Consumer Credit Regulation

Damian Hinds Excerpts

Tuesday 9th November 2010 Westminster Hall

[Damian Hinds (East Hampshire) (Con)]

I congratulate the hon. Member for Walthamstow (Stella Creasy) on the clear, in many ways convincing and impassioned way in which she put her case. She has had quite a double whammy over the past few days, with her ten-minute rule Bill last week and now this important debate. It is particularly timely, given the review of consumer credit and personal insolvency and this morning’s statement by the Department for Business, Innovation and Skills on the future of the post office network, which, to be fair, contained rather more of positive interest to people who care about those issues than perhaps some Members have suggested today.

Like the hon. Lady, I will concentrate on instalment credit, rather than revolving credit, although both are relevant. I am sure that the debate will be positive, but I will start with three negative points—three not’s. First, this is not a party political debate. I pay tribute to the previous Government’s work with the credit union sector, for example, which at the time had all-party support. I am also sure that measures to address those problems and help the most vulnerable people will receive support from across the House. I know that that is the case among many of my colleagues in the coalition Government, and it is evidenced to a large extent by the number of Members from both sides of the House who have attended the debate.

Secondly, this issue is not new, although, to be fair, it is changing. The leader in doorstep home credit has been around since Victorian times, but every few years the nature of the market changes a little. There are changes over time regarding the importance of priority debt and that of consumer debt, and there might in future be some change back towards priority debt. However, it would be wrong to suggest that the home credit market has been created by the comprehensive spending review, and everyone who has ever worked in communities that have such issues knows that well. It is also a dynamic market, and there is always something new to worry about: whenever we think we have got our heads around the market, something new comes along, be it the increasing problems with fee-paying debt management agencies, inertia selling, payment protection insurance, the growth in pay-day loans, the appearance of pre-paid sub-prime credit cards or the appearance of so-called credit rehab cards.

Thirdly, it is not all bad. Every segment of the market plays some sort of role. Even pay-day loans can have a role—for example, in avoiding excessive current account penalty charges. We also have in this country, much more so than in the European markets to which the hon. Lady referred, a pretty competitive and diverse market. The effect is that very few people in this country are totally excluded from the legal and, therefore, regulated—one might argue that it is not regulated well enough—and regulable part of the market.

There are always three key aspects to any debate on this subject. The first is the disclosure of information; education, so that people have the wherewithal to do something with that information; and the whole surrounding culture, particularly what we as a society aspire to regarding the balance between savings and debt to help people get through the ups and downs of life, which everyone has. I will not talk about that this morning because there is not much time and many Members wish to speak. The second area, which is the focus of the hon. Lady’s ten-minute rule Bill, is smarter regulation, and the third is alternatives to high-cost credit. I will talk briefly about each of those aspects.

When it comes to regulation, we need to understand our objectives, of which there could be one or two. It might be either to reduce the cost of credit to people on very low incomes and who have great difficulties in their lives, or to reduce the prevalence of credit and debt for those people. That is an important distinction, because it might lead to one or two different things. For example, if one just wanted to reduce the costs, one might liberalise the rules on door-to-door canvassing for cash loans, because that would allow new entrants into the market more easily, which could undercut the existing players and cut the cost. However, not many of us would want to do that. If we are trying to reduce the prevalence of lending in those sectors, we might do the opposite and ban door-to-door canvassing even for non-cash loans—meaning voucher loans—because they are used, as the hon. Lady will know, as the way in to new customers, who can then be graduated on to higher value cash loans. My assumption is that the objective must always be both to reduce the cost to people who are taking on sub-prime loans, and to reduce the prevalence of such lending.

The second key question on objectives is whether we are trying to hammer a particular segment. As I said, each segment, if handled properly and responsibly, has a role. Therefore my assumption is that we are trying to target not a particular segment—for example, pay-day loans or home credit—but the principle of people paying sky-high rates for credit when they need it.

There are perennial problems when trying to make smarter regulation in this area. In particular, because it is such a diverse and organic market, as soon as we deal with one problem, another pops up. In fact, in some ways, it is because we deal with one problem that another pops up. Let me give a couple of examples. If we manage to bear down on cash lending, we will see—this is true in some of the American states to which the hon. Lady referred—an increase in rent-to-own, voucher lending and catalogue lending, with grey pricing. That is where the base price of the item is inflated such that at a 29.9% interest rate, to use a random example, the lender is making considerably more than that in terms of margin. If we bear down effectively on interest charges, there is the automatic tendency, it seems, for lenders to rely more heavily instead on behavioural penalties, which, in many types of lending, can end up costing far more than the apparent rate of interest.

