Consumer Rights Bill

Baroness Drake Excerpts

Wednesday 26th November 2014 Lords Chamber

[Lord Stoneham of Droxford (LD)]

My Lords, I support what my noble friend Lord Higgins has been saying on the precise nature of this amendment, but I will also share the underlying feelings on this issue that have been expressed by the right reverend Prelate and by the noble Lord, Lord Mitchell, who has played such an important role in getting fundamental changes in the conduct of payday lending. I think it is also fair to say that the Government have listened. The Government also have worked through the Financial Conduct Authority to make sure that these payday loan companies are now in retreat.

As somebody who has worked in the media, I am always very cautious about structural intervention in advertising, because there are always arguments for restricting advertising in certain circumstances. I think that this issue is not just about young people but about all vulnerable people being taken in by this advertising. We have seen the complications. It is not just children’s television or even daytime television; it is the use of branding to appeal to a particular audience. It is a very complex issue. Two bodies deal in this area: the Advertising Standards Authority and the Financial Conduct Authority. Both those bodies should now look at this and come forward with their recommendations before we consider detailed legislation. I hope very much that the Minister will agree to initiate that.

[Baroness Drake (Lab)]

My Lords, I support Amendment 47. The findings of the different charitable organisations about the prevalence and impact of payday loans are rather chilling and depressing. I will not deploy all the statistics referred to by noble Lords today and in Committee other than to re-stress that Ofcom’s findings show that 80% of payday loan adverts are shown before the watershed. The Children’s Society has found that 55% of children aged 13 to 17 recognise the name of at least three payday lenders—I would have been distressed if my children had known that information at that age—and that parents aged 18 to 24 years increasingly see payday loans as a normal means of money management: almost 40% of them have used payday loans at some point. That is all illustrative of a serious problem.

As many noble Lords have articulated, the characteristics often revealed by people who take out payday loans are all too familiar. A high proportion of borrowers experience financial distress, many come from less well off socioeconomic groups, and few have assets. A significant number of borrowers have two or more loans, which exposes them to unsustainable and spiralling debt. Many borrowers get these payday loans to cover basic needs, including the needs of their children, yet many are in acute repayment difficulties. According to the CMA, more than one-third of loans were not repaid on time or at all, which often brings considerable consumer harm relative to the amounts that were borrowed in the first instance.

Successfully addressing the problem of high-cost credit requires a multifaceted approach and, as my noble friend Lord Mitchell acknowledged, much action has already been taken by organisations such as the FCA. However, taking steps to protect children from exposure to advertising for high-cost loans, which is both ill suited for the children and corrosive in its impact upon parents and families as a whole, is an essential ingredient of that multifaceted approach.

Children exposed to particularly suggestive loan adverts pressurise their parents to take out those loans to buy things. Yet we know that families trapped in problem debt are more than twice as likely to argue about money problems, which leads to stress on family relationships and causes emotional distress to the children. Many noble Lords have referred to pester power, which arises from children’s exposure to payday loan advertising. However, the potency of that power is so great because people love their children. If you are on a low or modest income, it is very hard to say no to your children if they are missing out on social activity or feel disadvantaged in comparison to their school friends. How much harder it is at Christmas to say no to the children you love, when you have no money and your children do not understand why they cannot have something in their stocking when you just need to respond to those funny furry grannies who are offering you some money.

Pester power has a powerful emotional pull on parents, and the advertising has such a powerful impact on the children. This advertising masks a business model that is based on exercising great persuasive power on low-income households and their children. There is a continuing need to address the behaviour of firms in this high-cost consumer credit market. These companies have substantial funds for marketing and advertising. That allows them to have great persuasive power over vulnerable people and their children. The prevalence of the advertising has an impact on many people’s choices. In the short term, there are the effects of pester power and increased debt; in the longer term, people see credit as the normative solution to managing their finances.

