Damian Hinds
Main Page: Damian Hinds (Conservative - East Hampshire)
Yvonne Fovargue
I agree with my hon. Friend. As for the idea that people can manage by themselves, that is not happening at the moment, and as a result of the cut to legal aid, 100,000 of the poorest people will lose access to advice. We need to look at where they will go, and how they will be helped in future.
Of course, there is a cost to free debt advice, and it is estimated at about £150 million a year. The credit industry contributes 3% of that amount. I would like the Minister to investigate further how a levy on the credit industry could be made to work without affecting the business model of companies such as the Consumer Credit Counselling Service, which relies on a “fair shares” principle to fund its work; I would not like such companies to go because we were looking at a levy on the credit industry. However, it is not sustainable that the industry should pay just 3% of the £150 million.
On the latest figures, Citizens Advice deals with 8,910 new debt problems each working day. The reason why it deals with that many cases, and why people go to it, is brand awareness. Some 97% of people recognise Citizens Advice, although they might not always know what it does; they sometimes say, “It tells people where to go, doesn’t it?”—well, it does not tell people where to go very often. However, people recognise Citizens Advice, and I am concerned about the Money Advice Service spending its hard-earned money on building a brand that people will recognise. I would question the need to build yet another brand. Why not use a trusted brand to deliver money advice services on the high street?
I am pleased that there is more research on why people get into debt, and I do not think that the reasons have changed significantly over the years. As I have said, they include low income, sudden changes in income, changes in family circumstances, illness, divorce and so on. However, the type of credit that people access has changed. One form of credit that has exploded over the past five years is payday loans. There is evidence of people relying on that type of credit when they max out their credit card and have been denied other avenues of mainstream credit. They use their credit cards regularly to pay their bills.
Only this week I attended a fascinating presentation facilitated by the Centre for Responsible Credit on the international experience, particularly in the US, which is an interesting place, because different states have different regulatory regimes, so the way in which they work can be compared. The former secretary of the securities and banking council who presented the report was adamant that the sector needs to be regulated. He said that as an American citizen he is no fan of regulation, but that regulation needs to be enforced, and the regulator has to have the power to suspend companies where necessary.
I urge the Minister to consider the report and its conclusions, including limiting the number of roll-overs and a cooling-off period so that people cannot immediately take out another loan when the first one ends, then take out another one to pay off the second one. Evidence from Florida shows that capping the total amount that people can take out in any one period—for example, $500 in a year—improves their ability to pay back that loan. We asked whether that sent people into the hands of illegal lenders, but we were told that the average amount that people take out in loans in Florida is $388, which is quite a bit below the $500 limit. People do not max out their loans, which may mean that they do not go anywhere else. In California, however, where maximum loans are much lower at $250, people take out $249, which is evidence that they will look elsewhere quite quickly. It is an interesting report.
We should also consider setting up a real-time database owned by the regulator, but funded by payday loan companies, that stores basic data, including the number of loans and amounts, so that easy referrals for debt advice can be made.
Damian Hinds (East Hampshire) (Con)
Does the hon. Lady agree that the United States consumer credit market is rather different from the one in the United Kingdom? She is right to identify the difference between states, but another key difference is that there is no home credit market to speak of. There is a danger that if we over-regulate on payday lending we may shift that borrowing into other business models.
Yvonne Fovargue
I agree, but the disadvantages of the payday loan industry are greater than those in the home credit market, which is easier to regulate, because we can target it. The home credit market has been here for a long time—we all know the Provvy—and when I worked at a CAB, we could see when lenders were going around an estate, and we could talk to those consumers about that. If people get loans on the internet, or from high-street shops or over the phone, that is much more difficult to control.
We should consider a real-time database, because there is a lot of interesting data that could be gleaned from it. The regulator could very quickly look at companies acting illegally as a result of the information on the database. I recommend, too, the Smith Institute publication that was launched today, which is entitled, “A Nation Living On The Never-Never”. It includes a chapter by Damon Gibbons on learning from other countries. I agree: we are not the US or France, but there are things that we can learn, particularly because regulation is different in different states, so quite a lot of comparisons can be made.
