agree we would not mind if the beastly EU fisheries legislation sorted out for ever.
The motion proposed by the hon. Member for Walthamstow calls on the Government to introduce caps on prices. Interestingly, when she introduced the motion she called for the regulator to put these caps in place. All that is at stake in terms of whether we vote for the motion or for the amendment is the narrow issue of whether it is the place of the Government to impose caps on prices or whether it is the responsibility of the Government to encourage a regulator to do so. In that respect, it is relevant that the snappily named "son of OFT"-the consumer markets protection agency, if that is to be its final name-is the relevant body that should be putting caps on prices. The consultation is out there, and we should all be participating in it and encouraging the new agency to do so, as the motion and the amendment suggest.
The other side of the equation, which is all about the ladders of opportunity, comes back to the other issue dear to the hearts of many of those in the Chamber-how to provide sensible credit to these vulnerable constituents. I declare an interest, as have many hon. Members, as a member of the Gloucester credit union. I pay tribute to the Government, specifically the Department for Work and Pensions, for funding a post to enable five small credit unions to form together into a Gloucestershire-wide credit union, which will be launched in March. It is through credit unions that we will make credit available to such constituents. I hope that it is part of the Minister's plans-no doubt he will tell us more-for credit from credit unions to be available through the network of 11,500 post offices.
The final point I would like to make about the ladders of opportunity is on financial education. I pay tribute to my hon. Friend the Member for North Swindon on the new all-party parliamentary group on this matter. Although it is a less attractive game than bashing bankers, I urge all Members to work with the financial services institutions in their constituencies, many of which provide considerable free financial education.
The hon. Gentleman compared the motion and the amendment and suggested that the motion called on the Government to introduce caps. It actually calls on the Government to introduce regulatory powers that would allow the introduction of caps. The amendment calls on the regulators to consider introducing caps. Do the regulators currently have such powers? If they do not, the amendment is specious.
I thank the hon. Gentleman for that contribution. The amendment encourages the Government to introduce
"measures to increase access to affordable credit"
"urges regulators to consider putting"
caps on prices. I believe that that is precisely the form of words that is appropriate. That is why I support the amendment. It recognises that 95% of the motion is right, but that it needs a significant but small fine tuning.
I, too, praise my hon. Friends the Members for Walthamstow (Stella Creasy) and for Darlington (Mrs Chapman) for their hard work on this issue and for securing this debate through the Backbench Business Committee.
In the poorest communities in my constituency and throughout Teesside, the most vulnerable people are being preyed on by loan sharks and payday lenders. That is especially true in these difficult economic circumstances. The two councils in my constituency offer financial advice services that provide free support to people who need it, with support from Citizens Advice and the credit unions. Those services are well used by local people and sometimes they are the only accessible source of advice and support. Such services could be developed if post offices worked alongside credit unions as a post bank. I believe that the Government have a role in regulating to prevent vulnerable people being targeted and taken advantage of.
It is no surprise that among the only businesses to have consistently benefited from the credit crunch are pawnbrokers and cash-for-gold shops, which offer quick-fix financial solutions for those in need of money. As the Office of Fair Trading and the Competition Commission have said, the fact that customers seeking short-term loans cannot afford to shop around has meant that there is little competition in the sector, which has inflated rates artificially.
In my constituency, the north-east illegal money lending team has worked tirelessly in communities such as Easterside to drive out illegal loan sharks who have been taking advantage of vulnerable people. It helped to set up sustainable lending and saving by community-based credit unions. The Minister has decided to withdraw funding for such teams and expects a national body based in Birmingham to replace them. I can only guess that that is part of the new consistent localism agenda that the Government have displayed.
The hon. Gentleman will know, I would have thought, that an independent study was done on how best to use the funding for illegal money lending teams. We have taken on the broad recommendations of that study. It suggested that a central team would be more effective and use the money better. The people in the north-east will still have the services of the illegal money lending teams.
I do not accept that evidence, because the new team will not do the follow-up work that helped to set up the credit unions in those communities. A team in Birmingham cannot have the relationships with local people that can defeat the local illegal moneylenders who people know on their estates. I have campaigned hard against this decision, which I believe will leave communities in my constituency vulnerable to illegal loan sharks, after all the hard work that has been done to rid us of such criminal moneylenders.
I back the motion because, contrary to the opinion of Lorely Burt, it is not true that regulating the lending market will push people to use illegal loan sharks. In the real world, evidence shows that high-cost lending may be a precursor to illegal lending because people get into such a financial mess, and have such poor credit ratings as a result, that they turn to illegal lenders. And not only that: they are often dragged into criminal activity themselves as repayment by favour or in kind, such as hiding fenced goods, drugs or weapons. When they get caught, they lose their job and spiral downwards.
