Government: Economic Policies
Lord Mitchell Excerpts(11 years, 9 months ago)
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Lord Mitchell
To ask Her Majesty’s Government what is their assessment of the impact of their economic policies during their 1,000 days in office.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, the Government’s economic strategy is underpinned by fiscal consolidation, allowing monetary activism and supply-side reforms to support the economy. This strategy has provided the foundations for recovery. Market interest rates have fallen to near-record lows; the deficit has been reduced by a quarter; more than 1 million private sector jobs have been created; and goods exports to China, India and Brazil have increased by around a third.
Lord Mitchell
My Lords, I thank the Minister for that reply. Today, this Government have been in office for 1,000 days: 1,000 days, and we are teetering on the brink of a triple-dip recession; 1,000 days, and the UK’s credit rating is close to being downgraded; 1,000 days, and our national debt is rising; 1,000 days, and our productivity is falling; 1,000 days, and our trade gap is widening. After 1,000 days, does not the Minister think that this Government should stop blaming the previous Government and start taking responsibility for their own failed economic policies?
Lord Deighton
I thank the noble Lord for that question. I confirm that we are facing extraordinarily challenging economic conditions, but the economy is recovering from the most damaging financial crisis in generations after a decade of growth built on unsustainable levels of debt. This Government inherited the largest deficit since the Second World War and the largest in the G20, and we experienced one of the deepest recessions of any major economy. This Government’s strategy is designed to protect the economy through this period of global uncertainty, to maintain market confidence and keep those interest rates low, and to lay the foundations for a stronger, more balanced economy.
Economy: Growth
Lord Mitchell Excerpts(11 years, 9 months ago)
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Lord Mitchell
My Lords, I am afraid to say—yet another businessman. It is getting rather dangerous. In many cases anniversaries mean little— just dates in the calendar—but sometimes they are useful moments to take stock. Tomorrow will be the thousandth day that this coalition Government have been in office and it is a good moment to take stock of the economy. I must therefore thank the noble Lord, Lord Deighton, for securing this debate. As one of his sponsors at his recent introduction, I feel that I bear a personal responsibility, because for him it is going to be very tough to defend this Government’s record.
Any way we look at it, the scorecard on this thousandth day is lamentable. Last week, as has been mentioned by several speakers, we received the GDP figures for the final quarter of 2012. As we all know, growth was minus 0.3%. We are heading for a triple-dip recession—unheard of in modern times. It is no wonder that the Prime Minister was anxious to distract attention with his speech on Europe. I know that the Government get tetchy when my right honourable friend the shadow Chancellor talks about flat-lining, but with only 0.4% growth over the past couple of years, what else can we say? Noble Lords should compare this with Germany, which has experienced growth of 3.6% over the same period, or better still, the United States, where the figure is 4.1%.
America is a very pertinent comparison. In many ways, the American economy and ours are parallel. Yet, while we wallow, the Americans are experiencing improving growth. There is no need to take my word for it. Noble Lords should look at the Dow Jones index, which is racing ahead. Indeed, the Nobel laureate Paul Krugman, in a notable column in the New York Times last week, totally debunked the deficit hawks in his own country. The United States did not pursue a policy of austerity, but instead chose stimulus through massive public investment while interest rates were kept at rock bottom. The result is that deficit and public spending as a share of GDP have started to decline of their own accord. Contrast this with George Osborne, who slashed public investment and raised taxes on families. In doing so, he has killed business confidence and growth and we know the result. The deficit has increased as a share of GDP and is up more than 7% on the equivalent period last year.
The facts in America, as they are in our own country, are that, when the financial crisis hit, the economy went into a tailspin, tax receipts fell and unemployment benefits rose. However, unlike us, the Americans held their nerve, re-invested and, as the economy recovers, the deficit as a share of GDP is falling. It is really easy economics to understand, so why does our Chancellor take a totally different position? If our economy were recovering, perhaps it would all have been worth the pain, but it is not. Everything is heading south. Indeed, in America, recent forecasts suggest that the federal deficit will be below 3% of GDP by 2015, a number that I am sure we, too, could live with.
So, where are we on the 999th day of this totally misguided policy? Our economy is static; our people are suffering; our businesses lack confidence; the banks are not lending; companies are sitting on piles of cash instead of investing; and our trade gap is widening. It is a total disaster, much of which could have been avoided were it not for the obsessions of the Chancellor of the Exchequer.
My Front Bench brief is SMEs, an acronym, by the way, that I loathe. Combining small businesses with medium-sized businesses shows how out of touch people are. Small and medium-sized businesses have very little in common, except for the fact that they are not large. But as everyone else uses this definition, I guess I will have to live with it. Interestingly, SMEs have held their own during this economic crisis. Employment figures have been pretty constant over the past five years and so too have export achievements. It has been large companies and the public sector that have shed their workforces. It should never be forgotten that SMEs contribute more than half of the UK’s GDP.
This sector should be promoted and helped and it is here that I have some of my greatest concerns. It is absolutely true that this Government have spawned a multitude of financial initiatives to help SMEs. At one point, it seemed like a monthly occurrence that one programme or another was being announced to a baffled world. Although the Government may feel that they are doing well, the fact is that, in the SME sector, the situation is dire. No matter what programmes are announced, very little financial assistance seems to be getting through to the sector.
