Damian Hinds
Main Page: Damian Hinds (Conservative - East Hampshire)
Damian Hinds (East Hampshire) (Con)
It is a great honour and a privilege to follow the hon. Member for Sheffield Central (Paul Blomfield). I congratulate him on bringing the Bill to the Floor of the House and on securing the prized second position in the ballot. Of course, we on the Conservative Benches are delighted that our hon. Friend the Member for Stockton South (James Wharton) got the gold medal position, but the hon. Gentleman has achieved a very worthwhile and useful silver.
The Bill is also timely, as we are in a period of rapid change in high-cost credit. We have had the OFT review—operators are losing their licences for the first time—and the Competition Commission referral. We have the new FCA regime, whereby, for the first time, it can impose a general cap, should it decide to do so.
The Bill is timely and current, but the issues are not new; they have just changed in their shape and manifestation.
My interest in high-cost credit started in 2003, when I did a research project for the Bow Group that looked at various issues affecting inner-city areas, one of which was debt. I ended up doing that research only because nobody else would do the bit on debt, but I discovered that it is a hugely complex, interesting and challenging area. Among the recommendations we made—Members should bear it in mind that this was back in 2003 and we published in 2004—were a complete overhaul of information and disclosure on high-cost credit, including replacing APR as the headline measure with a cash figure for how much people would have to pay back. We advocated “new model” credit unions, with a save-as-you-pay-back product, a slightly eased cap on the APR they could charge and a social ISA, as a way of bringing more capitalisation into the credit union sector from better-off consumers. Some of those things have now been done, by the previous Government and this Government. We have an opportunity to debate some of the others today, thanks to this Bill, and I hope that others may yet fight another day.
That period—2003 to 2004—was about two thirds of the way through what Which? in its recent report calls the credit feast of 1997 to 2007, when borrowing increased from £77 billion to £190 billion. I make that point not as a party political point but to negate a different party political point that is sometimes propagated—that the growth of payday lending, high-cost credit and sub-prime is somehow the result of a Conservative-Liberal Democrat Government. It is not; it is just that the different types of product on the market tend to evolve and change over time.
There is a great deal in the Bill. I suppose it is unlikely that anybody here would agree with every single part of it, but I think that every single part of it is worthy of consideration. I suspect that all or the vast majority of us would agree on some aspects—for example, that loans should be made only to people who can afford to pay them back, and that lending companies should not pretend to solve problems that they cannot solve, especially when they might well be creating newer and greater problems.
Damian Hinds
Of course it is; no one would deny that—well, perhaps some would, but I certainly would not. There is a big issue about individual responsibility, but this market is a complex one, and it can be difficult for people to find their way around the jungle of credit that is available. People who take these loans are often in very vulnerable circumstances, and I am afraid that the purchase decision—people can blame whoever they like—often ends up being made not on the product that is “right for me”, but the one that the person has just seen on the television or the person who came to the door.
Mr Kevan Jones
Part of this Bill tackles the important issue of advertising, but does the hon. Gentleman agree that what is also needed, especially in schools and for young people, is education about APR and borrowing in general?
Damian Hinds
I agree, and I shall come on to the point, albeit briefly, later.
The second issue on which I think the vast majority of us could agree is that the loan should get paid down within a reasonable period and not be left hanging over people who never get the loan reduced in size—and it gets even bigger for some.
Philip Davies
My hon. Friend said he was concerned about people taking out these loans because they had just seen an advert, and my hon. Friend the Member for Christchurch (Mr Chope) suggested that some people take out loans irresponsibly. Research by the university of Bristol personal finance research centre seems to suggest something different—that there were logical reasons why people took out these loans: convenience, having no or limited access to other sources of credit, and the customer service and reputation of the firms concerned.
Damian Hinds
And there are multiple other reasons why people take out credit products, many of which are just as rational. I shall come on to some of them later in my remarks, but there is ample evidence to show that many people taking out loans—and the same applies when they access a debt management plan—choose something that is inappropriate. Even where comparative, side-by-side, costings are available—to those of us who studied economics and believe in consumer sovereignty and rationality, this is difficult stuff to get our heads round—consumers often take the more expensive option.
Mark Durkan
Is the hon. Gentleman’s answer to the point from his hon. Friend the Member for Shipley (Philip Davies) that the very fact that these products are advertised in a mainstream way as being so convenient is one of the things that gives them the air of reputability, which encourages people to opt for them as a standard and acceptable form of borrowing?
