Payday Loans
Lord Kennedy of Southwark
To ask Her Majesty’s Government what assessment they have made of the alternatives to the payday lending industry available to consumers.
Lord Kennedy of Southwark
My Lords, I am delighted to have secured this debate today. I am looking forward to all the contributions from noble Lords, in particular from the most reverend Primate the Archbishop of Canterbury. I am delighted that he has found time in his very busy schedule to take part in this afternoon’s debate.
We are in a very desperate and difficult situation. The payday lending industry is making a small group of people very rich by lending to people who struggle to get access to reasonably priced financial products to meet their needs at the most exorbitant and outrageous rates of interest. As the most reverend Primate told the House when he spoke during the passage of the Financial Services Act, this is nothing more than usury. A loan becomes usurious because of the excessive or abusive interest rates applied, and the payday lending industry does just that.
I am extremely disappointed that the Government have done next to nothing on this issue following the cross-party agreement on an amendment to cap interest rates which was passed in this House last year. Will the noble Viscount tell the House why the Government have done so little on this issue? Yes, we are living in tough times, but I get the feeling that for some people times are tougher than for others. I do not feel that we are all in this together. Rip-off Britain is alive and well. The payday lending industry is one of the worst examples of exploitation of the poor and the vulnerable, and we all need to do something about it. Government, Parliament, banks and other financial service providers, the Office of Fair Trading, other regulators, the Church and civil society all need to say, “Enough is enough. We are not going to let you treat people like this any more”.
The Government should be doing a number of things and should use their influence to get others to take action as well. We find ourselves in a situation where the alternatives to the payday lending industry are few, and the alternatives that exist need active help and support to grow in strength to be able to deliver and provide real and effective choice for consumers.
The Government have had plenty of advice, seen plenty of studies, and lots of work has been done to identify the problem for them, but so far their response has been poor. Some of the worst practices of this industry include poor lending checks—when there is no proper assessment as to whether the applicant for a loan has enough disposable income to repay the loan in full. Payday lenders often roll over loans without checking whether they will be affordable, even though rollovers should be seen as a clear indication that the borrower may be experiencing financial difficulties. The Office of Fair Trading noted that payday lenders have a strong incentive to roll over loans, making as much as half of their revenues this way.
Multiple loans are also a key indicator of acute repayment problems and should ring alarm bells—but they do not. The misuse of continuous payment authorities has seen situations where money is taken from people’s accounts, leaving them with no money to cover food, housing and other essential bills. Default interest and charges make the cost of rollovers very expensive for borrowers, who cannot repay their loan on time. Again, this is another huge source of revenue for payday lenders.
The aggressive targeting of students and young people is wrong. I was horrified to learn of young people using their smartphones to get a payday loan to buy another round of drinks on a Saturday night. I could go on with this list of bad practices and horror stories but I am sure that other noble Lords will have further examples that they will want to share with us. I will speak about some of the things that could be done to regulate the industry more effectively and get it to act responsibly.
I invite the Prime Minister to call a summit at No. 10 to get the leaders of the payday lending industry, the banks and other financial services providers, including credit unions, the churches, the regulators and the representatives of civil society to sit down together to come up with an agreement on what is acceptable and what is not, what can and what cannot be done and, if need be, to enshrine that in law.
When I joined this noble House just over three years ago almost every Minister who spoke from the Dispatch Box told us that the answer to most of our problems was the big society. Today we never hear the term mentioned, as if it had been banished from the book. If the concept ever meant anything, surely it means people coming together, supporting their community and the most vulnerable, working together, opposing injustice and unfairness, and not letting people be ripped off. What happened to the big society? I hope the noble Viscount will be able to tell the House how this concept is helping people in financial hardship.
What can we do? At a minimum, we could create a situation where no one is struggling to pay off multiple payday loans. No one should owe more than £500 in payday loans. Lenders recovering payday loans should never leave borrowers without the means to meet basic expenditure such as rent, food and council tax. The use of continuous payment authorities should be stopped, and replaced with payment authorities that are controlled by the customer only. If that is not possible because the type of basic bank account the customer has will not allow that, the bank should change the rules and permit it. If a customer notifies the payday lender that they are in financial difficulties, then default charges and interest payments should be stopped for at least 30 days while they get help to deal with their debts. The default charges and other punitive charges should never exceed 30% of the original loan.
Every payday lender on the high street should be required to provide details of where people should go for debt advice, and online lenders should also provide similar information. I would like to see all payday lenders carry a health warning on their advertisements in whatever medium. These warnings should be about 20% of the size of the advert. Similar rules used to apply for cigarette companies, before they were banned from advertising. Payday lenders should tell customers where to go for debt advice, and notify them that cheaper alternatives are available.
For all those measures, other measures are being introduced by payday lenders. We need a plan, and we need to support the alternatives to the payday lending industry. Credit unions have a role to play, and noble Lords will be aware of my active support for the credit union movement over many years. However, only the biggest credit unions will be in a position to provide immediate help. The London Mutual Credit Union, one of the biggest in the country and the biggest in London, has taken up that challenge. The legislative reform order the Government passed on credit unions was very welcome, as is the Treasury’s recent announcement of a rise in the interest rate cap.
The credit union expansion project is good news, and on many occasions I have praised the Government for their work here, but a £35 million fund is not going to provide the solution to our problems. It is a drop in the ocean, and much more needs to be done. In this House I have previously called on the banks to actively support the credit union movement. They must do so not only with a bit of sponsorship or small sums of money, although that would be welcome, but by making a commitment to build these organisations and make them financially robust. Banks should use the skills and expertise of their own staff, working on long term secondments to help the credit union movement grow and develop. The aim is to build what we see on both sides of the border in Ireland and in the United States of America: financially robust institutions, owned by their members, which deliver locally tailored financial products at a reasonable price.
We also need the support of the wider business community, and in fact every employer in the public and private sector. Simply advertising the availability of their local credit union to staff and allowing them to save with it through check-off would be a big step in the right direction. Some of our biggest companies and the Government should take a lead in this with an advertising campaign in support of the credit union movement.
It would also be very helpful if local government as a whole took a proactive role in supporting local credit unions. There are some fantastic examples in places such as Southwark, Islington and Sandwell, to name just three. We need the whole of local government to play its role. If every local authority pledged to deliver a place on the high street for their local credit union, what a welcome sight that would be.