Many believe that the commercial banks take a significant cut out of government programmes in order to boost their own balance sheets. It is all so complicated and so difficult to understand one programme from another. To me, it all smacks of insufficient thought. I believe that the Government are making a grave mistake in looking to the high street banks to deliver their programmes. The truth is that the banks have forgotten how to relate to the SME sector. Five years of saying no, of being sceptical, of consigning troubled companies to the intensive care unit, now means that saying yes is hard to do.
Last month, I had the opportunity to visit the German Sparkassen banks. I know noble Lords are probably familiar with the German system, but what a contrast. More than 40% of corporate debt in Germany is channelled through these local savings banks. What impressed me was the long-term commitment that these banks have to their business customers, often going back decades. They stand on the touchline cheering their customers on. What a contrast to banks in our country. How many small companies have even met their bank manager? How many loans are accepted or rejected solely based on an online application, with never a human being in sight? In Germany, when a company gets into trouble, it seldom comes as a surprise and, if a banker is close to his customer, he can make an assessment based on something more than a computer print-out. I know some people say that we have had enough banker bashing, but until I see banks offering a real helping hand to SMEs, I will continue to criticise.
I would like to end by referencing my own area of business passion and that is technology. As some noble Lords will know, my whole business career has been in IT services, an area that I really care about. The Prime Minister seems to be captivated by technology, particularly the new business hub at Tech City. I am always sceptical about this. I have seen too many politicians who somehow think that they have become tech-savvy just because they can use the on/off button on their BlackBerrys. It is a lot more than that. We are blessed in this country, especially in London, in having all the constituent parts that are able to feed the new tech revolution—not just in IT but in fashion, media, advertising, pop music, and so on. All these are now converging into a new and very exciting tech revolution, much of it powered by smartphones and tablet devices. Mobile computing is here to stay and is becoming as ubiquitous as the pen and pencil of yesteryear. In addition, we have been swept away in the use of technology. This country does more online shopping than is done in any other developed county.
I end my speech today by asking the Minister a question that matters to the sector that I really care about. The Minister has been given the brief to speed up and manage infrastructure projects. Finally, we have had an announcement on HS2 and HS3, the first and second stages, and no doubt a major announcement on new airports will be forthcoming—if those in government can stop fighting among themselves—although, for the life of me, I cannot understand why it has to wait so long. Of course I know the answer, but why do party politics always have to take precedence over the national requirement?
When the Labour Government left office, we were ready to unroll universal broadband to all households by the end of 2012, but the coalition Government failed to make-good this guarantee. As a result, 5 million people are still denied access to even the most basic broadband coverage. Millions of families and thousands of rural businesses are suffering as a result. We have to be right at the forefront in IT technology, but we cannot do it without superconnectivity. Can the Minister give your Lordships’ House assurances on this development?
Financial Services Bill
Lord Mitchell Excerpts(11 years, 11 months ago)
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Lord Sassoon
My Lords, on Report I committed to bring forward a government amendment to give the FCA an effective power to make rules capping the cost and the duration of a regulated credit agreement. I am grateful to the noble Lord, Lord Mitchell, for raising this on Report and to noble Lords on all sides of the House who spoke in support of the need for action against sharp practices in the payday lending industry. The Government warmly welcome the cross-party consensus that emerged on this important issue.
As I said on Report last week, the Government were fully in agreement with the intent behind the noble Lord’s amendment but felt that there were weaknesses in the way it was framed. We have made use of the time between Report and tabling this amendment at Third Reading to get this power right and ensure that it is watertight. Moreover, I also committed to going further than the noble Lord, Lord Mitchell, proposed, by making additional consumer protections integral to the power.
The Government’s amendment spells out in detail the kind of rules that the FCA may make to prevent lenders from imposing excessive interest rates or associated charges on borrowers, and clarifies that the FCA would be able to specify the level of the cap in rules and also to define which charges, in addition to interest, should be captured. The amendment also allows the FCA to impose limits on the duration of the agreement, and to specify the detail of the cap and other restrictions in its rules.
Those who have compared the Government’s amendment tabled yesterday with the amendment of the noble Lord, Lord Mitchell, will have noted that the Government’s version is significantly longer and more comprehensive in its detail. I said last week that we would take care to frame the power to prevent unscrupulous firms exploiting loopholes and to ensure that consumers were properly protected. The Government specifically ensured that this power covers associated charges to avoid unscrupulous firms “gaming” the restrictions by, for example, reducing the interest rate but introducing exorbitant fees for related services such as setting up the loan. It also specifically captures the practice of rollovers, which we have seen abused by some players in the payday loans industry. Under the amendment the FCA will have a specific power to impose a limit on the overall duration of the rolled-over agreement and a limit on the number of rollovers that are permitted.
The government amendment has also built in robust protections for consumers who fall victim to lenders’ excessive charges. First, the FCA can provide that the lender cannot enforce the agreement and the borrower is not obliged to repay the loan. Secondly, it can provide that any money or property transferred under the agreement—an item that has been pawned, say—must be returned. Thirdly, it can provide that compensation must be paid to the consumer.
Before moving on I will address briefly one provision in the amendment of the noble Lord, Lord Mitchell, that we omitted in tabling the Government’s version: namely, a specific reference to consumer detriment or consumer protection. That is because the FCA will already be prompted to respond when it detects consumer detriment. Under Section 137A of FiSMA the FCA may make general rules only for the purposes of advancing one or more of its operational objectives. These are: securing protection for consumers, protecting and enhancing the integrity of the financial system, and promoting effective competition. As such the consumer protection objective will provide the strong underpinning mandate for the FCA to make rules under the new power that we are discussing. It is not therefore necessary to spell it out further in the Bill.
