I beg to move,
That the House has considered high-cost credit.
I thank the Backbench Business Committee for granting us time for this afternoon’s debate, which takes me back to my maiden speech in this House, just over three years ago, in which I raised this very issue. My reason was simple: I grew up in the south Wales valleys, where doorstep lenders were as much a feature of the towns and villages as the coal slagheaps from the mining industry. Although the valleys have changed and are now green and beautiful again, one thing has not changed—the loan shark, whether legal or illegal, is still a regular visitor to the terraced streets of my youth.
Despite heavy campaigning by Members on both sides of the House, I still have constituents trapped in the appalling cycle of debt. Indeed, in March 2012 I tabled a ten-minute rule Bill calling for the introduction of legislation to tackle the problem of financial exclusion. Based on the US Community Reinvestment Act, it called on banks to work with community lenders in areas where the banks have only a limited presence. It was my hope that such a development in fair finance would that ensure financial exclusion did not continue to push families into high-cost credit.
My Bill was formulated against a backdrop of the increasing market for short-term loans. Just recently, Wonga announced that profits after tax had risen by 36% to £62.5 million in 2012. Whether we like it or not, people will always need money for an emergency—such as a car repair or a new washing machine—and with many of the mainstream lenders not even in the market it is the short-term loan companies to which people will turn. To put it simply, we are not going to abolish the sector. If we do that, we will do nothing but push money lending underground. Families in communities such as mine might be tempted to borrow from people who might offer unattainable terms and conditions and many of those lenders might even resort to criminal behaviour if money is not repaid to their satisfaction. That is not what anyone would want to see.
That does not mean there is no room for improvement in the present market. At present, payday loan companies are expanding into new markets and target customers who previously would have borrowed money from friends and relatives. Last month, a study by the housing charity Shelter Cymru and the citizens advice bureaux in Wales warned that nearly half of adults in my native Wales—some 48%—struggle to afford rent or mortgage payments.
One in six mortgage or rent payers in Wales does not have any financial safety net such as insurance or savings and 12% “struggle constantly” to make ends meet. Citizens Advice in Wales says that it has seen a 555% increase in the number of people asking for advice about payday loans. Sadly, whether we like it or not, unlike the future of households across Wales, which have experienced the second biggest drop in earnings in the UK since 2010, the future of loan sharks and payday lenders is more secure than ever.
Despite the Archbishop of Canterbury’s announcement of plans to use the weight of the Church to boost credit unions so that they provide a real alternative, the Church is up against a considerable commercial opponent. In the past 12 months, the amount that the biggest five payday lenders spent on advertising rose by 26% to an incredible £36.3 million. My hon. Friend Paul Blomfield pointed out while introducing his private Member’s Bill in July that the payday loan sector was worth just £100 million in 2004 and is now, less than 10 years later, estimated to be worth more than £2.2 billion.
Since 2011, the average amount owed on payday loans has increased by £400 to £1,657. People now owe more than a whole month’s income on payday loans. Over the past few years, there has been a very aggressive marketing strategy by these companies. The more payday loans are advertised, the more people will see them as a mainstream solution and will not look to other more cost-effective ways to borrow or make ends meet.
My hon. Friend makes the strong point that advertising and new technology are promoting those companies. One way we can tackle this is by making credit unions more visible on the high street and we have been trying to do that in Telford. We need to develop strategies to give credit unions a higher profile and make them more mainstream on the high streets so that more people will use them.
I agree entirely with my hon. Friend. As I said before, we are faced with an absolute juggernaut of advertising. A credit union might promote itself to 70 people whereas a payday loan company can promote itself to 7 million if it puts its advert on television at the right time. As I develop my argument, I shall suggest strategies to take on the goliath that is the payday lenders.
I wholeheartedly congratulate the hon. Gentleman on securing this important debate. Does he agree that just as we wish to expand and enhance credit unions we should also consider local community banks? They are trusted providers backed by the local community, and profits go back to the community after a limited time. They have strong local representation and an ability to lend at a better rate than even credit unions.
I agree wholeheartedly. If the hon. Gentleman proposed that, he might gain cross-party support. As my hon. Friend David Wright said, payday lenders have been extremely innovative in using advertising and the internet to reach people and we, as supporters of the credit union movement and community banks, must take a leaf out of their book, become innovative and consider other ways to reach the vulnerable people who see short-term lenders as the only solution to their problems.
After I was granted the debate, a constituent wrote to me about the problems he has faced with short-term lenders. When we met, he told me how payday loan companies added a range of administrative charges, interest and fees on top of initial loans. He borrowed in an attempt to pay back some of the money, but he fell further into debt as he took out loan after loan. He borrowed £400 from Wonga, but now must pay back £739. If he cannot afford the initial £400, how is he to afford £739? Where is the logic in that? It baffles me that payday loan companies seem to think that if someone is unable to pay back a loan, the answer is to take out another one. With Wonga breathing down his neck, he was forced to borrow £100 from QuickQuid, but now he owes that company £201.
My constituent told me that at no stage when taking out the initial loan was he asked about his income or expenditure, which bears out the findings of the Office of Fair Trading’s compliance review that only six of the largest 50 firms in the market made any attempt whatsoever to carry out proper income checks. That is simply not good enough. Had I not carried out such checks when I worked at Lloyds TSB, I would have faced disciplinary action—and rightly so—but such companies continue to follow those discredited practices.
The Office of Fair Trading also found that 75% of payday lenders renewed loans without checking whether they would be affordable, despite the fact that rolling over loans is a strong indicator that the borrower cannot pay back the money. It is especially worrying that each time someone fails to pay back a loan and takes out another one, they are committed to paying not only the interest on the initial loan, but admin fees and hidden charges on the new one.
My constituent was the victim of the culture of multiple loans, but he is not the only one. Some 30% of the people who contact StepChange Debt Charity for urgent help hold four or more loans. Parts of the industry are getting people into a vicious cycle of borrowing from one creditor to pay another. UK borrowers can end up paying back 74% of their initial loan in charges and administration fees on top of the money they borrowed. That figure is capped at 7% in Canada, meaning that the maximum payable in default interest and charges for a £300 loan is just £25. That practice needs further study in the UK. The consumer group Which? has called on the Financial Conduct Authority to replicate existing rules for mortgages and other credit products to help borrowers struggling with repayments. There is already a cap on default charges and fees in the credit card and mortgage markets, and we must consider extending such a cap to credit consumers.
I have further examples of how payday loans mean just piling on the debt. A payday loan company issued a man with a claim for £1,830 in penalty charges that were incurred for defaults on a loan of just £120. Each time the company went to his bank and was unsuccessful in recovering the money, it cost him £5, and the company made 330 attempts to get back the money. On top of that, the lenders added £178 of interest. It would be farcical if it was not true, but for many people in communities such as Islwyn, that is a sad fact of life each and every day. A Which? survey found that one in five users of payday loans were hit by unexpected charges and that, in the past 12 months, more than half of payday loan users had incurred charges because of missed or bounced payments.
We need to accept that borrowing from a payday lender is not like borrowing from a bank. When I worked in a bank, I would meet someone to discuss their needs. We would look at their income and expenditure, and talk about the affordability of loan and why they needed it, but even if the customer credit scored for a loan, I would still have no hesitation in saying no. However, with payday loans, because of the internet and fast access through iPhone technology, there is no one at the end of the line to say no, and what worries is that a person taking out such a loan may have the money in their bank account within 10 minutes.
For many, payday loans are a last resort. Many of the people I talk to have basic bank accounts that do not credit score for financial products. They have never got into mainstream banking, principally because they have seldom come across a bank in their lives. They see walking into a bank as a scary experience, so when they find themselves in dire straits and see the friendly advertising of Maud and Errol and the granny puppets from Wonga, or Amigo Loans, they think that there is a friendly place to go and they pick up the phone—they find it so easy. I therefore welcome the Government’s actions to investigate the effects of advertising and the year-long study of the market. I also look forward to the Financial Conduct Authority formulating a strategy in the autumn. However, I and others who have campaigned on the matter find the speed of implementing such measures frustrating.
As those processes are going on, short-term loan companies are devoting huge budgets to advertising, which I talked about in response to the intervention made by my hon. Friend the Member for Telford. The many daytime adverts predominantly reach the old, the young and the unemployed. Much as I welcomed the Government’s announcement in June 2012 that the Department for Work and Pensions would proceed with a credit union expansion project and make up to £38 million available to credit unions until March 2015, that is just a drop in the ocean.
Will my hon. Friend join me in congratulating Bolton Wanderers on deciding, as a result of pressure, not to sign a deal with QuickQuid? Does he agree that we need to act on advertising not only on the television, but on our football pitches and throughout our communities?
I join my hon. Friend in congratulating Bolton Wanderers. The first draft of my speech included a reference to the team turning down a sponsorship deal with QuickQuid, but I took it out for reasons of time. She raises an important point. The premiership is sold throughout the world. Anyone who watches “Match of the Day” or Sky Sports will see managers and players being interviewed after a match against the backdrop of their sponsors. There is nothing wrong with that, but seeing the names of loan companies such as QuickQuid or Wonga next to those of reputable companies such as Barclays sends the powerful message to the chap in the pub who has watched the game that those loan companies have the same legitimacy as blue-chip companies that follow the rules, work in a well-regulated market and look after their customers.
I have noticed the huge problem that payday and short-term loan lenders have recognised the absolute power of advertising. I do not say this often as an Opposition Member, but I feel sorry for the Government, because they are in a David and Goliath situation. They are investing £38 million over three years in credit unions, for which they should be applauded, yet the big five payday lenders have just spent £36.3 million on advertising in one year, and that will only continue.
As the treasurer of the all-party group on credit unions, a Co-operative Member of Parliament and a member of the Islwyn community credit union, I think that credit unions are the way forward. They offer vulnerable people with few safe options an alternative to get cash when they need it most. They are the remedy to predatory loan sharks and high-interest lenders. Aside from the more regulated industry that I would like to see, the alternative to high-cost credit is a financial services sector that contains a wider array of ethical and enlightened products and services.
I entirely agree with the tenets of the hon. Gentleman’s speech and thank him for securing the debate. My constituents say that while credit unions are all very well, a person needs to be saving with one before it will lend to them. My experience and that of my constituents is that problems often arise when people have not been able to save in the first place, meaning that credit unions are unable to lend to them under their rules, so could we consider dealing with that?
As I have said, we need an innovative approach because the payday lenders have become huge and they are a first-stop shop for anyone who needs money. We need to examine how credit unions are funded and to let people borrow through the Post Office.
In addition, yesterday I spoke to the UK Cards Association and asked whether there was a way to get credit cards to impose a small limit and micro-manage them in some way. It was very receptive to the idea. My argument was that then the big banks could be involved and they could use their own account management techniques. It would be a win-win for everybody in many respects. A decent interest rate could be charged on a credit card and the banks could then manage people who need short-term loans into mainstream banking. That is the way forward. I have every sympathy for people who need this money, but the way forward is to find a way with the big banks to manage people into mainstream banking.
I welcome much of what is being said, but I have a word of caution. An unauthorised overdraft in a mainstream bank is equivalent to 80,000% APR. We may not want to signpost people towards that.
Order. Before Chris Evans concludes his remarks, I gently remind him that the recommended period for opening a debate is 10 to 15 minutes and he has now had 19 minutes. I appreciate that he has taken interventions.
I apologise Madam Deputy Speaker. I am coming to an end, but I will just deal with the hon. Gentleman’s point. The significant word is “unauthorised”. I know that the hon. Gentleman has done a lot of good work on financial education, which is the way forward.
An unauthorised overdraft is a failure to manage the account properly, so we need to teach people how to do that. I think that he would agree with that.
Credit unions rightly receive support from both sides of the House, but for them to flourish they need the support and help of Government. If that means regulating the high-cost credit industry while at the same time restricting its advertising budgets, as we have done in other industries, so be it.