That leads me into the need for debt advice, which should be free, independent and quality marked; should be funded in a sustainable way; and should meet the needs of all consumers, including the most vulnerable. Anyone who is in debt can be vulnerable. One of the most difficult cases that I saw involved an accountant, who had reached the stage where they could not open an envelope or answer the telephone. They needed the initial face-to-face advice so that someone could talk them through the situation and explain that they were not alone. They could then be referred to a telephone service and deal with things themselves, but the initial face-to-face advice had to be there.
Nic Dakin (Scunthorpe) (Lab)
It is a pleasure to follow the hon. Member for Meon Valley (George Hollingbery), who made a very intelligent speech about controls on the use of bailiffs that is helpful in the context of the overall picture that we are looking at.
I congratulate my hon. Friend the Member for Stockton North (Alex Cunningham) on securing this debate, and I thank the Backbench Business Committee for allowing us the time for it. The debate is timely in two ways. First, as the Chancellor said this week, we face an economic storm. Families and individuals are facing rising energy prices, higher food prices, and rocketing fuel bills. Their incomes are being squeezed, and there is a real risk that more people will move into debt. Secondly, we are now in December, with the extra pressure of Christmas hitting household budgets. We do not want a debt hangover in the new year, with its awful consequences.
When someone summons up the courage to ask for help with dealing with their debts, they need to get the best possible support from people who will help them to clear those debts, not make matters worse. The hon. Member for Chatham and Aylesford (Tracey Crouch) clearly illustrated the dilemmas and problems, and the kinds of practices that unfortunately happen. At present, people who try to take responsibility for their debts can find themselves at the mercy of unhelpful, aggressive and sometimes unscrupulous practices that make dealing with debt an even more unbearable experience. In 2010, the high-cost credit industry lent £5 billion in the UK. Payday loans alone increased from £1.2 billion in 2009 to £1.9 billion in 2010. The UK now has one of the highest levels of personal debt in the world. In April 2011, the figure stood at a staggering £1,460 billion.
At this time, the future of debt advice is uncertain, with changes to eligibility for legal aid and the transfer of responsibility for debt advice to the Money Advice Service. It is important that the Government and the Money Advice Service confirm the future of the financial inclusion fund debt advice services as soon as possible, not just for next year but for future years. The funding from that is part of the overall funding of Citizens Advice services. There will be real risks if the critical mass of funding to provide advice is destabilised by further cuts in income at local or national level.
The FIF debt advice services are in their sixth year. They were deliberately located in areas such as Scunthorpe to meet the needs of communities that have difficulty accessing debt advice. Every year, those advice services have directly helped more than 100,000 people nationally to resolve their problems. Regular audits and evaluations have found high levels of customer satisfaction, with services exceeding clients’ expectations and effectively reaching their intended target group.
The provision of independent debt advice in my constituency is particularly worrying. The situation is in danger of being exacerbated by the changes to legal aid eligibility and reach. There are real worries about the availability and accessibility of future support. I fear that that is typical of the situation in many parts of the country.
If the FIF debt advice services cease, there will probably be no alternative sources of help. By definition, those services are used by people with very low incomes and limited means. Their inability to repay substantial amounts towards any consumer credit debt means that private sector debt management services do not see them as a profitable client group to serve. Research shows that there is little overlap and duplication between the national telephone advice services and the local FIF services. Clients often use local services on referral from other local agencies such as jobcentres, landlords and local authorities. Many of the people they serve have problems or communication needs that require support to be given face to face for it to be effective.
