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.