Once again, I thank the Backbench Business Committee for granting me time for this debate. I know how important it is to Members from both sides of the House and I look forward to hearing colleagues’ contributions.
It is a great pleasure to follow Chris Evans, who has given an excellent introduction to the debate. I pay tribute to colleagues on both sides of the House who have done so much to shine a light on some of the more irresponsible practices that have sadly become all too commonplace in this industry.
My remarks today will focus on what I think we would all agree has been a regulatory failure in this section of the market, and I want to refer to a Public Accounts Committee report which some hon. Members present today were involved in producing. We looked at the regulation of consumer credit earlier this year, and we reached the firm conclusion that the Office of Fair Trading had been found wanting in getting to grips with tackling some of the more unpleasant practices of high-cost lenders. The message that I would like Parliament to send out today is that we are now at a crossroads with the regulation of this sector. The Financial Conduct Authority is preparing to take responsibility for it from the OFT, and bearing in mind that the OFT has been so slow in getting to grips with this, I want us to send a clear signal that we all expect the FCA fully to use the regulatory tools at its disposal really to give the sector challenge, and to be fleet of foot in intervening where we see poor practice.
The OFT has had a number of tools that it has failed to use, and there are clear breaches of rules. There are powers under the unfair contract terms regulations that could easily have been used to tackle some of the more unacceptable levels of fees and penalties for default, which are probably the most acute cause of additional cost to anyone who takes out these loans. Equally, every credit provider is required to follow responsible lending rules. As the hon. Member for Islwyn outlined in some of his examples, the advancing of credit to people in such situations was far from responsible lending. The OFT has the power to withdraw credit licences, but it has failed to use it, resulting in irresponsible lenders and unscrupulous companies exploiting the vulnerable and laughing all the way to huge profits. That is not acceptable, so Parliament needs to give a clear signal about what we expect the FCA to do in future.
Much of the debate in the past has focused on how we control some of the costs. As I have said, I believe that the unfair contract terms regulations give regulators the power to intervene to control some of them. However, we have a real problem with the consumer credit directive, which has prescriptive rules about how firms advertise costs of credit with reference to APRs. The reality is that APRs are meaningless in this sector, because we are talking about loans that are advanced for a short period. The real issues are how much the credit will cost and the transparency of additional charges. I have seen one example of a payday lender who charged £25 for each reminder letter sent when a customer defaulted. That would not be caught by any regulation regarding APRs. It is an unfair contract term and a clear exploitation. The powers exist to control such activities. The PAC stated explicitly that we wanted the misleading APR rules to be ditched and replaced with clear guidance on and responsibility for publishing the cost of credit in amounts repayable in cash.
I also associate myself with the hon. Gentleman’s comments on credit unions. As we all readily understand, the only reason customers access credit in this way is because they cannot get it from anywhere else. Unfortunately, mainstream lenders are not interested in providing small loans for short periods. However, we have to be careful about prescribing additional regulation for the sector, because if people cannot get credit from it they will go elsewhere and that will send them into the hands of some very unscrupulous people.
Will the hon. Lady give her evidence for that assertion? It is a myth that many of the lenders propagate. Where does her evidence come from to show that if caps were introduced, people would go elsewhere?
The reality is that people will follow regulation if it is economical to do so, otherwise they will go elsewhere. My evidence is that people are accessing these loans in the first place. We have a failure in the market to extend affordable credit, and that is the issue that we are trying to tackle today. I remind the hon. Lady of what was said earlier. The rules and the tools are already in place, but the regulator has failed to use them. This is not about more burdensome regulation; it is about regulators being prepared to use their teeth and the tools that they have to do the job.
Further to that intervention, the hon. Lady may remember that the PAC heard evidence from Fair Finance, which explained that if the interest rate was capped, as a social enterprise it would have to lend a higher amount to individuals, so risking greater indebtedness. So we have to get the balance right to make sure that people without a credit record get the loan that they need but are not over-indebted.
The hon. Lady is quite right. The cost of extending small amounts of credit is higher, pound for pound. We have to be sufficiently grown-up to realise that when we are considering regulation. I have not yet come across one consumer organisation that is in favour of caps. They all recognise that there is a market failure and a need to clean up the industry, but caps are not their preferred tool. However, there are some measures that they would like to see. The first is a ban on excessive default fees and charges. Again, this is not the preserve of the payday lenders. Unauthorised overdraft users also experience punitive charges, which again illustrates that these are issues that extend throughout the credit market, which the regulators need to grips with. In fact, Which? has found that unauthorised overdraft users suffer more from excessive charges than payday loan users: more than 20% of overdraft users are surprised by the level of charges they face. Again, we need to look at using the regulatory tools available. The FCA’s requirement will be that any institution has to treat its customers fairly, and that would extend to not having excessive charges. The regulatory power is there; it just needs to have the guts to use it.
Secondly, the FCA must give a clear signal that it really will implement the rules on irresponsible lending. We have seen that 48% of payday loan users and 44% of unauthorised overdraft users have taken out credit that it turned out they could not afford. It is clearly irresponsible lending for any firm to continue extending credit with roll-over loans or to let an overdraft get ever worse. It must be clear to lenders that they will face penalties from the regulator if they continue to exploit vulnerable consumers.
We all need to think about what more we can do to support effective debt management and encourage people to take appropriate advice, because when people are that desperate the only place they can go is to those lenders. We need to make it much easier for them to access advice that will help them, so that they do not get into a worse situation.
There also needs to be a clear sign to lenders that they must give clearer information on what the consequences will be if people default. We know that many consumers are over-optimistic about their ability to pay off credit on time and in full, so clear warnings are needed about what the consequences will be if they do not. Those warnings need to be given in a simple and clear way, such as by stating the amount of cash it will cost per £100 if the loan is not paid on time, so that people really understand the deal they are getting into. Again, that is consistent with the Public Accounts Committee’s recommendation. Even mortgage statements, and indeed any credit, should come with clear health warnings explaining the consequences of missed payments. All costs must be transparent.
I believe that those measures would greatly strengthen the protections for consumers. That is what we really need to focus on today. I agree that we must look at what more we can do to support credit unions. I think that employers have a big role to play, because we know that many payday loan customers are in jobs. If employers can be encouraged to have relationships with their local credit union, that would be a good way of signposting people to more reputable lenders. We need to use the tools we already have for the job: tough rules on responsible lending, tough action on default charges and much more regulatory activism.
I am pleased to follow Jackie Doyle-Price, because I genuinely believe that there is now a clear divide between the political parties on how best to approach something that we all agree is a problem. I am pleased that Government Members are now talking about the problems payday lending causes and recognise that there is a problem with the market. Our disagreement is over how to deal with those problems and what the challenges are.
It will come as no surprise to the hon. Lady that my perspective on how to deal with the incentives in the market is very different from hers. In the time available, I want to try to explain why I think that tackling the incentives is so important and why the evidence on how caps work shows that they are the best answer, given the challenges we now face.
When I talk about those challenges, we must remember that in the past three years we have seen a tenfold increase in the number of people going to a citizens advice bureau for whom debt involving payday lending is a problem. When I started campaigning on this issue, along with many colleagues, we were looking at 1 million people borrowing in that way, but the figure is now 5 million, and 20 million people in this country are desperately worried about their debt picture, with the cost of living continuing to rise. We know that people need access to credit and that these loans are causing problems with gaining that access. I absolutely accept that not everybody who borrows from a payday lender gets into financial difficulty, but enough of them do, as a result of the terms of the loans and how the market works, that it is right for Parliament to intervene and to try to learn from the experience of other countries about what works in tackling that kind of credit.
In this industry people do not make money by lending at a high rate of return; volume is what matters. If lenders can lend to people in a way that makes them more likely to keep coming back to borrow more, because the following month they are a little short again, and the month after that, that is when they make their profit. Indeed, market analysts have pointed out that 50% of the revenues of those companies come from just a small number of their customer base, their repeat borrowers. Indeed, one company operating in the UK makes 23% of its profits from just 34,000 people. Who are those 34,000 people? They are the people who are constantly indebted because every month they have to borrow, because borrowing from those companies means that they are more likely to borrow the following month.
It is the spiralling principle that we have to tackle. When we look at that principle, we must ask what incentive it creates for the market and how the companies make their money. The OFT research shows something that many of us have been warning about: debt is positive in this industry. If a company can get people in a situation in which they have to keep rolling over their loans and borrowing from them, that is how they make their profit. That is why we are seeing Wonga making £1 million a month more in this country. It is not just Wonga; there are now four companies in the UK making over £100 million a year by working in that way, pushing people into debt, constantly extending their loans and pushing them with their marketing and advertising.
They know that because those people have borrowed from them once, they will probably need to borrow from them again, because that is the way in which the loans are constructed.
Some people borrow £300 but end up owing £811 in interest alone by the end of the year because they get caught in that spiral and because of the price of the credit. That means that the average payday lending customer, who earns £18,000 a year, would pay 6% of their entire annual income to pay off a £300 loan. It is little wonder that the OFT research shows that few of those companies are doing affordability checks, because affordability does not matter once they have people hooked. It means that they can always get some money from them.
Who are the people who take out payday loans? There is the nurse who came to see me. She borrowed £100 because she had a flat tyre. She ended up paying back £17,000. Thankfully her mother, because she got a redundancy settlement, was able to help her out. There is the father who came to see me. He has tried to tell Kwik Quid multiple times that his son has mental health issues and asked it to please to stop lending to him because he cannot afford to keep paying the bailiffs when they turn up at his doorstep. But of course they keep marketing, because once they have someone hooked they are more likely to have to keep coming back again and again.
Yes, all those practices break the self-regulatory codes that those companies have come up with, but that should tell us something. Just as it is no point asking turkeys to organise Christmas, it is no good asking companies to act themselves when they can make those kinds of profits by setting their own terms, hooking people in and continuing to charge them to set the limits. It makes no sense. That is why we have to learn from other countries where intervening on price is what has changed behaviour. Yet those countries still have payday lending industries and have not seen the exit that the companies threaten. They also have lower levels of illegal lending and personal debt.
Which countries am I talking about? There are multiple examples we can learn from when it comes to total cost capping—not interest rate capping, which I have never argued for, and which nobody else I know could credibly argue for. Whether we learn from Japan, the American States such as Indiana and Washington, from the Canadian states of British Columbia, Alberta and Manitoba, or from Australia, which has brought in new models, there are examples out there of how we could tackle the problems that people in our country are facing now with the cost of credit without removing their ability to get hold of credit.
Like my hon. Friend Chris Evans—I pay tribute to him for the work he has done in the all-party group to promote credit unions—I am a passionate defender of credit unions, but I have one in Walthamstow that is working as hard as it can against 18 of those credit companies on my high street, and that is before we even get to online lending. He is absolutely right: it is not a fair fight. That future credit market that works for everyone contains payday lenders, credit unions and social finance organisations.
I am glad that my hon. Friend has raised the issue of imbalance, because one of the answers that have frequently been given to me is that we need credit unions, but when volunteers are pitted against professionals that is very difficult. Would it not be helpful if far more financial support was given to credit unions to back that up?
I absolutely agree. In that future model of a finance system that will work for people struggling in a system in which the cost of living is continuing to rise, credit unions absolutely need to be supported to expand and grow. We know that they make up only about 6% of the total finance market in this country, but that is alongside a capping process.
The time for arguing about whether capping is the most effective intervention in this market is over, because the evidence from other nations is overwhelming. The question we should be asking ourselves is what we can learn from that for the UK, because the UK credit market is different. We have always been a nation of people who are much more willing to borrow, and so the terms and reference frames for any kind of cap must reflect that. That is where the Financial Conduct Authority could come in. That is why we fought so hard to give it the power to cap, and why I am pleading with the Government not to sit on their hands yet again on this issue.
