Jo Swinson
It is delightful to be able to return to the issue of high-cost credit and payday lending after that short interlude for the urgent question on tobacco packaging.
Before we were interrupted, I was saying that I really appreciate the particularly constructive way in which the hon. Member for Sheffield Central has brought forward this Bill, working with not only the wide range of campaigners outside this House but MPs across the House, including me. I am delighted to accept his request to have further meetings with him and campaign groups to continue to discuss the issue and how we solve the problems that he raises. I would also be happy to extend an invitation for him to meet the chief executive of the Financial Conduct Authority, which will obviously play a crucial role in the industry as it moves to become the regulator. I am sure that the hon. Gentleman would find that useful, as would the FCA.
It is important to say from the outset that the hon. Gentleman is spot on about the problems in the industry and I agree with him on roll-overs and affordability assessments. We know from the evidence that my Department has commissioned, the Bristol report and ongoing Citizens Advice surveys that all those issues are causing difficulty. I think there is a huge amount of agreement on the issues we are trying to tackle, but we disagree slightly on the solutions and on whether legislation is necessary at this point or whether the Government’s tough action, which was announced in March and has been taken up by the FCA since April, is a better way of tackling the problems. I believe the latter to be the case and the hon. Gentleman disagrees, but it is important to recognise that there is a huge amount of agreement on what the problems are and that they need to be tackled.
Jo Swinson
I will confirm that we do not believe that this Bill is the best way to tackle the significant problems in the industry. Obviously, it is up to the House to decide, as is always the case with such matters, whether the Bill should go into Committee, but I and my Government colleagues will not support it if it goes to a vote.
Mark Durkan
A few moments ago another Minister, the Under-Secretary of State for Health, the hon. Member for Broxtowe (Anna Soubry), said that policy should be made on the basis of evidence from elsewhere. There is clear evidence from many other jurisdictions—not least at least 13 states in the United States of America—that competent legislation and regulation exactly such as those proposed by this Bill can be effective and telling. Why are the Government rejecting moving on the basis of evidence and examples from elsewhere?
Jo Swinson
We absolutely are moving ahead on the basis of evidence. We have legislated on this issue. We are transferring the issue of consumer credit to a new regulator. It is not as if there is no legislation. We agree that tough regulation is needed to deal with the significant problems in this market, and that regulation is happening. I have confidence in it and in what has happened already, which I will set out. This is about whether further legislation is needed at this juncture and I think that that is the only issue about which there is slight disagreement.
Jo Swinson
I will give way to the hon. Member for Birmingham, Northfield (Richard Burden) and then to the hon. Member for Worsley and Eccles South (Barbara Keeley), and then I will make some progress.
Richard Burden
I am grateful to the Minister for giving way. She has said that the objectives are shared throughout the House but that there is slight disagreement on some aspects. If the disagreement is slight, would it not make more sense to let the Bill have its Second Reading and go into Committee, and then any amendments that she might want to table could be debated? What is wrong with that?
Jo Swinson
The disagreement may be slight, but it is on the basic principle of whether the FCA is best placed to regulate these matters or whether the Government should mandate it to do so through legislation. That is a significant difference in principle.
Jo Swinson
I said that I would give way to the hon. Member for Worsley and Eccles South and then make some progress, but I will be happy to take further interventions later.
Barbara Keeley
I thank the Minister for giving way; she is being generous with her time. As somebody who had a private Member’s Bill that was blocked last year by the guys on the Government back row, I have to say that this is unfortunate. My Bill was a valuable Bill which would have really helped carers and the identification of carers. This is also a valuable Bill which would help people who are in debt. It would be very helpful if the Minister would support its going into Committee, because that could help build a really good public campaign, which is what I intended to happen with my private Member’s Bill. It would be an absolute waste if she let her colleagues on the Government back row talk this Bill out.
Jo Swinson
I share the hon. Lady’s frustrations, having supported private Members’ Bills on Fridays in the past, such as the Climate Change and Sustainable Energy Bill proposed by the hon. Member for Edinburgh North and Leith (Mark Lazarowicz). Ultimately, it got through and was enacted, but getting there was a painful process.
I hope that I will be able to reassure the House on the issue of protecting vulnerable people and taking action on their behalf. Significant action is already being taken. Today’s debate is helpful in raising the issue’s profile, so I thank the hon. Member for Sheffield Central for promoting the Bill, but there is a sticking point with regard to the independence of the FCA and its role as a regulator with real teeth that is able to set its own rules.
Jo Swinson
I want to make some progress, but I will mention the FCA later, so I will take more interventions shortly.
Across Government we share the concerns that have been voiced about payday lending. There is widespread poor practice within the industry and harm to vulnerable consumers. Since the Bristol report on high-cost credit and the Office of Fair Trading’s review of payday lending compliance were published in March, there have, unfortunately, been no signs of the problems going away, as backed up by data from Citizens Advice and StepChange.
The hon. Member for Sheffield Central said that his preference would not be to ban payday loans. It is important to be clear that there is a place for high-cost short-term lending and that emergency cash or managing a short-term cash-flow problem can be useful. However, it is not right for many consumers, many of whom get lured into taking out loans that they cannot afford to repay and that they should not be given in the first place. Too many people are not getting a fair deal, which is why action is needed and why it is indeed being taken.
The Government are making this a high priority and I am personally very keen to make progress in changing the industry. It is important to recognise, however, that the solutions are not easy or simple. This is a complex market. A wide range of factors drive consumer behaviour toward financial management and debt. I will set out the action the Government are taking to achieve better, faster and more responsive results than legislation.
It is also worth mentioning that we have tried very hard to work with the industry on these matters. Indeed, last November the industry produced a payday and short-term loans code of practice. I would argue that if everything in the code was being complied with, there would not be anything like the number of problems that are being experienced, such as three days’ notice from a continuous payment authority—that is mentioned in the hon. Gentleman’s Bill, but it is already in the code of practice—or affordability assessments or better information on constraints and roll-overs. The vast majority of the industry has already signed up to that and I think that the real issue is delivering it, which is why we recognise that further regulation is needed through the FCA.
We need to assess the progress that is being made with codes of practice so that the FCA has information on how the industry is complying with what it has signed up to. If the industry itself has signed up to something, I am sure the FCA will consider whether it is worth turning it into a firm rule when it publishes its rules. The Department has launched a survey to encourage customers who have used payday loans to undertake a quick online survey of their experiences, so that we can better assess the extent to which lenders are complying with their codes. I tweeted a link to that survey earlier today, if anyone listening is keen to take part in it.
Jo Swinson
I will take a few interventions. My hon. Friend the Member for Portsmouth North (Penny Mordaunt) asked first and then I will take an intervention from the hon. Member for Glasgow North (Ann McKechin), who has not yet intervened.
Penny Mordaunt
I thank the Minister for giving way. I want to respond to the accusation that some of my colleagues and the Minister herself are seeking to talk out the Bill. Although my hon. Friends the Members for Shipley (Philip Davies) and for Christchurch (Mr Chope) are a dynamic duo, I would point out, as someone who is sympathetic to the Bill, that they could not possibly do a better job today than the Labour Front Benchers.
Jo Swinson
I thank my hon. Friend for her description of my hon. Friends the Members for Shipley and for Christchurch as the Batman and Robin of Fridays in the House. We will obviously have to wait to hear what Members want to say.
Ann McKechin
I am grateful to the Minister for giving way. Does she agree that the basic problem is that self-regulation, as in other jurisdictions across the world, has completely failed, and that time is of the essence and that we need to get on with regulation now, not in another two years?
Jo Swinson
I absolutely agree with the hon. Lady: that is exactly the point I was making. We have tried to work with the industry and it has produced its voluntary codes, but the Citizens Advice survey suggests that it is not sticking to them. The industry also committed at the time to monitor the compliance with those codes by this summer. Only one of the four main trade associations in the industry has said that it will do that monitoring; the others have not even agreed to comply with that. That is why we are transferring consumer credit regulation to a new independent regulator, the Financial Conduct Authority, which will have real teeth to clamp down on the problems in this market.
Jo Swinson
I will give way to my hon. Friend the Member for Shipley and to the hon. Member for Foyle (Mark Durkan), and then I will make a little more progress.
Philip Davies
I am not sure whether I am Batman or Robin in the Minister’s mind, but perhaps she can expand on that in a moment.
My understanding is that, a week or so ago, the Government and Ministers held a summit on this issue with interested parties. Will the Minister give us an update on any results of that summit?
Jo Swinson
Absolutely. I will mention the summit; my hon. Friend anticipates my remarks. If he has a little patience, I am sure that he will have the information that he is looking for. I will not comment on whether he is Batman or Robin. Hon. Members can make up their own minds.
Mark Durkan
Perhaps the Joker.
A few minutes ago, the Minister made the point that the problems are complex and that the solutions will not be simple. Why, then, is she adopting a position of leaving it to the untested, unproven role of the FCA? Simples. That seems to be the Minister’s position and seems to contradict the very arguments that she is making about the nature of this problem. I hope that the role of the FCA will work, but it will be one role among its many other competing responsibilities. We as a Parliament have responsibilities, too. The hon. Gentleman’s Bill is giving us the chance to meet those responsibilities.
Jo Swinson
I understand the hon. Gentleman’s point, but, first, the Financial Conduct Authority is not the only thing that is happening; and secondly, because of the complexity, it is better to have a regulator that is able to make rules and to change them quickly, because markets change quickly. That is the whole point of having a regulator that can be responsive. Otherwise, if primary legislation sets out everything prescriptively, it is much more difficult to respond to changes in the market. Indeed, the Financial Conduct Authority has also made it clear that this is a priority for it. I hope that that provides some reassurance.
Paul Blomfield
I want to restate, as the Minister will know from discussions that we have had, that the Bill does not seek to limit the opportunities for the Financial Conduct Authority to respond to a changing market. It specifically does not include detail; it provides a direction of travel and empowers the Financial Conduct Authority. In that context, would not it be better if we could talk about the detail in Committee?
Jo Swinson
I welcome the hon. Gentleman’s contribution and his constructive approach to this matter, but I would say that his Bill limits the independence of the Financial Conduct Authority. It is not helpful for us to set that out or to mandate exactly what it should do. The FCA is producing a draft rule book for September, which is only two months away—we are not talking about this going into the long grass—and it will be consulted on. I am sure that the hon. Gentleman and other hon. Members will want to contribute to that consultation. That rule book will then be finalised in advance of the transfer of consumer credit regulation, which, of course, happens in April, so it will be in place then.
Of course, the Financial Conduct Authority will have really tough new powers. The Office of Fair Trading, the current regulator, was mentioned earlier and I will come to its action shortly. We have recognised that stronger powers are needed. The FCA will have new powers to make binding rules on firms, including to ban certain products if necessary. It will have tougher sanctions—for example, the ability to impose unlimited fines and to order redress for consumers who have been ripped off. It will also be setting a higher bar for entry in the first place, so when it is granting a consumer credit licence, the applicant will have to prove that its business model is not based on ripping off consumers. We had the discussion earlier about roll-overs and whether, if some companies are making significant proportions of their profit from roll-overs, their business model in fact depends on people’s not repaying in time, and whether that is an acceptable business model. The FCA will be able to look into these issues before people get a consumer credit licence.
The FCA has made it clear that it is committed to plugging gaps in payday regulation and has outlined four specific areas that it wants to target: first, affordability checks; secondly, continuous payment authority; thirdly, advertising; and fourthly, roll-over loans—all of which hon. Members have rightly raised today as issues of deep concern, and which the FCA has said it is keen to tackle as a priority. Indeed, the chief executive of the FCA, Martin Wheatley, has written to me to outline its work on that, and I will place a copy of that letter in the Library so that Members can have a look.
The Office of Fair Trading, the current regulator, recently announced a crackdown on payday lenders and has been delivering real results. It has also referred the market to the Competition Commission, to investigate the root causes of problems with payday lending and it can, of course, use its powers to fix that. An investigation by the Competition Commission is a serious thing. It takes a bit of time, which is why we are ensuring that we take other action at the moment—it is important to do that at the same time. However, it is important that fundamental problems within the payday lending market are looked at, and the Competition Commission is well placed to do that.
The National Audit Office report into the OFT was mentioned. Of course, one of our responses to that has been to ensure that the OFT has further powers. For example, in February, we gave the OFT further powers to suspend a credit licence immediately, if it had reason to believe that that was necessary to protect consumers, rather than waiting to go through the whole process of revoking a licence. We are also transferring the regulation to the FCA, which will have more powers. It is important, in the spirit of balance, to recognise that the NAO also said in its report that it was encouraged by the action that the OFT had been taking on this issue since March. I should like to share with the House a little bit more about where that has got to, because the situation is changing every week owing to the action that is being taken.
In March, the OFT completed its review into compliance in the payday lending industry. It identified the top 50 firms, which between them make up more than 90% of the market, and did a significant investigation into the practices of each of those. Those 50 lenders were sent a detailed dossier of where their practices were not up to scratch, with a 12-week deadline to sort out the problems that they were causing or face losing their licence. That has brought real results. Those 12-week periods, which are on a rolling basis to enable the OFT to process the responses, have been coming to an end and will all be finished by the end of this month.
So far, 28 of those 50 have responded to the OFT. I am sure that hon. Members will be interested to hear that 10 of those 28—more than a third—have left the payday lending market altogether as a result of that action, either by giving up their consumer credit licence entirely or by continuing to operate in other areas of consumer credit but no longer in payday lending. In addition, a further three licences have been revoked from lenders outwith the 50 largest and one further licence has been handed in. So since March, 14 payday lenders, including 10 of the biggest 50, have left the payday lending market. That shows that the tough action is starting to work. Market exit can be a good thing in a market where there are significant concerns about unscrupulous behaviour.
To respond to my hon. Friend the Member for Shipley, last week I called the payday lending summit to take stock of the progress that we had made since March and to look ahead to the new FCA regime. We delivered a strong message to the payday industry that it must get its house in order in preparation for the transfer next April. The meeting included regulators from the OFT, the FCA and the Advertising Standards Authority, which has a role in advertising that I will come to. It also involved charities and campaign groups such as Citizens Advice, Which? and those who provide debt advice to individual consumers. It was a successful summit. It was helpful to have that kind of event as the FCA produces its rule book that is due in September. I was very encouraged by the responses from the regulators.
I will turn to the various issues that are raised in the Bill. First, advertising is something that I feel strongly about. People should not be lured into taking out a payday loan when it is not the right thing for them to do. [Interruption.] I am not sure whether the hon. Member for Harrow West (Mr Thomas) wants to intervene. I am happy to be generous if he does.
