Payday Loans

Baroness Kramer Excerpts

Thursday 20th June 2013 Lords Chamber

[Baroness Kramer]

My Lords, I congratulate the noble Lord, Lord Kennedy, on obtaining this debate, particularly because it focuses on alternatives to payday lenders. I will not go through the routine of describing the evils of many of the high-interest lenders; that has been well done by others in this debate. However, I will take issue with the noble Baroness, Lady Wilcox, on the point that these are impulse loans for something frivolous—the noble Lord, Lord Kennedy, gave the example of a student buying beer. I think that is the exception.

We have here a group of people on modest incomes. They have some income—otherwise they are of no interest to the payday lender—but find themselves under stress and have nowhere to turn other than to the payday lender or to the illegal market. That, to me, is not choice. The issue that I want to raise and focus on is the absence of choice in this market.

I say in passing that I hope very much that the OFT and the new regulator, the FCA, will use the considerable powers that have now been given to them—many of those amendments were moved in this House—to bring the payday loan industry to heel. Indeed, I join those who call for a cap on payday lending. It may mean that we first have to make sure that there are alternatives in the market, but that is a challenge to which I think we ought to rise.

The noble Lord, Lord Kennedy, talked about credit unions. Obviously, they play a very important part in trying to provide an alternative, as do the co-operative banks and the mutuals. For all of them it is quite difficult, because they cannot put the kind of spend into sexy advertising and affectionate granny puppets that payday lenders can. However, it seems to me that, with the proper support, they can make a very big difference in this market.

I will talk about another area where I think we have been missing a trick, and I take my example from the United States. It is the concept of community development finance institutions. There are relatively few of these in the UK, but in the US they are common. Indeed, many of the states that are now capping payday lenders are able to do so because the CDFIs offer the alternative that some in this Chamber have talked about. CDFIs have a mission to provide financial products and services to people and communities underserved by traditional financial markets. They are sometimes banks, sometimes credit unions, sometimes loan funds and sometimes venture capital funds. Indeed, they account for a lot of the early start-up capital for new businesses in the US.

However, it is their commitment to distressed communities that sets them apart. For example, while a traditional credit union serves its members, a community development credit union is specifically targeted at a disadvantaged community. CDFIs are local institutions serving their local community, and members of the community usually serve on the boards. They are typically funded by outside investors. These could be social investors, who are seeking either no return or little return in financial terms but are looking for social and environment return. In the United States, they are frequently able to access capital from the Government. However, they are required, as they function, to be self-sufficient and to operate on commercial principles.

Your Lordships will be aware that we will soon know more about where the big high-street banks in the UK are actually lending their money and what types of loans they are making, be they small business loans, mortgages or unsecured loans. We will know it by bank and by postcode once a voluntary agreement, which is now in negotiation, is completed between the Treasury and the banks. We hope that the first data disclosures will be available before the year end. As noble Lords will remember, the Government promised to get this disclosure after the issue was forcefully raised in this House through proposed amendments to the Financial Services Bill. The Government promised this House that, if such a disclosure agreement could not be reached voluntarily, it would be mandated through an amendment to the banking reform Bill. However, it now looks as though that will not be necessary and that a solid and sound voluntary agreement will be in place very soon.

Those data should tell us whether the high-street banks are neglecting communities and, if so, which communities they are and where they are. If we identify vacuums, it strikes me that they will be the perfect space into which to introduce CDFIs. In the US, major banks that fail to lend in areas where they take deposits can, as it were, amend the situation by investing in a CDFI to do the job which they, the high-street banks, are reluctant or not equipped to do. That seems to be very right, as at least a part of banking is surely a utility service, and that can be recognised in the terms of the banking licence.

I anticipate that local authorities, charities and social enterprises could move into this CDFI space, supported by investment and technical know-how from the major banks. As I said before, a growing breed of investors—we see them becoming increasingly active in the City of London—are seeking not just economic returns but social and environmental returns for their money. This is a way for them to begin to participate in this kind of benefit to disadvantaged communities. I am very pleased that some of this is recognised in the report from the Parliamentary Commission on Banking Standards.

The CDFI world in the United States has assets under management exceeding $30 billion. It is a massive sector, stretched across the country. In the UK, we have just a scattering of institutions. However, they lent some £200 million in 2012, so they certainly have a foot on the ground, and they had some 33,000 customers. Many of those customers were social ventures but they were also micro-businesses and individuals. So far, they have been helped to the tune of some £60 million by the regional growth fund. The high-street banks have agreed in principle to refer to the CDFIs small businesses whose loan applications they have rejected, although I do not think that the referral system is working terribly well at the moment. However, there is the beginning of a relationship and a network between the existing banks, the major banks and the existing CDFIs, and we can start to build on that. It is crucial that we find ways to bring disadvantaged communities into the economic mainstream, as that will enable people to empower themselves in their lives and contribute to the economy.

The period of banking reform that we are going through at the moment comes together with new regulators, who have a new attitude. Both the FCA and the PRA have taken up the cause of diversity and competition in a way unheard of in the past. All these things have created a window of opportunity. However, if we do not seize that window and try to make sure that over the coming years we create the necessary network to provide banking services and credit to all the communities in our country, we will lose it, because there are plenty of naysayers who are happy to write off both disadvantaged individuals and disadvantaged communities.

I am therefore arguing for a concentrated effort to accelerate the growth of CDFIs, and credit unions are a part of that. I echo the call of the Parliamentary Commission on Banking Standards to the Government to look at tax incentives and other mechanisms to boost investment in these bodies. If we find from data disclosure that the high-street banks are essentially neglecting certain communities, it seems to me that the moral case is made for those banks to step in voluntarily, support CDFIs and make sure that no one falls through the cracks. If they will not do it voluntarily, let us do it by making sure that it is done under the terms of their banking licence.