The Financial Conduct Authority takes over in April next year. It is hampered by the fact that it needs to see the evidence about the UK credit market. It needs the credit reference data and other evidence from the companies, all of which claim that they are responsible lenders, yet about all of which we have heard stories of bad conduct. Indeed, Citizens Advice has shown that some are not even following 10 of the 12 good practice codes. If we are really serious about resolving the problems in this market, let us ask the FCA to do its job but also give it the data so that it can do so from the get-go in April. We should tell the companies to give it the data about their credit market, their profit ratios and how they are operating so that we can see how and where a cap would influence the UK credit market from April next year. Let us not kick this issue into the long grass yet again, because we now have a window of opportunity.
I am sure that many Members, like me, have people in their communities who have £10,000 or even £15,000-worth of unsecured personal debt hanging over their families. Asking those families to make long-term choices about education, social care and housing costs is a non-starter in that context. Those debts are racking up because of these kinds of practices. We could help them to manage the cost of living, to manage their borrowing and to make ends meet if we do our job today and get the regulator the information that it needs so that it can make the choice about what kind of cap would work in the UK. I think that the Japanese model is the way forward, because it has been done in practice along with the industry and consumer groups. Let us not have another three years of talking about how terrible these problems are and having to work in our communities with fantastic groups such as Movement for Change, the trade unions and the credit unions to try to deal with them when we could do something to avert them in the first place.
I hope that Ministers will today make the commitment to push the industry to give the information to the Financial Conduct Authority so that it can hit the ground running from April 2014 and finally bring in the cap that British consumers deserve.
It is a pleasure to follow the impassioned speech by Stella Creasy. I congratulate the Backbench Business Committee and Chris Evans on securing this very important debate. He took a sensible and non-partisan approach, and I appreciate that. There is cross-party consensus on the mood for taking action on payday lenders. Many Members from all parties came to this Chamber to support the private Member’s Bill on the subject introduced by Paul Blomfield—I would call him my hon. Friend—which I still hope can make some progress in forming Government policy.
Other Members have mentioned constituency cases. I have recently been particularly moved by a couple of cases in my own constituency. In one, someone had six separate loans from payday lenders, which clearly cannot be justified on the basis of seeing them through until payday, and they were being absolutely crippled by the interest. In another, a pensioner living on the basic pension got thousands of pounds in debt to payday lenders—a clear sign that some of these businesses are not looking at the affordability criteria. It is right that we should express our concern about such cases.
I am sorry that the Bill did not get voted on on Second Reading; a number of us were here to support it. In responding, the Minister expressed some understandable concerns on the part of the Government, which were shared by the previous Government, as regards not wanting to tie the hands of regulators. However, this House has been clear in its desire that regulators consider caps. It is very important that we give guidance to regulators about what we expect them to do. The Government are right to have launched investigations into the impact of advertising in the sector, but many of us are a little frustrated by the pace of action on that front and would like more to be done. The hon. Member for Islwyn made some good points about that.
We have to acknowledge that high-cost lending goes much wider than the payday loan industry. It also covers doorstep lenders and credit cards where they are not used appropriately; people can build up enormous amounts of high-cost debt through that sector. As the hon. Gentleman pointed out, there is also a large informal sector that we should be wary of encouraging or supporting. Many Members have noted that when banks generate overdraft charges they can raise the cost of borrowing to exceptionally high levels. His comment about moving people into mainstream banking was absolutely right, but we need to find tools to do that which protect them from such charges. In a recent discussion with Six Towns credit union, I was interested in a ring-fenced bank account that it was considering launching which would allow people, in effect, to set aside rent and energy bill payments and then only access money to spend on other things. Innovative financial products like that can help to move people towards mainstream finance.
We need to look at the overall level of debt. Any debt is high-cost if it is unaffordable. We still need to do more work on deleveraging the economy as a whole. Some progress has already been made on that front. It would be wrong for anyone to pretend that overall debt problems are greater now than they were in 2008, at the height of the boom. Credit Action produces monthly reports that show a significant decline. In July 2013, overall unsecured debt was £158 billion. That sounds an awful lot, but in 2008 it was £231 billion. In the 1980s, during the boom years under Lawson, household debt as a percentage of income rose from 70% to 80%. During the period when Mr Brown was Chancellor and Prime Minister, it rose from 80% to 170%. It is now falling back to 145%, but that is still too high. There is significant progress to be made on the level of debt as well as its quality.
On quality, we need tools to help people to access the better lenders and to ensure that customers are well informed on the real costs. As many Members have said, percentage rates do not tell the whole story: hidden costs and charges are important. We should pay tribute to the many financial advice services that work in the voluntary sector and the state sector to try to provide that information, including Citizens Advice, which we all know well in our constituencies. I am delighted that the Archbishop of Canterbury has entered this debate and offered support to the credit union movement and the voluntary sector in taking on the loan sharks. The Church can play a very important role in this, as Christians Against Poverty and many other religious groups already do.
The hon. Gentleman is making a very good speech. He talked about the percentage rates that are quoted. Does he agree that there should be much clearer ways of explaining to people what they will have to pay back, given that only about 10% of people understand percentages?
My hon. Friend is absolutely right. The work that my hon. Friend Justin Tomlinson has done on financial education will be crucial in getting people to understand the reality of what taking out a loan means and all the potential hidden costs, including the real cost of interest over whatever period it is charged, which is often far more directly important than levels of APR.
I had an interesting meeting about debt issues with members of Worcester’s Tolladine mission, which works with a number of local churches in one of the poorest areas of my constituency. They strongly supported the initiatives we have heard about to support credit unions and make them more accessible. They also made it absolutely clear that financial education will be key. It is a huge victory for my hon. Friend and his cross-party campaign to have secured financial education in the national curriculum, but that is only the start. We should not kid ourselves that writing something into the national curriculum will solve the problem. We will have to make sure that it is taught well and that a generation of teachers who came through the system when financial literacy was not a key component get the best opportunity to take it forward. There will be real challenges along the way in doing that.
The Government are doing a lot to support credit unions, as did the previous Government, but there is still much further to go to catch up with the levels of credit union engagement in other countries. Achieving that should be a constant challenge. Tragically, in Worcestershire we lost our local credit union, not necessarily because it did not have support but, unfortunately, due to bad lending. Capacity in credit unions is another vital aspect. I am very glad that Six Towns credit union, from elsewhere in the midlands, is now looking to move into our area.
On overall levels of debt, it is important that all Governments set out policies that help people not to get into debt, which the coalition Government are trying to do by making sure that people keep more of the money they earn and by raising the income tax threshold.
We need an incentive to support the growth of credit unions and responsible lenders. As I argued when we debated the Bill, I think it would be wrong for the Government directly to subsidise the credit union industry, because that would undermine its business model when we want such businesses to be able to stand on their own two feet. I suggest that we should go further than even the CAB argues in its briefing paper, which welcomes the extension of the Money Advice Service levy to payday lenders, and consider putting a higher levy on high-cost lenders. We should create an incentive for people to go to credit unions, and the higher levy would create a fund to support financial advice services, financial education and all the other good things that can help people. Yes, we should support the credit unions, but we should do so indirectly by giving them that competitive advantage.
There is a straightforward way to do that. The Government have set a cap on lending for credit unions. If we start the levy at the top of that cap and apply it to all lending over that amount, it could create a valuable revenue stream to support the free financial advice industry and the financial education industry. I urge the Government to look again at the provisions in the Bill and to examine what they can take from it, because it made some well-thought-through recommendations.
I welcome today’s debate and the consensual way in which it is being conducted. Parliament can do a lot on this issue and we should continue to concentrate on it.
It is indisputable that everybody needs access to credit, but it has always seemed perverse to me that the people who can least afford it pay the most and therefore need the most protection, because they are the most likely to be vulnerable to exaggerated claims and to be in need of a very quick solution to the immediate need for cash.
Payday loans are not always the illogical choice, despite the rate of interest. If someone’s washing machine breaks with two weeks to go until their payday and they know they will have an overtime payment in their next pay packet, it makes sense for them to shop around and buy another washer for £200 with a short-term loan—at a total cost of £267—than to go to BrightHouse, pay £600 for the same product, have a mandatory five-year guarantee for £400 and pay it back over five years at about 30% interest, which would result in a total cost of about £1,500. But—and it is a big but—although such loans provide a service, they cause detriment to tens of thousands of people each year and their providers have been, and still are, guilty of bad practices that cause much concern.
The Office of Fair Trading report highlighted bad practice by the vast majority of the industry and warned a number of them that either they clean up their act voluntarily or action would be taken, and they have been referred to the Competition Commission. I am pleased that some have had their licences revoked, but I hope that stricter enforcement will continue until the Financial Conduct Authority takes over in 2014. That transfer of responsibility gives us a golden opportunity to clean up the market and protect vulnerable consumers, but what are the payday lenders suggesting? A voluntary code of conduct devised by the industry.
There are two things wrong with that. First, it is voluntary. It is not even a requirement to be a member of a trade body. If consumers do not even research the cost of paying back a loan, they certainly do not research whether their lender is a member of a trade body—that is if they are aware of who the lender is, a point I will return to later. Secondly, the code has been devised by the industry and I am not totally convinced that it will put protection before profit. Statutory regulation and a constant review of the market are absolutely necessary.
I will outline the main issues that I think are causing problems. The market is ever changing and new practices emerge almost daily, so we need a flexible regulator. The first and most important issue—it is probably more important than headline-grabbing high interest rates—is the continuous payment authority. People who do not know what this is are not alone, because the banks, let alone the consumers, do not know, either. What it means is that the loan company can access someone’s bank account at any time, for any amount of money, as many times as it wishes. It is not just a blank cheque; it is a continuing, unending number of blank cheques. A constituent of mine had her account debited four times just before Christmas. Her account was cleared completely, leaving her with no money for Christmas, and she only became aware of this when she tried to pay for her Christmas food shopping and could not. It is clear in all the guidance that the customer should be able to cancel the CPA with either the lender or the bank, but Citizens Advice has numerous examples of the banks telling people that it cannot be cancelled by the customer because it is different from a standing order, and of the lender preventing people from cancelling.
Another practice I have recently become aware of—I am looking into this at the moment, because I heard about it only two days ago—is that of companies asking for a borrower’s online bank account details, including their PIN number and password, which makes the matter even more problematic. The lender can see when the individual is paid and when the rent and bills go out and take advantage of the gap, plunging the borrower into even more serious debt.
The other major problem with the continuous payment authority is that it reduces the incentive to perform a thorough and proper affordability check. After all, if a lender has unlimited access to someone’s bank account, why bother too much about checking whether they can afford it? The lender can dip into their bank account at any time, for any amount. Continuous payment authority has been described to me as the one thing that the payday lenders really want to keep. On that basis—as I used to say when disciplining my daughter—it is probably the one thing they should not have.
There is an issue with the industry writing its own code. Wonga has given 10 commitments and I have evidence—I do not have time to give it—that demonstrates how its code needs to be thoroughly examined. Even given the three extensions and the 60-day interest at 1% of the principal under commitments 6 and 7 of the code, the total repayment amount for a loan of £200 would be £588. That is a cause for concern.
Too many people delay the evil day when they have to sit down and face the difficult fact that they cannot afford their outgoings. As a result, they use payday lenders, because it is hard to admit to family or anyone that they cannot afford to keep going.
Is my hon. Friend, like me, worried about the evidence that a quarter of payday loans are taken out to pay off other forms of credit—not just other payday loans, but credit cards and other bills? People get caught in a trap and that becomes the only way for them to try to manage the situation.
I agree with my hon. Friend. Citizens Advice and StepChange say that in the last quarter the number of people with six or seven payday loans has gone up tenfold.
This situation cannot continue. There must be an obligation on payday lenders to signpost customers to free sources of debt advice if they fail the affordability check, which should be thorough, or miss a loan repayment. Of those who responded to the Citizens Advice survey who had repayment problems, only 18% felt that the lender dealt with them sympathetically and only 8% were told that they could get free debt advice.
This is an industry that contributes to the debt problems of individuals, as my hon. Friend said. It is welcome that it pays a levy and I do not disagree with the very interesting suggestion that they should pay more. It is vital that that additional contribution represents an increase in the funding of the Money Advice Service to assist the rising number of people seeking help with their debts.