I was surprised to learn how basic some basic bank accounts are. In an age where you can get a payday loan on your smartphone in minutes, some of these accounts do not allow people to get cash back at a supermarket when going shopping, forcing them to use cash machines. If your local bank branch has closed and taken its cash machines away, you are left with the corner shop where you have to pay to use the cash machine. These machines charge £2 or £3 to get out a £10 note. Why can the banking industry not look at some sort of basic loan of up to £500? That could make a huge difference here. Why can the Government not work with banks to provide them with protection and support if they work to help people get away from the payday lending industry?
The point I want to make in this debate is that if whole communities are abandoned then they will become the victims of the payday lending industry. To stop that, there must be a full range of financial products available. We must ensure that you are not discriminated against because of where you live or because you are poor. There need to be viable alternatives to payday lenders. Credit unions are part of the solution, but not all of it. Other financial providers need to step up, and civil society as much as government needs to say that enough is enough.
I thank all noble Lords who are about to speak in this debate. I look forward to their contributions and to the reply from the Minister.
Baroness Wilcox
My Lords, 23 years ago, in 1990, I chaired the National Consumer Council. We brought out a book called, Credit and Debt. With the permission of the House, I will read one or two lines from its foreword, which states:
“People have always needed or wanted things that they cannot immediately afford. And there have always been people on hand with the money to lend to them—at a cost”.
The book added that in the previous few years:
“Consumers enormously increased their use of credit. New types of lending grew quickly, older ones declined ... Most people have been able to make good use of these new opportunities, but there has, too, been a worrying increase, for whatever reason, in the number of credit casualties … The change in economic conditions … has reminded us that credit is a risky business. It is risky for lenders, of course, but it is risky for borrowers, too. Taking on credit means mortgaging your future in a large or small way. And none of us can be certain about the future. Today’s rising casualty rate raises anxieties about the greater potential for damage in an expanded market … Many people are still forced by necessity to borrow—sometimes on contracts they do not understand, and at rates that, realistically, they may not be able to afford … Information and education are important keys. They are at the heart of a truly competitive and healthy credit market”.
I read that and some of the rest of the book just to remind myself that I seem to stand up quite often in this House when the noble Lord, Lord Kennedy, stands up, and we are usually talking about credit unions. Some of the ideas that he has mentioned made me think that there is hope and that there may be new ways for us to go in.
However, the credit unions are all about saving, being prudent and putting something aside. The sort of lending that we are talking about here is very often for people who are borrowing in a panic, borrowing instantly, and want to go straight into the high street. We have seen more and more of such lending. Credit unions might not solve this issue, but some of the other suggestions are certainly worth listening to.
We have a Government committed to curbing unsustainable lending, and the report commissioned from Bristol University and the OFT’s final report on payday compliance demonstrated clearly that the high-cost credit market, particularly the payday lending market, is not functioning in the consumer’s interest. The Government have set out how they and regulators together will tackle the concerns in the payday lending market. The OFT now, and the FCA from April 2014, will clamp down on irresponsible practices, and in some cases blatant non-compliance, by lenders. The OFT is consulting on a provisional decision to refer the payday lending market to the Competition Commission. The Government will begin immediate work with industry and regulators to clamp down on the advertising of payday loans, and they are strongly pressing for the industry to improve compliance with payday lending codes. The FSA has committed to considering whether there are gaps in the regulation of payday lending that need to be addressed by the FCA from April 2014.
All this is good news for the consumer and consumer groups such as the National Consumer Federation, Consumer Focus, Citizens Advice and Which?. All are calling for better affordability checks, more transparent information, preventing lenders from levying excessive charges on borrowers in financial difficulty, and other measures. I and many noble Lords have received e-mails and letters from new lenders with many suggestions for alternative ways of lending.
Credit is therefore a popular consumer product. Most people in Great Britain handle it well, and I was reassured to read the foreword written by the Minister for Consumer Affairs, Jo Swinson, in the Government’s response to the Bristol University report, who stated:
“The Government does not believe that a cap on the total cost of credit would be the best solution now to the problems that have been identified by the Bristol report and the OFT payday compliance review”.
However, she added that a “cap might be appropriate” at some time. Here is the point of my concern and my reason for speaking today.
I hope that we can avoid capping at all costs. Germany and France cap at about 25% and they have a very narrow lending market. My worry, and that of consumer groups, the previous Government and this Government, is that capping will restrict access to the credit market, making it unavailable to the poorest and most vulnerable in our country: the disadvantaged consumers. They would undoubtedly lose access to the legal market and be forced into the hands of loan sharks and illegal lenders whose terms and methods cannot be easily controlled or monitored. All Governments and consumer groups are concerned that when it went wrong, the borrowers would be afraid to seek help from the very organisations that are set up to assist people taking panic-borrowing and to sort out their debts. They would find it hard to find these people until it was too late.
I was brought into this House to speak for the consumer, particularly for the disadvantaged consumer, and I hope I am doing that today. After all, a consumer is you and me; a consumer is somebody who buys or uses goods or services, whether publicly or privately provided; a consumer is empowered by having choice, by having access to that choice, by having the right information on which to make that choice and by having safety, equity and redress. Taking away access to a market—in this case, capping the lending market—is giving a disadvantaged consumer no choice other than the black market. As I have already said, capping would mean that the most vulnerable could not make a choice, thus stopping them getting equity, redress and help.
Achieving access to credit for all in a free, well regulated and open market should continue to be our goal. Government will regulate the market better. Schools, churches, families and lenders should, and if encouraged will, all play their part. However, 23 years on, I still believe that education and information are at the heart of a truly competitive and healthy credit market.
Lord Hollick
I thank my noble friend Lord Kennedy of Southwark for giving the House the opportunity to discuss and debate this important topic. High-cost lending is a booming business. The demand for short-term payday loans and longer-term high-interest loans is being driven by the crushing impact that the very tough economic climate is having on personal and family budgets. The fall in real incomes and the above-inflation increases in the price of essentials such as utilities and food are leaving many people short of the money they need to make ends meet, so they turn to the payday lenders.