Damian Hinds
I am grateful to the hon. Gentleman. That may well be part of it. There is a range of operators in this market, stretching from the big and well known with very large ad spends—we can call them “reputable brands” if we like—through to quite iffy-looking companies at the other end of the scale. As in most markets, there is a range.
All these points—I am grateful to hon. Members of all parties for making them—bring me to the third point on which I think we should all be able to agree. Wherever people are on the political scale—whether they are a Milton Friedmanite free market economist or a socialist—they should agree that people should not have to go to excessive lengths to know that they are not being ripped off. There is, of course, a reasonable amount of due diligence that has to be applied when people make a purchase, take a loan or whatever, but they should not have to run around the block seven times to know that what they are taking out is reasonable value.
Those are the three things on which I hope we can broadly agree, and the debate largely revolves around how we achieve them. It is not always quite as straightforward as it appears. On occasion in this House and elsewhere, relatively simple solutions have been proposed that purport to deal with complex market issues in one big initiative. I suggest that that is rarely an adequate answer, as it is rather more complicated.
There are a number of rules of the road in the credit markets, and they have come into sharper focus for me as I have looked into this subject over the last few years. The first is that there are always unintended consequences—except when there are no consequences at all—of what regulatory authorities try to do. The second is that markets cannot be beaten unless something better is provided. The third is that where demand creates its own supply, supply creates its own demand. Let me explain in a little more detail what I mean in each of those cases.
On the unintended consequences, it is a beguiling and attractive prospect to say, “Let us just cap the amount of interest that lenders can charge on their loan products so that people will pay less and household budgets and benefits will go further.” The problem with a blunt and general APR cap is that companies find new products that slip outside the definition being regulated and new ways of making money that do not count as part of APR. To the extent that this cap, or something like it, is effective, its major impact is market exclusion, which inevitably means the most vulnerable and the poorest customers are those most likely to fall into the hands of illegal loan sharks and the sorts of people whose idea of a late payment penalty is a cigarette burn to the forearm.
When I say that there are sometimes no consequences at all, it can again be beguiling to think that we have done something clever, come up with an initiative, empowered consumers and so forth, but it turns out that no impact whatever was made. It is very easy for disclosures, warnings, signposting and so on to just become part of the wallpaper of life—like the bit at the bottom of the billboard chart that says, “Your home may be at risk if you do not keep up your payments on a mortgage or other loan secured on it.” In the case of this market, hon. Members may recall from the previous Competition Commission inquiry that there was, for example, a lenders-compared website, which was meant to help consumers who might be home credit borrowers to compare the price of home credit providers against credit unions and so forth. The problem, of course, is that nobody uses it. The regulatory authorities feel happy because they have provided something, but what they have provided actually does no good at all.
Mr Robin Walker (Worcester) (Con)
My hon. Friend is making an excellent speech. Does he agree that part of the problem is the fact that one of the figures or statistics that people often ignore is that for APR? Does he share my concern that, in a poll of students, significant numbers thought that the higher the APR the better, showing how poorly this measure is understood?
Damian Hinds
My hon. Friend raises an important and telling point. It is, as he says, a problem affecting students, but I am afraid that it exists for many older folks as well. It highlights the fact that a cash number might be a more appropriate headline figure on which to explain the costs.
My second rule is that if the market is providing something that people want and it seems to fulfil a need, it cannot be got rid of unless something better is provided. Credit is a fact of modern life. During the year, people have ups and downs in their expenditures patterns—around Christmas, birthdays and back to school, as well as when unexpected things happen such as a car or a relationship breaking down. Credit is one of the means that everybody uses—or almost everybody, whatever their income level—to help smooth out those ups and downs. It can be entirely rational—the point raised by my hon. Friend the Member for Shipley (Philip Davies)—even to take out a payday loan at a 2,000% APR if in so doing someone avoids unauthorised overdraft charges by the bank, which might cost even more. When the market provides something that has a use, it will not be got rid of until something better is provided.
My third point is that although, as I said, the market will provide and supply will follow demand, it is also true that demand will follow supply—on that at least, Galbraith was right. Payday lending in the UK in recent years has not grown because it has suddenly become more difficult to get from one pay day to the next. People have always struggled to get from one to the next and to pay unauthorised overdraft charges to tide them over for a short period. The difference is the availability of payday lending—partly, Members may note, displaced from the United States, from where a number of operators have come as the regulatory environment in the US has become more difficult. That suggests that there is some efficacy in regulatory restrictions.
All of that tells us that individual simple and grand solutions will probably not create the whole answer. We need an integrated approach, and, as the hon. Member for North Durham (Mr Jones) mentioned, we need financial education. That is one of three parts that have to constitute an integrated approach. The others are sensible regulation and disclosure and ensuring that there are alternatives to high-cost credit and to operators that we would rather people did not have to use.