It is only right that the industry pays the levy, which is a drop in the ocean compared with the amount it spends on advertising. My two-year-old grandson can recognise the Wonga grannies; I have taught him to boo at them every time they appear—and they appear so often between children’s programmes. This blatantly targets young families, who can easily be vulnerable to sudden income pressures. As is the case with gambling, there should be a sector-specific code that limits such broadcasts until after 9pm, and companies should be expressly prohibited from advertising during any programme likely to appeal to anyone under the age of 18.
I mentioned new products and I want to raise a note of caution about a company that my hon. Friend Chris Evans has mentioned, namely Amigo Loans. There are no credit checks for the borrower, but the friend might have to repay all the loan and end up with a damaged credit record. I wonder how many people remain friends after that happens. New products are emerging all the time—often they are old products with a new spin—so careful monitoring and transparency are key.
One of my constituents thought that they had borrowed money from Cash Lady, when that is actually a broker. We need to prevent more people from finding themselves in that situation. When my constituent wanted to contact the lender, they had great difficulty in finding out who it actually was.
The trade and exchange of consumer details has to be curbed. It cannot be right that when a friend of mine applied for a loan as a test, without completing the transaction, they had 24 unsolicited texts offering high-cost loans within the next 48 hours.
The cap on the total cost of credit has been ably and comprehensively covered by my hon. Friend Stella Creasy. I support the decision of my hon. Friend Paul Blomfield to choose this topic for his private Member’s Bill. The interest that his work is generating is helping to shine a light on the industry. Hopefully, that will assist the FCA in devising and enforcing a proportionate but firm regime to protect the consumer.
There are vast profits in this industry, as we have seen this week. Let us have commensurate protection.
As the chair of the all-party parliamentary group on financial education for young people, I welcome the debate secured by Chris Evans, who made an excellent speech. We have also heard pragmatic speeches from my hon. Friends the Members for Thurrock (Jackie Doyle-Price) and for Worcester (Mr Walker) and Yvonne Fovargue, and a characteristically passionate speech from Stella Creasy.
Payday lending is controversial. There are many who think that the Government should regulate it out of existence. Ultimately, we need to understand how the payday lending industry has evolved and how that has been led by consumers. It exists because people wanted access to small amounts of money for a short period of time, not long-term loans for short-term problems, as was offered by the traditional banking system. A Consumer Finance Association report showed that younger people like the convenience of online interaction and the quick decisions that payday lenders offer in contrast to the relatively formal bureaucracy of putting on a suit, going to a bank and justifying oneself. Banks have been unwilling to lend to people whom they consider to be high-risk.
All the speeches today will understandably press for action to protect the consumer—I will list a ream of things that should be done—but such action must be taken with consideration. Anything less and we will simply push vulnerable consumers into the hands of the black market and illegal loan sharks. We have to look at why the market is not working in the interests of consumers and seek to change that.
There is a growing consensus that many of our consumer markets do not always work in the interests of consumers. Be it Government interventions to regulate pricing in the energy industry or scandals such as payment protection insurance, there are signs everywhere that the consumer is often at the mercy of markets, rather than at the heart of them. As a recent working paper by my hon. Friend Laura Sandys commented:
“Good markets put consumers in the driving seat to make, shape or break products… Bad markets disguise, mislead or control consumer choice”.
That point is key, especially given the vulnerable nature of the consumers. In this industry more than most, consumers need to be in the driving seat, because for many people, the consequences of bad market characteristics in payday lending are severe.
There is a fundamental asymmetry in the information within the payday lending market. That is at the root of why the market does not work in the consumer’s interest. The market distorts decision making so that rather than making an informed decision based on price, the consumer is led into favouring other factors above all others in making their decision. Of those factors, convenience is the most prominent. Although convenience is important and of benefit to consumers, it is problematic when it becomes the primary basis of competition in the market as it itself conveys no price information. Without clear price information, consumers are unable to appreciate relative value in order to make informed and savvy financial decisions.
As we have heard, an investigation of the 50 main payday lenders by the OFT found that 60% of them emphasise speed and quick access to money in their advertising. The cost of the loan is at best a second thought and is often presented in a muddled way through the use of misleading and confusing APR figures. In short, without price information, competition is undermined. That leads to reduced choice. Consumers are led into making a decision based primarily on convenience. For the market to work in their best interest, it needs to enable consumers to make a decision in which price is the key consideration. Convenience should be only a secondary factor.
I have a number of recommendations. We are coming up with quite a shopping list for the Minister. The Government should intervene to improve the information that is available in the market—most notably the pricing information—to encourage price competition. With better information and clearer competition, the supply-side control will weaken, allowing consumers to call the shots. That intervention should take three main directions, forming a tripartite approach to the problem.
First, we must reform the information structures. We all agree that the cost of loans should be displayed in cash terms. APR is confusing, even with financial education in the national curriculum. I thank all Members who supported the cross-party campaign that I led on that issue. Let us be frank: even Treasury Ministers would struggle to work out the cost of an APR rate. It is an incredibly complex calculation. The Government should consult on and implement a standard unit for lenders to allow for price comparison, such as the cost per pound that is borrowed per day. Greater minds than mine can work that out.
We should also have real-time credit checking. We all agree that people should be able to borrow only what they can afford. The horror stories of people taking out multiple payday loans are totally unacceptable. Part of the solution is real-time credit checking. The system is not quite there yet. Perhaps we should place a levy on the industry to get it in place. It is then crucial that the FCA enforces it.
Secondly, we need to improve access to information. I have mentioned financial education, which will put the next generation of consumers in a better position to make informed and savvy financial decisions. We also need access to independent debt advice and advice on whether products are right for people. Just as we have health warnings about smoking, when people attempt to take out one of these products, there should be a telephone number or a website that is advertised. Before Citizens Advice is snowed under with millions of calls, I say again that there should be a levy on the industry to pay for free, independent advice for consumers who are not equipped to make informed decisions.
Thirdly, we must complete the information circle. We should look to restore credit ratings. Consumers often choose high-cost credit because the traditional banking system does not wish to lend to them. People might choose payday lending, which is an expensive form of borrowing, because it is the only option. However, when they manage to repay the loan, they should have their credit rating repaired and should be allowed back into the mainstream.
We need to give the regulator teeth and ensure that it uses them. My hon. Friend the Member for Thurrock made some important points in that regard. It is clear that the regulator has often stood by when it could have become involved. We need the regulator to take a proactive approach. I have been very critical of doorstep lenders—something that was mentioned by the hon. Member for Islwyn. Such lenders may have good customer satisfaction ratings, but when people sell on a commission basis, there is always the potential for problems. We have seen that even in the traditional banking system with insurance products. Often, the consumers of such products are the least well equipped to make complicated complaints and to bring matters to a regulator to take action if they have been poorly treated. We therefore need mystery shoppers who will step in and find out whether nudge, nudge sales techniques are encouraging people to take on debt that they do not want or need.
I would like to see an affordability test, a limit on the number of roll-overs that can occur on an individual loan and for debts to be frozen when consumers are struggling so that they do not escalate. We also need to look at the cost of the licence. It costs only £1,500 to set up a payday lending company. With a few hundred pounds, people can get themselves up on the Google ratings and end up lending to all sorts of people. In the two years that it takes for action be taken, they can reinvent themselves. Let us charge more and use that money to pay for independent debt advice and the other things that I have called for.
We should consider a cap on the cost of a loan, but we need people to suggest what that should be.
My hon. Friend is making a series of powerful points, as did Yvonne Fovargue and my hon. Friend Mr Walker. He has not touched on the role of credit unions, but perhaps he is going to do so. My hon. Friend the Member for Worcester raised the issue of capacity. Is my hon. Friend aware that Lloyds bank has given considerable help to the Gloucestershire credit union and is thinking of providing even more help not only to our credit union, but to others around the country? There are opportunities for MPs to build capacity in their credit unions.
I thank my hon. Friend for that intervention, because it relates to my very next point and means that I now have longer than seven seconds to summarise that.
The Government should do more to promote a savings culture to prevent consumers from finding themselves in positions of stress in which they do not have the time to make an informed decision. Also, as many Members have said, we should strengthen credit unions and examine innovative products that come along involving community-based people who know the interests of their local community. There are many good examples that we should champion.
Finally, we must consider the mainstream institutions. They were caught sleeping, and the market has changed. It has gone online. People do not necessarily want to turn up at a bank in a suit to justify themselves. The market developed because there was a gap and the consumer wanted online services. We all instinctively trust the traditional institutions to do a better job, but they need to be in a position to do so.
I am grateful to my hon. Friend for giving way during his persuasive speech. Does he agree that the traditional, mainstream financial institutions could and should also innovate in the area of budgeting accounts, or jam jar accounts? Those accounts help to prevent people from tripping into debt in the first place and can also help to foster the savings culture that he mentioned. By siphoning off small amounts of money on pay day, people can build up a small savings account.
I thank my hon. Friend, who has been a champion of plans for jam jar banking. It is a fantastic idea, because we all know people who, even with the best will in the world and the best financial education, are not fantastic at handling money—that is true of many of us. At times of distress, such as death, family breakdown, partnership break-ups or unemployment, they can quickly be overwhelmed. Products that can help people manage as well as possible on limited money give the consumer power. As I said, we need to ensure that the consumer is in the driving seat. If we can do that, the market will respond in a way that is better for the consumer.
It is a pleasure to follow Justin Tomlinson and congratulate him on his powerful speech and his impressive shopping list, much of which, as he will know, is included in my High Cost Credit Bill, of which he was a strong supporter. I am grateful for the support that the Bill received on both sides of the House, and today’s debate is demonstrating a great deal of unanimity about how we need to tackle payday lending. I am only sorry that the Government did not take the opportunity to build on that cross-party unity by supporting the Bill on
After recent developments, the measures that we all seek are even more important. Since
Earlier this week I met staff at Centrepoint, who told me of the shocking way in which payday lenders are now targeting the vulnerable young people with whom they work. In a country-wide survey, it found a significant increase in the number of young homeless people turning to payday loans. It found young people, mostly under 21 and out of work, taking out payday loans for food and other essential purchases or, as other Members have said, to pay back other debts. As one Centrepoint worker said:
“These payday loans are a killer…I have young people that owe thousands.”
The reasons that young people gave were ease of access, irresponsible promotion, a lack of affordability checks and misunderstanding of costs—all factors that other Members have raised and that my Bill would tackle.
We need effective regulation of payday lenders that would stop them giving loans to people who cannot afford to pay them back; stop hidden and excessive charges; stop repeated roll-overs; stop lenders raiding borrowers’ bank accounts without their knowledge; stop irresponsible and misleading advertising; and require lenders to promote free and independent debt advice.
I should like to use this opportunity to respond to some of the points that the Minister made in her speech in the debate on my Bill on
That is certainly a point of significant difference, and I refer to the comment of my friend Mr Walker, who has been a great supporter of the Bill, that it is the responsibility of Parliament to right the wrongs that are brought to it, not by getting involved in the detail of regulation but by giving clear policy direction where it is appropriate, in this case to the Financial Conduct Authority.
In July, the Minister said that the FCA would produce a draft rulebook in September, which would go out for consultation. We are now in September, albeit in the early days, but on making an inquiry to the FCA yesterday I was unable to find out when the rulebook would be published or what the arrangements for consultation were. I would be grateful if the Minister told the House when those rules will be published.
I turn to how the Minister thought in July we should handle some of the problems that we all agree exist. On advertising, she said that when considering regulation it was important to proceed on the basis of evidence, and that her Department had commissioned research. However, she made it clear that she agreed that there was irresponsible practice, which has been referred to again today, and said that people should be signposted to debt advice. Does she agree that we need research not into whether advertising should be regulated but simply into how? Will she update the House on the research and confirm that the FCA will regulate advertising?
