Payday Loan Companies

Caroline Dinenage Excerpts

Monday 20th January 2014 Commons Chamber

[Ann McKechin (Glasgow North) (Lab)]

The fact that this is the second time in two years that the Business, Innovation and Skills Committee has reported on this issue reflects the enormous public interest in the matter and the concern about the impact of the sector on our communities as well as on individual borrowers. To date, the regulatory authorities have being running behind the curve, and it is important that the Financial Conduct Authority should start ahead of the game. The regulators initially gave little priority to protecting the poorest borrowers on the basis that the total lending represented just a small percentage of the total in the financial services sector. They failed to take proper account of the problems that had already beset other international jurisdictions, to which the hon. Member for Dover (Charlie Elphicke) has referred. The Government’s response to our first report was simply to try to shift the problem further down the time line, with an instruction for further reviews and reports. The transition to regulation by the FCA was used as the main reason for not taking immediate action.

In my own city of Glasgow, the council reported last year that its citizens borrowed £57 million annually through high-cost credit, including payday lending. Given that 49% of our residents are within the bottom 20% of the income quartile, it is not surprising that the council estimates that a staggering 100,000 residents are using non-standard credit and that a high percentage of that number are finding it difficult, if not impossible, to repay their loans.

In 2013, the regulatory authorities and the Government realised that a policy of laissez-faire was not going to work. The findings of the Office of Fair Trading’s damning report showed the scale of contraventions in the sector, and the growing amount of strong evidence from agencies like Citizens Advice, StepChange and Which? could not be ignored. The sector itself had rapidly increased from £900 million in 2008-09 to £2.2 billion in 2011-12. Wonga had become a household name and, even more worryingly, the level of personal debt in this country was beginning to rise again, potentially threatening any increase in growth.

The sector now has a shop in every high street, it dominates the advertising schedules and it has been allowed the freedom of a wild west market to achieve rapid growth and massive profits. Many of its victims now populate the ever-growing food banks and our debt courts. It should be abundantly clear that this issue cannot exist in a vacuum, devoid of political direction. The statutory independence of a regulatory authority to act should not be a barrier to setting a framework and priorities that it needs to address; nor should it be a way to sidestep the will of Parliament, which on numerous occasions over the past three years has expressed exactly the concerns that are being raised today. The level of cross-party agreement and civic support for tougher regulation is overwhelming.

Wider issues have intensified the interest in this sector. The hon. Member for Dover referred to the lack of provision in the mainstream credit sector, but other issues include the squeeze on real incomes, and the above-inflation rises in essential costs—energy, transport, housing and food. The demand for unsecured lending continues to expand, but we also have a rapidly changing financial services sector that often lacks adequate transparency not just in short-term lending, which adds to consumers’ confusion in making the best decisions to suit their needs.

I believe the major players in this sector well know that the current era of weak regulation ripe for exploitation will one day come to an end, but if they can extend that period or find a new avenue for profit, they will happily go for the bottom line. They have achieved their aim of being a ubiquitous presence. The Chair of the Select Committee on Business, Innovation and Skills, my hon. Friend the Member for West Bromwich West (Mr Bailey), has referred to the evidence from the money expert Martin Lewis, who brutally exposed the scale of this insidious influence. He said:

“14% of parents of under-10s, when they have said, ‘No, you cannot have your toy,’…have had a payday loan company quoted to borrow the money from.”

We have also heard about scale and the Ofcom research on advertising, which found that there were 17,000 payday lending adverts in 2008 whereas there were 397,000 in 2012. That equates to each adult in the UK seeing an average of 152 payday loan adverts a year. Given that level of market penetration, some of the biggest firms barely need ever to advertise again. That is why our Committee believes that our modest recommendation on curbing TV advertising is important, but we should not believe that it will cure the cultural influence.

[Caroline Dinenage (Gosport) (Con)]

Does the hon. Lady agree that it is not just the volume of TV advertising, but the nature of it that is concerning? These companies are often advertised via cuddly, humorous characters, such as knitted grannies and granddads. That is worrying it lulls people into a false sense of security about the nature of the product in which they are investing.

[Ann McKechin]

I absolutely concur with what the hon. Lady, a Committee colleague, says. The advertising is very clear and insidious, and it is targeted at younger people and children in particular. There is no debate about that; it has happened and continues to occur.

I want to deal now with the real-time recording of credit information. If credit information is to work, it needs to be both accurate and comprehensive; otherwise, there is little point to it. Unsurprisingly, the industry was quick to downplay the significance of this potential regulatory step, and again it is regrettable that the authorities have not been faster to respond, preferring instead an approach of wait and see. I commend the sustained pressure from agencies like as Citizens Advice and StepChange, but the cloud lifted when BBC’s “Newsnight” programme and others reported at the end of last year on the potential impact on mortgage lending. If there is no real-time recording in the payday lending sector, the existing credit recording systems become increasingly unreliable and inaccurate, particularly in respect of younger borrowers, who form the bulk of this sector’s customers. Lenders in the mainstream sector have now decided, in their world of lower risk, to dismiss payday borrowers entirely from their eligibility test—and hey presto, this month we have the announcement from Wonga and some others that a real-time recording system is going to be put in place later this year. Call me a cynic, but I suspect that the potential hit on their client base, who were increasingly worried about future access to mainstream lending and to mortgages, acted as a greater incentive than the dialogue with the FCA.