The Bureau of Investigative Journalism recently published a report on high-cost lenders, which showed that they had enjoyed a 30% growth in turnover over the last 12 months and were achieving 30% profit margins on that turnover. Harsh economic circumstances might be the driver of demand, but the secret of the high profit is the mix of simple and instant loan availability, lax regulation, the absence of competition and eye-watering interest rates. Desperate borrowers—and it is estimated that there could be up to 5 million such customers—many with poor or no credit histories, can get instant cash, often without credit checks, documentary evidence or, as the noble Lord, Lord Kennedy, said, checks on affordability.
The lenders’ business model is to recruit borrowers and then to increase the number of loans, thereby maximising the yield per customer. So begins the awful debt spiral that traps so many payday borrowers. For the lenders, the high bad-debt experience, estimated at up to 25%, is more than compensated for by the stratospheric interest charges.
Unsurprisingly, this booming sector has caught the eye of international investors, most notably from the United States. The expansion of the payday loans industry in the US has been curtailed by the growing clampdown on high interest rates by state regulators, with some states going so far as to ban payday loans completely. Others, such as Pennsylvania, have capped interest rates on short-term loans at 30%. Similar initiatives are under way in other states.
The vanishingly light regulatory environment here in the UK is a big incentive to US investors, many of whom also take advantage of aggressive transfer pricing to ensure that, like Google and Amazon, the bulk of their profit is made in a tax haven. This combination allows investors to make spectacular tax-free or very low-tax returns at the expense not only of our most hard-pressed citizens but of our taxpayers generally. Could the Minister confirm that that is indeed the outcome of the coalition’s policies and its failure to put in place serious regulation to curb high interest loans, a measure that is commonplace in most developed countries?
Such a lucrative market would typically see high levels of competition, which would benefit borrowers with lower interest rates, but that is not the case, one reason being the complete absence of the major UK banks from this market place. That is all the more surprising, since the one thing that every high-cost borrower must have is a bank account to receive the money borrowed and to pay the interest and repay the principal by direct debit or similar arrangement. The millions of payday borrowers are all existing customers of our major banks, with known financial profiles and transaction histories. Yet the banks have failed to provide small loans to their existing creditworthy customers on terms that would almost certainly be substantially less expensive to the borrower than those currently available while being very profitable to the bank itself. To compound this failure and add insult to injury, it is reported and widely understood that the banks actually downgrade the credit rating of customers who take out payday loans.
The failure of our major banks to provide products to their existing customers is part of their wider failure to meet the demands of their customers generally. Despite the exhortations of the Government and the provision of low-cost funding for lending by the Bank of England, loans to SMEs have shrunk in each of the last three years, and loans to individuals are difficult to obtain and often prohibitively complex. Although the banks do not lend to their existing hard-pressed customers, they are happy to participate in this lucrative market by providing funds directly to the high-cost lenders. The Royal Bank of Scotland and Barclays have lent substantial sums to a range of payday lenders that are often secured on the very loans made by these lenders to the customers of the very bank providing the funds. This perverse behaviour speaks volumes about the banks’ lack of concern for the needs of their existing customers, their general lack of business acumen by failing to seize a business opportunity right on their doorstep, and their very confused attitude to corporate social responsibility.
The Chancellor has been keen to intervene in the affairs of the Royal Bank of Scotland and Lloyds to the point of becoming meddlesome. Could the Minister tell us if the Chancellor, or any other Minister, has asked either of these banks—RBS and Lloyds—to explain their failure to offer their individual customers loans at reasonable rates and thus provide competition to the rapacious payday lenders? Could he please also explain why it is acceptable for banks owned by the public to fail to lend to their creditworthy customers but acceptable for them to make loans to high-cost lenders?
I want to end on a happier note. Not all high-cost lending is actually high cost. Indeed, if you are the right borrower, the terms can be very attractive. An example of this is the Arbuthnot Banking Group, which owns high-cost lender Everyday Loans, which typically charges between 50% and 200% interest. However, Arbuthnot has made a loan facility of £5 million to the Conservative Party at the very attractive rate of 3.5%. I have no doubt that all the appropriate steps were taken by Arbuthnot to satisfy itself as to the creditworthiness of the Conservative Party. Then again, it probably helps that Arbuthnot is run by Mr Angest, a former Conservative Party treasurer and major donor to the party; so it is who you know that matters.
Baroness Kramer
My Lords, I congratulate the noble Lord, Lord Kennedy, on obtaining this debate, particularly because it focuses on alternatives to payday lenders. I will not go through the routine of describing the evils of many of the high-interest lenders; that has been well done by others in this debate. However, I will take issue with the noble Baroness, Lady Wilcox, on the point that these are impulse loans for something frivolous—the noble Lord, Lord Kennedy, gave the example of a student buying beer. I think that is the exception.
We have here a group of people on modest incomes. They have some income—otherwise they are of no interest to the payday lender—but find themselves under stress and have nowhere to turn other than to the payday lender or to the illegal market. That, to me, is not choice. The issue that I want to raise and focus on is the absence of choice in this market.
I say in passing that I hope very much that the OFT and the new regulator, the FCA, will use the considerable powers that have now been given to them—many of those amendments were moved in this House—to bring the payday loan industry to heel. Indeed, I join those who call for a cap on payday lending. It may mean that we first have to make sure that there are alternatives in the market, but that is a challenge to which I think we ought to rise.
The noble Lord, Lord Kennedy, talked about credit unions. Obviously, they play a very important part in trying to provide an alternative, as do the co-operative banks and the mutuals. For all of them it is quite difficult, because they cannot put the kind of spend into sexy advertising and affectionate granny puppets that payday lenders can. However, it seems to me that, with the proper support, they can make a very big difference in this market.
I will talk about another area where I think we have been missing a trick, and I take my example from the United States. It is the concept of community development finance institutions. There are relatively few of these in the UK, but in the US they are common. Indeed, many of the states that are now capping payday lenders are able to do so because the CDFIs offer the alternative that some in this Chamber have talked about. CDFIs have a mission to provide financial products and services to people and communities underserved by traditional financial markets. They are sometimes banks, sometimes credit unions, sometimes loan funds and sometimes venture capital funds. Indeed, they account for a lot of the early start-up capital for new businesses in the US.