With rising unemployment, the increase in VAT and the high cost of fuel, I genuinely fear that more and more of my constituents may feel that their only option is to turn to high-cost lenders such as payday, doorstep and hire-purchase lenders. The Government have already committed to regulating excessive interest rates on credit and store cards, and it is now time for them to focus on higher-cost unsecured lenders. That is why I support the motion. Now more than ever, it is absolutely necessary to protect vulnerable and often desperate people who turn to companies for credit that could destroy any hope of their having financial security in future.
I assure Stella Creasy that although my grandmother was called Crook, neither she nor I are related to the person whom she named earlier. I thought I should put the record straight on that one.
In Calder Valley, we have the fantastic Calderdale credit union of which I must declare I a member. It does some great work in combating doorstep lending and has achieved much in the local community of Todmorden to offset those lenders' high interest rates. It has done so through a great education programme and, of course, through providing small loans at a much lower rate, in line with that of most banks and reputable high street lenders.
Last week, I attended our local Sure Start centre in Todmorden, at which Barclays bank held a money skills training programme for a group of young people and young parents. It explained the many aspects of finance and, importantly, the value of saving, and it became clear that the majority of the group of about a dozen young people had already come into contact with doorstep lenders.
Some of the stories that we heard around the table were absolutely horrendous, and three key points came out of the discussion. First, young people are dealing with incredibly high interest rates from doorstep lenders. Secondly, those lenders' tactics are horrendous, with some of them knocking on the door at 4 am or 5 am to collect overdue money. Thirdly, as has been mentioned today, the most vulnerable sometimes enter a vicious cycle in which they are encouraged to extend loans time and again, or to add a television or washing machine.
As has been mentioned several times, many Members attended the launch of the all-party group on financial education, which was set up by my hon. Friend Justin Tomlinson and attended just last Monday by Martin Lewis. There is a real desire among all MPs to bring back financial education for our young people at school. Gone are the days when banks promoted bank accounts and the concept of saving to our young people at an early age through schools. We need to bring back a robust system in which our children are educated in finance in a consistent way.
The education programmes of our high street banks, to which many of the banks' staff dedicate their own time, such as the Barclays money skills programme, are having an impact where they are targeted. The great results provided by credit unions such as Calderdale credit union in tackling doorstep lenders are leading to progress, albeit with very limited funds, through high levels of dedication from their staff. Sadly, however, there is not enough progress and far too many doorstep lenders continue to target the most vulnerable with well advertised, huge APRs, often in the thousands. That is not only obscene but immoral, and we need to take steps to introduce measures to increase access to affordable credit. We must also urge regulators to consider putting in place a range of caps in parts of the market in which immoral and often unscrupulous operators target the most vulnerable people.
My hon. Friend talks about some of the positive things that the banks are trying to do, but the vast majority of debt cases that I have seen in my surgeries have originated in appalling lending decisions by high street banks. It is important to stress that now while we are hitting everyone else.
My hon. Friend highlights a serious problem, but it is important to appreciate that some of our high street lenders have recognised, in the light of what has happened, that they must do more to target the most vulnerable to highlight financial issues, as they are doing.
I support the amendment because it is important to have a widespread review and not just a prescriptive briefing, particularly given that unscrupulous companies currently get around advertising the high cost of credit by massively increasing the base price of goods on offer, examples of which were given by my hon. Friend Jackie Doyle-Price and Mr Bain. I urge hon. Members to support the amendment.
It is a pleasure to speak in this debate and to follow Craig Whittaker, who spoke well about an area that I know well and where I have relations. I add my congratulations to my hon. Friend Stella Creasy on showing the leadership to get this motion on the Order Paper today and to publicise it. She has been an example to us all.
This has been a good debate. Many hon. Members have spoken well and made excellent points. If the vast majority of hon. Members accept that there is a significant problem, it is a question of what the Government can and should do about it. As one hon. Member said, there is a legitimate argument in favour of funding financial inclusion education in early years education. Partly because of the progress made in recent years, that is necessary, but it is not sufficient on its own. We should welcome the fact that 350,000 loans have been made by the not-for-profit sector, but that is not enough, and the enormous problem of people being charged appalling rates of interest remains.
The question is this: if the Government decide that they cannot allocate the funds that they have allocated previously, can they take regulatory action to improve the situation and make a genuine difference? That is why I am disappointed by the response of some Government Members. They have a far greater grounding in such matters than I do and have spent much of their previous careers and parliamentary time in dealing with this issue, but they have not grasped the nettle, and they will not support the motion. Instead, they are taking a course of action that will ultimately delay things and put the matter in the hands of a regulator that has not been given sufficient political direction to tackle the problem head on.