While I am confident that our amendment clarifies the FCA’s role in this important area, we must be careful not to regard this power as a silver bullet that will fix all the problems in the payday lending sector. As the OFT’s recent report into the high-cost credit market showed, it is clear that regulation of the payday lending market as a whole needs to improve. Compared to the current regulatory regime under the OFT, the FCA will have a broader and more effective toolkit to monitor and tackle developments in the market and supervise practice among firms.
Capping the cost of credit and the number of times that the loan can be rolled over is a major market intervention, and I expect the FCA to contemplate the use of this power in a responsible and measured way. I discussed the mixed picture from international evidence on Report. We must avoid at all costs any such cap resulting in catastrophically unintended consequences, such as driving vulnerable consumers to illegal loan sharks. However, as I said on Report, we need to ensure that the FCA grasps the nettle when it comes to payday lending. This amendment grants the FCA the powers to deliver effectively on its consumer-protection objective and tackle consumer detriment. It is a power that I hope all sides of the House will wish to support. I beg to move.
Lord Mitchell
My Lords, never in my wildest dreams did I ever expect that I would be standing here at the opposition Dispatch Box with my name on an amendment alongside a government Treasury Minister. It is some achievement and could occur only in your Lordships' House and not in the other place. I thank the noble Lords, Lord Sassoon and Lord Newby, for the very constructive way in which they responded to the amendment we put forward. They listened to what we had to say, took our comments away and came back with an amendment that is entirely acceptable to us. However, I would not like them to think that this is a complete love fest—normal service will resume at some other time.
It is worth recounting that the Government told us in Committee that the points which we wanted were already in the Bill. We tried hard to find the location of those points—and no doubt they are buried somewhere. However, with an issue like this one, which is so important, it is dangerous to have implied rules which have to be inferred. Many of these payday loan companies have very successful lawyers and access to some of the best brains in the country in this area. The provision would have been a complete dog's breakfast, to be honest.
We tried again at Report, and I admit that I came in here today ready for battle. However, I was astonished and delighted at the complete turnaround that the noble Lord, Lord Sassoon, has offered. He promised us a better amendment and that is what we have been given. The new amendment is stronger, tighter and more effective, and most of all, it offers complete clarity. I would not be human if I did not savour the moment just a jot. It probably will not happen again, but it is good that it has happened today.
I have been asked why the Government conceded and no doubt at some stage, over a gin and tonic, I will find out. However, I feel that it was due to two reasons —the political argument, and the moral argument. As for the political basis, the Government knew that they would be defeated last Wednesday on Report. It had been a bad couple of weeks for the Government and another defeat was something that they could do without. The moral argument, however, was more important. I was fortunate because the noble Baronesses, Lady Howe of Idlicote and Lady Grey-Thompson, and the right reverend Prelate the Bishop of Durham added a non-political independent gravitas to what we were trying to do. I thank them from the bottom of my heart. I also thank all noble Lords who contributed to the debate.
The media also took up this cause with a vengeance. Every article and television programme that I read or saw seemed to back our position. They were against the payday lending companies. Indeed, I am sure that the man in the street in this country was also in favour of regulation. Everybody seemed to be in favour of it except for the payday loan companies themselves—and I was nobbled in the most unlikely of locations by them or their representatives telling me how wrong we were. However, the Government conceded because the political and moral arguments were absolutely against them. They did concede and I am grateful to them for the positive way in which they have dealt with this issue.
I had two questions to ask about consumer detriment and time and duration but the Minister has addressed them in his speech. He said that there was no silver bullet for this and I absolutely agree. As we go forward perhaps we should look at what is happening in other countries. I spoke at Report about the experience in Florida, which has had an amazing result. I repeat that anyone who takes out a payday loan in that state has to register it as a charge. They have to pay for it and it goes on to a database. It is known that they have a payday loan. That absolutely prevents any individual having more than one payday loan on any one occasion. That is something that we should look at for the future.
This provision will go forward and become a new law but I believe that it will also become a statement of intent. This amendment is simple, symbolic and now stands alone. This industry is going to be controlled. For many people out there, the world is now a slightly better place.
Lord Barnett
My Lords, perhaps I may add to what my noble friend Lord Peston has said. I will not repeat the may/must argument; it has been well enough made, and I hope that we will get a reply from the noble Lord, Lord Sassoon. Incidentally, in congratulating my noble friend Lord Mitchell, perhaps it is right that I should also congratulate the noble Lord, Lord Sassoon. This may be our last exchange before he retires.
The noble Lord, Lord Sassoon, mentioned the assumption that the FCA will now have the powers to deal with these unscrupulous people regarding payday loan schemes. As my noble friend Lord Mitchell said, they will have lots of good lawyers because when people have many profits to defend, as they do, they tend to use lots of lawyers. While I am not a lawyer, I hope that the noble Lord’s lawyers have indeed drafted this correctly. I know that these things can never be done tightly enough and that once lawyers get involved it finishes up in the courts for somebody else to decide. That is bound to happen and I am not blaming the noble Lord, Lord Sassoon, or his legal advisers for it. In my experience, when court actions involve lawyers on two sides in major cases, both advise their clients that they are right and that they should go to court about it. That becomes very expensive and they eventually resolve it only in the court.
