Debt Advice (FCA Levy)

Damian Hinds Excerpts

Tuesday 21st January 2014 Westminster Hall

[Damian Hinds (East Hampshire) (Con)]

It is a great pleasure to see you in the Chair, Mr Hollobone, and I thank the Backbench Business Committee for recommending this important debate. I join others in congratulating my hon. Friend the Member for Worcester (Mr Walker) on bringing the subject to Westminster Hall and his overall leadership on the issue, which he has pursued consistently and compellingly.

We all know the true human cost of problem debt, because we hear about it all the time in our constituency surgeries and from our local citizens advice bureaux, such as mine in Alton, Petersfield and Bordon. Problems often start when someone gets a little overstretched and then a shock happens, such as them losing their job, suffering a bereavement, or facing an enormous unexpected expense. As we know, couples are often reluctant to talk about money. Letters are left unopened, but calls and demands get more frequent. It might be that an enticing ad leads someone to borrow even more money, or that they go to a fee-charging debt management company that seems to offer a solution. Then, at one point, panic sets in. Stress and mental health problems can follow, and great strains can be placed on relationships—all too often, the family suffers.

At some point, such a person may decide to seek debt advice. That is the time when they can begin to take control, make a plan and start to turn the corner. It is vital that, at that moment, good-quality, free and impartial debt advice is available. I pay tribute, alongside others, to the work done by citizens advice bureaux, StepChange—formerly the Consumer Credit Counselling Service—and others in that regard.

This debate is particularly timely because the FCA and the Money Advice Service are considering how to levy and how to use funds from payday lenders to provide money advice and debt advice. The FCA levies two sums for the Money Advice Service: the money advice levy, which funds MAS directly; and the debt advice levy, which is onward allocated to third parties providing debt advice. Those organisations rely heavily on that funding from MAS, and all the more so because of the strains on public finances. It is worth saying, however, that there is another source of funding from lenders in the form of fair-share agreements and other contributions that they make to some of those charities.

Soon payday lenders, too, will have to contribute to the debt advice levy. I think that we all welcome that development, but we understand that, as things stand, it may not lead to an increase in the total pot available for debt advice, but rather that the budget would be held flat, with decreases in the contributions from other lenders to compensate for the new source from payday lenders.

Our focus today is on payday lenders, which make up the most visible part of the market, given their sponsorship of TV shows and adverts on the sides of buses. However, payday lending is certainly not the only part of the high-cost, sub-prime market, or the only part that causes problems. Home credit lenders—doorstep lenders as they are sometimes known—logbook loans, rent-to-own and good old catalogues are all significant players in the high-cost sector, as are mainstream prime operators when people get into trouble. At a time when payday lenders are becoming subject to the levy, we have a good opportunity to ensure that total funding for debt advice is increased, which would help to put advice organisations on a more stable, firmer footing.

Moreover, there is good evidence that payday loans generate a disproportionate number of debt problems. My hon. Friend referred to the StepChange statistics showing that although the payday market doubled in size between 2008-09 and 2011-12, the number of people contacting the charity with payday loan problems grew sevenfold over that period. As the sector grows further—I am afraid that it does, and it probably is not about to stop growing—it is important that the availability of debt advice keeps up with that growth.

There is a particular area due to which I assume that debt advice providers face above-inflation cost increases: online—so-called pay per click—advertising. Its pricing model involves an auction element, and those who make money out of people’s debts have an incentive to bid higher, so there is a tendency for costs to spiral. If debt advice providers are to be able to compete, as it were, on the internet, they need to be able to afford that.

It is important that we stress two things today, the first of which is a will for the total amount of funding available for debt advice to grow. Secondly, we need to give some input on how firms should contribute. As we consider those two things, there are two funding principles that should in turn underpin them. The first is a principle that has long existed in the debt advice sector: the beneficiary pays. When a creditor stands to regain some of what they are owed, it is right and fair—and, in fact, in their interests—that they support the organisations facilitating that. Secondly, a key principle of economics and internalising externalities is the concept that the polluter pays. In this case, that means that those associated with the greatest numbers of knock-on problems should contribute the most.