Philip Davies
Will the Minister give way to me as she is in such a generous mood?
Philip Davies
I am surprised that the Minister glossed over so quickly the summit that she held on 1 July. According to the statement from the Department for Business, Innovation and Skills, the summit included a “frank exchange of views”, which slightly flies in the face of the picture that she is trying to paint. One of the trade association representatives who attended the summit and highlighted information from a report called “Credit, debt and financial difficulty in Britain” said that those present did not appear to have read the report and were not interested in its findings. Would the Minister like to comment on that part of the summit?
Jo Swinson
I know exactly who my hon. Friend is referring to. I would merely point out that they were very selective in their use of statistics. For example, they ignored the fact that the payday lending market has doubled in recent years. The fact that there was a frank exchange of views in no way contradicts what I said about our delivering a clear message to the payday lenders about what they have to do to get their house in order.
My hon. Friend the Member for East Hampshire (Damian Hinds) spoke well about how adverts pretend that such loans will solve problems that they will not solve. The adverts suggest that a payday loan is the answer to problems such as not having enough money towards the end of the month. If people find themselves in that position, the answer is not to take out a payday loan, but to get some good financial and debt advice.
When legislating on advertising, the evidence base for what should be brought in and what will work needs to be strong. The FCA will have powers to ban misleading financial promotions and to create rules on advertising payday loans. At the press Q and A after the summit, the chief executive of the FCA made it very clear that he would consider all sorts of rules that could be made with regard to advertising, including on the timing of adverts and the content that needs to be included. The FCA is very clear that it is looking at that issue.
It is important to proceed on the basis of research and evidence. BIS has commissioned Ipsos MORI to conduct qualitative research into the impact of advertising on consumer behaviour because we want to know what changes would be most effective in helping consumers. It would be easy to pull something out of the air and say, “This is what we should do on advertising,” but we want to know what works.
My hon. Friend the Member for East Hampshire talked about the wallpaper of life: the little annotations that we hear and see in adverts all the time, such as “terms and conditions apply” and “shares may go down as well as up”. Do we actually respond to all those things or would other things be more effective? The research will look at what health warnings or wealth warnings might work on such adverts, whether signposting debt advice might be more effective, and what is the best way of simply explaining the cost to people. There is a range of reasons why APR is not the most relevant figure in the context of payday and short-term credit advertising, not least of which is that many people do not understand what APR is. Is there an easier way to get that information to the consumers? That research will provide evidence to inform the FCA as it develops its rule book. We will publish the findings in the autumn.
The next issue is roll-overs. The hon. Member for West Ham (Lyn Brown), who is no longer in her place, made an interesting intervention in response to my hon. Friend the Member for Shipley. She was right to say that people are often not lending £150 at a high interest rate for just two weeks. If it was just for—[Interruption.] I do apologise. The hon. Lady is in her place but I could not quite see her behind the Table. She was right to highlight this issue. If somebody is lending money over a very short period at a high interest rate that basically covers the administration cost of setting up the loan arrangement, that is not necessarily problematic. The problem arises when that short-term loan is no longer short term, but becomes medium or long term because it is rolled over from one month to the next. That is when the APR is much more relevant, because people are taking out a much longer-term form of credit. Roll-overs are therefore problematic. In some cases, even one roll-over is too many.
Mr Kevan Jones
Why are the Government and the hon. Lady opposed to legislation such as that common in Canada, for example, which bans roll-overs in some places or limits the length of a loan?
Jo Swinson
I am not opposed to regulation or rules on that, but the issue is whether it is best for the Financial Conduct Authority or the House to put the rules in place. We have given responsibility for regulation to an independent agency that has tough powers and the ability and expertise to look at specific evidence on what will be most effective, and that is where rules will best be made. The FCA has said it will look carefully at what needs to be included in the rules on things such as roll-overs, and the voluntary code to which lenders have signed up states that they too believe that some restrictions on roll-overs are appropriate within the industry.
Mr Jones
Would it be sensible to let the Bill go to Committee rather than vote against it today so that some of those issues could be explored, or is the hon. Lady doing the dirty work of the Conservative party and clearing the decks for the European Union (Referendum) Bill?
Jo Swinson
That intervention hardly merits a response. I am here because I am the Minister responsible for issues that affect consumers and consumer credit. We have significant problems in the payday lending industry, and my priority is finding the best way to solve them. I do not believe that the House prescribing these measures is necessarily better than it being done by the FCA. The FCA can put rules in place and, importantly, can change them whenever the market changes. We know that the market is fluid and that it changes regularly. If rules are put in place and practices change to get round them, the FCA can act swiftly to ensure that loopholes and gaps are plugged. That is a better way of protecting consumers, although the hon. Member for North Durham (Mr Jones) is entitled to disagree.
Jo Swinson
I will make a little progress and then I will give way to my hon. Friend. Existing guidance from the Office of Fair Trading includes provisions on roll-overs. It is cracking down on non-compliant lenders, and earlier I mentioned some of the firms that have already left the market as a result of such action. The FCA has power to cap the duration of credit, and could take action to limit roll-overs. The hon. Member for Sheffield Central mentioned the deliberate strategy of rolling over loans, and if there is a flawed business model that relies on such behaviour, the FCA could decide not to grant a licence in the first place. The Competition Commission will also consider that issue in its wider market investigation.
Jo Swinson
I would like to make a little progress, and then I will let the hon. Gentleman make his point.
Affordability checks are vital. One of the most shocking facts is that nearly half of those who take out a payday loan already show signs of financial stress. We must have proper affordability checks so that people are not given loans when they cannot afford to repay them; all that does is embed them in a further spiral of debt.
Existing OFT guidance clarifies how lenders should check the ability of borrowers to repay, and it is cracking down on that issue. The FCA will also have powers to tackle consumer harm. It has prioritised affordability assessments as an area for potential intervention, and that will be included in the consultation.
Jo Swinson
It depends on the specific circumstances. Current guidance does not necessarily suggest a ban on roll-overs, but there is evidence that some practices mean that borrowers, including those who are not necessarily unable to repay the loan, are proactively offered a roll-over—for example, by text message. That gets them into more debt and incurs more charges, even though they may have been able to repay the loan. There is a suggestion—more than a suggestion: evidence—that there are problems with roll-overs, but that does not mean that every roll-over is wrong. We also want to encourage lenders to recognise and show leniency when borrowers get into difficultly. That is also important. There is sharp practice with roll-overs, whereby the lender perhaps appears to be helpful in offering extra time when that might not be the right thing for the consumer. We are discussing a short-term product. If a proper affordability assessment is performed, the number of occasions when a borrower is unable to repay a short time after it was granted should be relatively low, and such occasions really should be the result of unexpected emergencies or circumstances that could not have been predicted weeks earlier.
There is also concern regarding the use of continuous payment authority. This tool allows lenders to dip into a borrower’s bank account to see whether they have enough money in their account to make a repayment, and to do that multiple times—sometimes hundreds—a day. Many card issuers and others in the financial services market are concerned about how that is being done. The Bill suggests three days’ notice of CPA and an awareness of the right to cancel. Those measures are already in the voluntary code. If they were stuck to and ended up in the FCA rules, that would be helpful.
It is important to clarify that people have the right to cancel continuous payment authority. Indeed, the FCA has recently made it clear to banks that if their customers wish to cancel CPA they have a responsibility to ensure to that that happens. Further, if customers have paid erroneously through CPA after they have asked for it to stop, the banks should refund the consumer. Banks will also have to undertake a review of such cases in the past few years.
It is important to respond to an issue raised by the Bill, although I accept that it is not something that the hon. Member for Sheffield Central was prescribing. A cap on the cost of credit sounds like a neat and simple solution to the concerns in the market but it is not, as my hon. Friend the Member for East Hampshire eloquently set out. This is a complex market and clumsy interventions could have unintended consequences. The Bristol report findings indicate that a total cost of credit cap could risk harm to consumers, reduce access to credit and lead to less tolerance by lenders of customers with repayment problems.
The evidence from other countries shows that in some EU member states interest rate caps have resulted in reduced credit access for low-income consumers. In Australia, lenders have imposed charges outside the cap, or developed products outside regulation. Sometimes a cap results in a move to rent-to-own credit. I am sure Members will be aware of places on the high street where technological gadgets can be bought at a very high hire purchase fee. The expansion of this market occurred in Michigan in the US, where pawnbroking thrived following restrictions on payday lending. It is important to follow the evidence.
The Government have ensured that the FCA’s powers will allow it to impose a cap if it decides that that is the best way to protect consumers, and that doing so is consistent with its statutory objectives. The hon. Member for Sheffield Central talked about a report on the cap and I want to reassure him on what the FCA will have to do. It is already required to set out in guidance how it is achieving its objectives and to report against that in its annual report, which the Treasury will lay before Parliament so that it can be scrutinised by the Treasury Committee. The Public Accounts Committee also has the ability to scrutinise any National Audit Office reports on the FCA. The FCA is, therefore, already able to set out in its annual report what it is doing and why, and, importantly, Parliament is able to scrutinise it.
Before I conclude, I would like to touch on alternatives mentioned by the hon. Members for Harrow West (Mr Thomas) and for Birmingham, Northfield (Richard Burden). Credit unions are an important alternative, and the hon. Member for Birmingham, Northfield mentioned the role that post offices can play. They can help credit unions and it is important to note that they are piloting current accounts, in particular the control account, which is aimed at people who may not have had significant bank accounts before and may want a lot of control over managing their money. We hope to see that rolled out across the rest of the country. Furthermore, the Department for Communities and Local Government is running a competition to get post offices to play a greater role in their communities, some of the prize money from which they could use better to help those in financial difficulty. Financial education is key, however, hence the importance of the Government’s moves to have it provided in schools. Some people taking out payday loans have access to alternatives, but are not using them, partly because the advertising is so effective and partly because of the speed and convenience of payday lending compared with the discussions with a bank about an overdraft.
Martin Lewis, from Money Saving Expert, has produced an interesting guide on payday lending. Money Advice Service also has a lot of information on its website. Martin Lewis has made the excellent suggestion that if people are worried they might need emergency credit in the form of a payday loan, they could instead take out a credit card, stick it in an ice cream tub filled with water and keep it in the freezer, which might instil in them the discipline of not being tempted to use it for everyday spending. Should they need emergency credit, however, they could use the credit card in the short term and pay it off before the next bill, thereby not paying any interest. There are ways of getting around it, but I appreciate that not everybody will want to follow that advice.
As mentioned, on credit unions, the Government are increasing the monthly interest cap from 2% to 3%, which will help credit unions, and investing £38 million in helping them to improve their services and compete better with other forms of credit.
The Government absolutely share the concerns that the Bill is designed to address, but, working with the regulators, we already have a strong package of action in progress to tackle them. In the immediate term, the OFT is pursuing tough enforcement action, with its referral of the market to the Competition Commission, while in transferring consumer credit regulation to the FCA we have ensured a strategic solution to many problems in the high-cost credit market. The FCA’s tough new powers will enable it to take targeted action more flexibly and faster than the Government could. It will have the tools to make balanced judgments on potential interventions based on robust evidence, consultation and cost-benefit analysis.
I agree with the hon. Member for Sheffield Central about the problems and I have set out how the solutions we are pursuing are already starting to work. I appreciate his introducing the Bill and this useful debate—maintaining the profile of the issue helps to apply pressure on the industry to shape up—but I hope he will recognise that our actions and those of regulators are a better way of tackling the problems. I hope he will take that on board and decide to withdraw the Bill. On the off chance that he does not, and regardless of what happens to his Bill, I look forward to working with him, other hon. Members and campaigners outside the House to clamp down on unscrupulous and irresponsible payday lenders.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)
On behalf of the Opposition, I support the Bill introduced by my hon. Friend the Member for Sheffield Central (Paul Blomfield). I was bemused by the claim from the hon. Member for Portsmouth North (Penny Mordaunt), who is no longer in her place, that the Opposition were trying to delay or talk the Bill out; nothing could be further from the truth. In all things this week, I hope I have been a model of restraint, and I intend to continue in that way this morning by making a brief intervention in support of the Bill in order to allow Back Benchers to contribute.
My hon. Friend gave an eloquent and thoughtful presentation of the Bill. It was interesting to hear him highlight the cross-party support for these measures, built on the growing consensus about what the key components of regulation ought to be. I hope the Minister heard that and took it on board. It was correct that she spoke at length, because it enabled her to lay out the issues, particularly around the summit she held and the other work undertaken. I hope she understands that, as my hon. Friend said, Citizens Advice, Which?, the Centre for Responsible Credit, the charity StepChange and the Centre for Labour and Social Studies—which have all published or given opinions on this issue—have highlighted the difficulties and issues faced by ordinary people who get involved in payday loans. He also paid tribute to the many people who give advice on debt locally. I add my congratulations to them on the work they are doing in difficult economic times, as they try their best to ensure that people have the correct information.
In introducing the Bill, my hon. Friend laid out the importance of the FCA’s role, which would not be as over-prescriptive as the Minister seemed to suggest. Rather, the FCA would give the direction of travel on key issues and set a clear framework. My hon. Friend did well in outlining those options to take the Bill forward, but also making it clear that he was open to further debate.
Mr Kevan Jones
Does my hon. Friend find it intriguing—indeed, it is quite inexplicable—that the Government are not prepared to allow the Bill to go into Committee to explore some of the issues she is articulating?
Cathy Jamieson
Indeed, and that is one of the points I wanted to make in response to what the Minister said. I know her to be someone who cares about what happens on this issue. To be fair, she has shown that since taking up her post, although I would not necessarily agree with everything she said this morning. Notwithstanding the fact that she said that she did not agree with the principle of the Bill, I suspect that, as an individual, she has some sympathy for what my hon. Friend the Member for Sheffield Central is trying to do. That is why I am somewhat surprised that the Government seem to be responding by not allowing the Bill to proceed to Committee, where there would be the opportunity to explore some of the information in much greater detail.
Barbara Keeley
Was my hon. Friend as surprised as I was to hear the Minister say that our hon. Friend the Member for Sheffield Central (Paul Blomfield) should “withdraw” his Bill? If the Government choose not to support it, that is one thing; if the Minister chooses not to support it, that is another. However, there is no sense in which this excellent Bill should be “withdrawn” by the Member introducing it.