The quality of advice from many fee-charging debt management companies is questionable. Their fee structures mean that they get much of their income up-front. They are therefore not encouraged to work with their clients to help them manage their affairs and become debt free. A huge amount of those companies’ budgets is spent on advertising to draw in income from the indebted. That contrasts with companies such as the Consumer Credit Counselling Service and Payplan that use a “fair share” model to gain income. The incentive under that model is to work with creditors and the individual to make them better able to manage their money.
According to Citizens Advice, the majority of people in difficulty find themselves there due to changes in their life circumstances, such as death, divorce and redundancy. My hon. Friend the Member for Stockton North, in opening this debate, drew attention to research from the University of Nottingham that underlines that finding.
With all its experience, Citizens Advice highlights three principles for taking debt advice and management services forward. First, access to free and independent debt and money advice services is vital for those in financial difficulty. Such services need to be funded in a sustainable way and should meet the needs of all consumers, including the most vulnerable. Secondly, people in financial difficulties need better options to deal with their debts so that they are not drawn into using poor-quality debt management firms or taking on high-cost credit as a coping strategy. Thirdly, the consumer credit regulator needs stronger powers and more resources to prevent consumer detriment and to act more quickly and decisively to deal with problems. I will return to the point about regulation later.
There are other things that need to be looked at carefully. We have heard about misleading advertising. Many businesses claim that their services are free when they simply are not. Fees should be clear, understandable and highly visible from the start. At the same time, free services must be made equally obvious and clear. My hon. Friend the Member for Makerfield (Yvonne Fovargue) has introduced a ten-minute rule Bill to make advertisers signpost free advice. That is worth careful consideration.
Another issue is up-front fees. Debt management companies often front-load their charges, with customers paying several hundred pounds before they receive any advice. We need to consider whether up-front fees should be banned. We should also consider whether cold calling should be restricted.
The Office of Fair Trading lacks the resources proactively to monitor compliance by debt management companies. It has issued formal warnings to 129 firms out of the 172 that it has surveyed recently for compliance. We need to strengthen the regulatory framework. Across the House, there is recognition that this is an area in which the regulatory framework needs to be used. I draw attention to the comments of the hon. Member for Chatham and Aylesford, which made that point clear.
We can consider better control on firms entering the market, better scrutiny of business models and making the regime less reliant on enforcement action against firms that behave badly and more focused on preventing bad practice in the first place, so that bad firms do not get into the market. Consumer credit regulation needs to be strengthened, so that it has a deterrent power. At present, many firms are simply not sufficiently worried about action by the Office of Fair Trading to avoid unfair practices.
The regulator should be able to compel firms to compensate consumers for unfair practices, and there should be swifter enforcement against unfit firms. As my hon. Friend the Member for Makerfield said, firms that the OFT considers unfit to hold a credit licence can continue to trade and cause consumers harm for many years as a Jarndyce v. Jarndyce-type labyrinthine process is gone through in the courts. That is not to anybody’s benefit.
Interestingly, a large number of lenders in the UK are now US companies that have come here to take advantage of the lower level of regulation. Earlier this week I met an organisation called Veritec, which said that the market was very attractive to US companies at the moment because of the lack of regulation. Five of the seven largest UK companies in the sector started in the US. It is therefore right and proper that we look at practice in the US and how it has come to regulate this fast-expanding area of business since the problems in 2000 and 2001, particularly in the state of Florida. Those problems led it to introduce a regulatory framework that appears to have some attractions.
My hon. Friend has already drawn attention to the features of the Florida model: a maximum loan of $500—we could consider the maximum being a percentage of gross monthly income instead, but $500 is Florida’s model—limits on multiple loans, the stopping of any roll-over payments, a 24-hour cooling-off period between loans and finally, a very important ingredient, the real-time information system run by a private company and paid for by the credit companies, but accountable to and owned by the regulator. The database is funded by a transaction fee.
Damian Hinds
I am pleased to see that although it is the first of the new month, the hon. Gentleman has not taken the opportunity to make his face clean-shaven.
Will the hon. Gentleman acknowledge that the Florida measures apply specifically to payday loans, which do not account for the majority of the credit market or the majority of the debt problems in this country?