I think that the argument for a larger total pot of funding from the industry is self-evident, but I also want to say something about the formula that is applied, which was touched on by the hon. Member for Sheffield Central (Paul Blomfield). The FCA recognises that there are certain higher-risk operators and parts of the market, and that they should contribute more. I understand that the basis of the levy would be a split—50:50, I think—between an element based on the firm’s size and one based on the amount of debt that it writes off, with the idea being that the amount of debt written off is a proxy for riskiness or consumer harm. That principle is good but, like the hon. Gentleman, I worry about the specifics. Such a measure may tend to under-charge newer operators. By definition, when operators are new to the market, they do not have any debts being written off—that takes some time. It may also deter some firms from writing off debt and instead, as he said, they will use more aggressive collection techniques. More generally, if there is one thing that we have learned from the field of education and the metric of achieving five or more GCSEs at grade C or above, it is that if we give people one big hairy metric to be measured on, they will find 14 ways around it. Instead, we need a more balanced scorecard.

Obviously, there is another balance to be struck: accuracy versus simplicity. It could be argued that the amount of money that goes from the profit and loss to the debt advice levy is so small that it is unlikely, relatively speaking, to drive gaming, but I do believe that a slightly more nuanced formula would be useful. It could perhaps include—we may have slightly different lists, and I am not an expert—a broader range of things, such as the age of the debt due, numbers of consumer complaints and so on. I hope that the FCA will consider that.

We have an opportunity not to be missed to improve the sustainability of funding for debt advice. I congratulate the Business, Innovation and Skills Committee, whose Chair, the hon. Member for West Bromwich West (Mr Bailey), is with us today, on its very good report, as well as my hon. Friend on bringing the debate forward. I hope that the FCA and the Money Advice Service will find the debate a useful input into their work and that they will take the opportunity to bolster debt advice in this country, for the sake of all our constituents.

--- Later in debate ---

[Sajid Javid]

I completely agree with my hon. Friend. He will know that I gave evidence to the Treasury Committee’s inquiry on MAS last year in my previous role as Economic Secretary. I said that the Government would have a full review of MAS during this Parliament, and over the coming weeks and months, I will set out how that review will take place. The review will consider some of the issues he raises.

[Damian Hinds]

As the Minister is on a roll, I have a question. Will he confirm that he said only that money would not be ring-fenced for debt advice, rather than that money would not go to debt advice? Perhaps we should all welcome that extra flexibility, but if he is suggesting that the money would still come in and would not necessarily involve levelling down other contributors, who would decide—and how would they decide—how that extra funding would be allocated between money advice and debt advice?

[Sajid Javid]

As my hon. Friend will find out, I am coming on to how MAS determines its budget. As we all would hope and expect, the budget is based on demand. More generally, MAS has a statutory responsibility to consult on its budget for the forthcoming year. Right now, MAS is consulting on its budget for 2014-15. This debate, the Business, Innovation and Skills Committee report and the information from stakeholders, which we have heard about today, are important in providing MAS with the information it needs to develop its budget for the future. That makes a big contribution to how MAS decides the correct allocation of resources for forthcoming years.

MAS’s budget is based on what it needs to achieve its statutory objectives. Although it is right that payday lenders contribute to that funding, it is also right that the funding is based on demand and that it delivers value for money. In the year ahead, MAS’s budget for debt advice will be based on its assessment of demand for such advice. MAS must consult on its plans for providing debt advice each year, which must then be approved by the FCA.

The National Audit Office recently commended MAS for delivering value for money in its debt advice provision. As we have heard, MAS is also carrying out ongoing research to ensure that the debt advice it funds has the best impact on consumers and that it reaches those who need it most. MAS recently conducted an in-depth study of where in the UK debt advice is needed most. The study shows that 21% of over-indebted people do not even recognise that they are in debt and that 44% of people who are in debt are not aware of the solutions available to them. It is important that MAS reaches such people and engages with them successfully to give them the help that they need. MAS will use the report to inform how it funds debt advice, thereby ensuring that it targets those who need it most. It is important to note that more money does not necessarily mean better provision.