With any cap that we put on the cost of lending, mathematically we will be disproportionately impacting on the highest-risk customers, which in this market means the lowest-income customers and usually the most vulnerable customers. At the extreme end, when we are talking about excluding those people, there is the danger that we will push them into the arms of illegal and unregulated moneylenders—the sort of people whose idea of a late-payment penalty is a cigarette burn to the forearm. Of course we all want to avoid that.

However, despite the perennial problems, there are still possibilities, many of which were outlined by the hon. Lady. APR is a widely misunderstood measure, and there is always the danger that anything we replace it with will also be widely misunderstood, but total cost of credit has more potential than APR to be understood.

On caps, I am a free-market Conservative, so in general I am not in favour of price controls. However, the hon. Lady made a good point in that regard. If we look throughout the European tradition world and the Anglo-Saxon tradition world, hardly anywhere has a market as liberal as ours in terms of the interest rate regime. Of course, before 1974—when there was a Conservative Government—there was a usury ceiling in this country. We have to ask the question: if we have got this so brilliantly right, how come other countries are not trying to copy us?

I do not think it will work to go after individual markets saying, “We’ll have this restriction on this product and that restriction on that product,” because new products will just be invented. I wonder whether it is possible to come up with a formula that does away with the market’s worst excesses, while not putting any individual segment of it entirely out of business.

I would love to hear the thoughts of my right hon. Friend the Minister on the regulation of rules and supplementary charges on loan roll-over, missed payments, minimum payments and so on. We also need to think about the way in which credit scoring works. By the time that people eventually seek help, many of them have run up eight, nine or 10 separate lines of credit. We have to wonder what the lenders of the eighth, ninth and 10th lines of credit were thinking. This is a matter of responsibility. Of course in terms of the maths, it might be perfectly rational for the lender to issue a lot of loans with relatively low credit-scoring hurdle points, in the knowledge that although they will have to write some off, that is still a more advantageous profit model than rejecting them.

Most of all, I would love to hear from the Minister on something the hon. Member for Walthamstow talked about at length—alternatives to high-cost credit, to which there are multiple aspects. For example, the social fund is probably due for a bit of root-and-branch reform. Here I am talking not about priority debts or emergency loans, but the discretionary fund. In addition, mainstream banks can be exhorted to develop bounce protection credit lines more quickly, which will stop so many people being forced into pay-day loans.

Above all, however, the opportunity is with credit unions. I welcome this morning’s statement on the post office network, which gives some positive indications. Credit unions have made great strides in the last few years. Historically, they had been very strong in the west of Scotland, Manchester, Merseyside and parts of London, but not in the rest of the country. In recent years, the situation has improved, but we are still not at the point at which everyone can access a credit union.

The range of services has also improved dramatically, with the credit union current account, cash ISAs and so on. When the legislative reform order that we all hope will come along very soon is passed, that will make further strides in liberalising the common bond—in being able to pay fixed rates of interest on savings accounts and being able to bank to groups as well as individuals, which fits well with the big society agenda.

[Mr Thomas]

I do not seek to make a partisan point, but will the hon. Gentleman join me nevertheless in asking the Minister to clarify the future of the growth fund, which is due to end in March 2011 and provided significant money to help credit unions and other community finance organisations expand, in order to provide the access-to-credit alternatives he has described?

[Damian Hinds]

I am sure the Minister has heard the question and made a note of it. What I will say about the growth fund is that of course, capitalising credit unions to expand their customer base has many positive aspects. Not all credit unions were fully geared up to make maximum use of some aspects of the growth fund, and particularly the speed of the growth fund.

I would also like to see other ways of further funds for lending going into credit unions. All of us, if we have not already done so, can open a savings account with a credit union. That is not a flippant point. We need to encourage more people at higher and middle rates of income to use credit unions as their place for savings, because then, of course, those savings become the source of loans to other people.

Credit unions do not yet exist on the critical scale at which there is mass awareness of the services available.