If the hon. Lady does not mind, I will not take interventions because we need to hear as many speeches as we can.
The Conservatives and Liberal Democrats, when they were the opposition, spoke well of the need to tackle the level of debt in society and pointed out some faults in the previous Government's policies. Now is their chance to do something.
Labour must accept that although we must protect people's right to choose, we must not continue to give unscrupulous companies a means to exploit people. I hope that the Consumer Credit (Regulation and Advice) Bill, which my hon. Friend the Member for Walthamstow introduced, promotes credit unions. I am deeply proud of Walney Island credit union, which was set up by churches in response to mass redundancies at Barrow shipyard to help people through those enormously difficult times. We should no longer tolerate the gap being filled in this way while alternative forms of credit are introduced.
In our privileged financial position, we have no need of loans of the kind regularly taken out by the poorest members of our society, but my hon. Friend Teresa Pearce spoke so well about the choice that she would probably have ended up making in desperation had she been in a situation in which she did not have enough money to get through Christmas.
The freedom to make choices is important, but it is ultimately part of the Government's role to prevent us from being exploited and making the wrong short-term choices when in a desperate situation. That is what this debate is about, and I hope that Members on both sides of the House will support the motion.
I join others in commending the hon. Members for Walthamstow (Stella Creasy) and for North Swindon (Justin Tomlinson) for securing this debate, even though they differ on the amendment.
Many hon. Members have described the problems in their constituencies. The problem is that firms in the credit market are able to exact credit terms that are lucrative for them but punitive for their customers. When we hear of some of the eye-watering interest rates that end up being charged, it is natural to think that there should be a law against it, and people look to this House to provide some sort of bulwark against open-sky exploitation. The motion asks the House to give the Government a mandate-although it is not a prescriptive mandate-to put regulatory powers in place that would provide caps that would be sensitive to the circumstances and needs of those who are in dire straits and otherwise financially excluded. Those caps would also be sensitive to the dynamics of different parts of the markets and sub-markets-
Well, I am addressing the wording. Many people are misrepresenting the motion and the amendment.
The motion would not put prescriptive caps in place or require the Government to do so immediately. Lorely Burt, who supports the amendment, said that a Government consultation is under way. But that consultation is not just asking the regulators what they think: it is rightly asking all of us what needs to happen to provide properly regulated financial services and proper protection to customers, both business and personal. Instead, the amendment says that we do not even want the Government to consider the question of regulatory powers that would protect those customers-we should ask the regulators to consider that question instead. Who are the regulators? The very consultation that the hon. Lady was talking about is about who the regulators will be in the future and what powers they will have. So the amendment is an evasion and dereliction of parliamentary responsibility, because it would simply ask the regulators to think about the issue-when we are still thinking about who the regulators should be and what powers they should have. It is a case of "There's a hole in my bucket, dear Liza." If people want an answer to this problem, they should not back the amendment.
No, because I want to give other hon. Members a chance to speak. The hon. Gentleman is supporting the amendment and he ended up pleading with the Minister to consider what he called "twin caps". I do not know why he did that when he is backing an amendment that says that the Minister should not consider anything to do with caps. So the hon. Gentleman does not want the Minister to have anything to do with this and instead it should be unspecified and unknown regulators.
There is even more uncertainty about who the regulators in Northern Ireland would be. If I, as a Member representing Northern Ireland, was to support the amendment, I would be asked by my constituents, "Well, who are the regulators in our country?" It is unclear who the regulators would be in Northern Ireland. That is why I cannot join others in sidestepping the main point of the motion by backing the amendment.
I would like to join my Celtic colleague, Jonathan Edwards, in making a point about debt management and debt management plans. There are not only loan sharks out there, but debt sharks, who pose as debt dolphins coming up to help people who are deep in dire debt. We need clearer regulation. We know that an Office of Fair Trading report found that more than 129 companies were engaged in various questionable practices; and we know that there are models for statutory schemes, not just in other jurisdictions such as the south of Ireland and elsewhere across Europe, but even in Scotland, where there is a debt arrangement scheme that provides a good model for protecting consumers in dire need of credit but being exploited in the name of debt management plans.
The term "flipping" was used during the parliamentary expenses scandal to describe MPs changing houses. In the debt management plan arena, of course, we have flipping as well, with companies sucking customers in with unsustainable terms then flipping them on to more exorbitant terms in the future.