I think we all agree that lenders should assess affordability, which they do presumably so that they can determine ceilings above which they should not lend. If that is the case, does the Minister agree that we should give the FCA the responsibility to set ceilings? We know from experience that we cannot trust the lenders.
On roll-overs, the Minister acknowledged in July that
“if some companies are making significant proportions of their profit from roll-overs, their business model in fact depends on people’s not repaying in time”.—[Hansard, 12 July 2013; Vol. 566, c. 692-693.]
She said that the FCA would look into the issue. However, the Office of Fair Trading has told us that 50% of payday lender revenue comes from the 28% of loans that are rolled over or refinanced at least once, and that 19% of revenue comes from the 5% of loans that are rolled over or refinanced four or more times. A number of Members have referred to that aspect of the problem today. Does the Minister agree with all the organisations working in the area that we should simply direct the FCA to limit roll-overs?
Finally, there is the crucial issue of CPAs. My hon. Friend Chris Evans referred to a horrific example in his excellent opening speech today, and my hon. Friend Yvonne Fovargue also referred to them. In her speech in July, the Minister referred to the clauses in my Bill that would require lenders to give three days’ notice of CPAs and inform borrowers of the right to cancel. She said:
“Those measures are already in the voluntary code. If they were stuck to and ended up in the FCA rules, that would be helpful.”—[Hansard, 12 July 2013; Vol. 566, c. 697.]
If that is the case, why not simply tell the FCA to put them in the rules? Will she confirm her view that measures on CPAs should be included in the rules and should be part of the published rulebook and the consultation?
To give other Members an opportunity to contribute and to give the Minister ample time to reply to my points, I will draw my remarks to a close. Those of us who have spoken today, and Members who supported my Bill back in July, are committed to ensuring that there is effective regulation of payday lenders. We will not give up until the measures contained in the Bill are in place, whether or not through the Bill itself, to ensure effective regulation and tackle the scourge of payday lending.
It is an honour to follow Paul Blomfield. I was proud to support his
Bill and am sorry that it will not make its way through Parliament. I hope that the Government are listening carefully to the cross-party support that it is getting and will take forward some of the sensible measures proposed in it.
I also congratulate Chris Evans on introducing this debate on an important issue about which many of us feel strongly. It is also important to congratulate Stella Creasy, who has done a great deal to raise the issue both inside and outside Parliament. During many parts of her speech today I was nodding furiously, as I found myself in violent agreement with her on some of the important issues that she raised.
I am sorry that my hon. Friend Damian Hinds has left the Chamber. He has done a great deal of work on credit unions. I also fundamentally support the work that my hon. Friend Justin Tomlinson has done on improving financial education.
The debate has been interesting and I will try not to repeat the points hon. Members have made. My hon. Friend Jackie Doyle-Price said that the sector is at a crossroads, which was an interesting comment. We must ensure that we take the right path. High-cost credit is an incredibly important issue for many of our constituents and will be in future for all the reasons hon. Members have outlined.
High-cost credit is defined as credit
“comprising of payday and other short-term small-value loans”.
However, it is important to note that it is not the preserve of alternative financial services providers. There are problems in the wider credit industry. The example I will give is highlighted by StepChange. Its research shows that
“a borrower making minimum payments for 18 months on a typical” credit
“card for an average balance of just over £1,800 pays £44 for every £100 borrowed”.
It is important that we do not exclude from the debate means of credit other than payday loans.
When I first spoke in Parliament about high-cost credit, I drew on my experience. When I came to London as a 21-year-old graduate, I worked as a researcher in Parliament, earning £7,000 a year. I got myself into a stupid amount of debt—£15,000—very quickly, not because I was trying to pay rent, meet bills and buy food, but because I wanted to keep up with the Joneses. I wanted to go out wearing nice clothes and to have good evenings out with my friends, all of whom worked in the City and earned a lot more money than I was earning. I borrowed a lot of money on credit cards, I was always at my overdraft limit, and borrowed money on store cards. I bought things on store cards that people normally pay for with small cash. I could not afford to live the life I wanted to lead in my not-very-well-paid job as a researcher.
I make no comment about the friendships the hon. Lady had, but does she agree that one worrying aspect of the debate on the payday loan industry—the evidence is clear—is that 80% of payday loans are for basics? They are for paying rent, and travel and food costs. People cut back as far as they can, so those costs are not equivalent to keeping up with the Joneses. It is important that we make that distinction—people are trying to cover unavoidable costs.
I agree with the hon. Lady. To be perfectly honest, I was stupid. I learned a lesson. It took me seven years to pay back my debt. I learned that lesson thanks to the bank. I got to the stage of hiding from the bills and not going out. I was in a miserable place, and—the hon. Member for Islwyn will be pleased to hear this—Lloyds TSB took me aside and said, “Your credit rating is dreadful. You keep going over your overdraft limit. You will be in serious trouble if you don’t deal with this now.” The bank cut up my credit and store cards, which was incredibly upsetting, and put me on a repayment programme. The problem today is that banks do not necessarily provide the personal banking they did back in 1996-97 when I was getting myself into debt, and people are finding alternative ways in which to deal with their debt problems.
My hon. Friend is making an interesting speech. She mentioned being put on a repayment programme. Does she agree that one of the more pernicious things happening in the sector is that some high-cost lending companies are masquerading as a way out and as a repayment mechanism for debts? That needs to be carefully considered when it comes to regulation.
I agree with my hon. Friend—I will talk about debt advice later in my speech.
We have heard a lot about charges for people who go into unauthorised bank overdrafts. I was recently charged for going into my authorised overdraft, which I found incredibly shocking. I did not know the bank could do that, but it did. The charge was the equivalent of taking out a £100 loan from Wonga for five days. I can see why people turn to payday lenders if they sometimes get charged by their bank for going into an authorised overdraft.
We need to be aware of people’s problems when it comes to debt. We should not judge people for getting into debt or for trying to get themselves out of it. We also need to be aware of the scale of the problem. I have two wards of deprivation in my constituency, and there is an increase in the number of people turning to payday lenders. The local citizens advice bureau tells me that the average debt in Medway is £43,000. It also tells me that people from more affluent areas are turning to payday lenders for the reasons the hon. Member for Walthamstow has outlined—they find it easier to meet their everyday needs by turning to those lenders.
When used correctly, those loans can be a help. When someone needs that short-term boost—when something is broken and they need to borrow £100—it is easier for them to go to a payday lender than it is to go to their bank. We need to be clear that such loans serve a purpose. However, problems arise when they are not used correctly. That is why we need to address problems such as rollovers, which the hon. Lady and the hon. Member for Sheffield Central have mentioned.
We need to be concerned about the proliferation of shops on our high streets. It is incredibly easy for the people to get the credit they need. Thank goodness payday lending companies were not around when I was in debt. Nothing would have stopped me going in to borrow £200 to get what I wanted. I have learned my lesson, but it took a long time to do so.
On the positive measures we could take, it is important that we consider sharing data. Real-time data are incredibly important. Currently, someone who has taken a Wonga loan in the morning can go to the Money Shop or Cash Converters or the next place on the high street in the afternoon and get money out. Nobody knows how much they are getting out on any given day. We also need to look at restricting access to online credit services overnight. Many years ago, I lay awake at night worrying about debt. When people come to see me, they tell me that they cannot sleep and are hiding from their bills. They know they can go online at 2 am, when they are not thinking straight, and access instant relief to their fears. We should look carefully at that.
We need to look at supporting our credit unions. I am a saver at both Medway credit union and Kent Savers credit union. Hon. Members should do all we can to try to help to promote them so that they are recognised in the high street. That is incredibly important. If that means using flexible business rates so that credit unions are encouraged to go into the bigger shops on the high street so they have that presence, we should do that.
Finally, debt advice is incredibly important. The Government are doing a great deal to promote free debt advice. I have worked to keep the Insolvency Service in Medway. It was under threat, but was saved thanks to the campaign. We need to recognise that there are experts who can help to inform people who are finding it very difficult to get out of the situation they have got themselves into.
We must not judge the entire payday lending industry by the bad mistakes we read about and hear about in debates such as this one. We need to recognise that it plays a role in our wider credit industry. As my hon. Friend the Member for Thurrock has said, we are at a crossroads. We need to ensure we go down the right route.
Each and every one of us has a responsibility to stop the emerging payday loan crisis. In my constituency of Blaenau Gwent, the number of payday loan applications shows no sign of slowing down. Data obtained from Wonga revealed that it gave out nearly 5,000 loans in 2012 to a population of 69,000. More than £1 million was predicted to have been borrowed. That is for one year, from one provider in one constituency. For a borough proud of its industrial heritage, proud of carving out its fortunes in the coal mines and steel, this is a desperate state of affairs. Blaenau Gwent can realise its potential in the years to come—it has done so time and time again. However, we cannot get back on our feet if we are hobbled by debt.
The High Cost Credit Bill goes a good way to stopping further damage to those trapped in a spiral of debt. We also have a duty to champion alternative providers such as credit unions, yet my constituency’s credit union has just 560 members, a number dwarfed by the thousands of payday loans. We must make a game-changing push to tell more people about these socially responsible services. We need credit unions that are fit for the 21st century. They need 24-hour access, whether through computer systems or smart phones; a walk-in, high street presence that is the equal of any bank; and a strong capital base supported by payroll saving from staff of local authorities and others. Only then can credit unions come close to offering a better deal for those most in need.
Another way forward could be for the Post Office, given its UK-wide presence and recent adoption of current accounts, to move into the market. It would be good to hear what the Minister thinks about that possibility. We also have a duty to support the next generation, with financial education in the classroom that will engage students with the real world and teach them about the consumer temptations that we have just heard so much about. How many of us here today understand our own mobile phone tariffs and payment systems? I do not see many Members nodding. For those already trapped by debt, we need to direct them towards the likes of Christians Against Poverty, services that can get people back on track rather than borrowing further.
It is easy to pass judgement on those who borrow beyond their means, but to do so ignores the fact that the demand for easy credit at a moment’s notice has never been greater. Our households are feeling the pinch, losing £1,500 a year in real terms. It is estimated that more than 1 million workers are living week to week on unpredictable zero-hour contracts. In short, this is a climate ripe for payday loan companies to step in and reap the benefits. A Bill and new regulators that do a much better job on high-cost credit arrangements and their providers would be a good step, but given all that has been said so far, we must do much more to address what is now becoming a massive problem.
This has been a valuable debate, and I congratulate Chris Evans on securing it.
What has become clear during the debate is that there are two strands to this issue. First, there is the need for enhanced regulation, which my hon. Friend Jackie Doyle-Price and others have talked about, and the Financial Conduct Authority and the Office of Fair Trading have a responsibility to step up to and deal with that. Secondly, each day Wonga makes 10,400 loans. When the Archbishop of Canterbury said that we had to compete Wonga out of business, a cheer went up. In the three years I have been fortunate to be the Second Church Estates Commissioner, I have not known an issue attract as much press interest—one morning I did about 20 radio interviews. All around the country, local radio and newspapers see this is as a serious issue. However, as my hon. Friend Justin Tomlinson said, the fact is that each day there are large numbers of people who want to take out short-term loans that they hope to repay over a short period. Of course regulation has an important part to play, but we have to think about what we can do to enhance the competition.
As many Members have said, this is a David and Goliath situation. Nick Smith said that we need credit unions to be fit for the 21st century. They need adequate IT platforms. After the Archbishop of Canterbury spoke, the Manchester credit union said that while having extra premises would be useful, credit unions needed an IT platform that is fit for the 21st century. We have to recognise that many credit unions are still at the starting gates.
