Lord Mitchell
To ask Her Majesty’s Government whether they plan to take action to cap the interest rate charged by finance companies offering payday loans.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)
My Lords, there are real concerns about these loans, but capping interest rates is not necessarily the solution as it could reduce access to licensed credit and force some consumers into the arms of illegal loan sharks. We have commissioned research to look at the impact of capping the total cost of credit that these lenders can charge. We are having discussions with the industry on ensuring that existing codes of practice contain real enhanced consumer protections to address concerns that blight this market.
Lord Mitchell
I thank the Minister for that reply. Some 3.5 million people in this country use payday loans. Yesterday I decided to become one of them. I applied for a loan for £300 over a 21-day period. I went on a very friendly website and filled out all the forms very quickly. It told me that if I clicked the button, I would have £300 in my bank account in 15 minutes. I had to repay, in three weeks, the sum of £369, which is an annualised interest rate of 4,200 per cent. I did not click the website. Will the Minister say whether the Government plan to regulate this industry? There are a lot of very desperate, vulnerable and gullible people out there, and I think that they need help.
Baroness Wilcox
I thank the noble Lord for his personal intervention on this question. No doubt consumers should not be swayed by promises that they will have the money in their banks in minutes. This may well be true, but before taking out one of these loans they should stop and think. Most people handle payday loans very well—we are rather good at handling credit in this country—but at the moment we are going through tough times and more people are borrowing fast, quickly and just for a couple of days. Of course, we all know that APR is annualised up and therefore most people pay about £50 or £60 for the couple of days that they need the money. Without doubt, there are concerns around payday loans such as rolling over old loans into new, businesses using continuous-payment authority to take money out of people’s bank accounts when they are not expecting it and a real lack of transparency about how these loans work, as the noble Lord has just shown. We have started discussions with the industry on ensuring that its existing codes are working and being enforced, and we are now looking at the total cost of credit. Bristol University’s Personal Finance Research Centre is to carry out research to identify the impact on consumers and businesses of introducing a cap on the total cost of credit, as referred to by the noble Lord.
Baroness Oppenheim-Barnes
My Lords, does my noble friend agree that the most important part about any new code is that it makes it absolutely clear to the borrower from the start how much the loan is going to cost and what other consequences might arise from late payment?
Baroness Wilcox
My noble friend was not only the Minister for Consumer Affairs but the chairman of the National Consumer Council for some years, so if she speaks on this subject we know that she speaks with authority. She is absolutely right; to be an informed consumer is the most important gift that we can give to people when they make purchases or take out a loan. We have started discussions with the industry to check that people are giving out the right information, and in April next year we will move free advice to the Money Advice Service, which will be co-ordinating debt advice across the country.
Baroness O'Loan
My Lords, in light of the reductions in welfare benefits coming down the road, are there any plans to address the critical period of debt and introduce effective regulations that will require advertisements in the windows of these money shops to say exactly what a loan will cost? For example, if you borrow £100 for a month it will cost you £X. That sort of information would immediately alert people to the risks that they are running. We cannot afford to wait for commissions of inquiry and academic research about something that, as the noble Baroness has said, is a long-standing problem.
Baroness Wilcox
The Office of Fair Trading is always vigilant and always has its eyes on this to make sure that the information is out there. That is a particularly good piece of advice, however. I will see whether this is being done and, if not, what we can do to take it forward.
Baroness Royall of Blaisdon
My Lords, I agree with the noble Baroness when she says that we need informed consumers, but will she agree that for a Government to say that people should stop and think before they take these loans demonstrates that someone is out of touch? These people are desperate and poor and they have nowhere else to go, which is why they need good regulation and assistance.
Baroness Wilcox
After six years as chairman of the National Consumer Council and seven years as the president of the Trading Standards Institute, I am sorry if I gave the impression that I take it casually that people should get into trouble in this way. I apologise if that is the impression that I gave. There is no doubt that the biggest worry in all this is that capping, or any other similar action that we take, will lead to the poorest and most vulnerable people having to go to illegal moneylenders, where the punishment if they do not pay is not always visible. All the time that they can borrow money legally—no matter how high the interest, no matter how wrong the way in which they are borrowing it is—we can at least be there to help them out of the trouble they get into.