In the little time available, I want to widen the debate to talk about financial exclusion in general. We have discussed these issues over the past few weeks, and in the coming months, when we will be talking about some of the big macro-prudential issues relating to the financial services sector, we will be considering whether to separate out our banks between investment and retail; and we will also be considering banks' loss-absorbing capacity, risk assets and such like. However, it is extremely important that we do not forget some of the issues presenting challenges for the people we represent. Ben Gummer, who is no longer in his place, referred to the raw deal that many of our constituents are getting from the big retail banks. I endorse what he said.
A 2004 investigation by The Guardian found that payment protection insurance, for example, was being widely mis-sold by many of the banks to customers who would not be able to claim under the terms of the insurance. Banks were making profit margins of up to 80% on those products. I am a member of the Treasury Select Committee, and last November I took the chief executive officer of Lloyds Banking Group to task for charging extortionate rates of interest for arranged overdrafts. He was levying a charge of 19.3% on his customers-more than 38 times the bank of England base rate. Last month, Barclays was fined £7.7 million by the Financial Services Authority for misleading savers, and RBS was fined £2.8 million by the FSA for its inadequate handling of customer complaints.
The increase in personal debt has been mentioned. It is not coincidental that, since 2000, productivity has risen at double the rate of wages, which have in some sense stagnated. As a consequence, people have borrowed and household debt has exploded. That might also explain why we have seen an explosion in the demand for short-term credit. It has already been mentioned that in 2009 the payday lending industry was worth more than £2.2 billion-more than 3.5 times what it was in 2006. However, we are where we are, and the need for credit has now become a basic essential of everyday life. I would be prepared to bet that most people in the Chamber have a credit card. We all come under different stresses when we go through different things in our lives-for example, moving home.
One of the problems is that it is often the poor and the vulnerable who are most in need of credit. That was one reason I wanted to participate in today's debate. I represent a constituency that is varied but has pockets of severe deprivation, and we find that it is those people who are struggling to gain access to credit and struggling with financial issues. In the past four months, my local citizens advice bureau has dealt with well over 400 debt advice queries. Despite that, however, those poor and vulnerable people are the very ones getting the rawest deal from the sector in terms of the services they are being provided with. Three million people in this country do not have a bank account, and 35% of those in deprived communities do not have access to simple banking services.
I think that Stephen Lloyd mentioned the fact that the industry has pointed to all that it has been doing since 2003 to introduce basic bank accounts. Typically, the bank accounts that have been introduced since that time allow customers to receive their pension or benefit payments and perhaps have a debit card, but they do not offer overdrafts and the often do not provide access to a cheque book. They do not provide the full menu of services that we would all expect.
For me, this is simple: the industry is failing to do anything about financial exclusion. With the present voluntary commitment, the sector lacks sufficient incentive to dedicate its resources to help to address the issue, not least because of its obsession with maximising shareholder value. Yes, it has a legal duty to do that, but that sometimes goes against its obligations to society, which has provided £1.3 trillion of support to the sector since the global financial crisis came to a head. In addition to supporting the motion, I would like us to introduce a universal banking service obligation, to prevent people from needing to go to the doorstep lenders in the first place.
I want to thank my hon. Friend Stella Creasy not only for securing this debate, but for the campaign that she has been waging on this subject since she was elected. Mention has been made of the review of consumer credit, and of the consultation, which closed some time ago. It is important to remember that that review would not even have looked at some of these issues if my hon. Friend had not pushed for them to be examined, so we are here today in part because of her efforts.
It always worries me when people say things like, "We don't need to regulate yet" or, "We're all in agreement with this, but-".
The Labour Government had 13 years in which to regulate, and they conducted three investigations into this very subject. They did not bite the bullet, however, so the hon. Lady should not be criticising us. We are conducting a consultation nine months into this Government.
The hon. Lady has been told on several occasions by various Members that the proposal in the motion is different from some of the proposals that were not taken up by the previous Government. If I had been in this place then, I would have been pushing my Government to do exactly what the motion proposes. It is not good enough to say, "If your Government did not do this, you should not propose it now." For how long does she think should we be disbarred from making such proposals? One year, two years, 13 years? On that basis, we might as well not be here at all, but perhaps some Members on the Government Benches would prefer that.
I understand the party politics involved, but does the hon. Lady acknowledge that we have already heard a lot of evidence today about how these unscrupulous companies get around the process anyway simply by increasing the base price? We need to take time out to have a look at this in a proper, regulated manner.
I am not convinced that we have heard assertions or evidence that that could happen. If we always decided not to legislate because someone could get around the law, there might be a case for not legislating.