Cathy Jamieson
My hon. Friend makes a valuable point. I, too, was slightly surprised to hear the Minister say that, because on the one hand she seemed to be engaging and listening to what people were saying—not only in this House, but externally—but on the other hand she was apparently closing down an opportunity to scrutinise the Bill in much more detail. I would be interested to see the Bill go into Committee so that we can look at some of those issues, particularly in relation to the FCA, where there might well be tensions. There might need to be some finessing, while other issues might need to be taken forward.
Ann McKechin
Does my hon. Friend agree that it should be for Parliament, which represents the electorate of this country, to indicate how it wishes the industry to be regulated, rather than leaving that completely to a bureaucrat?
Cathy Jamieson
I thank my hon. Friend for that intervention; I know her, too, to be someone who takes the issue seriously. She has done a lot of work on it. Indeed, this is such a high-profile issue—so many people are affected by it and so many external organisations are showing their concern or producing evidence, be they case studies or detailed research—that this would be an opportune moment to take the Bill forward and probe the issue further. The role of Parliament is important, and the fact that so many Members wish to speak this morning shows that there is further scope to debate the Bill in Committee, which is what I would certainly like to happen.
Jacob Rees-Mogg
It concerns me that the Bill would give too much flexibility to the FCA and allow it too much arbitrary power. This House should be concerned about that issue on Second Reading.
Cathy Jamieson
I hear what the hon. Gentleman is saying, but I would have thought—again, because I know him to be someone who would take a great deal of care and consideration looking at the detail of the Bill in Committee—that, with his intellect and interest in these matters, he would have been an asset to any Committee that wished to consider the matter further.
I am surprised and rather disappointed. The Minister herself raised issues about advertising and she seemed to be in agreement in principle with many of the provisions about how lenders should be obliged—although I think she suggested voluntary measures, and I am not sure that that would work—clearly to display the interest payable in cash terms. That is important so that consumers know exactly the position they would be in and could compare the costs of borrowing. The Bill would allow that consistent approach to be determined by the Financial Conduct Authority.
As I said, and as seen in contributions by hon. Members and the Minister, advertising is an important issue. We have probably all received some of these text adverts attempting to make us believe that we are somehow entitled to take out a payment protection insurance claim and that there is £500 or £800 just sitting there waiting for us to claim it at that very moment—if only we would text back. We have to look further at that issue.
We have that advertising in the background all the time—we see it when we are on the tube, on the bus, on the high street and, increasingly, on websites and the internet, if not on our own phones. The significance is that it seems to normalise the issue—as if it is perfectly normal for people to take out all these loans and as if there is nothing to be concerned about with them. As I say, it normalises that behaviour.
We heard the Minister talk about the affordability and cost of credit, and we heard the hon. Member for East Hampshire (Damian Hinds) address some of the concerns raised about the dangers of interest caps. He described them as a blunt instrument, and he spoke about how a market for new products can emerge. The issues that the hon. Gentleman raised could be explored further in Committee. His points about the role of the mainstream banks were important, too. He referred to the charging regime and to the need for the so-called jam jar accounts. When some people cannot access or have difficulty accessing a basic bank account, it makes it extremely difficult for them to consider saving. He highlighted the importance of financial education and the credit unions to encourage saving, but the harsh reality is that it is simply not possible for many people on low pay to have the financial resilience to save. If a child needs a pair of shoes or a school trip comes up, or something unexpectedly goes wrong in the home, they might have to use the little savings they have, making it extremely difficult for them to get back on track. The credit union movement has a great opportunity to develop new products.
My hon. Friend the Member for Sheffield Central spoke clearly about debt collection and the problems that can arise with the continuous payment authority and customers. Sometimes amounts have been withdrawn without due notice given, which can lead to a very difficult set of circumstances, perhaps leading to other bills going unpaid.
The Bill as drafted would ensure that lenders had to signpost customers to free and impartial advice when they were turned down for a loan or when they were having difficulties with payments or defaults or if a continuous payment authority failed. That is important. The Bill would ensure, too, that the FCA would be able to determine the enforcement powers to be used for breaches of the legislation. Again, I view that as an important issue. I heard the Minister talk about the need to have everyone together and to have the code of conduct encapsulated in the provisions. It was almost as if the bad companies or those that would not adhere to the rules would somehow fall off the end of the world. Unfortunately, that is not necessarily the case, and enforcement is particularly important.
I said at the outset that I did not want to take a huge amount of time, but I wanted to indicate support for the Bill. My hon. Friend the Member for Sheffield Central and the Members of all parties who have worked with him have introduced an important Bill that should be scrutinised in more detail. There is no doubt that it could be improved through debate and discussion in Committee, with the comments of all the external agencies taken on board. I am disappointed that the Minister has not seen fit to support it, and it would be disappointing if it were talked out or the House did not support Second Reading. I urge Members to give my hon. Friend and those who have sponsored the Bill their support by ensuring that it proceeds to the next stage.
Rebecca Harris (Castle Point) (Con)
I will try to be as efficient as possible with time, as I am well aware of the preciousness of time on Fridays. I congratulate the hon. Member for Sheffield Central (Paul Blomfield) on introducing the Bill, which contains sensible measures.
High-cost credit is a serious and growing problem, and the irresponsible actions of some of today’s payday lenders are beginning to resemble little more than traditional loan sharks knocking on the front door. However, the key difference that makes those firms so dangerous is that whereas not every vulnerable household in the country has a friendly neighbourhood loan shark knocking on their door, pretty much every household is likely to have a TV, radio or computer through which they are constantly bombarded with clever and manipulative advertising almost every time they switch on. In many ways, the cheap suit and the cheap comforting grin have been replaced by the cute advertising gimmicks that we heard about earlier. I support the Bill’s recommendations enormously.
We have heard a lot about the Citizens Advice payday loans survey, which gave frightening statistics about what is clearly still going wrong in the industry. I think 77% of respondents said they were having trouble paying their loan, and about 65% had extended their loan without being clear how much it would cost them. That is extremely worrying. Only 8% said that they were given any information about the availability of free debt advice, which tells us an awful lot about the problem.
I do not think any Member of Parliament has not had someone in their constituency who has suffered from payday companies getting them into deeper debt and roll-overs. I wish to give one example, a lady in my constituency who took out three payday loans to help to pay the bills. She was subsequently made redundant, and her relationship broke down due to domestic violence. She was therefore unable to repay her loans, and of course she began to get phone calls from the loan companies—up to five times a day from each company—and letters harassing her to pay. On many occasions, she was wrongly given the impression that they were priority creditors. They put her under a lot of pressure. She tried many times to renegotiate her loans, but she felt immensely threatened. She then went into counselling for domestic abuse, and the lenders’ harassment made her feel more anxious and depressed.
Terrified, my constituent began to repay the payday loans in favour of her mortgage, which obviously led to thousands of pounds of mortgage arrears and ultimately to her facing imminent eviction. She then got involved with the citizens advice bureau. I give enormous credit to citizens advice bureaux, and I am sure we are all extremely grateful for the fantastic work they do in our constituencies. They should be the first port of call for people in such difficulties, along with the Money Advice Service.
The fact that someone was pushed to the point of losing their home over payday loans tells us just how pernicious and dangerous they are. I cannot think of a case that makes their irresponsible practices more apparent or better shows why the Bill’s provisions are incredibly important.
We have talked about marketing issues, and I particularly support the desire to give an indicative cash cost in advertising. I know that the current regulations require companies to give a typical APR in their adverts, which is of course important, especially if there is a possibility of roll-over. However, on the whole it is not relevant if somebody is taking out what they intend to be a short-term, one-month loan. The APR does not give people much indication of their ability to pay the loan back. It is very hard to judge that, and to judge other companies and what they are offering. These loans are often what might be termed distress purchases to cover the cost of a sudden event such as a school trip or a broken boiler, and people are therefore looking for ease of access, but when they listen to these companies’ marketing they could be forgiven for thinking that ease of access is the only factor they should consider when taking out one of these loans.
I am sure Members will have heard many of the adverts—some may even have particularly irritating jingles rattling around in their heads now—and I have never heard an advert for one of these companies that says, “Our typical APR is just 5,000% per annum and a staggering 8% lower on average than that of our nearest competitors.” They simply do not market on those issues. If they were to give typical cash costs, that would make pricing more transparent for potential borrowers, and it could also mean lenders start to compete on that basis in their advertising, which might bring down the cost of these loans and therefore have a further benefit for potential customers.
I want to say a few words about the proposed restrictions to the continuous payment authority provision, which allows companies to take money from people’s bank accounts. Some payday loan companies have exploited that provision by simply taking money directly out of customers’ accounts on pay day even after those customers have done the right thing and have admitted to their payday lender that they are struggling and might need to reduce their payments. There are even some cases highlighted to us by citizens advice bureaux of customers who have rung up their lender, painstakingly negotiated a repayment plan with it over a number of months, only for it to take the outstanding amount it is owed straight away, leaving them with no money to pay their mortgage and utilities and other household bills. Payday loan companies behaving as if they are priority lenders in this way causes a huge amount of distress in my constituency and around the country, and I welcome the proposal that they should be obliged to give three days’ notice and make it very clear that customers can cancel their arrangement.
Alternatives such as the credit unions have been mentioned. Credit unions are doing fantastic work. In my constituency there is an incredibly popular one that meets at the St Nicholas church on Canvey island, and I would recommend it to any of my constituents. People in Essex can contact the Essex Savers net credit union based in Chelmsford.
People can also ask their employers for an advance on their wages, which may very well be met with a favourable response. When I was still running a small business, I would have been very receptive towards staff who wanted an advance. We must also constantly remind people that there is free Government debt advice. It is still the case that few people who use payday loan facilities and are therefore clearly in money difficulties are aware of the Money Advice Service—MA—debt advice or the fact that they can approach a citizens advice bureau. We should not just do the headline-grabbing thing of attacking the payday lenders, the names of which we all know; we must also constantly push forward the alternatives to people who are in difficulties, so they can get control of their finances without handing over large amounts of cash in interest to companies that perhaps do not have their best interests at heart.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
It is a pleasure to follow the hon. Member for Castle Point (Rebecca Harris), and I apologise to her for having missed the first part of her remarks. She certainly made an important point at the end of her speech about alternatives, in particular credit unions, and I shall return to that subject.
It was good to hear the Minister’s contribution. She rightly praised the work of the Office of Fair Trading, but she will understand our considerable disappointment that the Government are set to reject the Bill of my hon. Friend the Member for Sheffield Central (Paul Blomfield), which provides an opportunity to introduce tough new rules to tackle some of the worst excesses in the payday lending and high-cost credit industry. Nevertheless, I commend him for the manner in which he has introduced his Bill.
My interest in the Bill is sparked partly by the number of people in my constituency who have taken out high-cost payday loans, ended up in financial trouble and had to turn to local debt advice charities for assistance. Two particular cases stand out for me, and in neither was the person doing the wrong thing; both were in employment, trying to bring up their families without relying on anyone else. But such is the cost-of-living crisis being faced by too many families across the country, including some in my constituency, that these people got into financial difficulty and made the mistake of applying for payday loans, which has made their situation so much worse.
The first case involves a single mum, whom I will call Emma. She works part-time and has a 12-year-old son. She was managing fine until her elder daughter, who was contributing to the household bills, left home to get married. The bills did not reduce much when she left and as a result Emma’s wages alone were no longer sufficient to cover them all. Unable to get any help, Emma got behind on her rent and fuel bills, and resorted to taking out payday loans. She took out five, with five different companies, paying interest rates of between 1,700% and 2,900% APR.
The excellent Harrow citizens advice bureau pointed out to me, with commendable understatement, that anyone who had looked properly at Emma’s overall financial situation would have seen that there was no way in which she would have been able to repay these loans. Interestingly, when the CAB got involved in discussions with her landlord and the utility companies they were both willing to make reasonable arrangements to help her clear her arrears with them over time. The payday loan companies, however, were very different; they took notice only when formal complaints about their behaviour by the CAB to the Office of Fair Trading were threatened.
The other case involves a single mum who has two teenage girls at school—I will call her Sonika, but, again, it is not her real name. She is in full-time employment but, again, her household budget has been squeezed by the combination of rising prices, notably those for food and fuel in this case, and the fact that her wages have not risen. She was managing okay until a couple of years ago, when she began to fall behind with her rent. She took out a loan to help her pay the rent but then got behind again and took out another one. Soon she could not pay the rent because she was servicing some seven payday loans and by the time she went to see the Harrow CAB she was in absolute despair, facing eviction and homelessness.
Sonika, too, benefited from the CAB’s support in negotiating repayments on her rent arrears, so she was able to save herself from eviction. But, again, when the CAB came to negotiate on her behalf with the payday loan companies, even though it had her written authorisation for this, initially they refused to negotiate until a complaint to the OFT was threatened. Again, responsible lenders would have seen that she could not afford extra payday loans and would not have advanced the credit. Indeed, they would perhaps have pointed her much earlier towards the debt advice charities. She is gradually getting back on track with her finances, but it will be a long time before she clears her debts.
What is striking is the huge growth in the industry in the past few years alone. Consumer Focus has estimated that the number of payday loan borrowers in 2006 was comparatively small, at 300,000, whereas, as my hon. Friend the Member for Sheffield Central said, by 2011-12 the OFT was suggesting that some 7.5 million to 8.2 million loans had been taken out. Others in the debate have highlighted the considerable concern about the way in which payday lenders are operating, be it the misleading advertising, the fact that they are not doing proper affordability checks, the irresponsible roll-over of loans or the way in which vulnerable consumers get targeted.
Philip Davies
There is lots of talk about irresponsible lending and I am sure that nobody would advocate that. Will the hon. Gentleman at least concede that one of the lessons learned from the banking crash was that when people indulge in irresponsible lending the biggest victims are the people who are lending the money in the first place? There is no great incentive for people to lend money to people who have no prospect of paying it back.
Mr Thomas
With all due respect to the hon. Gentleman, the payday loan companies seem to have done rather well despite the problems many people have in paying them back. Let me use his intervention to suggest that these are issues we might usefully debate in Committee and an occasional rebel against those on his Front Bench might be tempted to recognise the benefit of further debate, in Committee, on irresponsible lending.
Rebecca Harris
As I rattled through my speech, the point I was trying to convey was how those lending companies often ensure that they put themselves in the position of being the priority lender. They ensure that they get their money back and it is the children who go hungry or the mortgage that goes unpaid otherwise. That is the problem.
Mr Thomas
The hon. Lady makes an extremely good point and I hope that even at this late stage her words might encourage the Minister to encourage the Whips to allow the Bill to progress to Committee so that we can talk these issues through in more detail.