As the noble Lord, Lord Sassoon, said, although he is confident about this provision, it is nevertheless not a silver bullet. Does he think that the advice he has been given will result over the next few months or weeks in the lawyers worrying about it? At the end of the day, will we require secondary legislation to deal with this? I hope not—I hope that the lawyers have it absolutely right this time. However, as the noble Lord said, one of the worries is the law of unintended consequences.
This is such a complex area but I like the point that my noble friend Lord Mitchell made about what happens in, I think, Canada.
Lord Barnett
In Florida, they have to register this. If it was in Canada, the new Governor of the Bank of England would have a still better idea. It may be that he still does because he seems a very bright fellow and he will know what happens in Florida. Perhaps, some time in the not too distant future, we will have something like what my noble friend Lord Mitchell quoted because that seems to me, as a non-lawyer, to be a sensible way forward. I hope that we can move that way in future. For now, it only remains for me, too, to congratulate all concerned in this matter and wish the new amendment well in the future.
Financial Services Bill
Lord Mitchell Excerpts(11 years, 12 months ago)
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Lord Mitchell
“Power of the FCA to make further provision about regulation of consumer credit
(1) The FCA may make rules or apply a sanction to authorised persons who offer credit on terms that the FCA judge to cause consumer detriment.
(2) This may include rules that determine a maximum total cost for consumers of a product and determine the maximum duration of a supply of a product or service to an individual consumer.”
Lord Mitchell
My Lords, yesterday I had tea with a dear friend here in your Lordships’ House. Unsurprisingly, the subject of payday loans came into the conversation. He told me about his son, who has mild attention deficit disorder, is frequently unemployed and had taken out two payday loans. The loans were for £800. His son could not pay them back and, to cover his embarrassment, rolled them over several times. In a few months, the amount due to be repaid had escalated to £5,000. My friend reluctantly had to settle the bill. That is the essence of the amendment that I put down at Committee stage, and which I have put down today. It is this that we are seeking to control.
Ten years ago, this amendment probably would not have been tabled, but today it is very much of the hour. The fact is that legalised loan-sharking, or payday lending—call it what you will—has gone viral. It is out of control, dangerous and is causing great distress to many vulnerable people. Two developments have come together to cause the rapid growth of this lending industry. The first is the dreadful state of the economy. People are desperate for money and they will take it from whatever source they can, whatever the price. Take a walk down any high street, particularly in deprived areas—payday loan shops are abundant. Recently, I went to Walthamstow with my honourable friend Stella Creasy MP and my right honourable friend Ed Miliband. There, on the high street, we saw more than 15 money shops of one form or another. Business was brisk.
The second development has been the astronomic growth of online lending. As I said in Committee, I went on to one of the most successful websites and what struck me was the slickness of the process: just some cursory information to fill in and the money would have been in my bank in 15 minutes. It is simply too easy. A straitened economy and the ease of usage of online lending have combined to create this booming business sector.
One online company—Wonga—is projected to be making more than £70 million profit this year, probably valuing the company well in excess of £1 billion if it were to go public. The annual size of the payday lending industry is at least £2 billion; it is growing at a fast clip and in time will become a major source of consumer credit in this country. I do not understand why this Government—who are determined to reduce personal indebtedness at the macro level—are at the same time allowing this sector to grow unchecked. I would have thought that both parties opposite would be encouraging me on this amendment, rather than opposing this very important piece of legislation. Perhaps the Minister will have some good news for me when he replies.
Payday loan customers, by their very nature, are people with very low credit ratings, who have no other options open to them. They borrow money on an unsecured basis at extortionate rates of interest. Does this not strike a familiar chord? Uncontrolled lending to people who are barely able to meet their repayments in a marketplace that is expanding at a massive rate: does that not sound like what happened in the United States with sub-prime lending? Sub-prime was off everybody’s radar screen until it hit the US and world economy like a hurricane. It was the initial cause of the financial crash of 2007 and few saw it coming. If Her Majesty’s Treasury does not buy into the moral repugnance that most of us feel about the dangers of payday lending, at least it should be on its guard about the economic consequences of this ticking bomb.
However, it is the moral argument that concerns us this afternoon. I am delighted that the right reverend Prelate the Bishop of Durham has added his name to this amendment. He has spoken previously on this subject and I am sure he will be making his views very clear. I am pleased that the noble Baronesses, Lady Howe of Idlicote and Lady Grey-Thompson, have also added their names to this amendment. Both have long records of standing up for the vulnerable and I await their speeches with anticipation.
I want to make one point very clear. This amendment does not seek to ban payday lending; it seeks to give the FCA the power to cap interest rates when they are causing consumer detriment. It is a “may”, not a “must”. It puts the responsibility squarely into the hands of the FCA. I will go further: we need payday lenders; they fulfil a vital role. There are many people who cannot get credit from traditional sources, and without legalised payday lenders, their alternative is the backstreet loan sharks whose penalty for non-payment is often pretty brutal.
Payday lenders fill a vital gap, but they need to be controlled. Interest rates charged by many payday lenders go well beyond the obscene. Any lender is bound by law to display the annual percentage rate—the APR—that it is charging. In many cases, payday lenders are charging an APR in excess of 4,000%. These lenders avoid the use of the term APR whenever they can; they say it is not appropriate for a short-term loan. I have heard them say to me that quoting APR on a payday loan is as relevant as quoting APR if you hire a car for a week or stay in a hotel for a similar period. We must not buy this argument and we must not let them get off the hook. Hiring a car or staying in a hotel is a rental of an asset and its associated services. It incurs no repayment of principal and is not a loan.
