Payday Loan Companies

Ann McKechin Excerpts

Monday 20th January 2014 Commons Chamber

[Ann McKechin (Glasgow North) (Lab)]

The fact that this is the second time in two years that the Business, Innovation and Skills Committee has reported on this issue reflects the enormous public interest in the matter and the concern about the impact of the sector on our communities as well as on individual borrowers. To date, the regulatory authorities have being running behind the curve, and it is important that the Financial Conduct Authority should start ahead of the game. The regulators initially gave little priority to protecting the poorest borrowers on the basis that the total lending represented just a small percentage of the total in the financial services sector. They failed to take proper account of the problems that had already beset other international jurisdictions, to which the hon. Member for Dover (Charlie Elphicke) has referred. The Government’s response to our first report was simply to try to shift the problem further down the time line, with an instruction for further reviews and reports. The transition to regulation by the FCA was used as the main reason for not taking immediate action.

In my own city of Glasgow, the council reported last year that its citizens borrowed £57 million annually through high-cost credit, including payday lending. Given that 49% of our residents are within the bottom 20% of the income quartile, it is not surprising that the council estimates that a staggering 100,000 residents are using non-standard credit and that a high percentage of that number are finding it difficult, if not impossible, to repay their loans.

In 2013, the regulatory authorities and the Government realised that a policy of laissez-faire was not going to work. The findings of the Office of Fair Trading’s damning report showed the scale of contraventions in the sector, and the growing amount of strong evidence from agencies like Citizens Advice, StepChange and Which? could not be ignored. The sector itself had rapidly increased from £900 million in 2008-09 to £2.2 billion in 2011-12. Wonga had become a household name and, even more worryingly, the level of personal debt in this country was beginning to rise again, potentially threatening any increase in growth.

The sector now has a shop in every high street, it dominates the advertising schedules and it has been allowed the freedom of a wild west market to achieve rapid growth and massive profits. Many of its victims now populate the ever-growing food banks and our debt courts. It should be abundantly clear that this issue cannot exist in a vacuum, devoid of political direction. The statutory independence of a regulatory authority to act should not be a barrier to setting a framework and priorities that it needs to address; nor should it be a way to sidestep the will of Parliament, which on numerous occasions over the past three years has expressed exactly the concerns that are being raised today. The level of cross-party agreement and civic support for tougher regulation is overwhelming.

Wider issues have intensified the interest in this sector. The hon. Member for Dover referred to the lack of provision in the mainstream credit sector, but other issues include the squeeze on real incomes, and the above-inflation rises in essential costs—energy, transport, housing and food. The demand for unsecured lending continues to expand, but we also have a rapidly changing financial services sector that often lacks adequate transparency not just in short-term lending, which adds to consumers’ confusion in making the best decisions to suit their needs.

I believe the major players in this sector well know that the current era of weak regulation ripe for exploitation will one day come to an end, but if they can extend that period or find a new avenue for profit, they will happily go for the bottom line. They have achieved their aim of being a ubiquitous presence. The Chair of the Select Committee on Business, Innovation and Skills, my hon. Friend the Member for West Bromwich West (Mr Bailey), has referred to the evidence from the money expert Martin Lewis, who brutally exposed the scale of this insidious influence. He said:

“14% of parents of under-10s, when they have said, ‘No, you cannot have your toy,’…have had a payday loan company quoted to borrow the money from.”

We have also heard about scale and the Ofcom research on advertising, which found that there were 17,000 payday lending adverts in 2008 whereas there were 397,000 in 2012. That equates to each adult in the UK seeing an average of 152 payday loan adverts a year. Given that level of market penetration, some of the biggest firms barely need ever to advertise again. That is why our Committee believes that our modest recommendation on curbing TV advertising is important, but we should not believe that it will cure the cultural influence.

[Caroline Dinenage (Gosport) (Con)]

Does the hon. Lady agree that it is not just the volume of TV advertising, but the nature of it that is concerning? These companies are often advertised via cuddly, humorous characters, such as knitted grannies and granddads. That is worrying it lulls people into a false sense of security about the nature of the product in which they are investing.

