Backbench Business — High-cost Credit

Part of the debate – in the House of Commons at 12:32 pm on 5th September 2013.

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Photo of Chris Evans Chris Evans Labour, Islwyn 12:32 pm, 5th September 2013

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.