Payday lenders say that quoting APR on a short-term loan is inappropriate—how can you use the word “annualised” to measure something that lasts just a few weeks? That is exactly what the finance industry does every day. If one bank borrows £100 million from the money market on an overnight basis, the charge is quoted as an annualised interest rate. Stating that APR is the wrong measure is simply disingenuous. APR is there for an express purpose and in my opinion it should be included in all advertising, but that is a debate for another time.
Last Sunday, we saw an interesting development. In an article in the Sunday Telegraph, Wonga was reported as saying that its rate of interest is equal to 1% per day. This is a big change from a company which has previously refused to admit that its repayments should be quoted as a rate of interest. What it says is true—it does charge 1% per day, or thereabouts—but it is playing games. If you borrow £100 from Wonga for seven days, the simple interest that you pay will be 1.82% per day. If you borrow £100 for a month, the simple interest will be 1.21% per day. For its maximum of 43 days, it will be 1.16% per day. The game it is playing is that this is calculated on the basis of simple interest, but interest is seldom calculated on a simple basis. The accepted measure is of course compound interest. A loan that costs just 1% per day becomes 4,000% per annum when aggregated in compound interest terms, which is exactly what APR is all about.
Lord Barnett
My Lords, I have a couple of points. Throughout the Bill, my noble friend Lord Peston and I have constantly raised the question of “may” and “must”. That question arises in this amendment, too. The amendment, moved so wonderfully by my noble friend, states:
“The FCA may make rules”.
That could be “must” because the amendment is already constrained by the end of that sentence,
“on terms that the FCA judge to cause consumer detriment”.
That is why it is so important, as my noble friend Lord Peston said, that we see the Minister’s amendment as soon as possible. I am not a lawyer but I do not distrust them; however, the lawyers who advise Governments can make mistakes, which are usually resolved by lawyers on both sides eventually having an argument, at great cost to everyone including the courts, until someone decides in court who was right. On this occasion we have to try to get it absolutely right. I regard what the Minister said as very helpful.
My noble friend said that we must see the amendments as soon as possible. However, nothing is built in stone. No law states that we have to have Third Reading next Wednesday. If necessary it could be delayed a little. The important thing is to get it right. I hope that the noble Lord, Lord Sassoon, will consider having a discussion with the authorities, or with the Leader of the House or whoever, about whether, if we do not get sight of the amendments as soon as possible, we should delay Third Reading until we are sure that we have got it right. That is crucial. I hope that the noble Lord, Lord Sassoon, can inform us that he will do that.
Lord Mitchell
My Lords, I thank all noble Lords who took part in this discussion, particularly those who are co-signees of the amendment. It has been a powerful and focused debate and I hope that the payday lending companies are listening. My guess is that they are glued to their screens.
The Minister has made a welcome statement of intent and to be honest that is as much as we could have hoped for. With the Government’s cast-iron acceptance of the principle of my amendments, as well as the effective force of veto that the three other signatories to the amendment will have over the revised amendment at Third Reading, this issue is now where it should be: beyond party politics. The winners are those who have tirelessly campaigned for this change in the law. I must mention my honourable friend Stella Creasy MP, who has been relentless in her pursuit of justice.
The other most welcome winners are those who live in the hellhole of grinding debt. Their lives will become a little easier. The losers are clearly the loan sharks and the payday lending companies. They have tried every trick in the book to keep this legislation from being approved and they have failed. Their failure is our victory. On the basis of the Government’s assurances, I beg leave to withdraw the amendment.
Small and Medium-sized Enterprises
Lord Mitchell Excerpts(12 years ago)
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Lord Newby
My Lords, the figures so far published do not take account of the impact of Funding for Lending, which only opened in August, and not least because it takes some time for loan approvals under the scheme to be finalised. I absolutely agree that promoting the scheme will be crucial. We are encouraged by the steps that the banks and building societies have already taken to do so, including double-page advertisements in national newspapers and promoting mortgage products very actively, not least through their websites. The Bank of England is administering the scheme but the Treasury is directly involved in monitoring it via a joint oversight board with the Bank.
Lord Mitchell
My Lords, Funding for Lending is the very latest of a whole plethora of programmes announced by the Government to stimulate SMEs. But here is the truth: very little of the money is getting through to the SME community. Why is that? It is because the chosen method of distribution is through the high street banks, and their interest is more in stuffing their own balance sheets rather than advancing funds for SMEs. When will the Government realise that the banks are chronically risk-averse and ill suited to this important task?
Lord Newby
My Lords, it is simply not true that the banks are stuffing their balance sheets as a result of this scheme. This scheme gives the banks incentives to lend, not to stuff their balance sheets. There is considerable evidence that the banks are offering loans to SMEs at significantly lower interest rates and offering new mortgage products. These are already beginning to generate new business.
Financial Services Bill
Lord Mitchell Excerpts(12 years, 1 month ago)
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Lord Mitchell
“Power of the FCA to make further provision about regulation of consumer credit
(1) The FCA may make rules or apply a sanction to authorised persons who offer credit on terms that the FCA judge to cause consumer detriment.
