Consumer Credit and Debt Management

Baroness Chapman of Darlington Excerpts

Thursday 3rd February 2011 Commons Chamber

[Mrs Jenny Chapman (Darlington) (Lab)]

The United Kingdom is lagging behind on the regulation of consumer credit. The UK’s poorest borrowers pay the highest price for credit in Europe. Fifteen American states have now dealt with payday loans, and the cost of credit is also capped for all US servicemen and women. Even President Bush could see that his soldiers needed protecting from excessive interest and administrative charges. In the United States, the Centre for Responsible Lending estimates that credit regulation saved consumers $2 billion in 2009. We know that payday loans frequently leave borrowers unable to pay other debts.

Much is made by the industry of the possible unintended consequences of regulating payday loans, but research such as that from the university of North Carolina shows that restrictions on payday loans had no significant impact on the availability of credit for households in North Carolina. In fact, more than twice as many former payday borrowers reported that the absence of payday lending had had a positive rather than negative effect on their household. The state’s regulation helped more households than it harmed.

[Bill Esterson]

My constituent, Mark Billard, wrote to me recently. He said:

“Most US states and European countries have a legal limit to stop lenders charging whatever they want.”

That point has also been very well made by my hon. Friend. Does she agree that the danger of the amendment is that it would reduce the chances of such legal protection for those most in need of help?

[Mrs Chapman]

My objection to the amendment is that this is a Back-Bench debate, and it should be an opportunity for Back Benchers to express their views.

The New Economics Foundation published a report in 2008 that included evidence that restricting payday loans did not push people into illegal borrowing. Rather, the market for affordable loans actually strengthened in such circumstances. In America, small mainstream loans for less than $600 became more widely available following a clampdown on payday lending, as aggressive marketing by payday lenders disappeared.

We have heard it argued that caps on credit in France and Germany have led to reduced access to credit for the least well-off, but that argument rests on evidence from a narrow base of research. In fact, restrictions on access to all kinds of credit vary between Britain and other European countries. It is argued that borrowers know what they are doing and should jolly well live with the consequences, but the individuals getting into trouble with these loans are desperate. They are not in a position to shop around. Their problems, as well as their credit, are compounded until they are no longer able to cope.

[Mr Richard Bacon (South Norfolk) (Con)]

The hon. Lady is making an interesting case. Does she agree that borrowers often do not know what they are doing, and that it is our job, as elected Members, to protect not the moneylenders but our constituents? Does she also agree that the motion, for which I have a lot of admiration, and the amendment suffer from one problem—namely, the assumption that the regulator will be able to solve the problem? Does not the evidence from a whole variety of regulators, including Ofcom, Ofgem, Ofwat and the Charities Commission, suggest that regulators are far too often wet and useless? Would it not be much better to put these powers—which should be draconian, but exercised with the judgment of Solomon—in the hands of a feisty Back Bencher? May I suggest the hon. Member for Walthamstow (Stella Creasy) for the role?

[Mrs Chapman]

The only kind of regulation that is really going to get to the nub of the problem is the one that caps the cost.

To argue that high-cost loans are necessary simply cements the market dominance of high-cost lenders and, worse, cements endemic poverty. The industry is seeking asylum in the under-regulated UK market, having been forced out of certain American states and parts of Europe. Other countries are getting a grip on the problem. The debt industry is resisting regulation, claiming that it has the best interests of its customers at heart. I am afraid that that simply will not wash.

The motion before the House does not propose to outlaw short-term lending or impose a cap on APRs. It simply asks the Government to agree to curb the worst excesses of the credit and debt industry. The Office of Fair Trading recognises that there are problems with this market, and it is beginning to regulate more closely. But the regulation that counts, the one that will actually make a difference, is the one that cuts the cost. There are many problems with this market, but the biggest problem for consumers is the spiralling cost of the loans. Loans are rolled over and charges are added until they become not an occasional crutch but the only means of getting by. Consumers become trapped in a cycle of debt. How different this reality is from the fun, free-and-easy way in which high-cost lenders and debt management companies market their products.

My hon. Friend the Member for Walthamstow (Stella Creasy) has explained carefully that the motion attempts to bring about a cap not on the APR but rather on the total cost of credit. The motion does not prescribe a particular cap or propose anything that might cause credit to be unavailable to those who need it. The motion has been carefully crafted to bring about a limit on the overall costs. It does not propose a requirement for a new regulatory body and it will not close down short-term lending.

The motion does not condemn debt. Debt is a necessary part of modern life. It enables us to get married, to go to university and to buy a house or a car. It gets many people through life’s emergencies, such as a broken washing machine or unexpected travel, but it is not right that those least able to afford high charges, those who are in desperate situations and unlikely to shop around, should have to pay the most.

We know that people are deliberately targeted by high-cost lenders in their marketing and are enticed into taking loans they cannot afford. These are the people for whom the normalisation of high-cost lending has the cruellest consequences. Time is up for the worst of these expensive loans. It is up to this House to tell the Government it wants to change the rules.

Finally, I would like to pay tribute to the sterling work of my hon. Friend the Member for Walthamstow on this issue. She has demonstrated how the at times confusing procedures of this House can be effectively used to bring forward an important issue and, if good sense prevails, to make a difference. Her tenacity goes to prove that it is always a mistake to confuse gentleness with weakness.

Our concern for this issue is not borne of soft naivety, but from seeing first hand the effects on the lives of our constituents of these exploitative charges for borrowing. I commend this motion to the House.