My hon. Friend Mr Walker said that the credit union in his area collapsed altogether, and Worcestershire is a pretty prosperous county. Oxfordshire is an equally prosperous county, but it has pockets of high deprivation, such as Blackbird Leys in the constituency of Mr Smith, and at least three wards in my constituency are in the highest social indices for the south-east. We have a credit union that has only just over 1,000 members, which is less than 1% of the population of the city of Oxford. It has just £300,000 of members’ savings and £200,000 out on loan. The Oxford credit union is seeking to do all the right things: it has established a partnership with the south Oxfordshire housing association to help tenants; it rolled out prepaid debit cards to allow members to buy goods without using cash; and it worked with a fuel-buying organisation to allow new members to spread the cost of buying high-cost fuel. However, this House has to give much more thought to what we can do collectively to enhance the status of credit unions. Elsewhere in Europe, credit unions are a much greater feature. I was recently in Ireland for a family wedding and in practically every town I went to there was a prominent credit union building—they are part of the waft and weft of the social structure.
There is a disconnect here. Large numbers of savers in Oxfordshire complain that they get very little return from the banks for their savings. Are there not ways to encourage savers to invest in credit unions? The difficulty is that many people living in Oxfordshire would not think of joining or investing in a credit union. Are there ways in which one could give minimal tax incentives to people who invest in credit unions? If I let a room in my house, I can get up to £6,000 a year tax free. What if the interest on what is invested in a credit union, up to a certain amount, is tax free?
Finding an alternative financial mechanism to the banks and payday lenders will require an enormous amount of energy. The Archbishop of Canterbury says that he thinks it will take a decade to turn things around. It is welcome that the Government are investing £38 million in credit unions, but that is almost exactly the same amount that the main payday lenders spend in advertising in just one year. By and large, the £1 million that they make each week in profit is money that is leaving poorer areas of the country. It is not being spent in shops in areas such as Blackbird Leys.
When the Minister replies to this debate, she will obviously reply to the comments that hon. Members in all parts of the House have made about regulation, but we also have to focus on how collectively we compete Wonga out of business and how collectively we work out an alternative financial mechanism. That might also require banks changing their practices. As the House might know, the Church Commissioners are one of those competing for the new Williams and Glyn’s bank. If we win that competition, we hope to return to the sort of old-fashioned responsible banking that people remember from the 1960s. However, unless people feel able to access short-term loans for short-term needs, they will be pushed into the hands of the payday lenders or, even worse, the loan sharks. We therefore have a collective duty to try to work out how we get credit unions in this country funded and fit for the 21st century.
This has been an interesting debate. I congratulate my hon. Friend Chris Evans on calling it and all hon. Members who have spoken.
Owing to time constraints, I will not comment on most of those speeches, but I think we are all clear that there is a world of difference between those of us in this place, as well-off MPs, able to access interest-free credit cards or get loans at 5% or under these days, and many of our constituents, who have no savings and no credit record or a poor credit record, for whom the options are limited. It is important that there is a sector that can lend to people who have a crisis when the washing machine breaks down or, typically—I hear this a lot in my constituency—when they have to pay for a funeral, which is a huge expense, and have nowhere to go. We need to ensure that the system works.
I want to touch on some of the concerns, as I see them, and what needs to be done; to highlight some of the organisations in my constituency and how they work to achieve things; and also to pick up on the point that Justin Tomlinson made about the disgraceful withdrawal by the major financial institutions of products for poorer, riskier borrowers.
It is now harder even for people with good ratings to get products from the banks, as many of my local businesses will testify, while those who do not have a good credit record cannot get products from anywhere. We need to be careful, because the vilification of payday lenders means that there is a huge reputational risk for mainstream lenders entering the quick, short-term loan market. We have to think responsibly and in the round about how we act and how we ensure that there is something out there for those who will be a higher risk and will therefore face a higher cost. There is a place, as we have all agreed, for short-term lending of fixed sums at high rates.
We heard on the Public Accounts Committee about how Provident works. For many people, it is a psychological thing. A nice woman—they are nearly all women—comes to the person’s door and asks for the money. It might be £185 to borrow £100, but it never goes up: even if someone misses a payment, there is no penalty. Many of my constituents—they are often the same sort of people, and rely on meter keys—do not want the surprise or worry of a bill they are not expecting. I agree with the hon. Member for North Swindon that there is a worry about secondary selling, but that certainty and direct contact is important.
It is interesting that ABCUL—the Association of British Credit Unions Limited—has sent round a note about interest rate comparisons, which says:
“A £300 loan over 52 weeks from Provident Financial home-collected…at 272% APR costs £246 in interest while the same loan from a credit union at the maximum 26.8% APR costs £38 in interest.”
However, it is not really right to make the comparison, because if the credit union went round to people’s doors in person, there would be an increase in the cost and the interest rate would be much higher than the 26.8% quoted. We need to be careful when comparing products to be aware that there are different products out there. I agree with all colleagues that the focus on APR and percentage rates is confusing for people. We need to change that—I will touch on my suggested changes at the end.
My hon. Friend Yvonne Fovargue mentioned BrightHouse, which has a really invidious system, providing high interest on credit via purchases and then tacking on insurance. Indeed, the insurance costs for one item of furniture or a television can be as much as the insurance for a whole household, yet it is sold in a shop-front environment in places such as Dalston Cross shopping centre. Worse still, BrightHouse is often recommended by social landlords. When someone moves in and says, “But I’ve got no furniture,” they are often told—by people who are not qualified to give financial advice—“Oh, why don’t you just go down to BrightHouse?” They think they are giving shopping advice—often, probably in good faith—but have no idea that they are indebting their tenants for a long time to come.
On the high street in Dalston, we have every type of high street lender that could be imagined, from the legitimate banks to the loan sharks, who do not exactly have shop frontages, and the swish, nice-looking frontages of the Money Shop, Oakam and so on. I want to touch on Oakam, which has an interesting business model that is different from many of the other high street lenders. It is based on an American model, which is fairly newly arrived in the UK, and works with people who are themselves fairly newly arrived in the UK who are trying to build a credit record or set up a business, but do not have access to credit from mainstream institutions. Typically, someone from Poland—we have a lot of Poles in Hackney—or people from parts of west Africa, having arrived in the UK, will spend six months building up their credit record at a higher interest rate than many others, but then move to the high street bank over the road to get a loan. Oakam provides a service that people need—it is at a higher interest rate, but people know what they are doing. Oakam says that a lot of its customers are clearly building their records.
Fair Finance is a social enterprise that gave evidence to the Public Accounts Committee. It has a base in Hackney and provides face-to-face loan advice, but has taken nearly nine years to reach break-even point. One of Fair Finance’s worries is that if interest rates were capped, it would have to provide loans to people at higher levels and further indebt them, so if someone came wanting to borrow £5,000, it might have to call it £10,000 to cover their costs, because it costs a lot. Fair Finance has a model that trains advisers to sit face-to-face with someone, talk them through all their financial issues and ensure they can manage the loan and the repayments. Fair Finance feels that talking face-to-face is one of the reasons why it gets the money back.
We have talked a lot about credit unions, too. As a Co-op MP, it saddens me that too often we see credit unions failing. Having to save before a loan is one issue. In Hackney, our credit union collapsed. We are now working with the Tower Hamlets credit union, which has taken over the space. One of the challenges was that a lot of people were basically using the credit union as a bank account for their benefits. They never really saved and were therefore never able to take out a loan, although they had no great interest in taking out a loan either. The service quality was poor, and too often the credit union was badly managed and there was a lack of advertising, as is the case for other credit unions. We need to work with the credit union sector to get it to step up to the mark. If credit unions are to compete with flash shops such as the Money Shop, which people who can walk into and get good quality service—whatever the issues with the products—they need to remember that people will shop around.
I want to touch on what needs to be done and to refer colleagues to the Public Accounts Committee report, which Jackie Doyle-Price highlighted. I will not repeat them, but its recommendations clearly show that there is an issue with a lack of regulation from the regulator. The work of the regulator—we now have a new regulator, so there is some hope in this—needs to focus more on consumer protection, ensuring that those with a licence to lend have the right protections and checks in place, so they do not over-lend and over-extend people. There should be a limit on roll-overs. There is sometimes talk as though everyone is always rolling over all the time. There are legitimate payday lenders that limit roll-overs. We need to recognise that there is a range of providers.
There also need to be proper affordability checks. People should not be able to walk down the high street and get three payday loans on the same day. The whole point about the speed of many payday lenders is that they can make online checks quickly, so the system needs to be updated. It is interesting that one’s own credit record is sometimes not updated very quickly, so there is a basic IT issue. Continuous payment authority is an invidious system and needs to go. We also need a change from APR to clearer costs. These are all things that need to be done.
Let me end on a cautionary note by quoting Mark Hannam, the chair of Fair Finance:
“Those who campaign on this issue need to decide whether they want a well run, well regulated market with a few dominant providers (who are very profitable); or a highly diverse and less well regulated market, with lots of smaller providers who are under less pressure to treat their customers well. From the consumers’ point of view, the former seems a better outcome.”
When we look at regulation, we need to be careful that we do not throw the baby out with the bathwater.
The question that this debate is making patently clear is whether it is the responsibility of the state to look after those who cannot look after themselves. It has also been made patently clear in the brilliant opening speech of Chris Evans and in other contributions that there are many different practical and relatively immediate measures that could be introduced to address the problem of high-cost credit. They include restricting advertising budgets, implementing a greater degree of financial education, doing more work on shared data, addressing the question of interest rates and improving debt advice. I endorse the comments of the Public Accounts Committee and urge the Financial Conduct Authority to do more, as requested.
I believe that everyone agrees that the Archbishop of Canterbury was right when, in July, he championed the cause of credit unions and criticised the payday loan companies. He was right to say that we needed to “compete” the payday lenders out of the market. I welcome his comments, but I would argue that this debate has shown that although we all support credit unions, they are not necessarily the mechanism by which we will succeed in competing the payday lenders out of the market.
There is cross-party agreement on specific measures that can be taken to address the problem of high-cost credit, but I suggest that the mechanism by which people ought ultimately to borrow on a long-term basis is local community banks. They have all the flexibility, the clout and the borrowing power of a bank, as well as all the sympathetic community approach of a credit union, and the amalgamation of all those qualities will produce the best way forward.
My hon. Friend will be aware of the resurrection of TSB as a brand in a market in which it previously had a good reputation for providing small loans and deposits to people in local communities. Does he see this as offering opportunities in that space?
Indeed I do.
I held a conference in Gateshead only a few months ago. It was attended by 170 delegates who were trying to set up local community organisations to address the lack of lending in their communities. They wanted to enable such lending by local, trusted providers, rather than by nameless, faceless, computer-led organisations based in London, Frankfurt or wherever. The smaller providers such as the TSB, the Hampshire bank and the Cambridge and Counties bank that are beginning to be set up are clearly the way forward.
No one should dispute that the expansion of credit unions is an extremely good thing. I welcome the changes in the way in which they are to be run; the Government should take credit for that. All Members of Parliament should become greatly involved in their credit union; I certainly support the Hexham credit union, which was set up with the help of the Churches in Northumberland. However, I question whether the credit unions alone will be able to address the problems of high-cost credit. In regard to interest rates, credit unions have clearly adopted a fantastically successful approach—their lending rates are so much better—but their deficiencies might mean that it is difficult for them to go forward. None the less, debates such as these on Wonga or on the private Member’s Bill introduced by Paul Blomfield have substantially raised public awareness of credit unions in the House and in our local communities.
I want briefly to talk about local community banks. For far too long, under successive Governments, we have been dominated by the big six or seven banks. I welcome the idea of a Church bank put forward by my hon. Friend Sir Tony Baldry, but the kind of long-term community banking that he referred to has disappeared from our high streets and rural communities. That has had a detrimental effect on the ability to lend and to get credit.
The Government have rightly addressed that problem. It used to be incredibly difficult to set up a bank. It took in excess of £50 million and the process was highly regulated, even though the smaller banks in question were in no way comparable to a Barclays-style bank. The Financial Services Act 2012 changed the approach taken by the then Financial Services Authority and its successor organisations involved in regulation, and I strongly support those changes.