(2) This may include rules that determine a maximum total cost for consumers of a product and determine the maximum duration of a supply of a product or service to an individual consumer.”
Lord Mitchell
My Lords, by any criteria, 4,214% being charged on a personal loan is outrageous. It is usury par excellence. Yet this is the rate of interest being charged by one of our largest and most popular online payday lenders. There are many others who are charging similar amounts. This amendment does not seek to ban payday lending because it fulfils a role and, for many people, they have no choice. What we do seek is to permit the Financial Conduct Authority to place a cap on the total cost of any loan if it judges that that loan will cause consumer detriment.
Payday lending has gone viral. Noble Lords need only stand in Parliament Square this evening and see the advertising copy plastered on London buses—one says “Go on. Get money. Go on”, while another one says “Arrives in 15 minutes”—in order to realise that this really is big business. Or they can do what I did, and go to Walthamstow in north-east London and there on the high street see the plethora of payday lending shops, all of which seem to be doing good business. Or they can go on to the Blackpool FC website, there to see that this football club is selling replica kits with “Wonga” plastered all over the shirts. You can even buy a baby Blackpool FC shirt so that your baby has “Wonga” on full display.
Until a year ago, I knew nothing about payday loans. Of course I had heard about loan sharks and I knew that this is an illegal, murky underworld where desperate people seeking immediate cash can get it quickly from backstreet dealers. I also knew that if you did not repay your loan, nasty people with black gloves and baseball bats would come round and make you an offer you could not refuse. I decided to look up the definition of “loan shark”, which the OED defines as,
“a moneylender who charges extremely high rates of interest, typically under illegal conditions”.
The truth be told, loan shark is an ugly expression and baseball bats are unacceptable, so many of the new generation have gone upmarket and spruced up their image. They have become illegal and, like any good marketing company, they have rebranded their product. Now their offerings are called “payday loans”, and if you do not repay, it is no longer the baseball bat but the bailiff and the threat that your personal credit rating will be shot to pieces. Some 4 million people are using these loans, and the amounts advanced exceed £2 billion. This is an industry that is enjoying stratospheric growth—no double dip here. It is a world where the companies have jaunty, blokey names like “Quick Quid”, “The Money Shop”, “My Advance Loan” and “Wonga”. Need a few quid over Christmas? It is easy-peasy.
But I have seen another side of the fun-filled world of easy loans. I have met people whose lives have been destroyed as they are sucked into the payday loan vortex. For some of them, it becomes a never-ending cycle of payment and repayment, payment and repayment, shuffling credit cards, borrowing from one payday loan company to meet the never-ending demands of the other, and all the time the inexorable clock of compound interest keeps ticking away. It is a Kafkaesque nightmare. Once you are in, it is hard to get out. I know it shows my age, but the words from the song “Hotel California” keep reverberating in my brain:
“You can check-out any time you like,
But you can never leave”.
I am in a beneficial position to understand what is going on as I come from an asset finance background. In my day, we financed capital equipment to large companies, which is clearly not the same as consumer credit, but the fact is that I totally understand the workings of compound interest and I know the games that people play.
Wonga is a good example to examine. The payday loan companies have taken to the internet like ducks to water—no shops, more upmarket and they have become very slick. They have turned loan sharking from a shabby backstreet activity into a recreational pursuit. I decided to do my own investigation. Wonga itself has no history of illegal loan sharking. It is a true 21st-century online payday loan company and is by far and away the most well known and maybe the most successful, so it made sense for me to go on to its website. It is brilliant. In terms of user friendliness, it is right up there with Apple and Google; it is very seductive. To test it out, I set out to borrow £300 for a 21-day period. It was so easy. Wonga wanted my personal details—where I live and where I work—and required details of my debit card so that it could capture the repayment after three weeks. So far, so good.
Wonga was able instantly to assess my credit rating, which enabled it to accept or reject my application within minutes. It highlighted the fact that it offers straight-talking money and promotes responsible lending. It told me that it would give me a decision in six minutes and that the £300 would hit my bank in 15 minutes. It also told me clearly and upfront that I would have to repay £365 in 21 days’ time. It stated, as it must, that this loan was equivalent to an annualised interest rate of 4,214%—totally transparent and totally exorbitant. Noble Lords will be pleased to hear that I did not click the “Accept” button.
Payday loan companies are correctly obliged by law to display their APR. As I say, in Wonga’s case, it is 4,214%. Some are more, others are less. Most of them claim that APR is an unjust measure. “After all”, they say, “how can you apply an annualised rate of interest to a loan that lasts for just a matter of days?”. But the fact is that you can apply an annualised rate of interest to any loan, whether it lasts for one day or 100 years. It is the only comparative measure. Attempts to rename interest and call it a fee payment must be resisted. Payday lenders are obliged to display APR on their websites but for some reason they do not have to show it on their advertising. I think they should. Imagine a bus advertisement where one panel says, “Straight-talking money”, and the other says, “APR 4,214%”.
Payday lending and loan-sharking are not going to disappear. This sector provides a vital service to those in our community who cannot get credit elsewhere. In these straitened times, it is only going to get worse. This amendment gives the Financial Conduct Authority the power to act where it sees that the terms on offer cause “consumer detriment”. I hope that the Government and noble Lords are able to support this amendment. I beg to move.
Baroness Kramer
My Lords, I will speak very briefly to this amendment, with which I have great sympathy.