I should declare an interest as a solicitor, and one of the things that drew me to the law as much as to politics was my belief that the law is a valuable tool to help those who are more vulnerable. The law is a lever to create a better balance of power between those who have power and assets and those who do not.
I am not saying that we should regulate on absolutely everything, but regulation is necessary if we are to deal with a problem that has expanded greatly, partly but not entirely because of the recession. The industry is incredibly seductive for people; it offers them attractive places to go and produces attractive adverts that make everything seem very easy. There is widespread agreement on the need to help people and to make changes, provided that that is not done through regulation, but we must will the means, not just the end. It is not enough to have warm words and to keep talking about how important it is to have measures to deal with financial exclusion and vulnerable people. We have to will the means to do that.
There was a recent Westminster Hall debate on basic bank accounts, in the course of which it became clear that, for all the espousal of financial inclusion, there is a growing inability to will the means that are needed. The measure before us is one of them, and there are several more. In my earlier intervention I referred to the growth fund. Every Member wants there to be more sources of affordable credit. We are all great supporters of credit unions-indeed, I am a member of my local credit union-and we want their lending to be expanded.
One practical recent measure that led to that expansion was the growth fund. As a result of it, lending by credit unions and other community-based financial institutions was able to expand greatly. That will end in March this year, however. Some people might say, "Well, that's the date your Government set for it to end." I must say yet again, however, that had my party been re-elected last May, I would have been pressing them to extend the growth fund because it has built up many credit unions and other community-based financial institutions to provide an alternative for people. Without that lending capacity however, many such organisations will have to reduce their lending activities substantially; that is what they are telling me. The alternatives that people often say should be in place before we legislate will therefore not be in place if we do not go on expanding through the growth fund.
I was also concerned to hear that the financial inclusion taskforce within the Treasury, which the previous Government set up, is, in effect, being wound up. Several of the people who were working in this field have already been redeployed to other activities.
If we want to put our money where our mouth is, we need to put in the financial resource and the legislation. Even at this stage in the debate, I hope that Members are willing to decide to vote for the motion and not support the amendment, and to put pressure on the Government to continue the work that the previous Government did in a variety of fields. This is part of the big jigsaw puzzle that we have to address when dealing with financial inclusion and the problems some people face. We need all the following measures: we need credit unions, but we need the resource to go with them; and we also need community-based financial institutions and other sorts of credit unions.
There is one further small provision that the Minister might want to consider: reforming and extending community investment tax relief. Many community development financial institutions-community-based lending institutions that lend to individuals and businesses-would like that, and I hope that the Government are prepared to consider this further measure that is part of the wider jigsaw puzzle.
I commend the motion, and I hope the consensus that has been apparent will translate into support for it.
I congratulate my hon. Friends the Members for Walthamstow (Stella Creasy) and for Darlington (Mrs Chapman) on proposing today's motion. I especially congratulate them on recognising the complexity of the problem and on presenting us with a practical and realistic proposal for cracking down on the excessive fees and costs charged by doorstep lenders. The Opposition Front-Bench team is pleased to support the motion.
I also pay tribute to my hon. Friend the Member for Walthamstow for using parliamentary procedures and organised campaigning so effectively to highlight this problem and for seeking to find a workable solution. It is a tribute to her that her work has inspired so many other hon. Members to prioritise the issue, to do their own research and to try to think through workable ways of cracking down on extortionate charges. She is fully aware of the reasons why a single cap on interest rates-perhaps an arbitrary figure plucked out of the air-would not be the solution and could have unintended consequences.
My hon. Friend has understood the evolution of our thinking, from first having reviews when we were in government, to the position in our manifesto in which we pledged to clamp down on such practices. She has used her own research and has come up with a practical solution, which she has explained in her speech and the motion, which comprises a range of powers that the regulator needs to tackle the problem. As my hon. Friend Mr Umunna has said, we are asking the Government to consider the matter now precisely because they have been looking at regulation. Those are the reasons why it is particularly appropriate that the motion should have been brought forward today, with its practical solution to the problem.
Many of those on low incomes have no reserves to help them get through difficult times. They struggle to make ends meet and pay their bills. Any loss of income or small change in circumstance can lead to their having to choose between putting the heating on and putting food on the table, driving them into the hands of those offering payday loans. It is therefore not surprising that there has been a particularly rapid increase in the payday loan market over the past few years. In 2009, the payday lending industry was worth more than £1.2 billion, more than three and a half times what it was worth in 2006. There are now some 1.2 million people using the payday lending market and more than 3 million people using the home credit market. The problem has been further exacerbated in the past couple of years by the tightening up among mainstream lenders. People have found their credit limits from mainstream lenders suddenly curtailed, and they have been forced to look elsewhere, thereby swelling the numbers of those relying on high-cost doorstep borrowing or home credit firms.