[Ann McKechin]

I absolutely concur with what the hon. Lady, a Committee colleague, says. The advertising is very clear and insidious, and it is targeted at younger people and children in particular. There is no debate about that; it has happened and continues to occur.

I want to deal now with the real-time recording of credit information. If credit information is to work, it needs to be both accurate and comprehensive; otherwise, there is little point to it. Unsurprisingly, the industry was quick to downplay the significance of this potential regulatory step, and again it is regrettable that the authorities have not been faster to respond, preferring instead an approach of wait and see. I commend the sustained pressure from agencies like as Citizens Advice and StepChange, but the cloud lifted when BBC’s “Newsnight” programme and others reported at the end of last year on the potential impact on mortgage lending. If there is no real-time recording in the payday lending sector, the existing credit recording systems become increasingly unreliable and inaccurate, particularly in respect of younger borrowers, who form the bulk of this sector’s customers. Lenders in the mainstream sector have now decided, in their world of lower risk, to dismiss payday borrowers entirely from their eligibility test—and hey presto, this month we have the announcement from Wonga and some others that a real-time recording system is going to be put in place later this year. Call me a cynic, but I suspect that the potential hit on their client base, who were increasingly worried about future access to mainstream lending and to mortgages, acted as a greater incentive than the dialogue with the FCA.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

My hon. Friend will be aware that only four payday lenders have entered into this real-time conglomerate. The FCA has indicated that it will take action if the sector does not get its act under way. Do we not need to get action from the FCA to make sure this happens?

[Ann McKechin]

My hon. Friend has taken the next sentence from my speech, because that is what the FCA absolutely needs to do and it is what we have recommended. Unless we have a recording system that is properly comprehensive, we will not have a solution and we will not stop lenders making non-compliant loans. The current proposal contains no requirement to report to the FCA; it still relies on voluntary reporting, and we know that many of the same lenders were found wanting in last year’s OFT investigation. As colleagues have done, I urge the FCA not to rely on the industry to provide the solutions, but to ensure that the public’s protection is paramount. Given that no one trade organisation represents the sector and that new entrants are likely, albeit in smaller numbers than before, we need a regulated and transparent system of recording which will have the trust of borrowers and lenders alike, and which will do the work it needs to do to allow our constituents to obtain legitimate credit. The FCA should quickly impose such a system, rather than allowing a not very satisfactory alternative to emerge in fits and starts.

Our Committee has further requested that in the light of the disturbing evidence we received of continued abuses of the present regulatory system, all companies should resubmit their affordability tests to the FCA for approval. Like some other hon. Members here today, I received whistleblowing evidence this weekend from a former senior employee of a major payday lender. It portrays an endemic culture of avoidance, from the senior managers down to shop-floor staff, and I trust it will receive the urgent and serious attention it deserves from the regulators. This is not just about a company bending the rules to suit its own profit line; it is about full-scale lending to people the company knows will be unable to repay in full or part, with the misery that goes along with it. I do not believe this is an isolated example, and as the Chair of our Committee has stated, the evidence before us challenges regulators to make sure that their enforcement systems are going to work. As this evidence suggests, there may be a move by some lenders to have long-term lending simply to bypass regulatory attempts. To be fair to the FCA, I know it appreciates that the challenge on effectiveness will be in trying to cope with changes in the market and how it shifts over months and years. I believe it is important for the Government to have a strong response to our Committee’s report, to accept our recommendations and to make sure that public protection is always paramount in our considerations.

--- Later in debate ---

[Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)]

This is a timely debate. The issue has captured the public’s imagination because people cannot understand why apparently high and exploitative interest rates are charged on short-term loans, and the Government have faced mounting pressure. It is important to pay tribute to Members on both sides of the House, but particularly my hon. Friends the Members for Sheffield Central (Paul Blomfield) and for Walthamstow (Stella Creasy). Their work, in combination with the public’s feeling that this is somehow unfair and wrong, has brought the issue to the Government’s attention. The Government have recently crossed the Rubicon in announcing that an intervention in this market would be justified. They said not only that the FCA now has the power to impose a cap on the total cost of credit, but that they feel that that will happen.