Even on the FCA’s own analysis, after the cap is introduced the proportion of borrowers who experience financial distress as a direct result of taking out payday loans is expected to remain as high as 40%. Notwithstanding the positive actions taken to date by bodies such as the FCA and the Advertising Standards Authority, there is still a clear and compelling need to send a strong and clear message by placing in statute the responsibility of high-cost lenders to run their advertising appropriately. If the advertising of alcohol and gambling can be heavily regulated to help prevent the normalisation of alcohol abuse, why on earth would one not want to take the fullest action to prevent the normalisation of the potentially harmful behaviour of taking out loans that are unaffordable and get you and your family into debt?

As the noble Lord, Lord Alton, referenced, the sheer quantity of adverts for payday loans seen by and impacting on children, young people and their parents made me shudder when I saw the figures. In 2012, 596 million adverts were seen by children compared to 3 million in 2008. If that is not an aggressive business plan, I do not know what is. That is 200 times more adverts over four years. Some organisations will quote aggregate statistics to seek to state more modestly the level of payday loan advertising, but we should remember that the charitable organisations are so concerned about this because they see and measure the concentration of risk from these adverts on vulnerable families. Never mind the aggregate figures: my children and I are not vulnerable to payday loans, because I have a good income. It is the concentration of risk from these adverts on these children and these families that poses the great risk. We need to remember that what may be a small amount taken out in a loan that is borrowed for a pressing purpose becomes a much bigger debt if the loan is not repaid.

The current advertisements, which other noble Lords have referred to, contain jolly characters. They can appear funny or appealing; they have catchy jingles. In fact, they have lots of characteristics but usually not the obvious characteristic, which is to make absolutely clear that they are presenting a very serious form of credit with high risk. An advert can have a cuddly granny, but it will not spell out the risk to your family if you pester your parents to take out such a loan.

Of course, children watch programmes and adverts in other ways and at other times. People are changing their viewing habits and watching programmes on laptops, tablets and iPads. That, too, needs to be addressed. Protection for children needs to be modernised, but that is not an argument against the watershed period remaining sacrosanct for as long as possible and keeping those adverts away from children before the watershed. This really is a compelling amendment.

[Baroness Benjamin (LD)]

My Lords, I rise very briefly to support the amendment, as in the past I have spoken in support of this issue in the House. I am also supportive of the Children’s Society “The Debt Trap” campaign, which seeks to protect children from payday loan adverts by banning payday loan advertising before the 9 pm watershed.

As we have heard, Children’s Society research reveals that too many children are frequently seeing irresponsible payday loan adverts, which in the long term can have an influence on their financial education and attitudes towards debt. I believe that children should learn about borrowing and money in a responsible way—and also about the consequences that borrowing can bring—not from the irresponsible way in which payday loan adverts on television are performed. They can often be very funny animations with seductive, very popular, “can’t wait to see again” adverts.

It is crucial that we protect children from unsuitable advertising before the watershed, in the same way that we have legal restrictions to protect children from gambling, alcohol and junk food advertising. I believe that that will put a stop to the damage that debt does to children’s lives and beyond—long into their adult lives. I very much look forward to a positive response from my noble friend the Minister on this very important amendment.

--- Later in debate ---

[Baroness Drake]

My Lords, I support Amendment 50B. The evidence available on the use of payday loans heightens fears that credit is increasingly seen as the new safety net for many citizens. StepChange found, for instance, that its clients with payday loans often have other forms of debt, such as a much greater likelihood of being behind with their rent.

The FCA has taken some strong and definitive action against the payday loan companies, and is suggesting that within a year or so perhaps 95% of these payday lending companies will be withdrawing their services. However, on its own admission, even after the cap on charges is introduced, the proportion of borrowers experiencing financial distress as a result of such borrowing will remain at about 40%. But whatever the action taken by the FCA to regulate a particular market, the demand for credit among low-income households will remain, as will the problem of rising debt and the need for help and advice.

Even after addressing the business models of the payday loan companies, the systemic problem will still need to be resolved: how can people get access to affordable credit and get access to, and use of, a free debt advice service? Only the Government can drive the policy needed to secure sufficient capital liquidity for not-for-profit affordable lenders to provide an alternative source of credit. This amendment captures the need for the Secretary of State to bring forward measures to address those twin needs of free debt advice for vulnerable consumers and the provision of affordable credit.