--- Later in debate ---

[Justin Tomlinson]

I thank the hon. Gentleman for that intervention. I will be moving on to the failings of mainstream banking shortly.

It is also a recognition of how consumer habits have changed. With 24/7 internet shopping becoming increasingly popular, if consumers see something online at 3 o’clock in the morning and want to purchase it, they would like to be able to access the funding right away. Society is geared up for consumers wanting something, and wanting it right away. That market adapted to consumer demand and stepped in where the mainstream banks were not looking. Clearly, value for money for the consumer is not paramount, and that needs to be addressed.

I welcome the positive steps that the Government have started to take, working with the FCA. I will comment briefly on the various things that I would like to see. The first one, and it is often the simplest, but the one on which I am not sure we are there yet, is that the total cost of a loan should always be displayed in cash terms. I suspect that not even Treasury Ministers can calculate an APR rate, which involves a hugely complex formula. Therefore, a customer should be able to say, “I want to borrow £100, and it will cost me £20.” Even those without a particularly good grasp of mathematics would then be able to make a reasonably informed decision on whether that represents good value for money.

To encourage competition, we need a standardised unit for comparison. In the energy market and in mobile phone contracts there are standard units, so consumers can visit price comparison websites to find the best product. That is very difficult with payday loan companies.

[Caroline Dinenage]

My hon. Friend is making an excellent speech. I know that he has worked hard to bring financial education into the school curriculum. Does he agree that to be able to fathom even the cost of these loans in numerical terms people need a certain level of literacy, so we really need to tackle the poor levels of adult numeracy and literacy, which are a big barrier in this case?

[Justin Tomlinson]

I thank my hon. Friend for that contribution. If she can just be patient, I will be heaping huge amounts of praise on her shortly.

The second thing I would like to see is real-time credit checking. The industry wants that because, despite a lot of the rumours, it relies on people being able to pay back the money they have borrowed. It would help to avoid somebody going into one shop and 15 minutes later going into another one. The credit checking agencies follow the traditional monthly banking system, so in theory somebody can wreak damage on themselves in the course of a month before the banks catch up. The industry says that it wants real-time credit checking; the credit agencies say they would like to offer it but that it is very complicated. One of the smaller operators, Call Credit, has got 10 operators signed up, but it will not be 100% participation. The Government will therefore have to empower the FCA to demand this. We are getting close to it, and it exists in some forms in America. It will make a huge difference because it will protect people from taking out multi-loans and allow the FCA to enforce affordability checks so that lenders who are lending to people who cannot afford it can be dealt with.

I would like to go one step further in ensuring that people can rebuild their credit rating. When someone has been turned down for a loan by one of the mainstream banks, the payday lending industry is often the only one that is prepared to take the risk with them. If they pay back the loan properly and on time, they should then have their credit rating repaired, allowing them to re-enter mainstream traditional lending.

There is a perception that the products, prices and requirements placed on people pushed them away from mainstream banking into a more modern, innovative industry that was responding to the situation. Mainstream banking has to take a long look at itself to see how it can adapt to a changing world. I fully support the fantastic work that my hon. Friend the Member for East Hampshire (Damian Hinds) has done on credit unions as an alternative for people. It might not be the total solution but it is certainly a very important part of the process.

On debt advice, which will be debated tomorrow in Westminster Hall, I fully support the levy, and I think the industry does as well. The Nationwide building society carried out a survey showing that 91% of people who get into financial difficulty say, “If only I had known better.” We see this in our casework. People who have got into difficulty come to see us with their carrier bags of unopened envelopes, and they need face-to-face, patient help. At the point where they go to get one of these loans, it would be helpful to have well-advertised information about how they can access free, independent debt advice, with a freephone telephone number.

Under the licence to operate, it costs lenders about £2,000 to get set up. A particularly bad, unscrupulous lender can wreak all sorts of damage before the FCA, or formerly the OFT, will have had time to do something about them. Unfortunately, some of these operators on the very fringes of the market will take advantage of the potential two-year window to do whatever they want before being taken down, and will then spend more money to get themselves back up the Google search engine listings.

The FCA needs to be extremely proactive in terms of mystery shoppers. Often the consumers who get themselves into the most difficulty are vulnerable people who are least equipped to raise it with us so that we can chase things up. This particularly applies to doorstep lending, as I have said in previous debates. With that lending model, the lender befriends someone, gains their trust, goes into their house every month, and could encourage them to borrow more. They might say over a cup of tea, “Have you sorted out your Christmas presents? If not, don’t worry, because we could provide the money for that, and why don’t you get your carpet sorted out if you’ve got your family coming round—that’s only another £3 a week.” We need to have mystery shoppers to check that the operators are sticking to the rules.

I championed the desire to get financial education on to the statute book, and I am delighted that the Government are implementing that in 2014. As my hon. Friend the Member for East Hampshire said, things will now change. This is about equipping the next generation of consumers with the skills to be able to make informed decisions—not moralising on those decisions but enabling them to make the mathematical calculations.