The OFT’s report in March demonstrated the clear need for many of the measures proposed by my hon. Friend the Member for Sheffield Central. Indeed, I was struck in late June by the fact that the OFT, in the rationale behind its reference of the payday lending industry to the Competition Commission, asserted that payday lenders appear to derive up to 50% of their revenue from loans that are unaffordable. Borrowers essentially pay far more than expected through roll-overs, additional interest and charges. The OFT seems to be saying, albeit very politely, that £1 billion of the £2 billion the industry was worth in 2011-12 was made by exploiting the most vulnerable. Those are business practices of which the sheriff of Nottingham would be proud.
Important as the Competition Commission’s work will be, my hon. Friend’s Bill gives the House an opportunity to put in place a series of sensible reforms. He shrewdly allows time for consultation on the details and I welcome the opportunity the Bill gives for new powers for the FCA to restrict the amount of high-cost credit that can be advanced to an individual, to limit the level of charges, to deal with the roll-over lending issue that many Members have talked about as well as the way in which advertising takes place, and to require lenders to help fund debt advice.
It is important to acknowledge that there is clearly a market for short-term lending and that the alternatives to high-cost credit are either not available or not as flexible or responsive as many consumers would like. Clearly in our collective response as policy makers we need to avoid being so draconian that we completely kill off interest from responsible businesses as that would make people vulnerable to illegal moneylenders—loan sharks.
As well as the actions advocated by my hon. Friend the Member for Sheffield Central and the work of the OFT and Competition Commission to root out the worst behaving businesses, more action is needed to create viable alternatives to the payday lending business model. In days gone by, the social fund might have offered a credible alternative to a payday lender, but the cuts to the fund and its devolution to local authorities mean that access to social fund loans is increasingly a postcode lottery.
Credit unions are the other key alternative. The cost of a single loan with a credit union can be hundreds of pounds cheaper than a high-cost credit loan. Two examples are worth sharing. A £300 loan taken out over 52 weeks from Provident Financial at 272% APR costs £246 in interest. The same loan from a credit union for the same period at their maximum 26% APR costs just £38 in interest. That is dramatically cheaper. A £300 payday loan from Wonga at 4,214% APR over just one month costs £95.89 in interest. The same loan from a credit union costs just £6 in interest.
Sadly, in this country credit unions are still too limited in their reach and coverage. The Government, to be fair, have continued, like the last Labour Government, to invest in credit unions and to make sensible reforms, but a bolder set of measures is needed to reform the reach of credit unions. In the UK, just over 1 million people are members of credit unions, and I declare an interest as a member of the Rainbow Saver Anglia credit union and Harrow’s M for Money credit union.
Local authorities, social housing landlords, and other parts of the public sector, such as Transport for London and the Metropolitan police, should have an obligation to promote credit union membership to their staff. In the US, Canada and Australia, and even in Ireland, more than 25% of the population are credit union members. Indeed, I think the biggest credit union in the world is Navy Federal in the US. It is the credit union for the American armed forces, with more than 3 million US servicemen and women, from special forces soldiers through to navy cooks, as members. Why do our military not have the same offer for our soldiers and sailors?
Mark Durkan
I speak as the Member of the House who has the highest rate of credit union membership among his constituents. Is my hon. Friend aware that credit unions are now reporting a concern that some debt advisers are telling people to max the loan that they can get from the credit union and use that to discharge their debt to payday lenders? Then the credit union is quickly hit with an insolvency voluntary agreement. That is having an effect now on lending decisions taken by credit unions. It is potentially limiting the good that they can do, which he is highlighting.
Mr Thomas
I am not aware of such circumstances in my area, but my hon. Friend makes a wider point about the crisis that payday lending has induced for many people, and its roll-over impact on credit unions. That seems to be another issue that would be worth teasing out in Committee.
Perhaps, when we get to Committee, I might tempt my hon. Friend the Member for Sheffield Central to look again at the wording of his clause 4 proposals for a levy on lenders to fund the Money Advice Service. Good as that is, I wonder whether a levy to help to fund the expansion of credit unions is equally urgent, particularly those credit unions in areas of deprivation that have the capacity to offer the equivalent of payday lending products, albeit with far lower interest rates, and therefore much more affordably. Perhaps if we are able to persuade the Friday wolves to allow the Bill to progress, we might have a useful debate on that point. We certainly need to be far more ambitious about the reach of credit unions.
Lastly, I gently suggest to my hon. Friend one further refinement to his Bill. We need a culture of openness across financial services, as exists, for example, in the United States. By that I mean that we need to get down to local community level—postcode level—to find out what financial services businesses are lending, how they are lending and to whom they are lending. The data should be anonymised, to protect individuals’ confidentiality. That would help us target much better where investment in debt advice, credit unions or community banking services is needed.
In Thamesmead in south-east London, not one bank branch is open. It is an area that serves some 55,000 people, and the nearest bank branch is 30 to 40 minutes away by public transport. Lack of access to bank branches limits access to mainstream credit and increases the vulnerability of people and the demand for high-cost credit products. To be fair to the Government, the banks have had some pressure from Ministers, as well as from our ranks, finally to begin to publish some of their lending data, although they are taking a long time to do so. Inevitably, the data will need refining to be useful. That openness is important. The FCA will need to be tough with the financial services industry to get useful banking openness data. We need to make sure that we include the payday lending industry within the scope of that published data so that we have a proper sense of access to financial services in each community. I hope that if the Bill gets into Committee my hon. Friend might be open to an amendment, perhaps to the schedules, that allows the FCA to impose as part of the mix of requirements a need for anonymised lending data by payday lenders to be made public.
My hon. Friend’s Bill has the potential to make a real difference in curbing the activities of the worst players in the financial services industry. His approach has been exemplary in working with Members on all sides of the House and in wanting to consult before imposing the detail of legislation. Even at this late stage, I hope that his arguments will persuade the Government to think again and allow the Bill to make progress.
Mr Robin Walker (Worcester) (Con)
It is a pleasure to follow the hon. Member for Harrow West (Mr Thomas), who made a number of important points.
This is the first time in my parliamentary career that I have been here on two consecutive Fridays. I am delighted to be strongly supporting two Bills that are very different but both very important to my constituents. It is a great pleasure to speak in this debate, which was ably opened by the hon. Member for Sheffield Central (Paul Blomfield), with whom I greatly enjoy serving on the Business, Innovation and Skills Committee. Although we speak from different sides of the House, I think that I can genuinely describe him as my hon. Friend. I know how much work he has put into this Bill, and it is a credit to him that he has attracted widespread support across the whole House on such an important issue.
My hon. Friend the Member for North Swindon (Justin Tomlinson) would have been here to speak in support of the Bill but has been detained by issues in his constituency. I pay tribute to the work that he has done with the all-party group on financial education for young people and the major battle that he has won in getting compulsory financial education into the new national curriculum. That is a big step forward that will help to address this issue. I congratulate my hon. Friend the Member for East Hampshire (Damian Hinds) on a brilliant speech that addressed many of the issues involved. I was also pleased to hear my Select Committee colleague, my hon. Friend the Member for Castle Point (Rebecca Harris), raise issues on behalf of her constituents.
I listened carefully to what the Minister said. I welcome many of the ways in which she has engaged with this topic, particularly her emphasis on the FCA providing strong regulation; indeed, I have spoken about that in previous debates. However, I was disappointed to hear her say that she would not be supporting the Bill, because I think that it should be debated and taken forward. It is interesting that she chose to argue that it would limit the independence of the FCA. In fact, the phrases in the Bill have been very carefully chosen to empower the FCA and to give it flexibility—indeed, in the view of my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg), who is such a doughty champion of Parliament, to give it too much power and flexibility. We clearly have an ongoing debate on the Government Benches about whether the Bill would tie the hands of the FCA.
Mr Kevan Jones
Does the hon. Gentleman agree that if the Bill went into Committee and the Government had concerns about some parts, it could be amended to improve it?
Mr Walker
I agree with the hon. Gentleman.
This Bill deserves our support, first because it is a good and well-drafted Bill; secondly, because it addresses a hugely important issue that really matters in our constituencies; and thirdly, because of the polite, sensible and reasonable way in which the hon. Member for Sheffield Central has set about building a cross-party coalition of support for it. He has support from members on both sides of our Select Committee and, as far as I know, from all parties in this House, although the Liberal Democrats have not yet offered any.
This should not be a party political issue, but an issue on which we are all acting in the best interests of our constituents. As the hon. Gentleman clearly set out, there is a need for measures to protect the most vulnerable consumers from unaffordable loans. The many organisations on the front line, such as Citizens Advice, StepChange, Which? and Christians Against Poverty, have set out a powerful case for change to the way in which the sector works.
In rising to support this Bill, I pay tribute to the hugely important work of volunteers in providing debt advice, research into the problems of high-cost lending and the steps necessary to protect the most vulnerable from the risks of high-cost credit. Local organisations in Worcester that have contacted me about the issue include Worcester citizens advice bureau, Two Pennies Money Advice, St Paul’s hostel and the Tolladine mission, all of which, alongside numerous church and religious groups, provide invaluable support to my constituents and vital community services. I am very grateful for their support in drafting this speech and the information they have provided to me.
I have also received a number of letters of support for the Bill from a number of individual constituents and, indeed, from Unite the Union, an organisation with which I do not always find myself in agreement—at least in its national aspect—but whose local representatives I have always found to be reasonable, sensible people who want the best for their members and with whom I have been working closely lately on a couple of issues in the constituency.
Philip Davies
I, too, receive representations from Unite representatives. Does my hon. Friend agree that if this is such a big issue for the Unite union, perhaps it would be better employed withdrawing the £8 million it donates to the Labour party and lending it at low cost to some of its members who otherwise have to go to payday loan firms?
Mr Kevan Jones
Obviously, the hon. Member for Shipley (Philip Davies) does not understand how political funds work: lending money for that purpose would not be allowed by the law.
Mr Thomas
I am grateful to the hon. Gentleman for giving way. Interestingly, I think that Unite is one of the funders of a banking project in Salford that is designed to encourage alternatives to payday lending. Would he like to praise Unite and the other funders of that initiative, which is a little like a community bank?
Mr Walker
I would be very happy to do so. I have already praised Unite for some of the work it does in my constituency. I have no issues whatsoever in doing that.
Although I am sure many of the companies in the payday and high-cost loans industry will protest that they merely provide a service that their customers want, there are too many examples of people who have been trapped into loans they cannot afford to repay and of vulnerable people who have acted without sufficient advice or without the understanding that we would want them to have of the real costs and risks that they are taking on.
Research by Which? has shown that nearly 24% of people taking on so-called payday loans are using them to repay other forms of credit. StepChange tells me that constituents from Worcester who have contacted it owed as much as £1,717 on payday loans, which is much more than they are likely to receive in monthly income.
I have spoken in previous debates in support of the broad concept of capping the cost of lending, but I am aware of the controversies involved. I know that some colleagues warn—and, indeed, that many non-governmental organisations and charities argue—that there is a real risk in setting caps that more people could be driven into a black market and into the hands of illegal money lenders who would charge even more and offer less recourse.
Philip Davies
My hon. Friend has mentioned the number of people who have difficulties with payday loans. We certainly all sympathise with that, but surely in the interests of balance he should also refer to the number of people who are satisfied with their payday loan companies and the 90% or so who say that they would recommend their payday loan company to their friends.
Mr Walker
It is fair to acknowledge, as my hon. Friend suggests, that some people are satisfied, but I am concerned that briefings from these companies tell us that 75% of the people they are lending to are in employment. What about the 25% who are not? We should be worried about them, and about the ones who are trapped in unaffordable loans. The Bill sets out sensible measures to deal with that problem.
I am glad that the Bill sets out to remind the FCA of its responsibility to consider a cap. That is something that Parliament has previously urged it to do, in an unopposed motion. I would gently point out to the hon. Member for Foyle (Mark Durkan) that the Government have not opposed a cap, and that their MPs have voted for a motion that urged regulators to consider capping. That matter is still very much on the agenda.
The Bill proposes a number of other measures that could make a real difference, with or without a cap being imposed. Measures to improve the transparency of costs and ensure that advertising carries reasonable warnings seem to be a reasonable and proportionate starting point. Limiting roll-overs of short-term loans will be essential if the payday loan industry’s own argument that the relatively small cash cost of a short-term loan is to be believed, and if the argument that theoretical APR is irrelevant is to be accepted.
If roll-overs are allowed to happen too often, at the very high interest rates that some lenders charge, debts can spiral. It is not in the interest of borrowers or lenders for people to be trapped in a situation in which they cannot pay off their debts. I see no good reason for anyone to object to a limit on roll-overs. Indeed, the Consumer Finance Association tells us that it already carries such a provision in its terms of membership. However, not all payday lenders are members of that association and, furthermore, its terms of membership do not seem to be as rigorously enforced as they might be.
There are many other positive provisions in the Bill but the one that I want to focus on and which I think could make the biggest practical difference is the idea of a levy. The hon. Member for Sheffield Central has kindly acknowledged my long-term interest in this idea. I have long argued that it is unreasonable that banks and credit unions pay towards the provision of debt advice services but that payday lenders do not. This is a hangover from the regulatory regime that existed under the last Government, and, given the growth of the payday loan industry and other forms of high-cost credit, this matter will need addressing in any event.
However, I would be inclined to go further than simply putting payday lenders on the same level as lower-cost lenders. We have a responsibility to ensure that consumers are properly informed, but much of the evidence that we have heard today shows that they are not. We need to ensure that every consumer—particularly the most vulnerable—has access to free debt advice and an understanding of all their options when it comes to borrowing.
The coalition Government have rightly supported the growth of credit unions, as did their predecessor. Credit unions can often provide credit at a much more reasonable rate than payday lenders, as the hon. Member for Harrow West illustrated very well in his speech. However, they do not necessarily have the resources to advertise widely, and their coverage of the country is patchy. I want to see a credit union offering support to my constituents, but since the sad demise of the Black Pear union, we do not have a local organisation in Worcester with the capability to do so. We would welcome credit unions from elsewhere coming in, and I am glad that the Six Towns credit union has entered talks to do so, but it will take time for it to establish its presence and to scale up.
In previous debates, we have heard the argument that Governments do not set caps for lending costs, and that it would be wrong to interfere in the market by doing so. However, we have a good, recent example of the Government setting out a cap for lending, which has attracted broad support. The proposed 3% monthly APR limit for credit union lending has allowed credit unions to increase the interest that they can charge on loans, and thereby to reach a wider audience. That is still seen as a reasonable rate, as it is far lower than that charged by many payday lenders.