Those on low incomes often have the least choice. Those with the lowest incomes often end up paying the highest prices for goods and services. They often do not have the spare cash to bulk-buy or take advantage of special offers; nor do they have the credit ratings to walk into high street stores and use a credit card. Many on low incomes do not have access to the internet, and even if they do, many do not have the credit cards to enable them to go internet shopping. It is the lack of choice that makes people particularly vulnerable. They have no option but to turn to the doorstep lenders and home credit companies, which charge exorbitant rates on their cash loans or hire purchase agreements. The lack of choice or competition in the market makes it particularly important that the Government should step in and regulate.
There is a parallel between this debate and what we did in government to tackle the scandal of the high unit cost of electricity charged to those who pay using prepayment tokens. When we were in government, my right hon. Friend Edward Miliband, the then Secretary of State for Energy and Climate Change, put considerable pressure on the regulator Ofgem to tackle the energy companies with sustained pressure itself. The energy companies eventually reduced the unit costs paid by those using prepayment meters-reduced, yes; but admittedly not reduced to the very cheapest rates, which are paid by those who can shop around and choose to pay by direct debit, in recognition of the fact that, as the energy companies pointed out, there is a higher cost involved in the administration of prepayment meters. Nevertheless, there was a recognition that the charges had been too high, and they were reduced.
The motion that we are debating today asks the Government to intervene in a similar way in the high-cost doorstep lending market. By introducing new regulatory powers, a regulator can work with the industry, taking account of the legitimate extra costs of collecting frequent small payments in person, and can work to achieve realistic reductions in exorbitant interest rates and charges. This is not about imposing an arbitrary interest rate cap that would drive companies to slap on other charges; nor is it about driving legal companies out of the doorstep-loan markets, leaving vulnerable customers prey to the illegal loan sharks. This is about working with the industry to reduce the overall cost that the customer has to pay for payday loans and home credit.
As Mr Bacon has so forcefully reminded us, regulators need teeth, and it helps if they also have strong backing. That is precisely why it is so important to have the stronger wording of the motion proposed by my hon. Friend the Member for Walthamstow, which refers to
"regulatory powers that put in place a range of caps,"
rather than the weaker wording suggested by the amendment. Our experience with prepayment meters was that it took strong leadership and firm pressure to effect the necessary changes. I strongly suspect that tackling the excessive charges of doorstep lenders and home credit companies will also require strong powers and political will.
As the motion says, it is important to increase access to affordable credit. When we were in government, we took concerted action to promote access to alternative sources of credit through the growth fund. That increased the availability of affordable personal loans by third sector not-for-profit lenders such as credit unions and community development finance institutions. Between 2006 and 2010, 350,188 loans were approved and payments amounting to £152 million were made. I hope the Minister will tell us whether the Government plan to continue that provision beyond April 2011.
Let me return to the issue of regulation. As my hon. Friend the Member for Streatham pointed out, this is a particularly appropriate time for the Government to introduce regulatory powers. It is bad enough that low-income communities are bearing the brunt of taxation changes and the Government's savage cuts in entitlements and public services. The very least that the Government could do is accept our modest proposal, and protect people from excessive charges for doorstep loans.
What we are asking today is for the Government not to pass by on the other side of the road-not to ignore those who are being ruthlessly exploited-but to take some simple, straightforward steps to clamp down on this callous exploitation.
I congratulate Stella Creasy on securing a debate on this important subject, on which there is so much common ground. I believe that there is a consensus across the House that we need to protect vulnerable people, especially those on low incomes, from irresponsible and, worst of all, illegal lenders.
There is, of course, some debate about how we should protect consumers from exploitation. Although today's discussion has rightly ranged widely, the motion and many contributions have focused on one particular option for credit regulation, namely a cap on the total cost of credit. I shall deal with that specific point in some detail later, but in order to do justice to a number of the excellent speeches that we have heard, I shall begin by responding to some of the many points that have been made.
One of the huge benefits of a debate such as this is that the House has a chance to contribute actively to the Government's ongoing work and, in particular, to our two ongoing consultations. However the House votes this afternoon-and I strongly urge all Members to support the amendment tabled by my hon. Friend Mr Walker-I assure Members that we are in listening mode. We have not reached our final conclusions, not least because one consultation has not closed and we have yet to analyse all the submissions made in response to the call for evidence. Let me, however, tell the House what the Government have been and are still doing, and how we have learnt from the previous Government's attempts. Of course, they rejected proposals for caps on consumer credit not once, not twice, but three times.
