Consumer Credit and Debt Management

Damian Hinds Excerpts

Thursday 3rd February 2011 Commons Chamber

[Jackie Doyle-Price]

I believe that that actually makes the case for the early introduction of the consumer protection and markets authority proposed as part of our reforms to the tripartite regulation system. At the moment, we have a consumer credit system regulated by the OFT, in which the tools available are not very effective. With the reforms to the tripartite system, we have a great opportunity to state that we expect the new authority to take real action. In the past there has been a lot of, “Oh dear, isn’t this terrible?” and a lot of wringing of hands from regulators, but they have had no real ability to stop poor providers doing business or to give them appropriate penalties. That is what we want to see from the reform of the regulatory system.

One reason why many consumers find themselves in punitive agreements is that deals are often marketed in terms of the cost per week, so they do not necessarily understand exactly how much they will pay for their credit. That practice is not just restricted to doorstep lenders and loan sharks, because all too often we see it on our high streets, as the hon. Member for Walthamstow mentioned.

I wish to draw attention to one particular organisation, a company called BrightHouse. There is a branch on High street in Grays, and I thought I would do a bit of price comparison. At the moment, it is advertising a nice, attractive 46-inch LED television that currently retails at £849 in Currys. BrightHouse is retailing it at £1,478.11, but it quotes a weekly payment of £13.64. On the face of it that sounds affordable, but ultimately the customer will pay a total of £2,127.84 for the product—two and a half times the price that they would pay in a normal high street store. That is why we need to consider extending affordable credit provisions more widely, so that consumers are not ripped off by such companies.

[Damian Hinds (East Hampshire) (Con)]

Does my hon. Friend agree that in such rent-to-own cases, the annual percentage rate advertised may well be shown as 29.9%, which is in fact the cost of the credit, but the grey pricing means that the sticker price is elevated? That highlights exactly how companies try to get around whatever measures are put in place, even if they are very sophisticated.

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[Damian Hinds (East Hampshire) (Con)]

If hon. Members will forgive the pun, may I say that it is encouraging that there are such high levels of interest in this Chamber in this subject, particularly among the new intake? I pay tribute to the hon. Member for Walthamstow (Stella Creasy) and my hon. Friend the Member for North Swindon (Justin Tomlinson) for their interest, which has been shown not only in this debate, but in the hon. Lady’s private Member’s Bill and the Westminster Hall debate, and in my hon. Friend’s institution of the all-party group on financial education for young people. I commented at the time that, as so many people were crammed into the room, he had managed to make financial education for young people the new rock and roll.

Almost all of us in this Chamber, wherever we are on the spectrum of belief in free market economics, conclude that something else needs to be done to curb the worst excesses in the credit market. A number of us also have examined other countries in the world, both those in the European tradition, such as France, Germany and Italy, and those in the Anglo-Saxon tradition, such as Australia, Canada and most of the states in America, and asked, “Can they all be wrong?” Perhaps instead they are on to something in having some sort of usury ceiling and sensible credit limit.

Any approach to this matter has to cover all the aspects of education, advice and this country’s culture about debt, must include smart regulation that protects the most vulnerable, and must provide for proper alternatives, such as credit unions. They, in particular, have an important role to play, not only in providing affordable credit, but in encouraging the savings that a number of hon. Members have discussed.

There are a couple of problems with the motion. First, it refers to various “caps on prices” without saying what that means. It is not clear whether that would be a cash or a percentage cap. When lenders talk about the total cost of credit, they normally refer to a cash figure, but I assume that the hon. Member for Walthamstow was referring to a percentage.

[Mr Umunna]

Does the hon. Gentleman accept that the fact that a definition of the cap is not given would allow the regulator some form of flexibility in the event that it is required to take action?

[Damian Hinds]

I am grateful to the hon. Gentleman for that intervention and for being my minute man. That does create extra flexibility but we do need to know what we are talking about. A number of hon. Members have drawn a distinction between an interest rate cap and a cap that includes interest and other charges—that is what the annual percentage rate is; APR includes some other charges. It does not include behavioural charges, default charges and so on, and I do not understand mathematically—I am happy to take an intervention on this for a second minute—how they could be factored into a general cap that would apply to credit products extended to everybody, given that, by definition, behavioural and default charges are incurred only by some customers.

Another problem with the motion is its emphasis on a lack of competitiveness, because that is not the problem in this area. I do not wish to be too pernickety, but I do not think that “many” lenders can be in a “near monopoly” position, as the motion suggests. In many ways, stimulating competitiveness further might end up being counter-productive, but in the three minutes available there is no chance of our discussing that aspect.

This country is both blessed and cursed with a very diverse and dynamic consumer credit market. We are blessed because of the variety, where there is a product to suit just about every need in the market. Even payday lending can be very rational; it could be very rational for someone trying to avoid current account bounce charges to take out a payday loan instead. Very few people are excluded from the legal and, therefore, regulatable market altogether.

We are cursed by this market because of the ubiquity of the messages about credit that people are bombarded with; the emphasis on what people want to borrow, rather than what they need or can afford to pay back; and the complexity involved. Even very highly educated people find it difficult to understand every product and every aspect of every product. I am sure that some Members of this House struggle, as I do, with understanding some aspects of some of these products.

That complexity highlights one of the great difficulties with introducing new regulation, because companies make money in this market in lots of different ways. Rent-to-own companies, such as BrightHouse, which has been mentioned more than once in this debate, would almost certainly not be curtailed by any restriction on the cost of credit, because so much of the money they make is on the sticker price, relative to Argos or Currys, rather than on the charge for credit.

