Consumer Credit and Debt Management

Bill Esterson Excerpts

Thursday 3rd February 2011 Commons Chamber

[Justin Tomlinson]

My hon. Friend is spot on, and all too often we find that consumers are simply not equipped to make informed decisions.

It is suggested that total cost caps are the solution, and I support the principle. Surely there is an unequivocal case for saying that for borrowing X amount, there should be an absolute limit on the sum to be paid back. We should protect consumers from the very worst.

The motion is 99% there, but the amendment expresses a slight hesitation. There is still a nervousness, because whatever we do will have consequences. When organisations such as Consumer Focus and MoneySavingExpert, which is run by Martin Lewis, say that we must be mindful of possible consequences, it is right and proper that we should take a measured and detailed look at the issue to ensure that the consequences are thought out. The evidence is inconclusive—

[Bill Esterson (Sefton Central) (Lab)]

I take the hon. Gentleman’s point about the consequences, but the evidence from Members on both sides of the House suggests the problem is with the difference between voluntary and mandatory regulation. Unless enforced, the regulation just will not happen.

[Justin Tomlinson]

That is why I support the principle, but—as the hon. Member for Walthamstow said—it is essential that we make things better, not worse. We should not rush in if we have not considered all the consequences. However, we need to act urgently and, crucially, with a desire to find a workable form of total cost caps. For those people who say that additional regulation would push people into the hands of the illegal loan sharks or that extra action will damage our case for protecting vulnerable consumers, I point out that we have just seen significant changes to the credit card industry that have not affected people’s access to credit cards. We should not fear that the market would collapse.

I urge the Minister to look into the sales techniques of doorstep lending. They include nudge-nudge techniques that encourage people to take on expensive, long-term debt. Such lenders concentrate on having relationship managers who go into the homes of the consumers. They argue that that helps them to assess whether the consumer can afford to borrow more money. The relationship manager has a cup of tea and a chat. They might ask, “Christmas is coming up, have you made plans for that?” The consumer says that her children want the latest expensive toy, and the representative offers to lend some money—at a high cost. The consumer is nudged into a long-term cycle of debt, and that is one of the most important areas to consider.

My flagship issue is financial education, which is included in the motion. I launched the all-party parliamentary group on financial education for young people on Monday, with my hon. Friend the Member for Chippenham (Duncan Hames) and the hon. Member for Walthamstow as vice chairs. Some 171 MPs have signed up and it is supported by the Personal Finance Education Group and Martin Lewis of MoneySavingExpert. I am grateful for that support, as it is unbelievably important that we have savvy consumers who understand that they can shop around and are equipped to make informed decisions.

There is an incredibly strong case for making the costs more transparent, and it is another reason why total cost caps are so important. All too often, people judge a debt on the APR. There are many issues with high APRs, but there are extra charges as well, which is why the crude cap on interest rates alone was previously rejected. There should be a cap on everything. That would also allow consumers to make good comparisons.

I know that some hon. Members will criticise organisations such as Wonga.com, but I have to give it some credit, because of all the organisations that have lobbied me, it is the only one that has said, “We will work with whatever changes are put in place.” That should mean clear, understandable and transparent costs—I would support that. However, we cannot just look at APR. Part of Martin Lewis’s financial training for me was the following good example: if someone takes out £3,000 on a credit card at the age of 19 on a typical APR of 17.9% and makes only the minimum payments, they will not clear that debt until they are 60 years old. Although the 17.9% does not look too bad, there are long-term implications, which again supports the principle of total cost capping, showing all the costs, including what it will really cost over the lifetime of the debt.

I fully support any measures to give greater access to credit unions. Being conscious of the time, I will simply bow to my hon. Friend the Member for East Hampshire (Damian Hinds) for championing this subject in Parliament. I urge the Minister to take that on board, as well as the need to make available greater access to social funds, in particular by allowing greater flexibility in emergencies. All too often, the need to acquire debt is a result either of consumers wanting something now rather than later or of sudden changes in circumstances. We need to be in a position to help out those in the latter situation.

Finally, I want to address the principle of the savings culture in this country. The hon. Member for Walthamstow talked about how we have the lowest savings rates and the highest levels of debt. That is this nation—we have an insatiable appetite to buy now and pay later. Over the long term we need to change that, because where possible people need to have a savings buffer for changes in circumstances. So I urge the Minister to consider all the different options proposed. We have cross-party support for the principle. I am sorry that there is an amendment to the motion, because it will take up time in the Division Lobbies, but we are 99.9% there. The question is how we do this. However, we need to consider all the consequences, and I have every faith that we will be able to make a difference for the people who need our help the most.

--- Later in debate ---

[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.