[Mrs Jenny Chapman (Darlington) (Lab)]

I particularly welcome the hon. Gentleman’s observation that this is not necessarily a party political issue and that there is support on both sides of the House for many of the elements in the Bill introduced by my hon. Friend the Member for Walthamstow (Stella Creasy). There is a renewed sense of urgency about the issue, perhaps more so among we newer Members who have come by a community-organising route and have seen at first hand the effects in our communities. One thing that prevents credit unions from expanding is that they are seen as operating in charity offices and church halls and they lack the high-street presence of organisations such as BrightHouse, which can spend a lot of money on marketing and targeting people. Integrating credit unions more with the Post Office would have given them that mainstream appeal and access in all communities.

[Damian Hinds]

I thank the hon. Lady profusely and will remunerate her suitably later for teeing me up for my next sentence. One of the problems for credit unions, apart from lack of awareness of them in some sections of the community, is that they lack a high-street network throughout the country. Marrying them with the Post Office offers amazing synergistic opportunities for both sides. It marries the financial expertise and product base of the credit unions with the presence and trusted brand of the Post Office. We talked earlier about trusted brands.

[Henry Smith (Crawley) (Con)]

The point was made a few moments ago that it is important that middle-income people also join credit unions. I am pleased to have joined my local credit union, as I am sure everyone in the room has joined their local credit union, as a place for savings. The point about a high-street presence is extremely important. My local credit union in Crawley operates out of a community centre, which as we have heard is the norm. I very much support the idea of making credit unions mainstream, and it therefore becoming much more the norm for people to save and transact with them.

[Damian Hinds]

My hon. Friend makes a fine point, which I do not disagree with at all. I should say, for the avoidance of doubt, that my own savings account is with the United Savings & Loans credit union in Bordon. That fantastic institution has a high-street presence, but because of the rents in my part of the world, it is not the most prominent high-street presence. The established network of the Post Office could make a big difference to that. Of course, this is not just a matter of saying, “We’ll work with the Post Office.” It is also about the infrastructure that goes behind that—the electronics and the systems. That is why it is necessary to build a robust back-office system and interface. That takes money, but it does not necessarily have to come entirely from the Government, and it would be a mistake to think so. Such activities do of course carry with them a future income stream, and as everyone knows one can borrow against a future income stream. There is certainly a role for the Government in financing such a thing, but not just grant funding is needed.

Overall, the provision of alternatives is the surest and most important initiative that can be taken in this area. Whatever the regulation, people will always find ways to get around it, and we must strive to make things better.

[Stella Creasy]

I take the hon. Gentleman’s point, and I understand and recognise his experience in the credit union movement. Does he agree that these are the very issues on which the credit review should be formally consulting? It should be looking not just at store and credit cards but at access to credit, and also the home credit market, pay-day lending and the many other products that may well be expanded, to try to tackle once and for all the needs of the poorest consumers.

[Damian Hinds]

I am supremely relaxed about the names that are given to reviews, discussions and discussion documents. The important thing is that members of the coalition Government take a keen interest in this area and are interested in making progress, and I know that they are. The name or title is of secondary concern.

The surest thing we can do is to provide a good, robust alternative, and thereby revolutionise affordable credit. We can also improve the savings culture in this country and provide a real alternative to the doorstep lenders about which we are all so concerned.

[Several hon. Members]

rose—

--- Later in debate ---

[Mr Thomas]

I will not comment on my hon. Friend’s television viewing habits, other than to say that I know he has raised concerns about the activities of Wonga, and I will come on to that. It is an interesting company in the consumer credit field for a slightly different reason, which I shall come to later.

I join my hon. Friend the Member for Walthamstow in asking the Government to consider including the issues that she raised within the review of the consumer credit sector, and I do so in a spirit of welcoming their review of consumer credit.

[Damian Hinds]

There seems to have been a tiny bit of confusion earlier about the nature of the review to which the hon. Gentleman refers. I think I heard suggestions that it was restricted to credit and store cards only, but the call for evidence was much broader, as he knows.

[Mr Thomas]

As the hon. Gentleman says, there has been a broader call for evidence. I hope the Minister will use the debate to call for further evidence about, and embrace, the areas that my hon. Friend the Member for Walthamstow championed in the debate and in her ten-minute rule Bill.