Reference has been made to the platforms required to set up a credit union or a community bank. Those requirements are now changing dramatically, to enable much greater interchangeability between pre-existing accounts held with the big seven banks and those held with credit unions or community banks. The mechanisms by which we can set up those organisations are improving, and many groups now wish to get involved. They include not only local communities but local authorities and individual businessmen with a philanthropic approach to their local community. Some universities, and even the Army, are considering getting involved. There are tremendous opportunities in our local areas to set up and expand these organisations.
Over the coming winter, we will all be faced with the issue of the energy costs that our constituents will face. In my community in the north-east, we have 24% fuel poverty, and a large swathe of the community is totally reliant on either oil or liquefied petroleum gas. That is an unregulated market, with all the problems that that entails. We have now formed more than 14 separate oil-buying clubs to try to address the cost of the oil. However, the requirement to buy 500 litres involves a very large financial outlay, often when oil is at its most expensive, and we are looking at ways to address that. The credit unions are certainly being encouraged to be the providers in those circumstances.
I hope that we will all try to expand our credit unions, using the vast plethora of good advice on regulatory changes, and to support our constituents who need assistance on this issue.
It is a pleasure to be called to speak in the debate. I congratulate my hon. Friend Chris Evans on securing it, and the Backbench Business Committee on scheduling it to take place in the Chamber today.
I was particularly struck by the honest and frank contribution from Tracey Crouch. I was also pleased to be reminded by my hon. Friends the Members for Blaenau Gwent (Nick Smith) and for Hackney South and Shoreditch (Meg Hillier) about the context in which our constituents face difficulties with high-cost credit. There was a danger that we might forget that these problems do not occur in a vacuum. The reasons for people being forced into using high-cost credit include the decline in wages, which has accelerated over the past three years. We have seen a £1,500 real-terms reduction in the mean level of wages over that period and, as we discovered yesterday, the median wage in Britain is now £3,300 less than it was in 2006-07.
The presence of the Under-Secretary of State for Business, Innovation and Skills, Jo Swinson on the Treasury Bench prompts me to talk about the context in which the debate is taking place. She and I are parliamentary neighbours, and there is a road—Colston road—that divides her constituency from mine. On one side of that road, in my constituency, is the ward with the highest level of child poverty in Scotland, at 51%. On the other side of the road, in the hon. Lady’s constituency, the level of child poverty is only 9%. That is a yawning gap. I have constituents visiting my office who are in dire need of food because they do not have enough money to get through the day. That explains the surge in the use of high-cost payday lenders in my constituency and those of many other hon. Members across the country.
We have heard that the average APR for payday lender loans is about 1,737%, but some of our constituents are facing an APR of nearly 5,000% on even relatively small loans. In many parts of Glasgow, this demand for high-cost credit is, in my experience, clearly linked to financial hardship and the lack of available alternatives for finance. We saw previously that crisis loans proved to be a stop-gap, but even in the run-up to the period during which the arrangements were devolved by the DWP to local councils—and, in Scotland, to the Scottish Parliament—we saw the significant pressures caused by cuts in crisis-loan funding. Between 2011 and 2012, crisis-loan funding fell by almost £90 million, which led to an explosion in demand for payday lending, particularly in Scotland.
In recent months, the Resolution Foundation has evidenced a number of key facts that show the extent of financial exclusion across our country. About 4% of UK households have no bank account at all; one in 10 does not have a current account; and it has been estimated that people on very low incomes pay a poverty premium of around £1,000 a year just to access basic financial services. Some 7.8 million in our country are unable to access mainstream credit, while 60% of adults among the poorest fifth of the population would like to save just £10 a month, but are unable to do so. Growing numbers of people are only a broken washing machine or a broken fridge away from stepping over a very steep financial cliff indeed, while 3 million households in social housing do not have any contents insurance despite the fact that they are twice as likely to be burgled as people who live in privately owned properties.
We have heard about the scale of the payday loans market over the last couple of years, and the average loan is between £265 and £270 and borrowed over 30 days, but we have also seen an explosion in the market in recent years, with between 7.4 million and 8.2 million new loans in 2011-12, up from an estimated £900 million-worth of new loans in 2008-09.
The debate has been useful in focusing the eyes of the Government—and, I hope, those of the Competition Commission, too, in its inquiry—on the need to take concrete action on misleading advertising, the irresponsible roll-over of loans, about which my hon. Friend Stella Creasy spoke so lucidly, the targeting of vulnerable customers and the unfair treatment of customers who are in arrears and default. It is the charges for these defaults on which I believe urgent action is particularly needed by the Competition Commission and, perhaps, by the Financial
Conduct Authority next April when it takes over regulation of this sector. The Bristol study, which reported to the Minister’s Department, said that having tighter lending practices and a restriction on default charges could result in short-term lenders exercising less forbearance than they currently do on lenders who are very much in need.
I am pleased that we have heard such a focus on credit unions in this debate. I recently held a summit of small credit unions in my constituency, and they came up with practical suggestions about how the Government could help. They told me that, in their view, the Government’s fund through the DWP does not do enough to support small, community-based credit unions. They consider that the lion’s share of the funding had gone to the larger credit unions and said that the smaller credit unions were often run exclusively by volunteers, and they lack IT expertise and permanent staff. Credit unions from Haghill, Ruchill, and Greater Milton and Possilpark in my constituency have told me about the huge impact they could have and the huge extension in services they would be able to provide to constituents if only they had the possibility of having a staff member on board.
Does my hon. Friend not think that that is one of the problems and it is why people go to those other companies? With credit unions, on a customer service level, they often get what seems to be a second-rate service.
My hon. Friend is absolutely right in the sense that community-based credit unions often have much more of a personal knowledge of the people who use them and who save in them, and it can often lead to much more responsible lending practices, borrowing and issuing of loans.
My local credit unions also said that it was very important that the savings-loans link was maintained because it encouraged a sustainable business model and lending. They welcomed the fact that finance for a financial education worker was available, which they said had been pulled in the past sometimes after just six months, and argued that the Government needed to be much more consistent in their support. They raised an important final point—that credit unions are often seen as low priority in comparison with banks when customers become bankrupt. They asked the Government to think about reviewing the law in this area to bring them equality of treatment, which would very much help the credit unions’ provision of services.
Sir Tony Baldry mentioned the influence of the credit unions in Ireland, which is also true of Australia, Canada and the northern states of the US. We need to expand the services available and end the stigma that has led credit unions to be seen as of second order, which they are certainly not.
It is a pleasure to follow Mr Bain. He made an interesting point, especially when he talked about some payday loan companies charging up to 5,000% interest, for which there is simply no justification. However leafy our constituencies might be—mine is quite a leafy one—there are pockets of deprivation in them and people who really need credit, but they need it at a competitive rate.
I would like to go back to the basics. For three or four years, we have had a 0.5% base rate, and the Governor of the Bank of England is hopeful that that may well stay at that level for another three years. How can anybody, legally or illegally, offer loans at 5,000% or 6,000% interest? That has got to be wrong. The old adage that we can have an umbrella if the sun is shining but that it will be taken away from us if it starts to rain is, as far as finance is concerned, correct.
I feel hugely passionate about this issue. I welcome the comments of the Second Church Estates Commissioner, my hon. Friend Sir Tony Baldry about the involvement of the Church of England and the Archbishop of Canterbury. One thing that the Church of England certainly has got is a great deal of assets. If people have assets, they can borrow money at a very competitive rate. I would say in all honesty to the Church of England that there is a real role for it in credit unions and community banks because they can borrow money at an effective rate, and if they lend it out at a much more competitive rate, that will help people in need.
Many Members, certainly including my hon. Friend Justin Tomlinson, have spoken about the need for a levy on the industry, and I agree that we need such a levy so that people can have proper financial advice, as they often go from company to company and shop to shop, being charged enormous amounts as they do.
I entirely agree with my hon. Friend. Does he agree that it is extraordinary, indeed outrageous, that there has to date been a levy on banks and a levy on credit unions, but not a levy on payday lenders? Does he not find that situation impossible to explain?
I could not agree more with my hon. Friend. I would have thought that this wonderful Government of ours must be looking at such a levy—and if they are not, I am sure that they will do so immediately. We have got to do something about this problem. Yes, some might argue that we are saving people from themselves, but in this case, we have to do that. If people are in dire need of a loan to see them through to the end of the week or month, they should not be charged two or three times the value of that loan.
Of course, it is not just a question of whether the loan is repaid. People may reach a stage at which they are unable to repay it, and charges will then be levied for non-payment. The loan will be rearranged, another fee will be added, and they will end up paying five or six times the amount that they originally borrowed, or perhaps even more. That cannot be right. In any sort of capitalist system—or whatever system we have—there is a need for profit, but there is no need to extract money in a way that almost constitutes extortion. Someone who arrived in this world for the first time and observed that it was possible to charge such amounts of interest, or indeed—let me be blunt—to steal such amounts of money from people, would say that those who did that should be locked up. We must do something about it.
As well as the people who cannot repay their loans, there are people—although not so many—who are addicted to borrowing money, not just from payday loan companies but from, for instance, store cards that they can use in shops. They must be given more access to advice, and restrictions must be placed on the amount that they can borrow. If people are such a credit risk that they must be charged enormous amounts of interest because companies believe that that is the only way in which they can get their money back, we should ask whether we are helping those people by giving them the money.
A number of Members have rightly pointed out that, in this day and age, people need to be able to gain access to money online and from their mobile phones. Members may tell me that I am a little bit old-fashioned, but I am not certain that the ease with which credit can be obtained at any time of day or night, and regardless of people’s state of mind, is helpful. I think that it merely drives people deeper and deeper into debt.
I respect where the Government are coming from. When I last spoke about this issue, I went for the payday companies big time, and I still have them in my sights because I believe that they are making enormous profits at the expense of the very poorest members of society, but I also understand that there is a role for them. Nevertheless, they must be controlled. Their wings must be clipped.
Does the hon. Gentleman agree that there should be a cooling-off period? The problem seems to be that many people who are desperate for finance can get hold of £500 on the internet before they have even put down their laptops and arrived at the hole in the wall. If there were a cooling-off period of, say—
There is a great deal that we can do. We must help people to obtain credit, but we must also help them to obtain advice. I agreed with much of what was said by my hon. Friend Guy Opperman, but I agreed particularly with what he said about community banks. We will not be able to cure everything by means of credit unions, however good they are and however important the part that they play may be. I agree wholeheartedly with the Archbishop of Canterbury on one point: we need to be able to compete the payday loan companies out of business.
We have had an extremely good debate, which has not been vastly political. I do not think that any Government has come out of this smelling of roses. We must do something about the problem, and we must do it on a cross-party basis, because at the end of the day, we want to help our constituents. We want to help them to get to the end of the week, or the end of the month, but we do not want to land them in greater debt and greater problems than they had before taking out their loans.
I am certain that Ministers are listening to what is being said, and I look forward to the summing up of the debate. It has been made clear this afternoon that we are hugely concerned about the interest rates and other penalties that are being levied by payday loan companies, and we look forward to hearing what the Government are going to do about it.
I congratulate my hon. Friend Chris Evans on securing this debate about an increasingly problematic issue. He said that he had raised it in his maiden speech back in 2010, and I am sure that since then he has contended as strongly as many other Members that the problem has become worse rather than better.
Many Members on both sides of the House have campaigned tirelessly on behalf of their constituents who have suffered at the hands of legal loan sharks. My hon. Friends the Members for Makerfield (Yvonne Fovargue), for Blaenau Gwent (Nick Smith), for Hackney South and Shoreditch (Meg Hillier) and for Glasgow North East (Mr Bain) all deserve special mention, as does the dogged determination of my hon. Friend Stella Creasy, who has just returned to the Chamber, and who has kept this issue high on the political agenda.
I commend my hon. Friend Paul Blomfield for his private Member’s Bill, and for his superb contribution to today’s debate. The Bill attempts to provide a regulatory framework for high-cost payday lenders, and I shall say more about it later. I agree with Tracey Crouch that the Government should adopt some of its provisions.