Nic Dakin
The moustache is having an encore for today and will be removed tomorrow.
The hon. Gentleman is right that the Florida measures apply to payday loans, but I believe that it is worth considering how that model can assist overall. Interestingly, by 2009, 6.8 million loans had been authorised in Florida, and not a single loan was extended beyond the contract period. More than 90% paid back their loan within 30 days and more than 70% repaid on the contract end day. Consumer complaints of mis-selling dropped significantly, as did overall indebtedness, and not one borrower was indebted by more than $500 at any given time. The Florida model may well not be the answer, but I ask the Minister to what extent the Government are drawing on practice elsewhere in the world, including in Florida and in France, which has also been mentioned, to help inform how we can move forward. I believe there is cross-party consensus about the need to regulate, and as the hon. Gentleman indicated, it is horses for courses—the Florida model covers payday lending, but there are other issues to consider.
Damian Hinds (East Hampshire) (Con)
I congratulate the hon. Member for Stockton North (Alex Cunningham) and my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch) on securing this important debate, and I thank the Backbench Business Committee for granting the time.
With almost £1.5 trillion of personal debt in the country and £200 billion of unsecured consumer lending, debt can clearly be a problem at all levels of society. In common with others who have spoken, I am particularly concerned about the less well-off members of society accessing sub-prime and high-cost credit. It is worth reminding ourselves that although to many opinion formers, journalists and others, this is a relatively hidden market, it is not at all a small one. The leader in home credit provision claims to visit one in 20 UK households every week. The leader in the rent-to-own sector has almost 250 stores and hopes to double that number. Payday Loans—as we have heard, a relative newcomer on the scene—already has between 1 million and 2 million customers a year.
Most people who look at this issue end up concluding that we need a three-pronged strategy to deal with it. The first is about education and advice, both before the fact and when people get into trouble; the second is about smart regulation, including disclosure to make it obvious to people what they are taking on; the third is the provision of alternatives. All three are vital, either directly or indirectly, to the provision of debt management advice—directly because advice is one prong, and indirectly because they impact on the need to have that advice. I shall talk briefly about these three in reverse order.
Starting with alternatives, hon. Members will not be surprised to hear me mention the importance of credit unions. Credit is a fact of life. Although we all occasionally meet people who say, “Well, if you haven’t got much money, you shouldn’t borrow”, the fact of the matter is that it happens at every level of society to help people get through the ups and downs of life. Childbirth and Christmas can happen to anybody—[Interruption.] I accept that childbirth is unlikely to happen to me. We need affordable and responsible lenders to operate in the market. Credit unions provide affordable loans, promote financial inclusion, get more people to have bank accounts, which has a big knock-on effect, and encourage savings. With savings, people are much less likely to find themselves getting into debt problems later.
I congratulate both the current Government and their predecessor on their support for the credit union sector. They have taken different but equally positive approaches. The new legislative reform order will mean the liberalisation and potential growth of the sector; the coalition’s £73 million modernisation fund will help it to become self-sustaining over the medium term; there is a possibility of its working with the post office network—for instance, introducing “jam jar” budgeting accounts—and there are many other interesting and exciting opportunities.
Many Members have spoken about aspects of regulation. This is clearly not the occasion on which to go into detail about the regulation of the high-cost and sub-prime credit markets, because we do not have enough time, but I should like to touch on some key points. Other Members have mentioned the potential for caps on the cost of credit. At times during our debates about this subject in the Chamber it has seemed that there may be a simple answer to the problem, but there is not.
