Backbench Business — High-cost Credit

Part of the debate – in the House of Commons at 1:02 pm on 5th September 2013.

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Photo of Stella Creasy Stella Creasy Shadow Minister (Home Affairs) 1:02 pm, 5th September 2013

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.