However, it is their commitment to distressed communities that sets them apart. For example, while a traditional credit union serves its members, a community development credit union is specifically targeted at a disadvantaged community. CDFIs are local institutions serving their local community, and members of the community usually serve on the boards. They are typically funded by outside investors. These could be social investors, who are seeking either no return or little return in financial terms but are looking for social and environment return. In the United States, they are frequently able to access capital from the Government. However, they are required, as they function, to be self-sufficient and to operate on commercial principles.
Your Lordships will be aware that we will soon know more about where the big high-street banks in the UK are actually lending their money and what types of loans they are making, be they small business loans, mortgages or unsecured loans. We will know it by bank and by postcode once a voluntary agreement, which is now in negotiation, is completed between the Treasury and the banks. We hope that the first data disclosures will be available before the year end. As noble Lords will remember, the Government promised to get this disclosure after the issue was forcefully raised in this House through proposed amendments to the Financial Services Bill. The Government promised this House that, if such a disclosure agreement could not be reached voluntarily, it would be mandated through an amendment to the banking reform Bill. However, it now looks as though that will not be necessary and that a solid and sound voluntary agreement will be in place very soon.
Those data should tell us whether the high-street banks are neglecting communities and, if so, which communities they are and where they are. If we identify vacuums, it strikes me that they will be the perfect space into which to introduce CDFIs. In the US, major banks that fail to lend in areas where they take deposits can, as it were, amend the situation by investing in a CDFI to do the job which they, the high-street banks, are reluctant or not equipped to do. That seems to be very right, as at least a part of banking is surely a utility service, and that can be recognised in the terms of the banking licence.
I anticipate that local authorities, charities and social enterprises could move into this CDFI space, supported by investment and technical know-how from the major banks. As I said before, a growing breed of investors—we see them becoming increasingly active in the City of London—are seeking not just economic returns but social and environmental returns for their money. This is a way for them to begin to participate in this kind of benefit to disadvantaged communities. I am very pleased that some of this is recognised in the report from the Parliamentary Commission on Banking Standards.
The CDFI world in the United States has assets under management exceeding $30 billion. It is a massive sector, stretched across the country. In the UK, we have just a scattering of institutions. However, they lent some £200 million in 2012, so they certainly have a foot on the ground, and they had some 33,000 customers. Many of those customers were social ventures but they were also micro-businesses and individuals. So far, they have been helped to the tune of some £60 million by the regional growth fund. The high-street banks have agreed in principle to refer to the CDFIs small businesses whose loan applications they have rejected, although I do not think that the referral system is working terribly well at the moment. However, there is the beginning of a relationship and a network between the existing banks, the major banks and the existing CDFIs, and we can start to build on that. It is crucial that we find ways to bring disadvantaged communities into the economic mainstream, as that will enable people to empower themselves in their lives and contribute to the economy.
The period of banking reform that we are going through at the moment comes together with new regulators, who have a new attitude. Both the FCA and the PRA have taken up the cause of diversity and competition in a way unheard of in the past. All these things have created a window of opportunity. However, if we do not seize that window and try to make sure that over the coming years we create the necessary network to provide banking services and credit to all the communities in our country, we will lose it, because there are plenty of naysayers who are happy to write off both disadvantaged individuals and disadvantaged communities.
I am therefore arguing for a concentrated effort to accelerate the growth of CDFIs, and credit unions are a part of that. I echo the call of the Parliamentary Commission on Banking Standards to the Government to look at tax incentives and other mechanisms to boost investment in these bodies. If we find from data disclosure that the high-street banks are essentially neglecting certain communities, it seems to me that the moral case is made for those banks to step in voluntarily, support CDFIs and make sure that no one falls through the cracks. If they will not do it voluntarily, let us do it by making sure that it is done under the terms of their banking licence.
The Archbishop of Canterbury
My Lords, I, too, am grateful to the noble Lord, Lord Kennedy, for instigating this debate on alternatives to payday lending. It is something that he has studied for many years, and he is an acknowledged expert in the field.
The payday lending industry has grown at a vast speed, as we all know, and alternative sources of credit are few and far between, particularly for those who have had their applications for credit turned down by a high-street bank. It is very easy to see, as we have heard already—the noble Baroness, Lady Wilcox, spoke to this very clearly and powerfully, as ever—that it is going to take a long time to provide alternatives. However, the fact that we cannot do something now does not mean that we should not start doing it now or that it should never be done. The noble Baroness, Lady Kramer, spoke very powerfully on that.
Payday lenders lead to people being assured, through impressively slick marketing campaigns and targeted advertisements, that the process of taking out a loan is quick, simple and safe. However, once the loan has been taken out, it is difficult to get out of the cycle. With the rates offered, simply paying off the interest becomes a struggle.
The noble Lord, Lord Kennedy, spoke already of the problem of rollovers. I do not want to repeat that. I will, however, pick up the comment about interest rate caps. I very rarely dare to disagree with the noble Baroness, Lady Wilcox, but on this occasion I will take my life in my hands. A cap does not mean 25% or 30%. It is not any figure. The Financial Services Act provides for a study of the consequences of a cap to be looked at and then for the cap to be brought in at an appropriate level. Caps are needed at a sensible level that does not choke off supply and send people into the hands of loan sharks. I have seen the effect of that when working in Toxteth. Caps are there to prevent usurious lending. The noble Baroness said that caps should not be introduced at any price. The trouble is that the interest rates are at any price, typically more than 2,500% on an annual basis. We need to look at reasonable limits that cut out legal usury from our high streets.
This is not a problem faced only by the very poor. Some 5 million people in this country use payday loans and, apparently, one in four Londoners. The situation is becoming too big to ignore. I hope that the Minister will let us know whether the Government will consider seriously the exercise of its powers in this area under the Financial Services Act.
However, simply dealing with that does not deal with the long-term question. It is quite clear when I look at what is happening on the high street and in our local communities, particularly in the most deprived areas, that—as the noble Lord, Lord Kennedy, explained—alternatives are very few and far between. My own group, the church, can play a part in the development of credit unions up and down the country. There is a role to be played by local institutions. We have, so to speak, branches in every community—16,000 branches in 9,000 communities, even more than the banks. If we wish to see the development of alternatives to payday lenders in all communities, we must use all the institutions in all communities—churches, post offices, and even, if I dare say so in the presence of the Government, the Co-op. The Post Office is an institution that is playing an increasingly important role. That is clearly something warmly to be encouraged.