I understand that the Government are carrying out a review of payday lending. I have two concerns. First, we really need to nail the banks, frankly, because I suspect that if the various fees charged for unauthorised overdrafts were translated into an APR, they might not be so different from that charged by Wonga. Secondly, we need to understand this dynamic between companies like Wonga and the kind of loan sharks that come after their clients with a baseball bat, because the last thing any of us want would be to see people driven back to those illegal lenders and subject to their violent and aggressive behaviour.
Would the noble Lord, Lord Mitchell, not agree that the most important way to combat this kind of exorbitant charging is to make sure that there is a proper alternative for individuals, whether it is through a credit union, community development banks—which we do not have this in this country—or some other mechanism where there is a legitimate provider that serves this particular market? Would he not agree that one of the frustrations with much of the language in this Financial Services Bill is that it is not taking the necessary actions to promote those kinds of organisations coming forward and to provide regulator backing to ensure that the alternatives are in place so that people do not have to resort to Wonga or to banks charging exorbitant fees for unauthorised overdrafts?
Lord Mitchell
My Lords, I thank noble Lords who have participated in this short debate. To the noble Baroness, Lady Kramer, I say that credit unions are very interesting. They have started very slowly. As to the rates of interest they charge, I think that it is presently 2% per month of the capital cost and they are pushing hard for it to go to 3%. I do not know what that is when it is compounded out—I do not have my calculator with me—but it is probably about 50%. That strikes me as a reasonable amount to charge given the credit involved.
To the noble Lord, Lord Flight, I say that I think that Guernsey has probably got it right and we should pay attention to it. There is a lot of financial expertise there. I thank my noble friend Lord Kennedy for his support for the amendment. He lives in a deprived borough of London where, exactly as we saw in Walthamstow, payday loan shops are to be found everywhere.
To the Minister, I should like to make just a couple of comments. First, with online payday loan companies, ease of use is a significant issue. It is a bit like online betting: it is so easy to do; it is so fast. Let us think of people who perhaps do not have self-control or need the money quickly. It is frightening what people can do in the privacy of their front room to get money very quickly. It is not like it was before, when you would go into a payday loan company on the high street not knowing who was watching and perhaps not wanting to be seen there. This is between you and your computer, and it is very difficult.
I heard what the Minister said about compliance and licensing, but I am not sure that the issue of interest rates has been taken as the cost. It is the interest rate aspect of it that we are trying to push in this amendment, so that the FCA would have the power to control the effective interest rates being charged.
I shall reflect on the comments made and perhaps return to the matter on another occasion. I beg leave to withdraw the amendment.
Financial Services Bill
Lord Mitchell Excerpts(12 years, 5 months ago)
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Lord Mitchell
My Lords, I suppose this late in the debate it is stating the obvious to say that this Financial Services Bill is probably the most important Bill that is to go through in this Parliament. The stakes are high—it goes to the heart of our economy and our well-being, and we have to get it absolutely right.
I stand in wonder at the depth of expertise of Members who have spoken in this debate, including ex-Chancellors, Treasury Ministers, civil servants and economists. I cannot help but wonder whether an elected House of Lords would be able to bring the same degree of heavyweight knowledge and practical expertise—but I guess that is a debate for another time. Now we are joined by another heavyweight, the noble Lord, Lord O’Donnell, who made a superb maiden speech. We get a very strong hint of some amazing debates with contributions that he will make in future.
This Second Reading is, correctly, about structure, governance and regulation. We got it wrong; it needs to be restructured, making sure that power and responsibility reside where they are most effective. But enough people have spoken about that today, and I am not going to do so. I am going to talk about an issue about which I feel most passionately, and which I have spoken about before in your Lordships’ House—the issue of payday loans, which was also mentioned by the noble Lords, Lord Naseby and Lord Northbrook.
My background for 40 years was in equipment leasing. I understand compound interest—it runs through my blood—and I understand about rolling over compound interest commitments. I understand how you use public relations and advertising. My experience was in industrial not consumer finance; my customers were corporations, not desperate borrowers. But the calculations are the same, and I cannot be fooled by the hype that you see all the time on this issue.
I have to declare an interest. I formed an equipment-leasing company in 1992 called Syscap, in which I had a majority shareholding. I have sold most of that shareholding but still retain 8%.
In the other place there was an amendment to cap the level of interest charged by payday loan companies. In Clause 22, it was suggested that the Financial Conduct Authority should be able to make rules and apply sanctions or rules when credit is offered that the FCA judges causes consumer detriment. Consumer financing at 4,200% is detrimental to consumers, any way you look at it. We believe that that amendment, which was defeated in the other place, should be introduced.
We have a terrible economy, with many people unemployed and people and their families in terrible situations. It is not surprising that loan sharking is back on the agenda. At its most extreme, it is about monstrous interest rates and baseball bats if payment is not made. The other week I watched “Godfather II” again and, believe me, it is very pertinent. But of course now it has gone respectable, and people talk about payday loans instead of loan sharking. Many high streets in this country have shops offering nothing but payday loans. They have become even more respectable recently; they do not even call themselves payday loans but talk about “short-term financial availability”. Well, they can call it what they like, but it is loan sharking dressed in silk.
