Christopher Chope
Main Page: Christopher Chope (Conservative - Christchurch)
Jo Swinson
That intervention hardly merits a response. I am here because I am the Minister responsible for issues that affect consumers and consumer credit. We have significant problems in the payday lending industry, and my priority is finding the best way to solve them. I do not believe that the House prescribing these measures is necessarily better than it being done by the FCA. The FCA can put rules in place and, importantly, can change them whenever the market changes. We know that the market is fluid and that it changes regularly. If rules are put in place and practices change to get round them, the FCA can act swiftly to ensure that loopholes and gaps are plugged. That is a better way of protecting consumers, although the hon. Member for North Durham (Mr Jones) is entitled to disagree.
Jo Swinson
I will make a little progress and then I will give way to my hon. Friend. Existing guidance from the Office of Fair Trading includes provisions on roll-overs. It is cracking down on non-compliant lenders, and earlier I mentioned some of the firms that have already left the market as a result of such action. The FCA has power to cap the duration of credit, and could take action to limit roll-overs. The hon. Member for Sheffield Central mentioned the deliberate strategy of rolling over loans, and if there is a flawed business model that relies on such behaviour, the FCA could decide not to grant a licence in the first place. The Competition Commission will also consider that issue in its wider market investigation.
Jo Swinson
I would like to make a little progress, and then I will let the hon. Gentleman make his point.
Affordability checks are vital. One of the most shocking facts is that nearly half of those who take out a payday loan already show signs of financial stress. We must have proper affordability checks so that people are not given loans when they cannot afford to repay them; all that does is embed them in a further spiral of debt.
Existing OFT guidance clarifies how lenders should check the ability of borrowers to repay, and it is cracking down on that issue. The FCA will also have powers to tackle consumer harm. It has prioritised affordability assessments as an area for potential intervention, and that will be included in the consultation.
Jo Swinson
It depends on the specific circumstances. Current guidance does not necessarily suggest a ban on roll-overs, but there is evidence that some practices mean that borrowers, including those who are not necessarily unable to repay the loan, are proactively offered a roll-over—for example, by text message. That gets them into more debt and incurs more charges, even though they may have been able to repay the loan. There is a suggestion—more than a suggestion: evidence—that there are problems with roll-overs, but that does not mean that every roll-over is wrong. We also want to encourage lenders to recognise and show leniency when borrowers get into difficultly. That is also important. There is sharp practice with roll-overs, whereby the lender perhaps appears to be helpful in offering extra time when that might not be the right thing for the consumer. We are discussing a short-term product. If a proper affordability assessment is performed, the number of occasions when a borrower is unable to repay a short time after it was granted should be relatively low, and such occasions really should be the result of unexpected emergencies or circumstances that could not have been predicted weeks earlier.
There is also concern regarding the use of continuous payment authority. This tool allows lenders to dip into a borrower’s bank account to see whether they have enough money in their account to make a repayment, and to do that multiple times—sometimes hundreds—a day. Many card issuers and others in the financial services market are concerned about how that is being done. The Bill suggests three days’ notice of CPA and an awareness of the right to cancel. Those measures are already in the voluntary code. If they were stuck to and ended up in the FCA rules, that would be helpful.
It is important to clarify that people have the right to cancel continuous payment authority. Indeed, the FCA has recently made it clear to banks that if their customers wish to cancel CPA they have a responsibility to ensure to that that happens. Further, if customers have paid erroneously through CPA after they have asked for it to stop, the banks should refund the consumer. Banks will also have to undertake a review of such cases in the past few years.
It is important to respond to an issue raised by the Bill, although I accept that it is not something that the hon. Member for Sheffield Central was prescribing. A cap on the cost of credit sounds like a neat and simple solution to the concerns in the market but it is not, as my hon. Friend the Member for East Hampshire eloquently set out. This is a complex market and clumsy interventions could have unintended consequences. The Bristol report findings indicate that a total cost of credit cap could risk harm to consumers, reduce access to credit and lead to less tolerance by lenders of customers with repayment problems.