I am running out of time already, so I had better hurry up. The experience in America suggests that where there is effective regulation of cash lending, other sectors such as rent-to-own or good old-fashioned catalogues are stimulated, and if there is a clamp down on interest rate charges, that will stimulate growth in behavioural charges and so on. Everybody in this House probably agrees that a blunt, general, across-the-board APR cap is not a good idea, so the challenge is whether we can come up with a regime that curbs the worst excesses of the market without putting entire segments and entire product categories out of the market, and that protects the most vulnerable. We need a regime that does not push them into the arms of illegal loan sharks—the sort of people for whom the idea of a late payment penalty is a cigarette burn to the forearm.

[Justin Tomlinson]

Does my hon. Friend agree that that is exactly why we should be considering all of the actions that need to be taken as part of the credit review, so that we can get a measured and sensible approach which means that we do not end up, by default, aiding the illegal loan sharks?

[Damian Hinds]

I agree with my hon. Friend entirely. The amendment to the motion is very sensible and very welcome.

Having a range of caps on different products in the market is one option for achieving the two aims I have just set out. However, the market is diverse and dynamic; the mention of the growth in payday lending in the motion is a good example of how the market keeps changing. In such a market, the danger of such an approach is that when certain categories are capped, there will be growth in different categories as people try to morph products and move into different areas of the market to avoid regulation.

If caps are to be considered, one idea that I would like to throw into the mix for the Minister to consider is what I call a twin cap. Rather than having caps on different categories, we could set out a formula with a maximum rate of simple interest combined with a one-off percentage of the principal—for example, a 30% interest rate and a 15% arrangement fee. I suggest that structure because it more closely reflects the actual cost of providing loans. Shorter-term loans cost more to provide because there is a fixed-cost element for the initiation and completion of the loan. My own back-of-the-envelope modelling—I stress it is no more than that—suggests that some credit companies may well set their prices in that way. If there were a cap of 50% annual interest plus a 15% one-off charge, just about every segment of the market would survive, but by curbing the very worst excesses over time, we could bring that down.

I do not have time to go through the rest of what I wanted to say, but we should not forget everything else—supplementary charges, roll-over charges, missed payment charges and minimum payments. Critically, lenders should be required to take all reasonable steps to make sure that loans are paid down and that charges never exceed a set percentage of the outstanding loan in any given month.

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[Mark Durkan (Foyle) (SDLP)]

I join others in commending the hon. Members for Walthamstow (Stella Creasy) and for North Swindon (Justin Tomlinson) for securing this debate, even though they differ on the amendment.

Many hon. Members have described the problems in their constituencies. The problem is that firms in the credit market are able to exact credit terms that are lucrative for them but punitive for their customers. When we hear of some of the eye-watering interest rates that end up being charged, it is natural to think that there should be a law against it, and people look to this House to provide some sort of bulwark against open-sky exploitation. The motion asks the House to give the Government a mandate—although it is not a prescriptive mandate—to put regulatory powers in place that would provide caps that would be sensitive to the circumstances and needs of those who are in dire straits and otherwise financially excluded. Those caps would also be sensitive to the dynamics of different parts of the markets and sub-markets—

[Damian Hinds]

Will the hon. Gentleman give way?

[Mark Durkan]

No, because—

[Damian Hinds]

On the wording.

[Mark Durkan]

Well, I am addressing the wording. Many people are misrepresenting the motion and the amendment.

The motion would not put prescriptive caps in place or require the Government to do so immediately. The hon. Member for Solihull (Lorely Burt), who supports the amendment, said that a Government consultation is under way. But that consultation is not just asking the regulators what they think: it is rightly asking all of us what needs to happen to provide properly regulated financial services and proper protection to customers, both business and personal. Instead, the amendment says that we do not even want the Government to consider the question of regulatory powers that would protect those customers—we should ask the regulators to consider that question instead. Who are the regulators? The very consultation that the hon. Lady was talking about is about who the regulators will be in the future and what powers they will have. So the amendment is an evasion and dereliction of parliamentary responsibility, because it would simply ask the regulators to think about the issue—when we are still thinking about who the regulators should be and what powers they should have. It is a case of “There’s a hole in my bucket, dear Liza.” If people want an answer to this problem, they should not back the amendment.

[Damian Hinds]

Will the hon. Gentleman give way?

[Mark Durkan]

No, because I want to give other hon. Members a chance to speak. The hon. Gentleman is supporting the amendment and he ended up pleading with the Minister to consider what he called “twin caps”. I do not know why he did that when he is backing an amendment that says that the Minister should not consider anything to do with caps. So the hon. Gentleman does not want the Minister to have anything to do with this and instead it should be unspecified and unknown regulators.

There is even more uncertainty about who the regulators in Northern Ireland would be. If I, as a Member representing Northern Ireland, were to support the amendment, I would be asked by my constituents, “Well, who are the regulators in our country?” It is unclear who the regulators would be in Northern Ireland. That is why I cannot join others in sidestepping the main point of the motion by backing the amendment.

I would like to join my Celtic colleague, the hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards), in making a point about debt management and debt management plans. There are not only loan sharks out there, but debt sharks, who pose as debt dolphins coming up to help people who are deep in dire debt. We need clearer regulation. We know that an Office of Fair Trading report found that more than 129 companies were engaged in various questionable practices; and we know that there are models for statutory schemes, not just in other jurisdictions such as the south of Ireland and elsewhere across Europe, but even in Scotland, where there is a debt arrangement scheme that provides a good model for protecting consumers in dire need of credit but being exploited in the name of debt management plans.

The term “flipping” was used during the parliamentary expenses scandal to describe MPs changing houses. In the debt management plan arena, of course, we have flipping as well, with companies sucking customers in with unsustainable terms then flipping them on to more exorbitant terms in the future.