I would advocate using that cap on credit union lending as the base for a new levy. Organisations that lend above that rate should pay a levy proportionate to the amount of interest and costs that they charge, beyond the level charged by credit unions. That levy could then be used to fund free financial advice services. If the levy were set at a percentage of all interest above the 3% monthly rate, it could raise a substantial amount, given some of the rates being charged by payday lenders. Just 5% of Wonga’s profits would equate to £3 million that could be used to provide free financial advice.
This approach could create a virtuous circle whereby either the market share of the high-cost lenders would be reduced by the prevalence of better and more widely available free advice services, or the amount of free advice to support the most vulnerable consumers would grow as the industry did. It would also have the advantage of providing a financial disincentive for lenders to set their rates too high, and a competitive advantage to the credit unions. It could provide a valuable new source of income for a sector that has faced many challenges in recent years.
There is a precedent for such an approach in the voluntary support of major players in the gambling industry for GamCare, but in this case, it is important that any levy should be imposed by the regulator and backed by legislation, rather than being put forward by the industry on a voluntary basis. The industry has had plenty of time to consider making a contribution to free financial advice, and so far it has largely failed to do so. There is no evidence that the industry would act in concert to provide the level of support that the financial advice services needed, and I support the idea in the Bill that a levy should be managed by the regulator. I hope that the Government and the FCA will pay careful attention to the case for a levy, whatever the outcome of today’s debate and the progress of the Bill.
How the levy should be distributed could be a matter for debate. Some might argue, as the hon. Member for Harrow West did, that it should be used to fund credit union expansion, but I believe that a subsidy of any sort would distort the business model of credit unions and could risk making them less sustainable. I have discussed this point with representatives of the credit unions, including Six Towns. It would be better for the levy to provide them with a competitive advantage in being set above their lending cap, and to fund the financial advice that might direct more people to them as customers.
Some will argue that the levy should be directed towards financial education for young people and the most vulnerable. I would welcome some of it being available for that purpose, but I hope that its primary use would be to fund the valuable work of the voluntary sector in providing free financial advice and to ensure that the type of services that the hon. Member for Sheffield Central has signposted are sustained, supported and expanded so that they reach the people who need them most. I have no doubt that a substantial part of any such fund would be likely to go to Citizens Advice, and rightly so, but it must reach a wider range of voluntary organisations that provide free financial advice and help with debt, including the many valuable faith-based groups that engage in this area.
I believe that the best mechanism for allocating the proceeds of a levy would be a challenge fund, perhaps managed by the Big Lottery Fund, to allocate funding to debt advice services and financial education initiatives according to their reach in communities around the country, with the aim of encouraging support for the most vulnerable.
To make such a levy workable, it would be necessary to have a central register for payday loans. As the Bill sets out, such a register is desirable in any case. It would help lenders to establish whether their customers have outstanding loans and to avoid overloading people with a range of different debts. This is one area in which I disagree with my hon. Friend the Member for East Hampshire. I point out to him that such a system appears to be working well in Canada.
If I were to suggest one improvement to the Bill, it would be that it should provide a means for people whose only recourse is to high-cost credit to build up their credit rating so that they can return to the mainstream market. That is something that we might address another time.
I do not wish to detain the House longer because this is an important Bill and I want it to progress. There is strong cross-party support for the Bill. I hope that Government Members will recognise the value that it brings to an issue of grave concern and the potential that it has to raise substantial revenues for the voluntary sector in a way that can only benefit our constituents. I hope that Ministers will reflect on the many valuable propositions that it contains. I know that some of my hon. Friends are wary of private Members’ Bills and are wont to criticise legislation that they feel is informed by a “something must be done” approach. The case for this Bill, however, is not that something must be done, but that it is the right thing to do.
Mr Kevan Jones (North Durham) (Lab)
May I begin by declaring an interest? I am a non-remunerated director of the Prince Bishops community bank, which is a credit union in my constituency.
I congratulate my hon. Friend the Member for Sheffield Central (Paul Blomfield) on introducing the Bill and on coming second in the private Members’ ballot. Having promoted a private Member’s Bill myself, I know the amount of work that is involved. He has picked a subject that has clear relevance not only to his constituency, but to the constituencies of many Members on both sides of the House.
There have been three excellent speeches from Conservative Members, including the last one from the hon. Member for Worcester (Mr Walker), and I will refer to those in a moment. However, it is disappointing that although the entire parliamentary Conservative party was here last Friday, very few Conservative Members are here today. That shows what their priorities are. This Bill would make a real difference to our constituents, unlike the Bill that they lauded last week, which will make none at all.
I accept that some Government Members support the Bill and want it to proceed to Committee, where it can be amended, but I doubt whether that will be achieved, because the Minister has said that the Government will oppose it. That is clearly an attempt to keep the channels clear for the Bill that the Conservative party want to proceed, which is the European Union (Referendum) Bill. It is unfortunate that the Liberal Democrat Minister, the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for East Dunbartonshire (Jo Swinson), cannot be here. I understand that she has had to leave the Chamber because of family commitments. This is not the first time in the past three years that the Liberal Democrats have been hoodwinked by the Conservative party, but it is a classic example of it. A ComRes poll found that about 90% of Labour Members supported further regulation, but that 64% of Government Members opposed it. That shows the priorities that Government Members have, with the honourable exceptions of the Members who have spoken today.
My hon. Friend the Member for Sheffield Central and others have spoken of the heartache and misery that payday loans are causing in many constituencies. First, I will talk about interest rates and pick an example. For no apparent reason, I will decide on Stockton in the north-east—I am not sure whether the hon. Member for Stockton South (James Wharton) is here today. Let us look at the number of payday lenders on Stockton high street: Cash Krazy, No. 1 Currency, Cash Generator. The Money Shop, Cash Converters, and Ramsdens 4 Cash. Rates of APR—I checked the websites last night—range from 2,400%, to the lowest rate of 897%. That shows the scandal surrounding payday loans. Industry spin says that such loans are for short periods, but as we have heard, and as I know from my constituency, they are not. I will mention roll-overs later in my remarks.
Philip Davies
I tried to get this information earlier from the hon. Member for Sheffield Central (Paul Blomfield), without any success, so I wonder whether I can tempt the hon. Gentleman. According to moneysupermarket.com, borrowing £100 for one month will lead to a repayment of somewhere between £125 and £135. If he thinks that is excessive, what figure does he believe would be an acceptable amount for someone to repay after a loan of £100 for a month?
Mr Jones
That is an interesting point. The Bill suggests it is for the regulator to determine that and I will give some examples in a minute. I find the hon. Gentleman’s position very strange. I have a copy of the Telegraph & Argus from 7 March 2013—not that long ago. It has a very flattering photo of the hon. Gentleman and the headline:
“MPs welcome crackdown on payday lenders”.
That seems a little at odds with what he has been saying today, so perhaps he should go back to the Telegraph & Argus—which I understand is a reputable newspaper—and correct its possibly misleading headline. No doubt this weekend he will explain to his constituents that he is not actually that much in favour of a crackdown on payday lenders.
Can someone get interest rates that are cheaper than those I have described? Yes, they can. Credit unions have been highlighted already, and as the hon. Member for Worcester (Mr Walker) said, we must also do more to encourage high street banks to contribute to the pot, or offer some type of facilities for these people. Another way of getting a cheap loan is knowing one of the payday lenders. Everyday Loans is owned by a friend of the Prime Minister, Henry Angest, who lent £5 million to the Conservative party before the last general election. On average, Everyday Loans charges 74.8% interest, but the Conservative party paid 3.5% interest.
Jacob Rees-Mogg
The obvious answer to that is that there is no better credit-rated borrower than the Conservative party, the oldest party in history.
Mr Jones
Given the mess that the Chancellor is making of the economy, I am not sure I agree with the hon. Gentleman. The point is that the Conservative party can accept a cheap loan from a person involved in payday lending, at the same time as many of our constituents and ordinary hard-working families are being charged 74% interest. It goes further. Adrian Beecroft is a major stakeholder in Wonga which, as has been mentioned, charges up to 4,000% interest. He wants us to deregulate more—zero-hours contracts, the minimum wage and all the other things that he wants put forward in a deregulation Bill—but that will cause more of the problem. I am not surprised that he is in favour of it, because it will lead more people to payday loans at exorbitant rates from the likes of Wonga. I am a bit baffled by the Government’s approach to the Bill. It would be sensible to send it to Committee, debate it and if they want to amend it, they can bring forward proposals.
The heart of my point is how policy is influenced. The Prime Minister said this week that nobody buys Conservative party policy. We have heard very good contributions from Conservative Members who are clearly in touch with what is happening on the ground. However, while the Conservative party chairman, the Minister without Portfolio, the right hon. Member for Welwyn Hatfield (Grant Shapps) has described payday lenders as “obscene”, he is not afraid to accept their money.
Representatives from Wonga attended an event at the Conservative party conference that was described as a “speed dating event”, at which the Economic Secretary to the Treasury, the hon. Member for Bromsgrove (Sajid Javid), the Exchequer Secretary to the Treasury, the hon. Member for South West Hertfordshire (Mr Gauke) and the Minister of State, Department for Business, Innovation and Skills, the right hon. Member for Sevenoaks (Michael Fallon) spent 20 minutes at each table. The idea of speed dating two of them might not seem too bad, but the idea of speed dating the right hon. Member for Sevenoaks is taking things too far.
Philip Davies
The hon. Gentleman is thrashing around, trying to throw mud in every direction. In relation to the mud he was trying to throw at me, when I think he was alleging that I was acting in an inconsistent manner, he clearly does not read the mud he has been throwing. If he read the article he would know that I said:
“I am sure everyone supports the OFT in their aim to have an industry which operates responsibly. However, we must tread carefully. Removing legal lenders through well-meaning legislation and regulation will not reduce the demand for their services, it will just push people to illegal loan sharks whose way of operating is often utterly unacceptable and much worse for their customers.”
Did the hon. Gentleman read what I actually said in the article he quoted, or was he just hoping that if he threw enough mud some would stick?
Mr Jones
I think the mud is firmly stuck on the hon. Gentleman. From his comments today, I would suggest that he has been an apologist for the payday lenders rather than someone calling for a crackdown. All I am saying is that he might want to correct the Telegraph & Argus headline. He has used this debate to support the payday loan industry, rather than support a crackdown.
Philip Davies
The hon. Gentleman is just highlighting his own ignorance. If he read the article, which he clearly has not, he would know that it quoted all the Bradford MPs. The article was not specifically about me; it was about what all five MPs in the Bradford district said. The headline was a reflection of that, and not what I said. My views were made perfectly clear then and they are consistent with the points I have been making today.
Mr Jones
The hon. Gentleman must have a very good relationship with the Telegraph & Argus—I do not have the piece here; I just wrote it down—because there is a blooming big photograph of him next to the “crackdown” headline, when it is not a crackdown but the back-down that he has put forward today.
Returning to the speed dating initiative and the influence on Conservative party policy on this area, the party’s response was:
“It is essential for good regulation that ministers and others meet with and listen to the views of the businesses they regulate as well as those who campaign for tougher measures.”
I do not think that anyone would disagree with that, but why should the option to meet Ministers cost £1,250? Will my local credit union or some of the victims of payday lenders have access to those Ministers? No. This is privileged access to senior Ministers bought by raising money for the Conservative party. Payday lenders indicated that they wanted light-touch regulation, despite ordinary people suffering at their hands.
As others have said, payday lenders look like Robin Hood in reverse; they take money from the poor and give it to the rich, and some of the Government’s policies will only make it worse. If people have to wait seven days to apply for jobseeker’s allowance, it will be a bonanza for the payday loan industry. If someone is made redundant and has no savings, what do they live on? They will go to a payday lender and get into the cycle of debt already described. The hon. Member for East Hampshire (Damian Hinds) made a good speech, but I do not think he understands that a lot of people do not have savings, have no recourse to family members with large savings and are living from week to week—in some cases from day to day. I work with credit unions encouraging people to save small amounts—I accept his point about that—but, as the hon. Member for Worcester said, credit unions will not solve the problem, unless we make an effort to expand them.
There is another problem waiting to hit this country big time, and it does not just concern people suffering now: an increase in interest rates. Yesterday, The Times reported that if mortgage interest rates rose by 2%, 800,000 people would be spending more than 50% of their income to pay off their debts, and that if they rose by 4%, that figure would be 1.2 million. This is a time bomb. Currently, we rely on low interest rates, but if they rise, the situation will get serious, with a lot of people struggling now needing support, and a bonanza for the payday loan companies. I am not surprised that, as someone said, many American companies have moved away from that regulated market to what must seem to them like the Klondike.
I want to raise a question I have come across in my constituency, and one that has been raised already: can these people afford to pay back this money? In most cases, the answer is no; and the lenders know that. Their record on background checks is poor. It is like with heroin addicts. These payday loan companies get people on to it, and then keep them on it. That brings us to roll-overs, which the OFT, like my hon. Friend the Member for Sheffield Central, have criticised. Once people get into debt, it just carries on, so it is a bit like heroin. People get hooked and never get off the treadmill. That must be stopped.
The hon. Member for Castle Point (Rebecca Harris), who is no longer in her place, mentioned the misuse of the continuous payment authority. This comes down to financial education. People are not aware that these debts need not be the priority. Often, they are treated as the priority, however, because people have been led to believe that they have to pay them off before their mortgage and other debts. That definitely needs explaining and regulating, which the Bill would do.
Mark Durkan
Does my hon. Friend agree that some of these businesses are basically committing usury and that the arguments against the Bill are nothing more than “excusury”?
Mr Jones
It is an excuse not to do anything. Those who oppose the Bill, including the Government, have to recognise that this is a real issue, and not only in constituencies such as mine. The hon. Member for Worcester, which is very different from Durham, said that these companies have gone into different areas and are using these aggressive tactics. I looked last night at the list of Stockton payday lenders. Some of their websites are very attractive—bright advertising and so on; clearly that needs to be regulated.
Why can we not act in this country? I think it was my hon. Friend the Member for Glasgow North (Ann McKechin) who mentioned the highly regulated American system. The other system that seems to work is the Canadian one, which can cap interest at 7%, as opposed to the rate on similar loans in this country, which is 70% to 74%. If those countries can do that and ban, for example, roll-overs, why can we not do it here? It is about political will, and that goes back to the point I made earlier.
Why do the Government not want to do those things? They have clearly been lobbied extensively by the sector. Some may argue that they have a direct financial interest in raising money from the sector and accepting loans off the individuals involved. They will not introduce the regulation that would help people. If we are looking at this issue seriously, we need to ensure that the policy is not only reactive but morally right. Legislation should be introduced, but the Government are putting their vested interests ahead of those of many of my constituents.