The previous Government were not shy or inactive in this regard, and some of their policies were good. We are continuing those policies and hope to improve on them. Let me give two examples. The first relates to illegal moneylenders-the loan sharks who will use intimidation and even violence to collect their money. They are criminals, and they need to be identified, caught, charged and imprisoned. The previous Government set up illegal moneylending teams whose job was to help to enforce the law in communities throughout the country. They are specialist teams consisting of trading standards officers and seconded police officers who are taking the fight to the loan sharks. Despite the cuts that we are having to make, we have maintained spending in that area, and we hope to make the money go further and work harder against those criminal loan sharks by reorganising the teams and following the recommendations of an independent study.
My second example relates to the availability of more affordable credit. We are actively trying to make some of these high-cost credit markets more competitive so that people on low incomes can have more choice and credit can be affordable and accessible. I have made no secret of my support for credit unions and the building of closer links between them and the Post Office, enabling more people to take advantage of their services. I am pleased that we have seen real progress in that regard, and that many credit union customers who sign up for the service can now pay in and withdraw money at their local post offices. I am working with others across Government to establish where and how we can go further. I hope that we shall be able to proceed with new measures, but we must work out the details.
We are doing other things, and other things are happening. We have seen the vital development of better education about credit and about finance more widely. The Consumer Financial Education Body is funded in full by a Financial Services Authority levy on the financial services industry. It will provide Britain's first national financial advice service, which will offer a free, impartial financial education to all along with an annual financial health check. That will enable people to manage their financial affairs better. Clearly we can and should do more, and I particularly welcome the setting up of the all-party group on financial education for young people by my hon. Friend Justin Tomlinson.
In addition, this very week, the consumer credit directive came into force, which introduces new and powerful regulations for consumers that will have far-reaching consequences for the high-cost credit market. I know that not everyone in the House shares the same view on Europe and European legislation, but I am sure that we can all agree that the new requirements on lenders to undertake a creditworthiness assessment before any loan is made and the new 14-day cooling-off period for consumers, allowing them to withdraw from any credit agreement, are welcome. Under the directive, pre-contractual information for the consumer will now have to show the total cost of credit and how much has to be paid back. I believe that the new regulations and their changes will make a real difference.
From that list it should be clear that the Government have been active and lots of new measures have just been implemented, but I want to go further. That is why, jointly with the Treasury, my Department has launched two reviews that will be fundamental to the regulation of consumer credit in future. First, the Government are reviewing the framework for financial services regulation, including the two current consumer credit regulators, the Office of Fair Trading and the Financial Services Authority. The review is an opportunity for us to look at how best to regulate consumer credit and who should have responsibility for that. We are consulting now and any new regulator may well end up with greater powers to intervene in the consumer credit market to introduce the powers that many here today are seeking.
The FSA has already made its thoughts known on this subject in a discussion paper about "Product Intervention". Chapter 6 deals with product intervention options for the new regulator and mentions price capping. Paragraph 6.40 states:
"Price capping is the most radical price intervention and would involve us making difficult judgements about the appropriate price we regard as consistent with good consumer outcomes. However, we consider that it is an option that should remain open."
The Government have also launched a review of consumer credit and personal insolvency, which takes an end-to-end view from the decision to borrow to how we support people in difficult circumstances and help them to resolve their debt. It looks, for example, at the advertising of credit, which has been mentioned by several hon. Members.
I cannot give any undertakings today about what will emerge as a result of those reviews, because we are still considering the evidence. Nothing has been decided and it would be irresponsible of me to stand here today pre-empting their results, but we are not afraid of taking action where the evidence justifies doing so. We will not hesitate to act where there is evidence of detriment to consumers or exploitation of them. The Government want poor households to be able to strike a better balance between how they save, insure and access credit, and we are looking at a lot of ideas.
For example, we believe that there are great gains to be had from collective purchasing. We are working with the insurance industry and social landlords to develop and promote affordable home contents insurance for social tenants. If those products succeed, they will enable many more households to claim back the cost of household emergencies, rather than relying on high-cost credit to replace essential goods if they are burgled or a high-cost item, such as a washing machine, if it breaks down. We hope that the trials of such products will commence in March or April this year. Such measures will not be an immediate solution, but they could help those on low incomes even more than caps on high-cost credit.