In a moment, I will draw an analogy with the pensions market, which I know something about. I was struck by the fact that the hon. Member for East Hampshire (Damian Hinds) said that Conservatives were against caps in general, but that this was an exceptional case. I am sure that he is aware that the Government are consulting on a pension price cap for somewhat similar reasons, particularly the fact that consumers in the marketplace are not sovereign because they do not know what they are being charged.

A few reasons have been given for why we find this to be such an issue in 21st century Britain. My hon. Friend the Member for Glasgow North (Ann McKechin) noted the extraordinary growth in short-term loans being taken out. Members on both sides of the House have suggested that that is something to do with either bank overdraft charges or, perhaps more fundamentally, the growth of a low-wage economy. The latter is absolutely true. We cannot understand this problem without reference to the growth of low-wage employment. However, it is important to refer not only to low wages but to irregular and insecure employment.

What we see in the 21st century phenomenon of payday loans is something that we commonly found 100 years ago in the form of the pawnbroker: the debt-credit cycle, which appears in economies and contexts where low pay and insecure and irregular employment are a reality. One hundred years ago, the pawnbroker was ubiquitous for a simple and straightforward reason: weekly wages did not cover outgoings. Therefore, in a world where weekly wages could not meet the cost of living, what was the rational response of people in that position, of whom there were many millions? The rational response was to pawn their good claithes at the point in the week when their wages were exhausted and then to redeem their good claithes—that is, clothes, for non-Scottish Members of Parliament—when their wages were paid. That continued week after week. They pawned when their weekly wages were exhausted but their outgoings had not been met, and they redeemed when they were paid—over and again, week after week.

Of course, the world has changed enormously in the past 100 years. Everyone’s standard of living has increased significantly. I would argue that it is not coincidental that that happened at the same time as the Labour party was formed to advance the interests of people in those situations. [Interruption.] Government Members are laughing. I did not even think that that would be a point of controversy. Surely, the past 100 years have seen a significant—[Interruption.] The hon. Member for Brigg and Goole (Andrew Percy) shouts something. The point is that, 100 years ago, the pawnbroker was a reality; in the 21st century, the payday lender is a reality. The standard of living is much higher of course, but we find this problem emerging once again. It used to be a weekly problem; it now might be a monthly, six-weekly or bi-monthly problem.

[Ann McKechin]

There is one advantage of the pawnbroker: at least, the debt could only go so far—the amount of credit that someone put up. The problem with payday lending is that interest rates keep increasing and people are caught in a vicious cycle of debt, which is why it is becoming even more difficult for ordinary people to cope with it.

[Gregg McClymont]

My hon. Friend takes the words right out of my mouth. That, indeed, is the big difference. This is a much more exploitative form of lending than pawnbroking.

The hon. Member for East Hampshire, in a thoughtful speech, got on quickly to what sort of cap one should look to the Government to construct. I mentioned that the Government are consulting on a pension cap, and my involvement in that from the Labour side leads me to make a couple of observations that might seem obvious. The most obvious is that one must be absolutely clear about what one is encompassing in the cap—a point that he made very well—while being clear about when the cap will be introduced. As things stand, we have an undertaking from the Government to move towards a cap on the total cost of credit, but until we are clear what the total cost of credit includes, the dangers of leakage are significant.

Alongside that, we must be clear about what the objective of regulation is in that context. It must be to end the exploitation that is widely thought to be taking place—Members on both sides of the House feel that, and the public certainly do—but at the same time to ensure that legitimate access can be maintained to short-term loans that are not exploitative. That is the principle from which the Government must proceed.

However, to pick up on a point made by more than one Government Member today, when all that is done and exploitation through payday loans has been reduced, or hopefully ended, we will still not solve the problem unless we can build securer and more regular forms of employment with a higher wage. My hon. Friend the Member for Glasgow North is absolutely right that that form of lending can be much more exploitative than pawnbroking has been over the past 150 years, but the lesson from the era when pawnbroking was ubiquitous in working class communities is straightforward: as long as there is low pay and irregular and insecure employment, it is rational for people to have to find a way to make ends meet.

We welcome the view that the Government have taken on regulation. It is fair to say that they are moving on to the territory that the Opposition have staked out, but I think that we can agree—we might disagree about the method of achieving it—that unless we can a securer and more regular employment economy with a higher wage, the problem will not disappear.