A blunt and general cap on the cost of credit would have few positive results and many negative ones. It would, for example, push a large number of people out of the legal credit market and into the arms of those whose idea of a late-payment penalty is a cigarette burn on the forearm. It remains true, however, that some form of usury limit exists both in the European tradition, in countries such as France, Germany and Italy, and in the Anglo-Saxon tradition, in countries such as Australia and Canada and—as we heard earlier—many American states. That does not mean that they are all correct and we are wrong, but it should at least make us ask, as the hon. Member for Makerfield (Yvonne Fovargue) did earlier, what we can learn from abroad. I know that the Minister and the Government as a whole are keen on that idea. A variable cap may well be possible, and I know that Bristol academics are considering that as we speak. I have my own particular hobby horse: I think that a limit to the annual interest rate and a separate one-off introductory or set-up fee, also limited, would be a successful formula.
Members have mentioned the way in which debt mounts up as a result of rollovers and the accumulation of behavioural problems, and that too needs to be considered. Perhaps most important of all is the need to ensure that debt is affordable by imposing a requirement to that effect on lenders. The hon. Member for Makerfield mentioned the Centre for Responsible Credit. She and I attended the launch of a report that laid bare the massive difference between the affordability of credit at the high-cost or sub-prime end of the market and its affordability at the mainstream end.
In some American states there is a requirement for operators to pool data with a central agency. That is specifically in the payday sector—the distinction is important—but in any case I do not think that there would be any appetite for such an operation in this country. It does not accord with our way of doing things, and even if it did, there would be huge IT problems, My God, imagine trying to hook up every sub-prime and high-cost credit provider in this country—not just in the payday sector—into a database. It would be a nightmare, and the fact that the credit reference system seems to work so poorly at present—some people have eight, nine or 10 loans by the time they seek help from the likes of the Consumer Credit Counselling Service—does not bode particularly well. There may be possibilities, however.
John Pugh (Southport) (LD)
The hon. Gentleman’s speech is teaching me a great deal, but is he implying that debts can be affordable without a usury cap, or that a usury cap is necessary for them to be affordable?
Damian Hinds
Obviously credit can be affordable without a usury cap. It depends on the price that is set. I am increasingly of the view that there probably is room for some form of cap, but that it should not be a blunt and general cap that would have all sorts of unintended consequences. As I said a moment ago, I do not believe that there would be any appetite in this country for an enormous central database storing credit transactions involving every conceivable type of provider and every single citizen of the United Kingdom so that loan applications could be compared with earlier ones.
Affordability is now a principle in the OFT guidelines. There is an argument that lenders should have a general duty of care to make reasonable efforts to ensure that the loans they provide are affordable to the consumer, and also that the loan does, indeed, get paid down over time.
Yvonne Fovargue
At present, however, even the most up-to-date credit reference agency updates only once a fortnight. My constituent who took out six payday loans in a day would not be stopped by that. Most of our payday lenders come over from America, where they are registered with one agency that regulates only payday loans as a short-term means of lending.
Damian Hinds
That is a perfectly legitimate and credible line of argument. The hon. Lady mentioned, however, that the payday lending market barely existed in this country five years ago. There are many other high-cost forms of credit, so this market has a remarkable ability to shapeshift, and targeting just one sector will result in the growth of other sectors. Not all the states in America have the payday loans regulations the hon. Lady mentioned, but those that do have experienced growth in other areas of lending, such as rent-to-own loans. Somebody always picks up the slack in the market, therefore. I am not arguing against all regulation, but I am arguing that what appear to be easy and general solutions are usually ineffective.
Education and advice are essential. Some people would say that the best advice on debt that we could give to individuals—or to Governments—is, “Don’t.” To be a little more nuanced, we could say that capital spending—people investing in themselves through investing in their education, their home or a car that will help them get to work—is a legitimate reason to incur debt, whereas current spend is usually to be avoided unless people can be confident they will be able to pay the money back. In other words, people must ensure that in the ups and downs of life there are not only downs, but an up will come, too. We might call that a golden role. Opposition Members will recognise that term, and they will also appreciate how important it is to stick to the golden rule and not change it part way through.