As a comparator, for those who have assets rather than debts, the new freedom and choice agenda for pensions due in April 2015 comes with a guaranteed guidance service, captured in legislation—on the assumption, quite rightly, that the position of pension savers and consumers in the marketplace will be more vulnerable to poor decision-taking without such guaranteed guidance. How greater is the case, then, for those who have debts rather than assets?

No doubt the argument will be made that significant numbers who would benefit do not seek debt advice and that the allocation of funding to a debt advice service is proportionate to the demand. My response is to say that the Government should take the lead in creating the demand and the take-up for that debt advice service. My noble friend Lord Stevenson suggested examples based on the Scottish system. Maybe we should see the introduction of some conditionalities into the credit market on taking debt counselling in association with the giving of loans. There are lots of initiatives that the Government could take, not only to provide debt advice services but to ensure that users or takers of loans use that service.

We also need to see how structural changes in the labour market interface with the social security system to understand whether this is reinforcing the use of credit as a systemic solution to low-income families’ financial management, demonstrating the need for free debt advice services. I will take a few moments to explain what I mean. The casualisation of employment contracts, along with variable and zero-hours contracts, can result in significant volatility around hours worked and income received in any one week, let alone between weeks. In such situations, where people do not have a smooth income flow, if you have to pay your rent, buy food for your children or repair a much needed broken washing machine, you probably cannot wait until a week where you have more hours and higher wages. You need the credit to tide you over.

However, the welfare system cannot provide a real-time response. Under the current system, if you work less than 16 hours in a week, you do not qualify for the working tax credit in that week. If you are tied into an exclusive contract with an employer and provided with very few hours of work that week, and are not available for other work because of that exclusivity, then you cannot get JSA. Universal credit, when it is rolled out, may overcome the barrier of the 16 hours but it will replace it with another hurdle that will increase the need for credit. Universal credit is paid monthly in arrears, so you would struggle to catch up with your debt even under universal credit.

If you face such volatility in your hours and income and have more than 16 hours of work, you deal with the HMRC, but if you have worked under 16 hours in that week, you deal with the DWP for JSA and with the local authority for housing benefit. You also have to manage your debts. As my noble friend Lady Hollis frequently comments, being poor can be a full-time job—even more so with the changing nature of the labour market and, potentially, the greater need for credit.

The point that I am making is that for lower-income households, given what is happening in the labour market and how the welfare system operates, even under universal credit, the need for short-term credit for families—particularly vulnerable, low-income ones—to manage their finances will increase, not decline, and with it the desperate need for debt advice services. The examples that I have given illustrate the real evidence why low-income people will persist in being vulnerable to high-cost loans and in need of debt advice services.

The problems are compounded by the insufficiency of low-cost sources of credit and the absence of public policies promoting savings strategies for low-income people to provide a savings buffer. Most do not have such a thing or the means to acquire it. Tax incentives are targeted at the better off. One has to earn enough in the first instance to get the benefit of incentivised tax relief. The need for low-cost loans and debt counselling will remain very important for the foreseeable future for many on low incomes. Whatever the FCA does to the business model of payday loan companies, the systemic problem of how low-income people manage their finances, their dependency on loans and their need for assistance in managing debt will, when one looks at what is happening in the world of work, increase and not decrease.

This amendment would put a responsibility on the Secretary of State to bring forward measures to ensure,

“free debt advice for vulnerable consumers; and … provision of affordable alternative credit through credit unions”.

Much is said by politicians, including in both Houses, about protecting people in the face of the realities of today’s labour and financial markets. Helping them manage their finances, which will protect the well-being of their families though the provision of affordable credit and debt counselling, has to rank very high.

Thinking of a comment to conclude my speech, I remembered being at a discussion dinner a while ago on the duties of care of providers in the wholesale and retail asset management industry, an issue on which I engage a great deal. There was a mixed group of people there from different sides of the industry and of different political persuasions. Someone asked why the management of consumers’ assets and savings receives so much more political attention than the management of debt. There was a pause around the room. I replied that it is because unmanageable debt is concentrated among the poor.