Mark Durkan
I thank my hon. Friend for giving way again. Does he recall that when the Government were taking through the Financial Services (Banking Reform) Bill—which makes far more provision in respect of the FCA, the Prudential Regulation Authority and the new regulatory system—they made a point of saying that it rightly provided more indicators from Parliament for issues and options to be considered in relation to the FCA’s other functions, because the evidence was that that had been missing from the previous regulatory regime. Surely this Bill is simply colouring in the equivalent considerations in respect of this power for the FCA.
Mr Jones
I am going to do an unusual thing now and agree with the hon. Member for North East Somerset (Jacob Rees-Mogg), who said that this House should have control of those things. The de facto position under this Government—and, I have to say, the previous Government—is that the best way to do these things is to create an arm’s length regulator, which will somehow sort the problem out. I am not opposed to that—although the episode involving the Independent Parliamentary Standards Authority this week has shown that it can backfire a little—but if we are to have a regulator, Parliament has to set clear guidelines. I am therefore not opposed to external regulation, as long as it operates according to a clear set of guidelines, which this Bill would set out. Indeed, that is the strongest aspect of this Bill.
Philip Davies
The hon. Gentleman seems to be saying that he wants roll-overs banned. I wonder whether he can answer the question asked by my hon. Friend the Member for Christchurch (Mr Chope) earlier. If somebody comes to the end of a loan and cannot pay it back, for whatever reason, what does the hon. Gentleman suggest they should do?
Mr Jones
There are two issues about the situation the hon. Gentleman describes. He asks, “Would it work?”, but he should look at Canada, where there is already a limitation of, I think, four months. First, I would ask the lender, “What credit checks did you do on the individual in the first place to lend the money?” Secondly, the company should try to work out how that individual could pay—whether over a longer period or something like that—but certainly not sucker them into another loan, which is what happens now. The hon. Gentleman is being naive—he is obviously not keen to crack down as hard on payday lenders as the headline suggests. The point is that if someone cannot pay back the first loan, how on earth are they going to pay back the second one? These companies know that. I do not want to call the hon. Gentleman naive—he is certainly not naive—but he is being naive in arguing that payday lenders somehow do not know that once they have got people hooked on that line of credit, it is in their interests to keep them on it.
Let me turn to credit unions. The hon. Member for Worcester made some good points about credit unions. I agree with him on one point: I am opposed to giving money to credit unions to top them up. However, he also raised some good points about a levy and how it could be used. Financial education and promoting access to credit unions would be a good idea. If they became beholden to the grant as such to keep them going, that would be a mistake. He therefore raised a good point. He has certainly thought about the issue and is right.
Finally, the issues that this Bill addresses are affecting millions of our constituents. Frankly, what is happening is a national scandal. These companies are taking money from the poorest and most deprived communities and individuals in this country and making millions of pounds out of them. I do not know how these people sleep at night; they are causing absolute misery. One thing that we in this House can do is to take steps to put right any injustices we see.
It is absolutely appalling that the Government oppose this Bill and will not allow it to go into Committee. This has nothing to do with the Bill itself; it has more to do with another Bill that the Government want to get through—the European Union (Referendum) Bill. They want to kill this Bill and allow the other one through. I hope that the millions of people up and down this country who support regulation will recognise what the Conservatives are doing. They put party politics over Europe higher than the misery of millions of our constituents, which is a complete disgrace. I have to add that it is not just the Conservative party, because not for the first time the Liberal Democrats have been hoodwinked into supporting the Tories.
I support this Bill because millions of people need the protections it provides. It should be allowed to go into Committee. It is not perfect; it can be amended and the Government could actively work to improve it in line with some of the sensible suggestions that have come from Conservative Back Benchers, including those of the hon. Member for Worcester, which would help to solve the problem of injustice. Am I angry that the Government are killing this Bill today? Yes, I am, and I think many other people will be, too.
Jacob Rees-Mogg (North East Somerset) (Con)
I begin by referring hon. Members to my declaration in the Register of Members’ Financial Interests—not, I am glad to say, because I am a payday lender, but because I am regulated by the Financial Conduct Authority and am therefore involved in something that is relevant in the broadest sense.
It is always a great pleasure to follow the hon. Member for North Durham (Mr Jones), who is one of the most gripping speakers in this House. I am glad that he always speaks at sufficient length that his thoughts can be developed, which is invariably helpful to the deliberation on Bills. I was glad, too, that we agreed on the one point about Parliament regulating things rather than handing them out to random bodies. There is, however, one thing on which we disagree—his conclusion. I am going to say quite straightforwardly that I oppose this Bill. I congratulate the hon. Member for Sheffield Central (Paul Blomfield) on introducing it, but I do not think it is the right answer to the problem. There are different answers to it, some of which I shall try to cover.
Let me start, however, by placing the problem in its historical context. The issue of usury, as the hon. Member for Foyle (Mark Durkan) rightly called it, is one that goes back to the most ancient times. The Hittites, the Egyptians and the Phoenicians were all lending each other food, substances, bits and pieces and getting them back. It is always a pleasure to mention the Phoenicians because it is believed that Joseph of Arimathea brought Jesus himself to Somerset on a Phoenician trading vessel. It was quite near Bristol, so we never know whether our lord might have gone there, too. This is the ancient history of usury: it is almost as old a profession as the oldest profession; it is part of human nature to lend things and have them returned at interest.
Usury is an issue that has troubled theologians over the years. The Old Testament includes particularly strong statements against it. I shall quote only one, the first one from Exodus 22:25:
“If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.”
Even in the Book of Exodus, limits are being set on the amount that may be charged on the repayment that is to come.
Barbara Keeley
Is the hon. Gentleman going to move on to the example of Jesus throwing the moneylenders out of the temple of Jerusalem?
Jacob Rees-Mogg
Perhaps the hon. Lady refers to:
“You have made my Father’s house a den of thieves”.
I was not going to quote that because I thought it was so well known that it would be unnecessary to trouble the House with it. Interestingly, however, the money changers in the temple were changing ordinary Roman coinage into the special coinage used in the temple for buying sacrifices and so forth, and making a very healthy return on that. I am not quite sure that it is the same as usury, which is another reason why I was not going to mention that precise example. However, it is interesting that these issues have come up over the years.
The councils of the Church have considered the matter. At the council of Nicaea, the Church council that set out the Creed also decided that the clergy may not lend money at interest, and that interest may not be charged above a rate of 1% a month. The same issues were being discussed then—the rate of interest being charged and who may be involved in the process. The rather splendid Pope Sixtus V—I rather like somebody called Sixtus V; there seems to be some incongruity in it—said that charging interest was
“detestable to God and man, damned by the sacred canons and contrary to Christian charity.”
We see that these issues have been problematic for not just hundreds but thousands of years. They have been debated by theologians and looked at by economists.
The fundamental point is that there are people who have money to lend and people who want to borrow, and bringing the two together, when done in a suitable way, is beneficial to both sides. It makes it possible for people to spread payments, make investments and order their lives in a way that is convenient to them, and at the same time it makes a profit for the person on the other side of the transaction, who has excess capital to lend out. However, with that come difficulties and problems that Governments have sought to solve over generations.
At this point, I think it is relevant to quote the introduction to Henry VIII’s Act against usury, which shows the context of the problem. It states:
“Where before this Time divers and sundry Acts, Statutes and Laws have been ordained, had and made within this Realm, for the avoiding and Punishment of Usury, being a Thing unlawful, and of other corrupt Bargains Shifts and Chevisances, which Acts Statutes and Laws been so obscure and dark in Sentences, Words and Terms, and upon the same so many Doubts Ambiguities and Questions have risen and grown, and the same Acts Statutes and Laws been of so little Force or Effect, that by reason thereof little or no Punishment hath ensued to the Offenders of the same, but rather hath encouraged them to use the same.”
That, I fear, is why, in the end, I am not going to support the Bill. What happens is that Parliament legislates to rectify a problem but finds that what it legislates does not actually do that. Henry VIII’s Act was repealed within six years. It was against usury and also set a maximum rate on mortgages of 10% per annum. However, it did not work, because there are always people needing to borrow money and people willing to lend it to them. The question is how that is done, at what stage in the process and who is involved.
Having a source of borrowing within a regulated business system is preferable to loan sharks, who have been mentioned. We hear about “legal loan sharks”, and they may become illegal in some of their practices, but as far as I am aware Wonga, however bad a company it is, does not send people round with baseball bats. There seems to be a fundamental problem in legislating in a way that will push people in difficulties in that direction.
Mr Kevan Jones
I agree with the hon. Gentleman, but in many cases such companies use financial baseball bats on people.
Jacob Rees-Mogg
But the difficulty is that the loan shark uses both financial and physical baseball bats. That is not to say that the behaviour of Wonga is good, and I will come on to that. However, there are already measures available for a crackdown, to use the word we heard earlier, on the operations of such companies. I accept that there are problems with the way in which such lenders operate. I oppose the Bill not because I do not think there is a problem but because there are already measures that can be taken but are not being taken. Another statute is not the answer to the problem.
That leads me on to the FCA and the normal laws. If I may, I will cite the case of a constituent who came to me not because he had borrowed money from Wonga but because it came after him saying that he had. Somebody had used his name, had borrowed I think about £300, and had got it deposited in a criminal bank account—a bank account not belonging to my constituent. Wonga then came after him and said, “You owe us this money. Please may we have it back?” He is a wealthy man, so he would have had no difficulty paying this money if he felt like it, but he was also not the sort of person who was going to be fiddled around with and pay money that he did not owe. So he said to Wonga, “I do not owe it. I never took out that loan. That is not my bank account.” Wonga wrote back saying, “That’s absolutely fine. We’ll write it off.” He said, “No, that is not absolutely fine, thank you very much. That is criminal activity and I should like it reported to the police.” He reported it to the police, but he was not the sufferer of the crime. It did not affect him. He was not short of £300; merely his name had been used. The police therefore would not do anything on his account and Wonga refused to report it to the police. Therefore it was allowing a crime to be committed and in effect rolling up the cost of that into the interest rate it charged to the people who borrow from it—in a payday loan at a very high rate, as has been mentioned—and taking that as a cost of doing business.
I have a serious gripe with that on two counts, which I know very well from my own business life in financial services. The first is that there is a basic principle of know your client. If somebody comes to my business and wants to invest with us, we have to know that client. We have to understand what their objectives are, what their wealth is, what their situation is, what type of investment is suitable for them. We have also to know who they are—who they really are, that they genuinely are who they claim to be. The know your client rule is at the absolute heart of financial regulation in this country, but for some reason Wonga and the payday lenders can completely ignore it.
Jacob Rees-Mogg
The hon. Gentleman makes an interesting point, but knowing your client is not knowing a group of clients or a class of clients; it is knowing your client as an individual—as a person. That has been in the rule book of the FSA before and of the FCA now, and of the Investment Management Regulatory Organisation before them. It is a fundamental rule of financial services that we should know the counter-party with whom we are dealing and we should not deal with that counter-party if we do not, because we have a regulatory obligation to ensure the product we are offering is suitable to them. This seems to me to be a matter not of legislation, therefore, but merely of the FCA covering the bodies that are making the payday loans through its existing regulations, which would need very little change. That is a very straightforward means of putting this anomaly right.
Philip Davies
I am, as ever, very interested in what my hon. Friend is saying, but to what extent should payday loan companies get to know their clients? Is he simply asking that they get evidence of people’s bank statements or pay slips, or does he envisaging something more onerous?
Jacob Rees-Mogg
I suggest that the know your client obligation should be as strong on payday lenders as on somebody who was receiving an investment of a similar amount—that they should have an obligation upon them to know who their client is and to understand whether what they are offering is suitable. It would be as if someone went to Hargreaves Lansdown to get investment advice; they should know the customer as well as Hargreaves Lansdown would.
The second count is to do with an absolutely standard part of all financial service regulation: money laundering. It is drummed into anybody who works in the City that money laundering is one of the most dangerous things they can be involved with, and that anything to do with money laundering—any passive participation in money laundering—is a very serious offence subject to high penalties. The basic rule for an investment firm is, “If you hear about money laundering or have the vaguest suspicion of money laundering, you must inform the senior person—the money laundering officer—in your business, who will then decide whether to report that to the police.” The payday lenders clearly have no obligation to follow the money laundering laws that are already on the statute book, however. We do not need more laws; we need existing laws to be used.
Why do I think that? Let me go back to the example of my constituent and the £300. If the lender were paying it into a bank account of which they had no real evidence—no proper knowledge—that was a golden opportunity for money laundering. If someone can just ring up and say, “I would like to borrow a few hundred pounds,” and it is instantly put into an account in the name of someone who is not necessarily the person who has rung up, and is then paid back with a cash deposit, that is the most fantastic way of money laundering. Not only that, but the price paid of a month’s interest is a modest amount to pay to wash the money through the system. So this aspect of payday lenders’ operations would allow money laundering to take place—I have no evidence on whether or not it is taking place—in a very easy and straightforward way.
Philip Davies
Again, I bow to my hon. Friend’s expertise in this sector that I do not have. Do the money laundering regulations relate to moneys above a certain amount? Is that why payday lenders, which are generally lending very small amounts, do not appear, as he says, to be covered by that legislation and regulation?
Jacob Rees-Mogg
My hon. Friend is right; there are aspects of the money laundering regulations that set thresholds. For example, someone can bring only £10,000 into the country in cash—such a rule applies to many countries around the world in their equivalent currencies—and certain sums have to be reported, if they are cash transactions, by banks and so on. One part of the rules also deals with aggregations. Using a succession of small transactions is one way in which money launderers try to launder money, because the rules on higher sums have become relatively effective. Before legislating we should always want to look carefully at whether regulations that are already available could improve the system. The use of the two I have mentioned, relating to knowing one’s client and money laundering, would put a strong burden on the payday loan companies to ensure that they were lending to people they at least knew really existed and about whose financial circumstances they knew something. They would, thus, be able to lend to people who had a better chance of paying back.
The issue of people having a better chance of paying a loan back is important, because payday lenders have a cavalier approach to how they lend and so they build into their interest rate a high level of default, which means that people who can pay back, even though they may not be the greatest debtors, pay a much higher interest rate than would otherwise be necessary for them. If the business of the payday lenders was more tightly regulated so that they knew their underlying client and if the level of bad debt was brought down, the rate of interest would come down and the problem would be reduced in that natural and evolutionary way, rather than by trying to set caps and controls.