My hon. Friend the Member for North Swindon (Justin Tomlinson) has done amazing work not only in running the all-party group on financial education for young people but in raising the profile of this issue. I agree that young people must be equipped with the necessary skills for when they enter adulthood and the marketplace, and I believe the best way to do that is through maths, because if people understand percentages and so forth, they can assess all sorts of financial products. If schools and society are doing their job well, people will understand their self-responsibility too, which is also very important.
There will always be a need for a backstop solution for when things go wrong and I believe that debt counselling and advice should be mainly industry-funded. It must also be available through all channels—online, telephone and face to face. However, we must accept that face-to-face advice is massively more costly than the other channels. The hon. Member for Stockton North cited Citizens Advice cost-benefit analysis figures in respect of debt advice, but they are slightly exaggerated as they represent not the return to the Exchequer, but a much broader view of cost-benefit analysis taking account of the benefit to the economy. We must accept that face-to-face advice is costly, but, as my hon. Friend the Member for North Swindon rightly pointed out, it is essential to have that provision as it is important for some of the most vulnerable members of society. I am delighted that the Money Advice Service is focusing on how it can improve productivity—the case load throughput per person—in order to make face-to-face advice more affordable.
There is a role for debt management companies. There are hundreds of them and we must not over-generalise. On the other hand, a considerable number of them have got into trouble with the OFT, which suggests there might be a systemic problem in the sector. It is worth bearing in mind the circumstances of the customer that a fee-paying DMC will take on. They are, as has been said, typically not letter-openers. They often have unrealistic optimism about how the circumstances of their lives are about to change and turn around and, conversely, they have an enormous myopia about fixing today’s problem and today’s bills rather than looking at how to lay down long-term foundations. They are, almost by definition, quite easily swayed by good advertising—usually by either the first ad they see or the last. That all means that they are quite susceptible to the offer of an apparently easy solution whereby somebody else will take on the administrative burden and deal with the range of creditors on their behalf and they will focus on the smallness of the monthly payments rather than on how the alleged solution will bring them into long-term financial health.
That means, in turn, that the successful companies in the sphere tend to be those with the biggest marketing spend, the biggest promises, the longest repayment term on the loan and therefore the highest conversion rates. Although they will have a substantial drop-out rate, it does not matter so much if they have charged up-front fees that mean that they have ensured that their cash flow is safe. I hear from my excellent citizens advice service in East Hampshire that debt management companies all too often fail to consider the consumer’s overall position, the priority debts that they must pay first and their ability to pay back the loan schedule.
Yvonne Fovargue
The hon. Gentleman might be interested in a text that a colleague has just received—the Minister might be interested, too. It is cold calling from a debt management company and says that there is new legislation that means that debts can be written off. Is the Minister aware of introducing that new legislation? That is how people get drawn into the debt management companies.
Damian Hinds
Indeed. Remarkably, the hon. Lady might even discover that such texts seem to come from the Government on occasion. For the avoidance of doubt, let me state that they do not. Those are the sorts of tricks and ploys that are played, with a lot of subtle suggestions without saying anything. We probably know people who are not generally credulous who, from time to time, receive such a thing and take it as genuine.
I apologise for being almost boring in the extent to which I am going to agree with all previous speakers—[Hon. Members: “No!”] You are too kind. There is a remarkable degree of consensus among Members from all parties. Cold calling and canvassing for such businesses have no place in a responsible marketplace. The front-loading of fees sets apart the true interests of the customer and the provider. Although banning it might be excessive, we need to get rid of the front-loading and ensure that the operator has an incentive to see the individual through to financial security.
Finally, on search marketing and the extent to which people are actively searching for debt advice rather than being bombarded with marketing messages, I do not think we need to wait for a law or new regulation. There is only one substantial operator in that market. It is called Google and I am sure it has a corporate social responsibility department. I hope that it will read the transcript of the debate and take it on itself to ensure that although it will suffer some diminution in pay-per-click marketing fees, it can put free, respected and valued debt advice services at the very top of the list of the results when people search.