The church is in a unique position up and down the country. For the credit union movement to be successful and sustainable, and other forms of local finance to develop, we need a bottom-up movement of local organisations working to change the sources of supply. It will take many years—10 to 15 years—but it must start now. The new institutions must develop flexibility in order to demonstrate their ability to meet the new needs. As the noble Baroness, Lady Wilcox, pointed out very clearly, they are not the needs that were present when credit unions first began. People want quick access to money. They want to be able to get it now.
We can use local institutions that have places of work and skills that can be brought in through volunteers. Church members—not just those in the Church of England—give more than 23 million hours of volunteer time every month outside the regular work of the church. Volunteering comes naturally to us. Unlike some other things, it is something that we are very good at. Many who sit on the pews each Sunday have expert knowledge in finance, human resources, communications, marketing, debt counselling and all sorts of areas. We need a regulatory environment that makes it possible to have flexibility of provision.
If we are to have good regulation—huge improvement was made through the Financial Services Act, and we were grateful to the Government for the many amendments they introduced—equip alternative sources of finance with outlets that can be used in areas that need them and give them the capacity to exercise their location effectively, we also need to communicate the sources of alternative finance widely in the United Kingdom. Two-thirds of the population of Ireland are members of a credit union, but take-up and use of credit unions in the UK is still woefully low.
A mixed economy of geographically based credit unions and professional ones, and other forms of finance such as CDFIs, as the noble Baroness, Lady Kramer, said, will give the best chance of developing good, alternative sources of finance that will take away the need for caps because essentially they will compete the high-rate lenders out of existence. There is a very long way to go.
Recently in my diocese, I came across a painter-decorator who was made unemployed two years ago. For two years he sought a loan to start his own business. He was looking for £200. At the end of two years, through a third-sector organisation in the area, he was able to borrow £200. When I last heard, his book of orders was full for nine months and he paid off the loan in about three weeks. A finance system that in an area of poverty cannot provide £200 is dysfunctional and we need to pay attention to that. We need good, viable alternatives.
I warmly welcome the call by the noble Lord, Lord Kennedy, for a summit to deal with some of these areas. Will the Minister review the recommendations on basic bank accounts, which are also hidden in the depths of the Parliamentary Commission on Banking Standards—they are well hidden—in order to influence the banks, which indirectly he largely owns, to make better provision in the mean time before alternative forms of finance develop?
I am very grateful that we have had the opportunity to think creatively about alternatives. My hope is that a thriving alternative credit movement will one day mean that payday lenders simply are not necessary.
Lord Glasman
My Lords, I echo the sentiments of gratitude to my noble friend Lord Kennedy for initiating this debate and for his work over many years. He knows the realities and speaks plainly about them. It is also a tremendous honour to follow the most reverend Primate. I believe that the last archbishop to take a very strong stance against usury was Archbishop Laud and I say to the noble Baroness, Lady Wilcox, that we know what happened to him. I consider it a tremendous act of courage to stand in favour of the cap. It is an interesting story: the church resisted the increasing demands, but in the end, in the time of the Long Parliament, it was decided that politics should have no role in the setting of interest rates. It is wonderful that the voice of the church, Catholic and reformed, is heard once more on this issue.
I declare an interest: I worked for many years for London Citizens and the Industrial Areas Foundation. The noble Baroness, Lady Kramer, spoke excellently about the community development funds. An aspect that may be of interest to the Government is that the seed money was provided by President Nixon. It is not the case that Conservative Governments are hostile to the conditions of the urban poor. The interesting thing was that the initial seed money was £9 million. The assets of the urban development funds, looked at as a mixture of venture capital, urban development and loans, are now well over £1 billion. I have worked with them and looked closely at that in terms of Baltimore, and the effects that this has had there.
That is very inspiring, but we have nothing like it. We have no such framework; no initiatives have been taken. This speaks to the heart of the issue. I here put my head on the block in relation once more to what the noble Baroness, Lady Wilcox, said. My noble friend Lord Hollick spoke about Barclays: it made a loan of £120 million to the Money Shop six weeks before Christmas. I believe that the rate was 7%. The rate that was lent at to people was 4,000%, and now Barclays discriminates against its own customers and will not give them loans. This is completely out of order. The conditions of the working poor and the debt in which that they have to live are, as they say on the 73 bus where I come from, bang out of order. People cannot find access to money. They do not earn enough; they cannot find a decent, meaningful and honest way out of the poverty wages that they receive. Yet there are no new institutions in the banking sector that address this issue.
I am involved in a conversation with Salford about establishing a bank of Salford, working on the credit unions. An interesting addition to the suggestions made, which the Government should look into, is that if you put the payroll through the new institutions of local government or city governance, it transforms the financial status of those institutions, and suddenly they are able to lend. That is one important issue. We need to notice that there has been no innovation in institutions relating to the banking system.
We must go back to 2008 and assert sadly that none of us is innocent. Between 1997 and 2007, of the £1.6 trillion invested in the British economy, 81% was in mortgages and financial products. Family and personal debt exploded. People cannot find a way out of that debt. It is not outlandish to say, as we did in 2008, that 5% of the bailout should be used to establish regional banks, as part of this story. Why is quantitative easing going through the same failed banking institutions that are refusing to lend to local businesses and the working poor? It is important to stress that the overwhelming loans owed to these payday lenders are not from those on benefits. They are from working people who do not earn enough and cannot discharge their fundamental responsibilities to their loved ones and their absolute obligations to pay their taxes and rates. Overwhelmingly, the money goes on food.
I conclude by saying another thank you. This is the most fundamental issue that we face. Debt is exploding. We have not moved to value—we still have debt. We need to look at community development funds and the decentralised way in which they work, and the way in which they are controlled by local people. I worked with the Industrial Areas Foundation. To ease the concerns of the noble Baroness, Lady Wilcox, let me say that when the interest rate cap was set in Maryland, because of access to the alternative finance system there is no evidence that it led unavoidably to loan sharks. That is not the case. There were alternative financial institutions, and many were set up by a partnership between churches and local unions.