We have to raise that issue and say that there is nothing, looking at the horizon of the labour market and at how the welfare system will operate, that provides an easy solution for families caught in this need to manage their finances. That is why this amendment is so helpful. We have to sustain the debate. Governments and the Secretary of State must take on, as a core societal issue, how they address providing or delivering debt advice and low-cost access to credit to so many people who need them.

[Baroness Jolly]

My Lords, those were really interesting contributions from noble Lords who know—not at the coal face but at the advice centre—what the issues are.

Turning to the noble Lord’s proposal for a levy on payday lenders, I commend his work in the area of debt advice as he stands down. I am sure that he will find something else to do with his time. The Government believe that the key to tackling problem payday lenders is tougher and better regulation. This is already set out. I have spoken at some length today about the way that the Government have reformed regulation of the payday market with the introduction of the FCA’s new regime.

FCA regulation is already having a dramatic impact on the payday market. Indeed, the FCA has found that the volume of payday loans has fallen by 35% since it took over regulation in April. Further changes are expected to follow the introduction of the cap on the cost of payday loans in January. The FCA has estimated that as few as three or four lenders may remain in the market. Consumers are better protected under the FCA regime. It has introduced binding rules and a rigorous authorisation process where it assesses payday lenders’ business models and compliance, which will begin next month. Firms that do not meet the FCA’s threshold conditions will not be authorised.

The amendment specifically proposes imposing a levy on payday lenders to support free debt advice and credit unions. The Government share the view of the importance of free debt advice and acknowledge the points made by the noble Baroness, Lady Drake, that people in debt have problems around well-being. The well-being of families has to be critical and core to all of these issues. The Government have put the provision of free debt advice on a sustainable footing through the Money Advice Service, but it is clearly supplemented by organisations such as StepChange and Citizens Advice.

Free debt advice is funded by a levy on lenders: once they are fully authorised by the FCA, payday lenders will contribute to this levy. The noble Lord’s proposal would therefore duplicate existing funding arrangements for debt advice. It is important to note that the FCA is also taking steps to ensure that vulnerable consumers are aware of the free debt advice available to them. The FCA requires all payday lenders to signpost free debt advice at the point a loan is rolled over, and all payday lending adverts must include a risk warning and information about where to get advice.

The Government also place great emphasis on the role of credit unions—I note the comments from the noble Lord, Lord Stevenson. Credit unions provide an invaluable service to a growing number of members, many of whom are on lower incomes. The Government have already taken a number of steps to support them, including investing £38 million to support the credit union expansion project to ensure sustainable growth of credit unions. This is not going to be a quick fix but a slow burn.

The Government have also raised the interest rate that credit unions can charge. It used to be capped at 2%; it is now 3%. That sounds like a small difference, but it should make quite a sizeable difference to a credit union’s bottom line, month by month, to support its financial strength through their savers’ interest.

As the noble Lord, Lord Stevenson of Balmacara, will know, the Government issued a call for evidence in June to seek views from interested parties about the future of credit unions and how the Government can do more to support the development of the credit union movement in Great Britain. The Government want to see the credit union movement go from strength to strength and the call for evidence is the first step in developing an environment of co-operation and mutual self-reliance.

The noble Lord, Lord Stevenson, asked several questions. One was whether payday lenders would be authorised by the FCA in spring 2016. The FCA authorisation period for payday lenders begins next week, as I suspect the noble Lord knew. His second point was on the Farnish review. The Government commissioned an independent review into the effectiveness of the Money Advice Service. It will report to the Government by the end of this year.

The call for evidence has been successful in allowing all credit unions, regardless of size, to contribute their vision for the future of the sector to the wider debate. The Government’s response to the call for evidence will be published shortly. We believe firmly that consumers will best be served by the tough regulatory regime for payday lenders and the Government’s ongoing support for free debt advice and credit unions. Therefore I ask the noble Lord to withdraw this amendment.