Payday Loans
Lord Mitchell
To ask Her Majesty’s Government what assessment they have made of the findings of the Office of Fair Trading’s report on payday loans.
Lord Popat
My Lords, the Government are deeply concerned by the OFT’s evidence of irresponsible lending to people who cannot afford it, and by its findings of fundamental problems with the way the payday lending market works. The Government have worked with the regulators, including the OFT, to announce a strong action plan. Tough enforcement today, combined with the move to a new regulatory regime, equipped to deliver robust consumer protections in the future, will tackle concerns in this market.
Lord Mitchell
I thank the Minister for that reply. The report from the OFT is indeed a hard-hitting document. It says that payday lenders are guilty of widespread non-compliance with the law—not a few of them but most of them. However, I am left with two concerns. The first is that the Government seem to be indicating that they are reluctant to place caps on the interest rates charged. Is this true? Secondly, are payday lenders now sidestepping regulation by going offshore? What are the Government doing to plug this loophole?
Lord Popat
My Lords, that is why last week’s announcement was about the Government and regulators taking strong action together, both to address current problems quickly and to ensure that a more effective regime will be in place next year. A cap is not recommended by the Bristol University report; a cap will reduce access to credit and will mean fewer lenders. As for lenders going offshore, I do not believe that this is the case yet, but if we bring a cap into place there is a good chance that lenders would rather lend from abroad than from this country to avoid the cap regulation.
Lord Forsyth of Drumlean
My Lords, is not the problem with payday loans that people take them out and then take out another loan to pay off that payday loan, so that the loans become larger and larger and the interest rate burden unaffordable? Is that not very similar to the Opposition’s economic policy?
Lord Popat
My noble friend makes a very valuable point. That is why the Government are now clamping down on these payday lenders, particularly through our Office of Fair Trading. Unfortunately, the noble Lord is right about the rollover of interest costs, which are quite astronomical to borrowers. That is why enforcement action is being taken as quickly as possible.
Lord Martin of Springburn
My Lords, what steps are being taken to encourage more credit unions throughout the United Kingdom so that people in the poorest communities in our land do not have to turn to payday loans and illegal moneylenders?
Lord Popat
I thank the noble Lord for that question. Yes, we are expanding credit unions, which offer affordable credit and real help for people who might otherwise borrow money from high-cost lenders such as the payday lenders. The British Bankers’ Association is also looking into this to see what bankers can do to help people with a short-term overdraft or a temporary loan when they are in a difficult situation.
Lord Richard
My Lords, many years ago, when I was a young law student, I learnt about the moneylenders Acts, which, as far as I can remember, meant that if you charged an excessive amount of interest you could not recover your money. Does that still apply and, if so, is the way to deal with these payday loans and the excessive interest charged on them to have one or two good civil cases in which the borrower refuses to pay and is taken to court, with the judge then declaring recovery illegal under moneylenders Acts?
Lord Popat
My Lords, the consumers—borrowers from payday lenders—are of many different types. A large number of them borrow money from payday lenders as a short-term loan or in an emergency. Some use the payday lending system rather than a credit card; quite often a credit card is very expensive, and they have more control over borrowing from payday lenders than they would have over credit cards. Quite often there are customers who borrow money from payday lenders because the banks, for reasons of liquidity, are often not very keen to give short-term overdrafts.
Lord Elystan-Morgan
My Lords, the noble Lord, Lord Richard, is absolutely correct, is he not? For some years now, judges in our civil courts have had wide powers to cancel unconscionably unfair contracts and to rewrite the contract where the court considers that it is fair and just to do so. The powers are there; why are they not used?
Lord Popat
My Lords, the Consumer Credit Act requires lenders to be licensed by the Office of Fair Trading and we are passing these powers on to the new regime of the FCA in 2014. The noble Lord is right: quite often with heavy debt of this nature, the court tends to impose on the consumer a credit embargo or a county court judgment, and the consumer will often find it difficult to borrow money in the future.
Baroness Kramer
My Lords, during the passage of the Financial Services Act, the noble Lord, Lord Mitchell, together with the then Minister, the noble Lord, Lord Sassoon, and, I believe, the most reverend Primate the Archbishop of Canterbury, introduced clauses that gave the new regulator the power to cap the interest rates, fees and other charges of payday lenders. For clarity, will the Minister confirm that these powers are in the legislation and that, when the regulator comes into force laterthis year, we will, as I hope, all press it to make use of them?
Lord Popat
The noble Baroness makes a very important point. Under the current circumstances, capping by the OFT would cause problems for access to credit, but we are happy to give powers to the FCA, the new regulator. It will have power to cap credit in the future if appropriate, but at present the OFT does not.