This has been a fantastic debate. There is clearly a consensus, not only in the House but among key organisations representing consumers and the debt support industry, that action is needed, and needed now. Mr Walker was right to point out that there was cross-party support for such action. The issue has also been prominent in another Parliament, the Scottish Parliament, where Kezia Dugdale MSP has run the very successful Debtbusters campaign in an attempt to pressurise the Scottish Government to use their powers to assist. Unsurprisingly, they have so far refused to do so.
The pace at which the high-cost credit industry has grown is extraordinary. That is no doubt largely due to the cost-of-living crisis—my hon. Friend the Member for Glasgow North East referred to the desperation that drives people to food banks, and my hon. Friend the Member for Blaenau Gwent mentioned the problems of insecure employment in his constituency—but it must also be attributable to the attraction of the industry to countries with weak regulatory environments. Indeed, some commentators have described the regulatory environment in the United Kingdom as a “payday loans haven”. My hon. Friend the Member for Makerfield drew attention to the failure of the voluntary code in the sector.
It is a struggling economy, with ever-rising prices and stagnating wages, that is driving people towards high-credit borrowing just to meet the demands of everyday costs. Last year, Which? found that 60% of people who were using the high-credit market were doing so for everyday purposes. That shows how acute the cost-of-living crisis has become. There is a market for access to such short-term credit, as we have heard in the debate, whether that be for a broken washing machine or for the commuter whose car breaks down. Those problems cause unexpected shocks to families’ budgets and they can be helped by the short-term credit market, but as my hon. Friend the Member for Walthamstow said, many companies make most of their money through a small percentage of people who are forced to become repeat customers. It is becoming clearer that vulnerable people are being targeted and exploited by this industry; they find themselves drawn into a spiral of debt and are using such lending for everyday purposes. Many Members have told of their constituents’ experiences in that regard.
The harsh reality of the pressures of rising living costs is highlighted by the rising number of people using the StepChange Debt Charity. It has reported that more than 30,000 people contacted it in the first six months of 2013, which is the same number as for the whole of 2012.
While the high-cost credit crisis has deepened, month by month this Government have failed to take any meaningful action, and it is clear that consumers need protection now. The Minister with responsibility for the industry has played her part in that failure, despite the cross-party consensus which has been mentioned. Her payday loans “summit” in July, which she called the industry to attend, was slammed as a sham by many and what it actually achieved is unclear.
I ask the Minister to answer the following questions when she responds to the debate. Did she lambast industry executives for their continued flouting of their own good practice customer charter, as Citizens Advice has shown? Did she challenge industry executives, whose advertising spend rose by 26% in this year alone? Did she even ask them about capping the total cost of credit? If the industry is doing all the positive things it tells us it is doing, why will it not give the Government and the FCA its lending data so that we can determine whether or not we can trust what it says? We urgently need to put in place sensible and measured policies which will protect people. If we do not do that, ever more people will be affected.
Let me talk about some of the issues raised by Members today and by my hon. Friend Paul Blomfield in his private Member’s Bill. First and foremost, we must have a cap on the total cost of credit, including charges and defaults. In her wonderful speech, my hon. Friend the Member for Walthamstow highlighted how that could be done. Last year, we proposed an amendment to the Financial Services Bill to give the new FCA the clear powers to do that, and it is a shame that the Government rejected it—only for the Lords, including the Archbishop of Canterbury and other Cross Benchers, to persuade them that it was the right thing to do.
Although the Government are reluctant to over-regulate in the credit marketplace, they must lay down to the regulator some clear foundations about what they are looking to do. First, there must be a crackdown on irresponsible lending, for which an affordability framework needs to be put in place. The FCA also needs to introduce measures to stop small debts becoming large debts. That should include addressing roll-overs and a limit on default charges. They should also consider a cooling-off period, as my hon. Friend the Member for Wansbeck said. The FCA needs to collect some transactional information, too, so that we can be clear about how the market is operating. The Government and the FCA should introduce a live database as well, so that payday lenders can do proper credit and affordability checks in order to protect borrowers. That is the only way we can overcome the hurdle of the industry being accused of not doing proper affordability checks. There should be strong warnings on all advertising so that customers are aware of the risks and costs. My hon. Friend the Member for Makerfield said that her children had been told to boo when the adverts appear on the television; perhaps we should add those boos to the adverts themselves.
Borrowers experiencing difficulty should be automatically signposted to a free debt advice service. The continuous payment authorities should be reviewed, too. The Minister must tell the FCA to look at that, in particular with regard to the high-cost credit industry.
This has been a wonderful debate, but I am sorry we have not had time to explore some of the issues in greater detail. The Minister has said:
“Payday lenders are on notice—if they don’t take action to fix their problems they will face further complaints and further sanctions.”
Can she honestly say to the House today that she is doing everything in her power to make sure that the market is regulated properly? I would challenge her on that, because I do not think that she is doing that. The House has spoken clearly—not just in this debate, but in many debates on high-cost credit over the past 18 months to two years—and it is time the Government acted.
We have had an excellent and constructive debate, and I thank Chris Evans for introducing it and the Backbench Business Committee for allocating time. I appreciated his welcome for the action the Government have already taken, such as on the research into advertising and the FCA strategy that we are due to see soon with the publication of its rulebook. I understand and appreciate his concern about the speed of change, and the frustration he feels. His party colleague Ian Murray said the pace of growth of the payday lending industry has been extraordinary. The Government and regulators have, of course, been working to keep up, and I think we have seen in recent months that that has been happening.
Various alternatives have been mentioned. One of them was the possibility of introducing low-limit credit cards, and I have explored that with the UK Cards Association and others in the industry, as I think it could be one of the alternatives that might work. Of course, it would not work for everybody; as we have heard, some people who take out payday loans are keen to make sure that they get something quickly and with that level of convenience. Indeed, some may not pass the credit scoring that would be required for some of those credit cards. That underlines the importance of the affordability assessments, because people are currently passing the checks by payday lenders and perhaps some of them should not be.
My hon. Friend Jackie Doyle-Price talked about the PAC report and the importance of this House sending a clear signal to the FCA that it expects it to use its powers to intervene where there is poor practice, and I absolutely agree with her. We do expect that, and I have made that abundantly clear to the FCA. Today’s debate has also been very helpful in making it clear exactly how strongly the House feels about this issue. I am sure that the FCA will be following this debate, but just in case it is not, I will happily write to it to draw that to its attention. Indeed, next week I will be meeting Martin Wheatley to have further discussions on this issue.
My hon. Friend mentioned that she was disappointed that the Office of Fair Trading had failed to use its powers to revoke licences. That was true at the point at which the PAC took evidence from the OFT, but she will be pleased to know that since that report was published it has revoked three licences—so those powers are being used.
I commend Stella Creasy for all her campaigning on this issue; we had a positive meeting to discuss it earlier this week. Obviously, the profitability of payday lenders has been high up in the news this week, and we agree on the level of profits being derived from default fees, roll-overs and so on. That is why it is so important that the Competition Commission is investigating this market. It has already begun its investigation, issued its issues statement and invited comments from interested parties by later this month.
We discussed in detail the other day the points that the hon. Lady made about total cost capping. I appreciate that we perhaps have a difference of opinion on where exactly the evidence points, the possible negative impacts of fees being charged elsewhere—a displacement effect—and whether or not there would be less sympathy for lenders than difficulty. That said, it is vital that the FCA has that power and has the evidence. Her point about ensuring that the FCA can get off to a flying start when it takes on the responsibility in April 2014 is important. I have been keen to ensure that it is able to do that, and it has said it is prioritising the issue.
On the hon. Lady’s point about data sharing in the industry, I encourage lenders to liaise and share their data with the FCA in advance of its taking over that responsibility. The OFT has a data-sharing agreement with the FCA, so data that it has can be shared, with all the appropriate confidentiality protections in place, as one would expect. It would be helpful if the industry would share further data with the FCA, and when we had the summit the industry indicated its willingness to be as helpful as possible. I hope that it will be able to take that up.
I appreciate that the hon. Lady wishes to intervene, but as time is so short and as I wish to respond to other Members’ contributions, I will not give way. I hope she will forgive me.
My hon. Friend Mr Walker talked about the importance of ring-fenced bank accounts, where payments for rent and bills can be set to one side. The Government are working with consumer groups and banking organisations to see whether more of those types of accounts can be provided, because they can be an important budgeting tool.
Yvonne Fovargue has campaigned for her constituents on high-cost credit issues for a long time. She rightly highlighted concerns about CPAs and the way in which banks have treated them, because where individual customers decide to cancel a CPA, that should be honoured. She will be pleased that the FCA took up that issue seriously once it came into being earlier this year. It now has agreement with the high-street banks that they will ensure that when a customer asks for a recurring payment to end, that will be sufficient to cancel the arrangement. Furthermore, if any payment subsequently goes through by mistake, the customer will be refunded immediately. That will not solve all the problems on CPAs but it is a good start, in terms not only of dealing with the problem, but by showing the FCA’s recognition of it and its willingness to act.
My hon. Friend Justin Tomlinson has a strong record on campaigning on financial education, and he highlighted the issue of convenience and the importance of price information. He also rightly highlighted real-time credit checking as a key area. I found interesting his idea of a levy on the industry to enforce that kind of credit checking. The industry is examining whether it can do that itself and I hope it will do so, but it is important that the Government keep all ideas such as his in mind, in order to be able to do that in future.
Paul Blomfield had his private Member’s Bill and we had a good debate on this subject in July. Today, he asked about the date for the consultation and I can confirm that we still expect that to be in September. I cannot give him an exact date, but he does not have long to wait. We look forward to the FCA’s report.
My hon. Friend Tracey Crouch made a frank and moving speech about some of her own experiences and highlighted the human side of the argument—hiding from bills and lying awake at night worrying about debts. It is important that we bear that in mind when we discuss these issues.
Let me pick up on the points made by Nick Smith about whether post offices could play a role in supporting credit unions. There is scope for further work there.
Sir Tony Baldry wanted to chime with the Archbishop of Canterbury’s call to compete Wonga out of business. The fact that the hon. Member for Islwyn summed up the relationship between credit unions and the payday lending industry as like that of David and Goliath was particularly appropriate given the Church’s intervention. I was pleased to meet the Archbishop of Canterbury on this issue along with my right hon. Friend the Secretary of State.
It will not be a short-term solution, which is why regulation is also important, but it is part of the long-term answer.
Meg Hillier made considered remarks about the importance of there being different products in the market and the certainty that home lending, for example, can provide to some customers. She was also right to highlight some of the problems with some of the hire purchase agreements through companies such as BrightHouse. Although they might not technically be high-cost credit because the APR is not sufficiently high, the length of the loan means that customers can end up getting a raw deal.
Issues of financial education were highlighted by my hon. Friend Guy Opperman. My parliamentary neighbour, Mr Bain, talked about the Colston road divide and the important issues facing small credit unions. My hon. Friend Neil Parish highlighted the issues of the spiral of debt.
We have had a positive debate. I share the concerns that have been raised and Government and regulators are acting. The OFT has taken action and 19 of the 50 top lenders have left the market. Three further licences have been revoked. The FCA will have strong new powers from April, the Competition Commission is investigating and the House is right to keep up the pressure. I commend those hon. Members who have taken time this afternoon to put forward concerns on behalf of their constituents.
I will not keep the House for long, as I hear a number of north-east accents around me from Members who are waiting for the next debate to start.
I congratulate everybody who took part in today’s debate. It is a case of the House at its best. It has been an informed debate, as Backbench Business Committee debates always are, and I echo many of the comments made by both the Opposition and Government Front Benchers. We want to see a sector that delivers for the consumers who need that. We are seeing consensus among everybody in this House that we need not just regulation but better regulation. We have a real opportunity through the FCA and I hope that we do not blow it.
We have seen a manifesto for action today that everybody in the House can support. I thank the Committee again for allowing us the time for the debate, I thank everybody who has taken part and I am heartened by what I have heard from those on the Front Benches. I look forward to further action in the future.
Question put and agreed to.
That this House has considered high-cost credit.