There are many creative ways in which we can deal not only with the issue of the working poor but by which we can reactivate the civic institutions to a common purpose, which is value. We need to move absolutely from debt to value in the economic system. We must stop subsidising, bankrolling and giving all the perverse welfare incentives that we had to the banking institutions that are not fulfilling their role. We must create new institutions that have local people’s ownership and control, people who serve their own interests. This debate is a wonderful opportunity to investigate the genuine opportunities to bring some credit to the starving people of our country.
Lord Mitchell
My Lords, I, too, thank my noble friend Lord Kennedy of Southwark for securing this important debate. Both he and I share a passion for this subject and both of us are determined not to let the issue die. We both see the misery and hopelessness that is caused by payday lending and other forms of loan sharking. We see it on our high streets, on-line and advertised on our London buses.
I would like to recreate the mood that existed in your Lordships’ House last November. I had introduced an amendment to the Financial Services Bill which we had discussed in Committee. On Report, I was fortunate enough to secure as co-sponsors of my amendment the noble Baronesses, Lady Howe of Idlicote and Lady Grey-Thompson. In addition, the then Bishop of Durham, now the most reverend Primate the Archbishop of Canterbury, also sponsored the amendment. By any measure, we had strong support.
Imagine my surprise the day before the debate, just as I was about to enter the Tube at Westminster station, when I received a call from the Treasury Bill team. As noble Lords will readily appreciate, this does not happen too often, especially to mere mortals. The gentleman in question told me that the Government wanted me to withdraw the amendment the next day. I was more than a little surprised. I told him that we were going to defeat the Government, so why should I withdraw. “Because”, he told me, “we know you’re going to win and because the Government have totally reversed their position and now want to support you”. “But”, he went on, “we want to improve the wording and make it much more effective”. I staggered into the station hardly believing what I had heard.
The next day the Government were true to their word. They announced that at Third Reading they would introduce a tougher, more comprehensive amendment. So it was with great joy and a sense that right had prevailed that I withdrew the amendment. The revised amendment was introduced at Third Reading, in the name of the noble Lord, Lord Sassoon, for the Government, and I added my name to it. It went through on the nod, was confirmed in the other place and went on to the statute book.
To capture the mood at that time I would like to recount the words of the noble Lord, Lord Sassoon, who was the Treasury Minister at the Dispatch Box. He said:
“The Government are, like all of us, concerned about the appalling behaviour of some firms in this sector and the harm that vulnerable consumers suffer”.
He continued:
“Our objectives here are the same: they are to ensure that consumers of financial services have access to credit when they need it and at a price they can afford; and to ensure that the regulator is under a clear obligation, and fully empowered, to ensure that consumers are protected”.—[Official Report, 28/11/12; col. 215-16.]
I must emphasise the noble Lord’s words—“at a price they can afford”.
It was a government U-turn, to be sure, and it was of monumental importance; but to their credit, it was one that the Government made with good grace. Very soon, however, the mood music changed, and from statements coming from various government Ministers it became obvious to many of us that the Government’s heart had gone out of the matter. They were retracting their position.
Following the OFT’s report on payday lending companies, I tabled an Oral Question in March asking whether the Government were now reluctant to place caps on interest rates on these loans. The noble Lord, Lord Popat, who is in his place, replied:
“A cap will reduce access to credit and will mean fewer lenders”.—[Official Report, 12/3/13; col. 133.]
The noble Lord carefully avoided the fact that interest rate caps operate successfully in Japan, France, Italy, Germany, Slovakia and in many states in the United States. I do not know how this succession of events appears to noble Lords today but to me they sound like another U-turn. In four months the Government have performed a spectacular double U-turn—such athleticism and so devastating.
Of course, the amendment is now law and the FCA’s powers will become effective next April, but authorities are sensitive to what the Government say, and I am sure that they will see that heat has been taken out of the matter—that the Government no longer seem to care. I therefore want to ask the Minister three very simple questions to start with. Do the Government accept that it is reasonable for London buses to be driving around advertising loans that bear an interest rate of 4,200%? Will the Government state unequivocally that usurious interest rates are morally wrong and should be made illegal? Will the Government state emphatically that they will support the FCA in word and deed in its efforts to curb all the abuses of payday lending?
I would like to add just one more point before I turn to credit unions. In previous years loan sharks were very obvious—muscular men, probably with tattoos on their forearms and oozing menace. Their companion of choice? A pit bull terrier. Their message was crystal clear: if you don’t repay on time, you know what will happen. Today payday lending has become 21st century cool—iPhone apps, slick websites, high street offices with smiley people and flowers on the desks. They can disguise it any way they like; the fact is that they are all loan sharks. Some are legal, some are not, but they all peddle the same usury.
Fortunately, some organisations are choosing to distance themselves from these lenders. I am pleased to say that Bolton Wanderers Football Club no longer wants to be associated with QuickQuid. Unfortunately others have not been so responsible. It is a shame that great clubs like Newcastle United and Blackpool have chosen to be sponsored by Wonga, although individual players—to their credit—have bravely refused to wear its logo. Can it be that individual ethical institutions, such as the Wellcome Trust, are listed as one of Wonga’s shareholders? Following my noble friend Lord Hollick’s statement about Mr Angest, I believe that Mr Adrian Beecroft, also a major shareholder in Wonga, is similarly a major donor to the Conservative Party. I will say no more.
Let us move on to the alternatives. The noble Lord, Lord Kennedy, has been a champion of the credit union movement and has spoken eloquently on this subject a number of times. The combination of the excesses of the recession and the reduction in government benefits has made life doubly painful for many people in our society. More than ever it is necessary to have viable alternatives to legalised loan sharking and payday lending.
In April I saw a vivid example of this. I joined up with the Movement for Change and the Fair Credit Commission and I went to Kilburn. There I walked along the high road along with local residents. Today the street has at least 13 payday lending shops on it. It mirrors the situation in many other parts of the country. Local residents told me about members of their community running up unpayable debts. In one instance, a woman with disabled children told us how she now owed around £3,000. In another, a man with quite obvious serious learning difficulties told us how his unpaid bill with Vodafone had been sent to debt collectors when he was unable to pay. There the payday pattern of interest swung into effect—the amount outstanding rocketed as massive interest rates came into play. There are thousands upon thousands of heart-rending stories like this around the country. Some talk of suicide.