I have great difficulties with caps on interest rates, for the straightforward reason that no business is going to make a small loan if the interest rate is capped, because the administration of that loan will simply be too expensive to make it worth while. A £100 loan is likely to involve £5 to £10 of administration, whether that loan lasts for a day, a week or a month. So the rate for a week is extraordinarily high because it is being compounded over the course of a year. Setting caps is therefore not the right way to proceed, because it takes away the ability to borrow from the people who are most in need of these smaller sums at the bottom end of the scale.
The truth is that the bigger the borrower someone is, the better the interest rate they are likely to get. The hon. Member for North Durham (Mr Jones) talked about the Conservative party borrowing at 3.5%—of course it borrows at that rate. People who are borrowing millions of pounds pay low rates of interest, because usually there is some collateral against the loan, they are more likely to have a track record on lending and the interest rate covers the administrative cost. Where someone is paying 3.5% on a £5 million loan, the administrative costs are comparatively negligible. On a £100 loan repayable within a week, the 3.5% is so negligible that it would not begin to cover the administrative costs, and so what does the holder of capital do? They do not make the loan to the individual who needs it to get through that weekend. We must be careful about what we seek to regulate. If we seek to regulate one aspect of the system, we may well find that the unintended consequence is that the people who are most in need of this source of borrowing are cut out of the market altogether. In that case, they have no alternative but to go to the loan shark.
Mark Durkan
Does the hon. Gentleman not recognise that what he has just mentioned is already in statute among the things that the regulator would have to consider in relation to any of its other powers or options?
Jacob Rees-Mogg
The Bill is calling on the regulator to exercise those powers and I know that there was a vote in this Parliament to encourage the regulator to investigate the issue. That takes me back to my point and that of the hon. Member for North Durham: Parliament ought to decide these matters. We cannot simply say that this is too difficult for us to do, with all the resources we have and as the representatives of the British people, and that we will therefore hand it over to these grand panjandrums. Parliament’s job is to set the laws, not to delegate the powers to set the laws to unaccountable and unelected bodies. We have to stand at the next election saying, “These are the laws that we have passed,” not, “Well, we think this is frightfully difficult so we have decided on a quiet Friday that we will not do it ourselves but will past it on to the FCA.” That seems to me to be not only an abandonment of our duty but most unsatisfactory from the electorate’s point of view.
The electorate cannot hold the FCA to account. I do not even know the name of the chairman of the FCA, which is a lacuna in my knowledge that I probably ought to put right speedily. He is probably a very great man, but he is not accountable to the people of North-East Somerset. That is unfair on my constituents. There ought to be accountability on these crucial decisions that will affect their lives. There is no question about the fact that payday lending is an important part of the lives of people who are involved in it, and a very difficult one.
Mark Durkan
The hon. Gentleman must forgive me, but I think I recall him saying in a previous debate on possible financial regulation that Parliament should just leave things to the Governor of the Bank of England’s eyebrow, the way things had always been done.
Jacob Rees-Mogg
The great thing about the Governor of the Bank of England’s eyebrow is that it is not a matter of statute. We have not put it in statute—indeed, I cannot think how that the statute would be phrased—that the Queen’s most Excellent Majesty, her Lords temporal and spiritual and her House of Commons have decided that the Governor of the Bank of England’s eyebrow should have legal force. It is not an accountability issue. I must confess that such legislation was rather better drafted under Henry VIII than nowadays. The language used in the section I read out has the greatest attractiveness and beauty, whereas ours is rather more mundane, but even in the 16th century—before the Bank of England was even founded—the Governor’s supercilious qualities could not have been brought into statute law.
Let me move on to one of the issues raised by my hon. Friend the Member for East Hampshire (Damian Hinds), who made an absolutely fabulous speech and covered the issues with the greatest intellectual rigour. He got into the question of supply creating its own demand and demand creating its own supply. There is an important quality about demand creating its own supply and that is that it tends to reduce prices. If we regulate, we find that we interrupt the natural creation of the supply that comes through. Let us look at it this way: if more payday lenders come to the market, they provide excess capital that is available. They want to lend it out and they have it on their books. They then have to advertise and build up the market. They produce the supply available, but others are doing the same. There is then an excess supply in the market and the demand will fill it up, but only if the price falls. If we regulate in such a way as to reduce the supply that is coming on board so that that excess of credit is not made available in the market, the price will increase as there will be fewer people participating in the market.
Mr Robin Walker
Was my hon. Friend as surprised as I was, given his point about the availability of supply potentially reducing costs, to hear the Minister celebrating from the Front Bench the fact that people are exiting the market? Would he not agree that we ought to be encouraging people to take part in the market in a more responsible manner rather than driving people out of it?
Jacob Rees-Mogg
I am in agreement with that. I think we have to be careful, therefore, about introducing new regulation, because new regulation has a tendency to drive people out of the market, or, worse still, favour the largest players, who find it easiest to deal with the regulation, and will then create an oligopoly or ultimately a monopoly, which of course produces the highest pricing possible. I would very much not like us to legislate in such a way that it is hard for new entrants to come in, that existing participants are able to consolidate their positions, and that one or two of them are able to push their prices up even higher. That would be deeply undesirable and would increase the amount of abuse.
The concentration of power in a very small number of banks has reduced the competitiveness of the banking system in this country. If we had a more competitive banking system, we might find that the banks were more interested in making lower-level loans, but because they only need to concentrate on the biggest business, which is the easiest—the least risky—the major banks are not in this area. They leave it to the payday loan companies, which are less well organised; they are organised in a more aggressive way, and a relatively unattractive way compared with the major banks. They are dealing with people who have a lesser ability to protect themselves against the payday lending companies, and they are not so much a part of the full regulated system in the way that the banks are. My hon. Friend is spot-on to say that we should not make it our aim to be able to boast about how many payday lenders we are forcing out of business, because we want an active and competitive sector rather than just having one or two players left in the end.
One aspect of the Bill that has been much praised—including by my hon. Friend, in a speech with which I otherwise agreed a great deal—is the power to enable high-cost credit providers to levy and provide a fund. That is exactly the sort of thing that Parliament should not allow. Moreover, it is in contravention of Magna Carta to allow such a power to be given to third parties. The power to levy fines and taxation belongs, in this country, under Magna Carta, only to courts, and that includes the High Court of Parliament.
Mr Walker
I was very interested when my hon. Friend mentioned some forms of regulation of the investment sector and the banks, and argued in favour of the extension of such regulation to the payday loans sector. Does he accept that at the moment, banks and credit unions are paying towards the cost of financial advice, but payday lenders are not? Does he not find that an extraordinary situation—admittedly, one that we inherited from the previous Government, and one that we should try to rectify?
Jacob Rees-Mogg
I completely agree with my hon. Friend that it is an anomaly, but not all anomalies are corrected by adding people in to the anomaly. It is much simpler to abolish the anomaly and say that the right to levy taxation is a fundamental right of Parliament. I quoted specifically from Magna Carta, which refers to a court, and we are the High Court of Parliament. It is important to remember that fines should only come through a proper judicial process or through the will of Parliament extracting fees. As soon as we delegate that to other bodies, over which there is no democratic control, we give up something that is fundamental to this House and what it is for. The consent to taxation is what this House has done since 1265. Perhaps the last Labour Government passed it over in a fit of absent-mindedness; they were not known for their love of the history of the constitution and their strictest adherence to it.
Philip Davies
Would a solution to this rare disagreement between my two hon. Friends be for payday loan companies to volunteer a certain amount of money to help with this issue, in the same way as bookmakers voluntarily give money to charities to help with problem gambling?
Jacob Rees-Mogg
I am grateful for that suggestion; I think it is a very useful one. I would be very happy to see a levy brought in under the Finance Bill. I have no objection to a levy being placed on these people; it is just who places it. It needs to be placed by Parliament because that is a hard, constitutional right and power, not by an independent regulator.
Mark Durkan
Would not the answer then be simply to say that any levy proposed by the regulator would be subject to a resolution of Parliament?
Jacob Rees-Mogg
The hon. Gentleman has found a brilliant middle way. I do not usually like third ways, because one is going down the middle of the road and is most likely to get run over, but on this occasion I am in cross-party agreement with him.
To have the matter come before Parliament in such a way that Parliament can say no is infinitely preferable. I would also like it to be back-dated to cover the other levies. This House ought never to give up its powers accidentally because, in a sort of fit of absent-mindedness, we have passed the ability to tax to other independent, or nominally independent, bodies. That would be an error.
I want to indicate firmly that I think this Bill is very good in its intention but not in its practice. That is true of a lot of Bills on Fridays, and that is why the Government so often oppose them. I absolutely accept that there is a problem and that payday loans are an unattractive part of the capitalist system, but this House must always be careful that the solution is not worse than the problem.
As I said, the problem, in essence, is one that has existed from time immemorial. It is not a new problem that we have suddenly come up against, and unfortunately it is not one to which there has ever been a neat and easy solution. Caps have been tried again and again. A cap was the idea of the Council of Nicaea in the 320s AD, and it was repeated under Henry VIII in 1545. Those caps did not work and there is no reason to suppose that new caps will work. Why? Because people need to borrow the money when they need to borrow it, and therefore they will go out and find it one way or another. The more they are pushed into an unregulated and almost criminal arena, the worse it will be for them. It is therefore very important that this House does not rush to do something because it seems like a good idea when in reality it will not solve the problem and risks making it worse.
This House ought never to legislate when solutions already exist on the statute book. We see this time and again. In both Division Lobbies, the Acts passed, going back to the last war, are listed in volumes of ever-increasing thickness. The problem is that these volumes have laws going into them that are reprinted, re-enacted and re-passed because nobody bothered to look back to see whether they were already on the statute book and whether there might be a better answer already there just waiting to be implemented if only people had the gumption to get on and do it.
Lyn Brown (West Ham) (Lab)
I add my hearty congratulations and thanks to my hon. Friend the Member for Sheffield Central (Paul Blomfield) on his success in securing his private Member’s Bill, and for choosing this vital topic as its subject.
I regret to say that many people in my constituency find themselves in a situation where they have to resort to payday loans and other short-term, very expensive borrowing. Of course, in my part of east London using short-term credit is nothing new. In years past, my family used the pawn shop, as did many others in their communities. It helped out when the week’s money would not go quite far enough to meet the week’s outgoings. However, payday loans are in a different, far more pernicious league, and people are in a very different and more difficult place, with precarious unemployment, falling wages, soaring house bills, the bedroom tax, the benefits cap and rising food bills, along with heating and power costs. It is an ugly and toxic web that brings anxiety and stress to households. It makes it much more difficult to have a stable and resilient family life, and it undermines the entire community.
One of the factors in my constituency that is driving these difficulties is the proliferation of the zero-hours contract, which, in my view, takes us back to Victorian days and the days of my grandfather standing as lump labour on the dockside, hoping that he might earn enough money to feed his family. These contracts are extraordinarily exploitative and need to be regulated in the same vein as the providers of high-cost credit.
After three months of working for a company and being told regularly that he was doing a really good job, one constituent—I will call him Otis—was told to buy more work shirts, only to be told that very same week not to come back the following Monday. He was given no reason, no explanation and no notice. It is for such reasons that people feel helpless and surrender to the advertised images of a friendly, carefree, kindly world in which all is well and money is plentiful and freely given.
Philip Davies
I agree with an awful lot of what the hon. Lady has said so far about the cost of living and how difficult families are finding it at the moment. Does she agree that one of the better solutions would be to try to find ways to reduce the cost of living so that they do not feel the need to go to payday lenders in the first place—perhaps, say, through abolishing the BBC licence fee or voting against the Energy Bill, as some Government Members did, which is putting up the price of energy unnecessarily?
Mr Kevan Jones
Is it not the case that some of the things that the Government are doing, such as the bedroom tax, are driving people to take payday loans? If we followed through the proposals made by Beecroft, who is a major stakeholder in Wonga, there would be more zero-hour contracts and less protection at work for those individuals.
Lyn Brown
I agree with my hon. Friend’s analysis.
Community Links is a valued and well-established charity in my constituency that has worked tirelessly on behalf of disadvantaged communities for more than two decades. Its clients include people who have taken out payday loans as a means of supporting regular family expenditure. Community Links tells me that over the last year or so it has seen a 20% increase in payday loan problems, which its advisers attribute to the ease of access and application. It has given me two examples to share with the House of real everyday problems faced by my constituents.
The first client is a married woman with two school-aged children. The family own their property and are paying off the mortgage. She was in part-time employment, working as an administrative assistant, and her husband had been made redundant, so the family had to manage and struggle on her single wage. She started to take out payday loans in order to clear unexpected bills, but she then began to use the loans as a way of increasing family income.
Although she was highly experienced at juggling the loans, one by one the loan companies started to contact her regarding repayment. When she went to Community Links for advice, she had four payday loans with four different companies—short-term loans with high interest. She had also been using her credit card to pay for family expenditure and the total debt was about £7,000. She tried to negotiate the payments herself, but the companies simply were not interested. She felt threatened by numerous telephone calls, sometimes many on one day, and visits to her home address. Although she is a very competent individual, she became swamped by the loan companies’ demands and sought legal advice as a result. Community Links advisers drafted a financial statement, negotiated with creditors and arranged reasonable payment terms. It also arranged for her mortgage payments to be reduced in order to bring down her expenditure to match her income. The Bill’s proposals on affordability and access should help prevent the build-up of such calamitous debts. If she had not gone to Community Links, or if it had not had the staff to help her, I shudder to think what would have happened to her and her family. It would have meant default on the mortgage and homelessness. She would then have had no choice but to apply for housing benefit and would have had found herself, as is often the case in London, in substandard, expensive private rented accommodation. All this would have been at a cost to the taxpayer and would have been avoidable with the proper regulation of loan companies.
I am afraid that this case also highlights the crucial role of debt advice in starting to resolve people’s problems. Community Links tells me that it has lost all legal aid funding for welfare benefits and debt advice as a result of Government cuts, amounting to more than 700 cases a year, each of which would be more likely to lead to ongoing costs for the taxpayer, rather than individual, one-off payments and interventions.
Community Links also tells me that the loss of funding for advice services means that struggling families are finding it much harder to access support when they need it and are getting deeper into crisis. The solutions—eviction and homelessness—cost the taxpayer money and we must not forget that.
I welcome the Bill’s provision that lenders should signpost customers to free, impartial advice when they are turned down or miss a payment. I also welcome the potential levy on lenders, specifically to pay for additional debt advice through the Money Advice Service. I hope that the Financial Conduct Authority takes note of that when it assumes responsibility for the sector in April 2014.
