High Cost Credit Bill
Debate between Damian Hinds and Philip Davies
Damian Hinds
I agree, and I shall come on to the point, albeit briefly, later.
The second issue on which I think the vast majority of us could agree is that the loan should get paid down within a reasonable period and not be left hanging over people who never get the loan reduced in size—and it gets even bigger for some.
Philip Davies
My hon. Friend said he was concerned about people taking out these loans because they had just seen an advert, and my hon. Friend the Member for Christchurch (Mr Chope) suggested that some people take out loans irresponsibly. Research by the university of Bristol personal finance research centre seems to suggest something different—that there were logical reasons why people took out these loans: convenience, having no or limited access to other sources of credit, and the customer service and reputation of the firms concerned.
Damian Hinds
And there are multiple other reasons why people take out credit products, many of which are just as rational. I shall come on to some of them later in my remarks, but there is ample evidence to show that many people taking out loans—and the same applies when they access a debt management plan—choose something that is inappropriate. Even where comparative, side-by-side, costings are available—to those of us who studied economics and believe in consumer sovereignty and rationality, this is difficult stuff to get our heads round—consumers often take the more expensive option.
Damian Hinds
As ever, my hon. Friend makes a perceptive point.
I do not think that health warnings on advertising will solve every problem, but I do believe that there is a role for them. If we have health warnings on all sorts of other things now, it is reasonable that we have them on debt advertising.
We must also consider the representation of costs. APR is not a particularly helpful measure in many ways—once it goes past the first 1,000%, people start to think, “What difference does that make?” There is a natural argument for saying that there should be a cash cost comparison instead. However, there is no perfect solution. The formula that Which? proposes of pounds per 30 days seems to deal with the immediate issue, which is the growth of payday loans. It does not necessarily help with the comparability of all products, however, and with any cash comparison—the amount-to-pay-back figure—there is still the issue of how to deal with behavioural charges, which are an additional way of making money out of the customer. Companies can in theory charge a relatively low headline payback rate in the knowledge that they will make more money from missed payments and various other behavioural penalties. We may in the end decide that a cash comparison is useful, but we will still need the representative APR figure, and we will also need to have a proper analysis and debate about which behavioural and other charges should be reflected within that.
On agencies and intermediaries, I support the Bill’s provisions on credit brokers, underwriters and guarantors, and the Amigo model, but there is something else we need to be aware of: as the online market develops even further, there is a tendency in every sector—I saw this in my old sector of hotels and travel—for intermediaries to come in, particularly on paid search, and intermediate, and there is a natural inflationary pressure in that process, which in the end only ever gets passed on to the consumers. Whereas the internet is supposed to make things cheaper for consumers, and comparisons easier and markets freer, it actually tends to concentrate power with other people and add other costs, a lot of which end up going to search engine providers.
Affordability and cost limits is another important issue. Two types of limit can be applied. One is a limit on the cost of the loan—on how much companies can charge to anybody. The other is a limit on affordability, or how much credit can be extended to an individual given their circumstances. Both of them are very complex, which is implicitly acknowledged by the fact that the hon. Member for Sheffield Central says in his Bill that the FCA would have to decide exactly how these things work.
There are big arguments against having a cost cap, because of all the unintended consequences that I have mentioned, but if there is to be a cost cap, it ought to reflect the actual cost structure of extending a loan. In principle there are three elements of cost in extending a loan. The first is the initiation cost, including customer acquisition and credit checks. The second is the actual cost of capital. The third is the risk element, which will vary by customer-type.
If we recognise that and want to reflect it in a limit on the amount of interest that can be charged, we should end up having two elements to the cost cap. One of them is to cover the initiation of the loan, and the second is to cover the cost of capital and risk factor. The figure here would be something like a cap of 15% of the capital as a one-off, plus 30% as an annual interest rate. Sub-prime and high-cost credit providers that offer a range of loans seem to follow that sort of formula.
Philip Davies
My hon. Friend talked about assessing affordability and I just wondered whether he had any views about what information should be provided to the lender in terms of bank statements, proof of income and so forth. If this was just done on a self-verification basis, people could say anything they wanted to make sure they got the loan.
Damian Hinds
As ever, my hon. Friend tees me up nicely for my next point, which is about affordability. This is different from the issue of an overall cost cap. People need a bank account to get a payday loan, and payday lenders will typically require proof that they have a pay day on which a regular amount of income comes in. The Bill proposes a single real-time database. For myself, I think that is a step too far. This would be a database of every loan that everybody in the country has, and to be effective it would need to cover not only payday loans, but credit card debt, mortgage debt, car debt and all sorts of other debt. There are massive worries in that, relating to privacy, civil liberties, the concentration of data and, of course, what happens when, inevitably at some point, it goes wrong. I do think we need to look at serious reform of the existing credit reference agency system, however. It does not seem to work as it should when people who are overstretched and who have had eight, nine or 10 lines of credit extended to them go to debt advice agencies.
Another issue is making sure the loan actually gets paid down over time. There is a big fashion for restricting roll-over. We need to be careful about that, however, because it deals with the immediate issue we happen to face in 2013. I remind Members that 10 years ago roll-over was something we understood only in the context of the national lottery and 20 years ago we understood it only in the context of “10 in the bed and the little one said”. In terms of loan products, it is a new thing, therefore, and I would rather we instead had a general duty to make sure the loan gets paid down over time. That should apply to instalment credit and revolving credit as well as to payday loans. A product that is advertised as a 30-day loan should, therefore, be paid down fully by 60 or 90 days, but the payback should start before that 60 or 90 day point is reached.