Financial Services (Banking Reform) Bill

Debate between Lord Sharkey and Lord Selsdon

Tuesday 26th November 2013 Lords Chamber

[Lord Sharkey (LD)]

My Lords, this amendment has been somewhat overtaken by events. As little as four weeks ago, the Government were claiming in this Chamber that there was insufficient evidence for a cap on the cost of payday loans. They said:

“The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit”.—[Official Report, 23/10/13; col. 1109.]

On Sunday, the Chancellor underwent a kind of Damascene conversion. He is now convinced that there is sufficient evidence for a cap. That is very good news. Surely it would be unkind to point out that there was no more evidence available to him on Sunday night than there was four weeks ago.

After the Chancellor’s announcement that there would be a mandatory cap, there was another late intervention. At nine o’clock last night, like all of us, I was e-mailed a letter from the noble Lord, Lord Deighton. Without elaboration, it says that,

“the balance of evidence has tipped in favour of a cap”.

He says that the Government,

“will give the FCA a clear duty in legislation to use the powers we have given it to implement a cap”.

He continues:

“The FCA must ensure that it designs a cap that works in UK consumers’ interests and fits the UK market”;

but he goes on to say that the FCA will draw upon,

“the analysis and findings of the Competition Commission, whose investigation of the payday lending market is currently underway”.

The investigation is indeed under way, but it has a statutory reporting date of 26 June 2015. That is far too late. It means that any cap is unlikely to be in place before the end of 2016. That would mean millions of the most financially troubled people continuing to pay millions of pounds to PDL companies entirely unnecessarily. The Chancellor, in his interview on the “Today” programme on Monday morning, said clearly that installing a cap could happen in parallel with the Competition Commission investigation. I spoke to the noble Lord, Lord Deighton, about this issue earlier today. At the close of our conversation, he committed the Government to have the cap fully implemented by the end of January 2015. This seems to me to be reasonable and to allow the time necessary to put all the systems in place. I would be grateful if the Minister would explicitly confirm to the House the commitment made to me by the noble Lord, Lord Deighton.

The main difficulty this evening, of course, is the lack of any concrete proposals from the Government. We cannot know exactly what the Government will propose. This is a fundamental problem because the devil is very much in the detail when it comes to the regulation of payday loans. We can only make a little progress tonight, but it would help to hear the Minister confirm to the House that they will by legislation oblige the FCA to impose a cap on the total costs associated with any payday loan.

It would help to hear the Minister say that the FCA will be instructed to look again at the restrictions on rollovers. The FCA has said that it is minded to restrict rollovers to two. This is completely wrong. Some 28% of all borrowers have one or more rollovers, and a full 50% of payday lending revenue comes from rolled-over loans. Rollovers should be banned. We should do here what they have been doing in Florida for the last 11 years. In Florida, no loan may be taken out until any previous loan has been settled in full; and no new loan may be taken out within 24 hours of the settlement of a previous loan.

Will the Minister confirm that he will instruct the FCA to consider this system? In Florida there is a real-time lending database in operation. This database prevents rollovers. It also prevents borrowers having multiple simultaneous loans. Will the Minister confirm that we will have a similar real-time database here in the UK? Will he confirm that the FCA will be instructed to consider banning multiple simultaneous loans?

There are another couple of features of the Florida regulatory system which should be closely examined on the basis that we should use them here unless there is overwhelming evidence to the contrary. First, in Florida, any loan may be extended by 60 days without any additional charge at all. That is certainly not true here, but it should be true here. Secondly, any borrower in Florida who extends a loan by 60 days is required to undergo approved credit counselling and to abide by the plan agreed to retire the debt. This helps stop the spiral of increasing debt and provides a way out. We should have this here in the UK too.

The fact is that the Florida regulatory system is a model for payday loan regulation. Perhaps this is what the Chancellor suddenly realised on Sunday night. I ask the Government to ask the FCA to consider all aspects of the Florida regime for adoption here in the UK. At its simplest, in Florida, if you borrow £300 for 30 days you pay back £333. Here, if you borrow £300 for 30 days from Wonga, you pay back £397. That is three times as much—a wholly unjustifiable transfer of cash from the poor to the rich.

In closing, I simply ask the Minister to confirm that when we come to the capping amendment at Third Reading, we can operate under the less restrictive Committee-stage rules, as I think is entirely appropriate given the late stage at which the amendment is being introduced. I beg to move.

[Lord Selsdon (Con)]

My Lords, I support the noble Lord, Lord Sharkey, but I speak from a slightly different point of view. After so many years in your Lordships’ House, from time to time certain problems are raised with me when people have nowhere else to go. I want to talk about the link between the payday loan and credit and other things, particularly unemployment.

Take the situation at the moment of the young unemployed, or with some sort of weighting allowance in some form or other, who want to buy a mobile telephone or an iPad or something like this. They go along to any one of the suppliers, which then offers them a package that means they do not need to pay £500 up front but can pay it later. They sign up to something that they do not quite understand and then find that they cannot meet the necessary payments. They may have various allowances but, before they know it, the pressure builds up. So what starts as a £500 transaction can multiply into £1,000 fairly quickly. They cannot afford to pay the bill, so they go to a payday loan company—I will not mention their names—which, without the necessary research, offers them facilities at an exorbitant rate of interest. What starts with the wish to buy an iPhone or something of that sort for £500, when they have not got the money up front, can turn into nearly £5,000.