One of the more positive stories was that of a man who, like his father in Dublin, had set up a credit union in Kilburn after arriving there as a teenager. As noble Lords will be aware, the credit union movement in Ireland is particularly strong, with almost half the population using their services. It is a vivid example of their potential to expand here. This is especially needed as historically what credit unions provide reaches beyond just savings and credit to financial advice, encouraging a culture of saving. This week Glasgow Council announced plans to open a credit union account for all children starting secondary school. It is a particularly interesting step in that direction.
This kind of financial advice contrasts sharply with the growing evidence about how payday loan companies are operating. Noble Lords will also be aware of the ministerial statement last week that credit unions are now able to charge a maximum interest rate of 3% a month, a rate of interest that strikes me as just about spot on. It bears a stark comparison with the 38% charged by Wonga and others where there is no legal maximum. I hope that credit unions will be able to offer their services to more people and to run on a more secure financial footing. I also hope that they will be able to take advantage of new technology to improve their provision of low-cost credit to the people who need it. This was recommended in an ABCUL report on credit unions, and by Gillian Guy, of Citizens Advice, who wrote an article in the Financial Times this April which encouraged different providers to use modern technology to deliver financial support to those who need it. This leaves me with a thought on how to go forward—why does your Lordships’ House not set up a committee to investigate this industry?
I would like to ask the Minister some further questions. Will he confirm that the Government will continue to support credit unions, and in so doing carry on the good work of the previous Government? Will the Government reiterate their previous support for capping interest rates, confirm their support for the banning of advertising for these loans, and, finally, give their support to planning rules that would stop our high streets being completely overrun by payday lending companies?
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
My Lords, I welcome the opportunity to set out the Government’s position on payday lending and to explain how we are tackling some well recognised problems and promoting alternatives for consumers. I am grateful to the noble Lord, Lord Kennedy, for tabling this debate, and indeed for his work in this whole area, and to noble Lords who have raised important points today.
In line with the coalition principles of freedom, fairness and responsibility, the Government believe that people should be free to borrow. However, we also want more people to take responsible decisions about their finances. The Government recognise that not all people who use high-cost credit can get credit elsewhere. The Bristol University report on high-cost credit found that just over three-quarters of payday customers had no access to alternative credit. We therefore agree that finding different solutions to short-term, high-cost finance is important.
Payday loans are a relatively new phenomenon. They should be used only for an emergency short-term fix and never for longer-term debt problems. For some, payday loans can be a way of managing a short-term cash flow problem—for example, a sole trader who needs to buy supplies for the next job before being paid for a previous job, or someone who needs to pay their MoT simply to get their car back on the road so that they can commute to work or perhaps for the painting and decorating fraternity in the most reverend Primate’s diocese.
The spiralling cost of credit is not the main crux of the problem. Problems arise when people take out this kind of short-term, high-cost loan when it is not suitable for them and they cannot afford to repay. As the strength of the evidence shows, part of the issue is, first, that lenders are not always conducting adequate assessments of potential borrowers’ ability to afford the loan. This was a key finding of the OFT’s payday compliance review. Secondly, as the Citizens Advice payday consumer survey found, there is poor compliance with the voluntary codes implemented by lenders last November and 82% of loans did not meet the commitment to,
“treat customers sympathetically if in financial difficulty”.
Thirdly, the Bristol report found that 60% or more of payday customers felt that it was too easy to borrow in this way and that more than four in 10 customers showed signs of financial distress. Here I echo the opening comments of the noble Lord, Lord Kennedy, that these reports show that the payday market is not functioning in the interests of consumers. The Government are therefore deeply concerned about the scale of consumer detriment identified, the speed and ease with which loans can be accessed, the frequency with which loans are rolled over, the grave financial and social problems arising from defaults, and the calling in of such repayments. I hope this goes some way to reassuring the noble Lord, Lord Mitchell, that the Government are taking these matters extremely seriously.
Since the last significant debate on this issue in this House, we have begun to tackle these problems; my noble friend Lady Wilcox touched on this. In March, the Government and regulators announced a joint action plan to tackle the key problems, taking tough enforcement action against unscrupulous lenders and ensuring a strong robust regulatory framework for the future. Also since March, the OFT has begun clamping down on irresponsible lending practices across the payday industry as an enforcement priority. First, they have given no less 50 firms 12 weeks each to change their business practices or risk legal requirements or loss of their licence. Two firms have already surrendered their licences. Secondly, the OFT has revoked the licences of three payday lending firms and has three further investigations open. Thirdly, the OFT has consulted on referring the sector to the Competition Commission for market investigation and expect to announce a decision soon.
A further point is that the new regulator from next April—the Financial Conduct Authority—will have tough new powers to tackle early signs of consumer detriment and is looking at additional regulation on payday lending. The FCA will have powers to make binding rules, such as banning products or specific product features. It will have tougher sanctions, including imposing unlimited fines on firms and ensuring that customers can recover their loss. We will also have a more stringent bar for market entry.
The essence of this debate is the alternatives to payday lending. The Government have committed to further investment of up to £38 million to March 2015 to support and expand the credit union sector. Credit unions are community focused, and to this extent touch on the big society ethos. They are also non-profit making. Members share a common bond and often save before borrowing. The investment will enable them to provide financial services, including affordable credit, for up to 1 million additional consumers on lower incomes. Our ambition is to save low-income consumers up to £1 billion in total in loan interest repayments by March 2019. I am most grateful to the most reverend Primate for his generous support for community-based solutions, including the use of volunteers both in the church and outside.
As my noble friend Lady Wilcox so eloquently put it, an underlying issue is that we still have a culture of people wanting and expecting to be able to buy items on credit when they cannot afford them. Better financial education, raising awareness and signposting to sources of advice are key to helping people understand the alternatives to payday loans. That is why we set up the Money Advice Service to promote financial capability and to provide the tools that customers need to make informed decisions about their money. In 2013-14, the MAS is retaining its spending on debt advice provision at £27 million to maintain its target of helping around 150,000 people. In addition, MAS research found that industry invests around £25 million annually in 36 programmes, most targeted at the under-18s. The MAS is also actively engaged with the Department for Education in promoting financial education—a most important point.