I come to the one specific issue that the hon. Member for Walthamstow wishes us to focus on: a cap on total credit. The motion calls on the Government to consider introducing a cap on the total cost that lenders can charge for credit. At first glance, that appears sensible. Yet, despite what she said, the evidence base for her new approach is limited, to say the very least. What seems sensible at first glance could have huge unintended consequences for those we are trying to help. Without a proper assessment of the evidence it would be rash and frankly negligent to rush into this proposal. We know that there have been studies carried out that show that an interest rate cap could have very detrimental impacts on the vulnerable-that was accepted by the previous Government. This year's OFT review of the high-cost credit market ruled out not just interest rate caps, but any price controls in the market. The EU review that the hon. Lady prayed in aid is ambiguous on this, to say the least.
A forthcoming study, which has not yet been published, has been undertaken by Policis. It has had the advantage of collaborating with Claire Whyley, chair of the credit sub-group of the Financial Inclusion Taskforce and chair of the FSA consumer panel, and Paul Jones, who is the leading expert on social lending. The study concludes by saying that if a cap were to be constructed to take in the total cost of credit, including penalty charges and similar, more of those on low incomes would be likely to find access to mainstream options restricted or curtailed altogether. That is the only evidence I have seen that deals with this issue in detail. We have to assess these issues, because the hon. Lady's proposals do not do what she claims. We need to gather evidence and properly assess it, and I reassure the House that we will do that. When we have analysed the evidence and got the results of consultations, we will report back to the House. We will not be afraid of taking tough measures if they are required.
I want to put on record my thanks to all Members who have taken part in today's debate. The fact that 21 Back Benchers have come to speak and that there has been broad agreement suggests that this issue cannot be ignored any longer. I note the exceptions of the hon. Members for Solihull (Lorely Burt) and for Eastbourne (Stephen Lloyd) and their concerns. They might want to reflect on their ability to add heat to a subject that requires light. That is the challenge we face today.
I am deeply disappointed by the Minister's approach to the debate. He offers so much and at the last minute takes it away. To talk about the discussion on total cost credit and then quote from an industry-led report that has been funded and supported in that way is a shame. Notwithstanding that, I hope he will accept that the broad support from Members today shows that there is agreement that there is a problem that needs to be addressed, and that the measures brought forward so far have not been satisfactory. The issue, then, is how we should proceed.
I had hoped to convince the Minister today that the Opposition's proposals, to which the motion speaks, are rooted in evidence-recent evidence that he has previously put forward to me to support his case. I note that he has changed his mind now, but perhaps he will change it again. The big truth at the heart of this issue is that the longer the Government linger, the more problems will deepen. I go back to the point that nearly half of households, as a direct result of the economic conditions we are in, are struggling to make ends meet, and that 10% of them are borrowing from the people we have been discussing. The longer we fail to act, the more these rates will cripple families across the country, so I urge him not to reject the proposals simply because of an ideological objection to regulation. Regulation done well has been supported by Hayek.
I also urge the Government not to reject the proposal simply because it comes from the Opposition. I say to the Minister: "You may have used your party to delay progress to date, but you will not stop the pressure from the people of this country for something to happen. That has been very clear today. You have left your own Back Benchers uncomfortable by forcing prevarication, but please do not leave that wound to fester. Work with all of us who would support and encourage a form of capping. We will not let you throw these proposals out and we will do what we can to continue this debate and keep this issue alive. We will hold you to account because our constituents demand and need nothing less. If only the Government stand in the way of progress, I urge them to reconsider. Please support the motion as it is and do not amend it. Please show clear leadership and send a clear signal to our constituents that you are not in the pocket of the legal loan shark industry but that you stand as we do with the poorest consumers in this country, seeking action now." I tell the Minister honestly that if he does that and makes a clear commitment to doing that today, we will applaud him; if he does not, we will never forgive and we will never forget.
Question accordingly agreed to.
Main Question, as amended, put and agreed to.
That this House notes with alarm recent evidence showing a fourfold increase in the use of payday lending since the beginning of the recession and that high cost credit lenders advanced approximately £7.5 billion to low and middle income consumers in 2008 alone; recognises the problems of financial exclusion, lack of financial and debt management education, lack of price competitiveness in the unsecured lending market and the near monopoly positions of many large lenders which contribute to the high costs of borrowing; considers that without action these factors could worsen family debt, poverty and financial difficulties to the detriment of the economic recovery; therefore calls upon the Government to introduce measures to increase access to affordable credit; urges regulators to consider putting in place a range of caps on prices in areas of the market in unsecured lending which are non price-competitive, likely to cause detriment to consumers or where there is evidence of irresponsible practice; and believes that such caps should take account of the desirability of maintaining access to affordable and responsible credit, the likely impact on the supply of credit and the cost of enforcement, that they should be regularly reviewed and that they should use the total cost of credit, calculated on a yearly basis, to ensure that lender avoidance and distortions in price are prevented.