The Financial Secretary to the Treasury (Sajid Javid)
I congratulate hon. Members on securing this debate, and balanced and thoughtful contributions have been made by hon. Members on both sides of the House. In particular, I thank the hon. Member for West Bromwich West (Mr Bailey) for his contribution and his work on the issue in chairing the Business, Innovation and Skills Committee.
I recognise that the issue has caused concern not just in the Chamber but across the country. I should like to reassure all the hon. Members who have spoken today that the Government are taking decisive action to protect borrowers from the harm caused by payday lenders and that we are fundamentally reforming the regulatory system that governs them. I will do my best to answer hon. Members’ questions, but first I should like to take a little time to set out the main course of action that is being undertaken.
As many hon. Members will be aware, thanks to the changes made by the Government, the Financial Conduct Authority will take on new consumer credit responsibilities from the Office of Fair Trading in April. The OFT has done a good job with its powers and resources. However, the FCA will have far stronger powers than the OFT. It will be a regulator with teeth. It will have the power to set its own rules, rather than having to wait for the Government to pass legislation each time a new problem arises. That will put it in a stronger position to keep pace with a fast-moving market.
Furthermore, for the first time those rules will be binding on lenders. The FCA will have far stronger powers to enforce breaches of its rules and standards. For example, currently the OFT can fine up to a maximum of only £50,000, whereas there is no ceiling on FCA fines. For the first time the regulator will have powers to award redress to wronged borrowers. The FCA will thoroughly assess every single lender over the next two years. Those that are not fit to trade will be ejected from the market. It will approve key executives to ensure that they are personally accountable for the way their firms operate. In short, we are moving from PC Plod to Sherlock Holmes.
It is encouraging to see that the FCA is already flexing its regulatory muscle. It set out proposed new rules in October, as we have heard today, including: a cap on roll-overs; curbs on the use of continuous payment authorities; and mandatory risk warnings on adverts. The Government, as many Members will know, have welcomed the FCA’s proposals, and we look forward to its confirmation of the final rules next month.
Our absolute priority in this area is to ensure that the FCA can clamp down quickly on the causes of harm in the payday lending market, particularly the unfair and extortionate cost of borrowing from certain payday lenders and the spiralling costs faced by those struggling to repay. We took the opportunity in the Financial Services (Banking Reform) Act 2013 to give the FCA a clear mandate, and indeed a duty, to put a cap on the cost of payday loans by the beginning of next year, which means that it will not have to spend precious time making the case for a cap and can instead focus on the best way of implementing a cap and protecting consumers from those unfair and damaging costs.
The FCA is already on the case on that front, and we should see rules to implement a cap in place this year. It will be not just an interest rate cap, but a cap on all fees and charges associated with a payday loan, including default charges and roll-overs, which many hon. Members made the case for today. The total cost cap will work alongside the regulatory interventions already proposed by the FCA to tackle decisively the causes of consumer harm in the payday lending sector.
I will endeavour now to cover some of the important points raised in the debate. A number of hon. Members mentioned real-time data sharing. The Government believe that lenders must make proper assessments of an individual’s ability to repay before they lend and that that should be based on accurate, timely and comprehensive information. The FCA is looking at real-time data sharing as an absolute priority and has committed to bringing about a real improvement in the way data are shared, including looking at the role of credit reference agencies and at international examples of data-sharing systems.
The FCA has warned the industry that it must improve the way data sharing works, including how quickly lending data are made available. A number of Members referred to last week’s announcement by Callcredit that it will introduce real-time data sharing from this April, which I think is a welcome step. However, if the industry fails to improve properly, the FCA has been absolutely clear that it will not hesitate to act. The Government wholeheartedly endorse both that message to the industry and the regulator’s commitment to action.
The hon. Member for West Bromwich West and several others rightly mentioned advertising, particularly advertising aimed at children. The idea that children might see payday loan adverts and then put pressure on parents to take out loans is very concerning. The Broadcast Committee of Advertising Practice, the body that writes the broadcast advertising code, is considering the extent to which payday loan advertising features on children’s TV and whether there are any implications for the regulation of the sector. However, it is important to note that recent Ofcom research found that payday loan adverts make up just over 0.5% of TV ads seen by children aged between 4 and 15. Many payday loan firms, including Wonga and those that are members of the Consumer Finance Association, have stated that they do not advertise on children’s TV. It is essential that all payday loan advertising is responsible and is not designed to target children. That is why payday loan adverts are subject to the Advertising Standards Authority’s strict content rules. I hope that I will reassure hon. Members when I say that the ASA will not hesitate to ban irresponsible adverts. In fact, it has a strong track record of doing so, including, recently, Wonga and Cash On Go adverts. I hope that I will provide further reassurance by saying that the FCA is consulting on new rules for consumer credit adverts, and it will have the power to ban those that breach its rules.
Several hon. Members mentioned affordability tests. The Government believe that it is crucial that loans are made only to those who can afford to repay them, so we welcome the FCA’s tough action to make sure that that is the case. This will include ensuring that firms have suitable and sustainable business models, including appropriate affordability assessments. The FCA has announced in its rule book consultation that it will transpose much of the OFT’s affordability guidance requiring lenders to check borrowers’ ability to repay loans sustainably into binding rules that will, for the first time, be enforceable with the full range of FCA enforcement powers. This package of measures should help to address the problem of lenders giving loans to those who will struggle to repay them.
A number of hon. Members rightly raised credit unions as an alternative for people looking for short-term credit. The Government believe that credit unions provide an invaluable service to people on lower incomes, offering sound financial advice and responsible lending. That is why we have already taken action to try to help the sector by, for example, increasing the interest rate that credit unions can charge, as we found that many—indeed, almost all—were making losses, and this was clearly not sustainable. The interest rate was therefore increased from 2% to 3% per month. We also have the credit union expansion project, with £38 million of Government money designed to modernise the sector. I want to do more for it, and the Government are considering what further action they can take.
I congratulate the hon. Member for West Bromwich West on securing this debate and thank all hon. Members for their thoughtful and balanced contributions.