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.