It used to be shameful to borrow money in this way. People had to do it, but they kept it quiet. Now it is encouraged; you see it advertised on buses, TV and in sports sponsorship—it is everywhere, and it is very slick. The advertising is amazing, and they have managed to introduce an almost blokey image. “Short of a few quid, need £300? Don’t worry about it—go on the website and it’s in your account in 15 minutes”. These companies have cutesy names such as Uncle Buck, KwikCash and, of course, Wonga.
In 2011, payday loans equalling £1.7 billion were taken out, 4 million people in this country used them and interest rates varied from 440% to 16,500%—the mind boggles. It is rumoured that Wonga made £160 million profit and is going for an IPO of over £1 billion. You have to talk about Wonga as it is the market leader. I take my hat off to Wonga; it is a brilliant business. Its website is phenomenal—my background also lies in IT—and I have gone on to it and attempted to take out a loan. I assure your Lordships that I stopped at the final moment although I went through the process. A clock appears on the website telling you how many minutes it will take for the money to reach your bank account. The process is so easy; it is an availability issue. If you borrow £300, 21 days later you will have to repay £360. The company absolutely hates the fact that it has to display the APR rate on its website. It does so but says that it is not an interest charge and has nothing whatever to do with interest. However, for me, there is a clear definition of “interest”. If you take out a loan for £100 and repay £110 in a year’s time, the £10 difference is interest. That is very clear. That is the case whether you borrow for a day or 50 years—on a pro rata basis and an annualised basis, that is what an interest rate is. However, this company does everything it can to say that this is not an interest rate.
Payday loan operators say that 95% of their customers are happy. I suppose that if you were starving hungry and somebody came along with a really sexy website, you would feel happy if it enabled you to get some food. However, it is not like that. Payplan says that 47% of people who take out payday loans have six or more facilities at the same time and that 86% of these people use them to pay for basics such as food and transport and not for luxuries or short-term loans for Christmas presents. Three organisations—Consumer Focus, Citizens Advice and the financial services panel—all want the FCA to have specific powers to control these loans. Ministers have said that this is all being reviewed, perhaps by the OFT. However, I have the feeling that this issue has been kicked into the long grass. I suspect that nothing will happen in this regard unless we up the ante.
These payday loan companies can say what they like but the fact is this is gross usury, which affects people who are in dire financial straits, juggling credit cards, payday loans and anything else they can in order to survive from month to month. It is true that this is a vital service and that some people depend on it. Nobody can say that we have to get rid of it. The loan shark alternative is absolutely horrible. However, these companies have to be capped and need to be controlled. We plan to introduce an amendment to that effect.
Economy: Growth
Lord Mitchell Excerpts(13 years, 7 months ago)
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Lord Mitchell
My Lords, 11 years in your Lordships’ House and for the first time, I have lost my speech. Actually, it was left on the Northern line, so while somebody was having a lot of fun reading it, I was having a quiet panic in the Bishops’ Bar, trying to reconstruct it. Anyhow, here goes.
First, I thank my noble friend Lord Hollick for securing this debate. He started as an entrepreneur, he ran a major media group and now he is with one of the premier private equity companies in the world. He is the quintessential businessman. I, too, am an entrepreneur. I have started three companies from scratch, built them up and eventually sold them. It is great. I have loved being an entrepreneur and I would recommend it to anybody. Seeing companies grow and develop and seeing your staff grow is fantastic. However, there is a dark side to being an entrepreneur as well. It is terrifying not being sure that you can meet the payroll, there are problems with the banks, all sorts of things wake you up in a cold sweat at two in the morning and the stress is enormous. So when I hear the Government say that 300,000 public sector employees will, as a result of all the cuts, somehow find another job because of private sector growth and the entrepreneurial society that we are going to form, I simply do not believe it. I cannot conceive that somebody who has been working in the public sector for 10 or 20 years is somehow suddenly going to come out and become an entrepreneur. It absolutely does not make sense to me.
The tone of today’s debate has been, “What is wrong with the UK economy?”. I want to devote the two minutes and 15 seconds that I have left to what is right. It is a very exciting story. The noble Lord, Lord Kestenbaum, in his excellent speech, talked about Silicon Valley. We now have a Silicon Valley in this country. It is not in Cambridge; it is three miles from here and it is a revolution. It has the most wonderful title of “Silicon Roundabout”. It is to be seen around Old Street and Brick Lane—indeed, that whole area. It is the east London cluster development and it is better than anything else in Europe. It is fabulously exciting and it needs an awful lot more publicity.
I suppose that one of the things that people always said about Silicon Valley was that it was clusters of people with similar ideas in life getting together after work. I recommend to any noble Lord taking a drive around Silicon Roundabout to see the bars, the restaurants and the unbelievable enthusiasm around there. It is full of young people all working in small businesses in creative industries such as applications for iPhones, music, advertising, fashion and movies, in all of which London is to the forefront. As I said, young people are doing all this. There is something about that area that Cambridge would never have and the City and the West End never have. It is edgy and cool and it attracts these sorts of people.
How did this area come about? It did not come about under this Government or the previous one either. It was spontaneous. It just happened. It has just grown like Topsy. Why? First, low rents were available. Secondly, it was close to the centres of finance, fashion, theatre and advertising companies. It has produced these raw entrepreneurs, to the extent that today American companies such as Cisco and Google have decided to invest in these areas and in these companies. It is very exciting.
These companies are now running out of space. Where will they go to? After the Olympics in 2012, many of them will work in the Olympic park and, for the first time anywhere in the world, an Olympic Games will have a true legacy made up of high-tech and creative industries.