The introduction of a single monthly payment of universal credit should also support the Government’s aim of encouraging people to live within their means and to take personal financial responsibility. We are working closely with the MAS and consumer advice groups to ensure that universal credit claimants are able to access budgeting support services.
Wider government work to reform the consumer landscape and to strengthen consumer rights and protections is also important. The consumer reforms that we have been bringing forward since 2010 will help markets work better, improve consumer protection and give greater clarity about where consumers should turn for help and advice.
A large number of questions were raised by noble Lords, and I will attempt to answer them all. The noble Lord, Lord Kennedy, raised an important point about concerns about payday loan advertising. The Government are also particularly concerned about the advertising of payday loans. People should not be lured into taking out a payday loan when it is not right for them. We have also commissioned additional research to look at the effect of payday lending advertisements on consumers’ borrowing decisions. This will report by early autumn. From April 2014, the FCA’s strong new powers will enable it to restrict the form and content of advertising. My department, BIS, is commissioning research to inform the FCA’s thinking on that.
The noble Lord, Lord Kennedy, asked why banks cannot provide low-limit loans, backed by government support. I agree and want to see banks provide alternatives to payday loans—a point that was made by other noble Lords. However, banks have said that there is no profit in short-term loans—a point that we might all be aware of. The risk premium is high and the costs associated with lending to high-risk customers and giving them small-value loans are such that it is not profitable, so the banks say. I agree with the noble Lord, Lord Hollick, that banks shy away from customers who have taken out payday loans. I had that very conversation with a senior retail executive a couple of days ago as part of my research.
The noble Lord, Lord Kennedy, asked what the Government are doing to address the lack of ATMs in localities. Again, that is a very fair point and the Government share the noble Lord’s concerns about restricted access to ATMs. Although such decisions are operational ones for banks, so the Government do not seek to intervene, we will continue to monitor the situation closely.
My noble friend Lady Kramer raised some very interesting points, focused particularly on the opportunity for us in this country to introduce community development finance institutions, a model that I understand comes from the United States. The co-operatives consolidation Bill was announced by the Prime Minister in January 2012. Work on drafting the legislation has begun and it will be introduced in December. Although it will not contain any new legislation, it will put all legislation relating to industrial and provident societies, or co-operatives, in one place, making it easier for an IPS to be set up. We are also looking at introducing a package of measures to strengthen the co-operative sector, including increasing the withdrawable share capital limit and introducing insolvency procedures for co-operatives and credit unions. This was announced in the Budget 2013.
My noble friend Lady Wilcox, in a speech largely devoted to the issue, expressed concern at the prospect of a cap on the total cost of credit. She said that it would push the poorest and most vulnerable into having no access to credit at all. I thank my noble friend for giving an interesting historical perspective on the credit market and agree with her that a cap is not the solution for the payday market at this time. The Bristol report indicated a range of unintended consequences and risks which would harm customers rather than help them, such as a reduction of access to credit, lending charges being added outside the cap and, generally, less sympathy for those in financial difficulty. However, the Government have ensured that the FCA will have the power to cap in the future, if it is needed to protect consumers at that point. The FCA will start analysis on whether to use the new power from April 2014.
My noble friend Lady Kramer asked about the government commitment to disclose banking data on a postcode-by-postcode basis. It looks as if this will be delivered on a voluntary basis. The noble Baroness referred to the voluntary agreement that the Treasury is seeking to negotiate with lenders on disclosure of postcode-level data. I, too, am confident that such a deal will be struck and I commend the noble Baroness on her sterling work in this particular area.
The most reverend Primate the Archbishop of Canterbury raised the issue of the need to cut out “legal usury” from our high streets in a general comment at the beginning of his speech. It is a most interesting comment but I do not believe that it is the Government’s role to stop or ban payday loans. As I mentioned earlier, such loans serve a purpose. They can provide emergency cash for those who can afford to repay it. In line with coalition values, we want people to remain free to make their own choices, as my noble friend Lady Wilcox said, about whether and how to borrow, if it is right for them. However, in contrast, I would say that there is a duty on government to control, regulate and curb irresponsible lending, to empower consumers to make the right choices and to protect vulnerable consumers where that is needed.
The noble Lord, Lord Hollick, raised points about including international investors and about payday lenders making profits off the most vulnerable consumers. These were interesting points. It is important to remember that payday lending is a relatively new phenomenon, as I said earlier. The market has doubled in size in just four years but is still relatively small. To put it into perspective, it is worth between £2 billion and £2.2 billion, which is less than 5% of the total credit market.
However, we must bear in mind that those affected are the most vulnerable, as I said earlier. This has meant that there is very little evidence of the problems and causes, but we now have a better evidence base, including the Bristol report and the OFT compliance report. Consumer groups have also been adding to the evidence base. That is why we announced strong action plans in March to tackle the serious problems that were highlighted very broadly in today’s debate.
My noble friend Lady Kramer mentioned the lack of alternatives. That is not a reason not to cap. It just means that we also have to work on this as well—a point she spoke passionately about. I understand the attractions on the face of it, but, as I mentioned earlier and I stress again, we do not believe a cap is the solution at the moment. The Bristol report indicated a range of unintended consequences and risks, harming the consumers we want to help.
The noble Lord, Lord Kennedy, said the figure of £35 million—I say it is £38 million—funding for credit union expansion was a “drop in the ocean”. I welcome the noble Lord’s support for recent government initiatives such as the legislative reform order, increasing the interest cap and the credit union expansion project. The project aims to help 1 million people on low incomes, to enable credit unions to reduce costs and to reduce the need for further government funding by making them more sustainable.
The noble Lord, Lord Kennedy, and the most reverend Primate asked whether the Government would host a summit on payday lending. The strong action plan announced in March by the Government and regulators, which we are taking forward, also includes discussions to see whether we can work in concert with industry and consumer groups to look towards a summit.
I have run out of time. I regret that I do not have time to answer the few further questions that were raised, but I will most certainly write to all noble Lords. In conclusion, our assessment of the alternatives to payday lending is that it is about not just improving access to more affordable credit but about making a fundamental change in our culture, so that consumers can take personal financial responsibility, borrow responsibly and live within their means. It is also about ensuring adequate support for the vulnerable who need it. We believe that the Government’s initiatives will help address these problems.