The evidence from other countries shows that in some EU member states interest rate caps have resulted in reduced credit access for low-income consumers. In Australia, lenders have imposed charges outside the cap, or developed products outside regulation. Sometimes a cap results in a move to rent-to-own credit. I am sure Members will be aware of places on the high street where technological gadgets can be bought at a very high hire purchase fee. The expansion of this market occurred in Michigan in the US, where pawnbroking thrived following restrictions on payday lending. It is important to follow the evidence.
The Government have ensured that the FCA’s powers will allow it to impose a cap if it decides that that is the best way to protect consumers, and that doing so is consistent with its statutory objectives. The hon. Member for Sheffield Central talked about a report on the cap and I want to reassure him on what the FCA will have to do. It is already required to set out in guidance how it is achieving its objectives and to report against that in its annual report, which the Treasury will lay before Parliament so that it can be scrutinised by the Treasury Committee. The Public Accounts Committee also has the ability to scrutinise any National Audit Office reports on the FCA. The FCA is, therefore, already able to set out in its annual report what it is doing and why, and, importantly, Parliament is able to scrutinise it.
Before I conclude, I would like to touch on alternatives mentioned by the hon. Members for Harrow West (Mr Thomas) and for Birmingham, Northfield (Richard Burden). Credit unions are an important alternative, and the hon. Member for Birmingham, Northfield mentioned the role that post offices can play. They can help credit unions and it is important to note that they are piloting current accounts, in particular the control account, which is aimed at people who may not have had significant bank accounts before and may want a lot of control over managing their money. We hope to see that rolled out across the rest of the country. Furthermore, the Department for Communities and Local Government is running a competition to get post offices to play a greater role in their communities, some of the prize money from which they could use better to help those in financial difficulty. Financial education is key, however, hence the importance of the Government’s moves to have it provided in schools. Some people taking out payday loans have access to alternatives, but are not using them, partly because the advertising is so effective and partly because of the speed and convenience of payday lending compared with the discussions with a bank about an overdraft.
Martin Lewis, from Money Saving Expert, has produced an interesting guide on payday lending. Money Advice Service also has a lot of information on its website. Martin Lewis has made the excellent suggestion that if people are worried they might need emergency credit in the form of a payday loan, they could instead take out a credit card, stick it in an ice cream tub filled with water and keep it in the freezer, which might instil in them the discipline of not being tempted to use it for everyday spending. Should they need emergency credit, however, they could use the credit card in the short term and pay it off before the next bill, thereby not paying any interest. There are ways of getting around it, but I appreciate that not everybody will want to follow that advice.
As mentioned, on credit unions, the Government are increasing the monthly interest cap from 2% to 3%, which will help credit unions, and investing £38 million in helping them to improve their services and compete better with other forms of credit.
The Government absolutely share the concerns that the Bill is designed to address, but, working with the regulators, we already have a strong package of action in progress to tackle them. In the immediate term, the OFT is pursuing tough enforcement action, with its referral of the market to the Competition Commission, while in transferring consumer credit regulation to the FCA we have ensured a strategic solution to many problems in the high-cost credit market. The FCA’s tough new powers will enable it to take targeted action more flexibly and faster than the Government could. It will have the tools to make balanced judgments on potential interventions based on robust evidence, consultation and cost-benefit analysis.
I agree with the hon. Member for Sheffield Central about the problems and I have set out how the solutions we are pursuing are already starting to work. I appreciate his introducing the Bill and this useful debate—maintaining the profile of the issue helps to apply pressure on the industry to shape up—but I hope he will recognise that our actions and those of regulators are a better way of tackling the problems. I hope he will take that on board and decide to withdraw the Bill. On the off chance that he does not, and regardless of what happens to his Bill, I look forward to working with him, other hon. Members and campaigners outside the House to clamp down on unscrupulous and irresponsible payday lenders.
Barbara Keeley
I will not.
I hope that the Bill can move into Committee and that there will be an opportunity to discuss ways of improving it. It is vital to the millions of people it would help. We need to—