Mr Robin Walker
I agree with the hon. Lady about the importance of free financial advice—she gave a good example of that from her constituency—but would she not agree that, potentially, this should be extended beyond the Money Advice Service to other voluntary bodies that provide free financial advice and do so much for our constituents?
Lyn Brown
I absolutely agree. Community Links is not a money advice service, per se; it is a general advice service, and a good one at that.
The second case that Community Links told me about also illustrates why the Bill is needed. The case is that of a single woman with three dependent school-age children—nine, 12 and 16—living in council accommodation. She lives with slight learning difficulties and experiences problems with literacy. She currently has a part-time job, receiving a salary of £557 a month, with working tax credits of £240, plus child tax credit and child benefit. When she visited Community Links, she reported council rent arrears and difficulty meeting regular utility bills, and was finding it difficult to live on her income. She also began to use easily available payday loans to supplement her income.
At the time of her initial visit, the total value of the loans was £977, which was renewed—rolled over—each month, to supplement her income. She also had unsecured credit of £14,000. Payday loans were used for regular living expenses; for example, child minding, school meals, household bills and travel to work. The client did not fully understand the long-term implications of interest payments at all, or of using payday loans for family expenditure. There was simply no understanding. Community Links is currently assisting this woman by applying for a debt relief order. The proposal in the Bill to determine and regularly review the number of roll-overs and a limit on the number of loans per year would help people such as this woman.
It is certainly no help to allow—indeed, to encourage, through attractive advertising and inadequate regulation—almost unrestricted access to expensive credit, when advice and support to manage debt is so much more appropriate. An existing alternative has already been spoken about in this Chamber: the credit union movement. I have direct experience, from my time working in Waltham Forest, of establishing a credit union. I am delighted that Justin Welby, the Archbishop of Canterbury, has called on church parishioners to lend a hand to credit unions, so that they can provide an alternative to payday loans. The Waltham Forest community credit union was ahead of its time, because it was set up by a confederation of churches in the borough. With the skills, financial experience and premises and halls at the heart of communities that it offers, the Church is exceptionally well placed to help the credit union sector to grow and thrive.
Credit unions often have difficulty in establishing themselves because they do not have the basic seed funding that they need to grow to the level at which the membership of the union makes it sustainable. It would be good if my hon. Friend the Member for Sheffield Central could find a way in which the Bill could be amended to nurture credit unions so that they become an alternative to the payday loans system. There would be a just logic in imposing a levy on payday lenders to support the development of credit unions, because the problem would be funding the solution.
I commend the principles and provisions of the Bill. It would make the market fairer by regulating the advertising of payday loan providers, requiring clear information on the cost of loans and introducing a range of measures to protect borrowers in difficulty. In particular, I commend the Bill because it would give the FCA the ability to prohibit
“specific features of high-cost credit”,
including the amount of credit that can be advanced, the level of default charges, charges related to the use of a continuous payment authority, roll-over and repeat lending, and obligations on loan guarantees.
Those are the issues that are most often brought to me by the advice services in my area and I am sure that they are the types of problems that hon. Members on both sides of the House encounter at their surgeries. Those issues are at the heart of the irresponsible lending and repeated rolling over of unpaid loans that cause so much harm and misery to borrowers and families. The provisions of the Bill are greatly needed. They would help people in our communities who are vulnerable to exploitation, and who need and deserve our support.
Barbara Keeley (Worsley and Eccles South) (Lab)
I am pleased that there is a little time left for me to speak. I pay tribute to my hon. Friend the Member for Sheffield Central (Paul Blomfield) for introducing a Bill that addresses a number of serious issues in respect of payday loans. It is clear from today’s debate that such loans are of concern to many hon. Members.
The Bill is important because, as my hon. Friend the Member for Glasgow North (Ann McKechin) said, we have a weak regulatory system for high-cost credit. Citizens Advice tells us that self-regulation of the payday loans sector has not worked. Since the introduction of the industry’s good practice customer charter in November 2012, Citizens Advice has run a survey to help people who have payday loans check whether their lender is sticking to the charter. The results show that the charter is not being met to a surprising degree. Payday lenders are failing to treat people fairly and are breaking 12 of the 14 promises laid out in the charter.
The Citizens Advice survey also shows that lenders are not making adequate affordability checks. I am glad that that problem has been referred to repeatedly in this debate. There are many examples of customers who get into financial difficulty not getting the help that they need. Some even find that the lenders, rather than helping them, are positively obstructive to their attempts to pay off their debts.
My hon. Friend the Member for North Durham (Mr Jones) talked about the millions of pounds that are being made in the payday loans market. That market is growing very quickly. In 2008-09, it was worth an estimated £900 million. Last year, it was worth between £2 billion and £2.2 billion. That big increase is a sign of the growing hardship in our communities.
I welcome the measures in the Bill to deal with the serious pitfalls that are experienced by large numbers of borrowers, which we have heard about today. It would deal with opaque interest charges, the use of continuous payment authorities to collect repayments regardless of the borrower’s financial circumstances and the key issue of advertising, which we have talked about. Young and vulnerable people are bombarded with a saturation level of adverts and texts promoting payday loans.
Lyn Brown
I was going to say more in my speech, but I wanted to keep it short so that my hon. Friend and others could get in before the end of the debate. I was going to speak about those pernicious television adverts with the little old puppets who wander around. They just look so cosy. In fact, one of the young people who came to see me because they had difficulty with payday loans did not go to Wonga because it was for old people. Does my hon. Friend agree that the advertising targets vulnerable groups in our constituencies?
Barbara Keeley
It does target such groups, and those cartoon characters are pernicious, as is the use of celebrities, some of whom should be ashamed of endorsing such products and bringing misery into people’s lives.
The Bill provides that the Financial Conduct Authority shall have power to introduce an additional levy on lenders to fund a debt advice service, which is good. We have heard repeatedly in this debate about the misery that payday lenders are causing people, and it is right that they should fund debt advice services. Such services should be an integral part of the lending process, but that need is too often ignored. Given the profits and growth in the market that I outlined, it is only right for the high-cost credit sector to help with a levy to pay for debt advice services.
Citizens advice bureaux up and down the country are struggling with cuts to their grants from local authorities. I felt the need to enter a 10 km race, which I ran on behalf of my local citizens advice bureau. It was not the sort of help that Front-Bench colleagues can sometimes raise, but I thought it important for those at my local citizens advice bureau to understand that I was prepared to do something to help with funding. The funding of advice services is crucial.
I have three broad concerns about the way the payday loans industry works. The first, which we have heard much about, is the issuing of multiple loans, which is one of the biggest causes of defaulting on the repayment of a loan. Many examples have been provided by the StepChange Debt Charity, which reminds us that findings by the Office of Fair Trading highlighted widespread irresponsible lending. In particular, the scale of repayment problems shows us that such lending is not confined to a small group of rogue lenders.
In 2011-12, about 2.7 million loans—one third of the total—could not be repaid on time, or at all. That is serious, and plainly highlights the issue of affordability. Nearly two thirds of those seeking help with their debt from StepChange have more than one loan, and nearly one third have four or more. In Salford, a person who works at a college on the minimum wage told Salfordonline, a local community website, that she had taken out loans to pay both her rent and council tax—an example of using loans for everyday living costs similar to that presented by my hon. Friend the Member for West Ham (Lyn Brown).
That person said:
“I have poor credit so I went to Wonga, then I got into a mess with interest so I got other loans. At first it was £150, then £300, then I just started paying the interest. Then I got other loans to cover my living expenses, it was out of control and I was missing payments.”
She was finally forced to call in a debt management company, but that, too, was “for a fee”, making her problems worse.
A request for more than one loan should ring alarm bells about the applicant’s financial circumstances and their ability to pay, but no alarm bells appear to be in place in the officers of these lenders. We need tighter controls to ensure that requests for more than one loan trigger comprehensive debt advice, and a repayment plan with a proper assessment of a person’s ability to pay.
We have heard much in this debate—quite rightly—about the volume of roll-over loans where loans are renewed at the end of an initial loan’s repayment period. That business is increasing, and few mechanisms are in place to assess properly the ability of borrowers to repay.
The Office of Fair Trading states that three quarters of payday lenders—a substantial part of the market—are renewing loans without checking whether they will be affordable, even though a roll-over is a clear warning sign that a borrower might be experiencing financial difficulties. The OFT notes that payday lenders have a strong incentive to roll over loans as they make half their revenues that way. I welcome the provisions in the Bill that empower the Financial Conduct Authority to set limits on charges, including interest, and to restrict the ability of lenders to make multiple and roll-over loans.
StepChange tells us that since 2011 the average amount owed in payday loans has increased substantially by £400 to £1,665. On average, people now owe more than a month’s income in payday loans. Average monthly income is now £1,298, and the average owed in payday loans is £1,665. That is a key measure of lack of affordability. Sadly, in my constituency the average owed on payday loans is £1,673, which is even higher than the national average.
As my hon. Friend the Member for Sheffield Central detailed earlier, there is serious concern about how the industry uses and misuses the continuous payment authority. Many hon. Members will have heard about constituents —we have heard some examples today—who are trapped in a cycle of debt that is made worse when the lender uses the continuous payment authority to take money out of their accounts, regardless of the impact on the borrower. As we have heard, money is often withdrawn by the lender with no consideration for the borrower’s essential living costs. Indeed, an example given today by Salford’s citizens advice bureau is of a borrower who fears he will lose his home and his job because payday lenders have left him with only £1.17 a week from his weekly wage. He does not have enough money to travel to work, let alone pay for his other living costs.
Lyn Brown
One of the things that has come up in my surgeries time and time again is how telephone calls and letters from lenders imply to borrowers that their debt to a payday loan company is a priority debt. There is no explanation that the real priority is to keep a roof over their head: paying the mortgage or the rent, and the council tax. Does my hon. Friend have similar examples?
Barbara Keeley
Indeed. One difficulty is that the banks are not straightforward enough with their customers. I strongly support greater controls over the use of the continuous payment authority. People have to be allowed, however much or little income they have, to plan their own finances.
We know from all these examples, and the example cited by my hon. Friend, that not enough borrowers know that they have the right to ask their bank to cancel the continuous payment authority. The Bill gives the FCA the power to require lenders to provide information about the right to cancel from the outset of the loan. This would give people who took out payday loans additional peace of mind that if they got in a mess and things were not working out they could cancel it.
The third area of concern, returning to the point made by my hon. Friend, is the persistent and excessive advertising of payday loans. Citizens Advice tells us that advertising for payday loans has reached saturation point. The adverts are unclear on costs and the potential impact of failure to repay a loan. Also worrying is the use of celebrities and cartoon characters in adverts. How are we targeting a market of responsible borrowing and lending by using cartoon characters? Clearly, young families and vulnerable people are being targeted with blanket advertising on daytime television. It is when I exercise in the gym that I am confronted by this constant advertising, and I find myself wanting to turn away because I get so sick of seeing it. One 32-year-old worker told Salfordonline that he had used Wonga to take out eight short-term loans in one year. He said:
“I was working but needed a little extra cash to help out at home”.
He had used overdrafts and credit cards before but:
“The most recent loan of £200 was taken out over four weeks, with £260 to pay back. I was tempted because it’s so easy to borrow and all the adverts on TV don’t help. The fact that there are no credit checks helps a lot of people into bad financial situations.”
Citizens Advice feels that broadcast advertising for payday loans should be limited to after the 9 o’clock watershed, and should be prohibited from any programme likely to appeal to anyone under the age of 18. It also feels that the measures in the Bill are needed to stop marketing via text messages. The 32-year-old from Salford whom I just quoted highlighted the fact that payday lenders would hold on to his details for six years, and that he was expecting to be bombarded with e-mails and texts offering him more loans. He commented:
“I won’t be using”—
payday loans—
“again, but I wish I could just close down the account so there is no temptation. Once they get their teeth into you they never let you go.”
This morning, Paul Lewis’s money website raised the issue of payday lender QuickQuid, which yesterday sent lots of e-mails to people on its database. They might have been QuickQuid customers who had already paid off their loan, but they seemed to include people who had never paid it back. We have discussed the point about bailiffs; these threatening e-mails warned that action would be taken if the customers did not pay back the debt and that debt collectors would be sent in. It caused great alarm.
Research for Which? found that seven out of 10 payday loan users regretted taking out credit and that half had taken out credit they could not repay. Citizens Advice believes that the Bill would be a key step towards protecting people from some of the worst practices of payday lenders and help better to protect borrowers struggling to repay debts. I pay tribute to the citizens advice bureau in Salford, which gives great help and advice, and to citizens advice groups across the country. I am sure hon. Members might like to pay tribute to their own CABs.
Barbara Keeley
I went on a 10 km run to help my CAB; it was under threat, but we managed to preserve this essential service in my locality. Salford city council offered it accommodation, and it now runs an excellent service from a local council building. That has really helped.
Mr George Howarth (Knowsley) (Lab)
I would like to pay tribute to the CABs and other advice bureaux in Knowsley, which are the last defence for many people seeking advice on what to do when they get into debt as a result of payday loans. It is also important to highlight the significant contribution of credit unions. In Knowsley, they provide not only a lending and deposit service, but a link to banks and credit from the Co-op so that people can buy white goods, for example.
Barbara Keeley
That is an excellent example. We heard earlier about a project run with the backing of Unite—that seemed to cause some amusement among Government Members—in Salford to get a credit union off the ground. We have credit unions serving parts, but not the whole of Salford, which has some very deprived wards, where the whole gamut of loan sharks have been plying their trade. I am concerned that we protect people from the bailiffs and the financial truncheons—I think that is what someone called them earlier—and help them join together in co-operatives.
Mr Howarth
This point has been made repeatedly, but it bears repeating: with multiple loans, roll-overs and all of that, people are eventually driven into the hands of loan sharks, with all the woeful consequences that can have.
Barbara Keeley
Absolutely.
I applaud my hon. Friend the Member for Sheffield Central for introducing the Bill, which could do much to regulate the industry and provide greater safeguards for those who need them most. My hon. Friend the Member for North Durham talked about the millions up and down the country in such dreadful situations. There is nothing more worrying than the oppressive feeling of being in debt, yet being unable to pay it back, so this Bill is vital.
Paul Blomfield
Would my hon. Friend like to comment on the important proposals made earlier by our hon. Friend the Member for Harrow West (Mr Thomas) about developing alternative products and the role of credit unions in that process?
Barbara Keeley
I will not.
I hope that the Bill can move into Committee and that there will be an opportunity to discuss ways of improving it. It is vital to the millions of people it would help. We need to—