Consumer Credit and Debt Management

Barry Gardiner Excerpts

Thursday 3rd February 2011 Commons Chamber

[Stella Creasy]

I do indeed, but I will leave that to my much more eloquent colleague, my hon. Friend the Member for Darlington (Mrs Chapman), who has done some sterling work in introducing proposals on how we might address some of the problems caused by advertising.

It is the captive nature of this market that makes intervention so key. The lack of competition for these products keeps prices artificially high, along with profits. The Office of Fair Trading says that there is not enough of what it calls “substitutivity”. Let me put it more simply. As the industry itself admits, 25% of home credit users and 23% of payday users have no other credit option. Consequently, these companies can extract what might be termed an economic rent. They set the terms of the trade in what they will lend at a risk that is much too high for consumers. In this context, I pay tribute to the work of the right hon. Member for Welwyn Hatfield (Grant Shapps), who is now a member of the Government, and who published a report in 2009 highlighting the lack of competition in this market and its consequences. As he said,

“We think it is obscene that anyone should end up paying 10,000% APR, particularly when the evidence suggests that these loans are targeted at some of the most vulnerable members of our society”.

These are people for whom such repayments become a weight on their finances and their families—people who do not have large amounts of disposable income and for whom any change in circumstance, be it divorce, job loss or increases in rent, can tip them into destitution. The Consumer Credit Counselling Service says that one in eight people who contacted it for help with such unsecured debts in the first half of last year were on jobseeker’s allowance. Contrary to what might have been suggested this morning on the “Today” programme, one in 10 payday loan customers are on £11,000 per year or less. These are people like the man who contacted me because he currently has nine payday loans that he is trying to pay off. One company, Wonga, is chasing him for £1,600 for an £800 loan that is 40 days overdue. The first loan was meant to be a stop-gap to bridge the gap between one job and the next pay cheque, but the interest in itself quickly becomes the long-term debt. If those are the problems, what are the solutions?

[Barry Gardiner (Brent North) (Lab)]

I am grateful to my hon. Friend for the very powerful argument that she is making. Does she agree that part of the problem is that a vicious cycle develops, whereby companies use the rate of default to justify the increasing percentage that they are charging on the loans? That is a completely fallacious argument, but one that they always advance to the regulator.

[Stella Creasy]

I strongly agree with my hon. Friend. Few companies have been able to explain to me precisely how they manage to set their rates; they seem to pick a number out of the air and go with that. However, I will return to that point in some of my suggestions for solutions.

There is a new proposal that we, as a House, can take forward to address this phenomenon, and that is what the motion is about. It is based on new evidence about what would work in addressing the impact of such loans on our constituents. That is why I come to the House today not to speak on my own but to speak with the backing of many different organisations from a wide range of sectors. I want to put on record my thanks to Citizens Advice, which has opposed other measures such as interest rate caps, but in contrast believes that these proposals could offer a way forward; to Consumer Focus, who says of this motion that it is

“a different, and more considered, approach than the blanket application of a blunt interest-rate-cap”;

to Martin Lewis, a passionate advocate for financial education, as many Members may have found out earlier this week, who had also opposed interest rate caps but supports these proposals as “much more sensible”; and to the Better Banking campaign, London Citizens, the Co-operative movement, Compass, the GMB, Unison, Church Action on Poverty, the New Economics Foundation, the Centre for Responsible Credit, and countless others, especially those on Twitter, who have supported these proposals.

All those people agree that we can have an effective, evidence-based policy, and that we can learn about what works from other countries where such measures have been introduced. Nothing that I am proposing today is rocket science or untried or tested. When we talk to people outside the UK, we find that they are surprised that we have not dealt with the problem so far.