To be fair to the Government, there is quite a strong story to tell on each of those points about action that has been taken and is being taken. Financial education is going to be in the national curriculum, and there will be a strengthening of mathematics in schools. On sensible regulation and disclosure, we have the new regime with the Financial Conduct Authority, which has the potential to be tougher and more effective than regimes hitherto. Even at the end of the old regime, we are now seeing a sharper and tougher approach from the Office of Fair Trading.
Finally, on alternatives, I am proud of the Government’s support for the credit union sector. We could say the same of the previous Government’s support, although this Government have gone further and are seeking to help the credit unions—those in Great Britain, I should say for the benefit of the hon. Member for Foyle (Mark Durkan)—be self-sustaining and a healthy sector, just as credit unions in Northern Ireland are, and at economic scale. There is also possibly more that could be done in exhorting the mainstream banks to live up to what they might do to ensure further financial inclusion and affordable credit.
Are the Government doing enough? I think it remains to be seen. To some extent they may be, and the new FCA regime could produce quite a dramatic change over time, with credit unions becoming bigger, offering an improved product range and so on. That will really make a difference, and with the lifting of the cap from 2% to 3% per calendar month, we will start to get into a zone in which short-term loans can take on parts of the payday lending market.
Big issues remain, however, and the hon. Member for Sheffield Central mentioned some of them. At the top of the list, of course, is the massive and visible growth in payday lending. One thing that has really made a difference to the public policy debate is that now that high-cost credit is on the side of buses a lot more people are paying attention to it than when it was only on daytime telly or on the back of tabloid newspapers. There are also issues to do with credit brokers and the Amigo model, which is a new model of credit whereby people get their mates to underwrite their loan, and then it turns out, lo and behold, to the surprise of that mate, that he or she gets stiffed for having to pay the loan later. We must also consider the behaviour of certain debt management companies, marketing practices and so on.
Through it all, we should not forget old-school credit. I have mentioned all the flashy new things that are clearly visible on the radar of public policy makers and commentators, but home credit is an enormous sector that is largely invisible to most of us, because most of the time it is a door-to-door activity on streets and estates, using an agency network and without advertising. The leading operator of home credit claims to have one in 20 UK households as regular weekly customers. It is an enormous business.
I turn to specific aspects of the Bill. I will comment on them in the sequence of the customer journey, starting with advertising. This is tricky for me to say, as I believe in free markets—I am a Conservative MP and was a marketer before I came to the House—but at some point we have to face up to the fact that not only sharp practice, such as dodgy or unrealistic advertising, but the volume of advertising in the credit market makes a difference. The sheer ubiquity of messages about the ease of access to credit and the problems it will solve has an impact.
I am not about to advocate some sort of volume restriction on advertising, but we must have that point in the back of our mind. I understand that the Government have commissioned some research on the effect of payday loan advertising on consumers, and that we will hear back on it in the autumn, to which I look forward. Without trying to restrict the total number of ads for credit, I think there are some things that everybody can agree are blatantly bad and should be stopped. One example, to which I think the hon. Gentleman alluded, was the £1,000 night out text that First Payday Loans sent to people. It purported to be from a friend and said, “I’m still out on the town and I just got £850 or £1,000, and you can too.” That is clearly bad practice in advertising.
I saw an advert on Sky News the other day for an instalment loan, not a payday loan. It said, “Quote this voucher code for 20% off”, and then in small letters on the screen, it said “20% off your first repayment.” There are 12 repayments, with 20% off the first one, so it is hardly a bargain. We need better enforcement on advertising, and the new regime can bring that.
More generally, as the OFT has said, there is too much emphasis on the speed and ease of getting credit. The terms of competition are, “We will do it faster than the other lot.” It is about fewer checks, less waiting time and so on.
Penny Mordaunt
Does the hon. Gentleman agree that for an enormous number of people who are going for such loans, it is extremely attractive not to have any face-to-face time? Often, they are intimidated by having conversations with a bank manager and so forth, and some of them are deeply embarrassed about the situation in which they find themselves. Being able to go online and spend 15 minutes getting a loan without any advice or any real time to think about it is an extremely attractive option.
Damian Hinds
My hon. Friend is entirely correct. It is not necessarily even about face-to-face time; even not having to provide a physical signature makes a difference. We cannot logically explain why that is so—it just is. Each hurdle makes people reflect further on what they are doing, and as things become quicker online, that creates an added danger.
Some of the advertising and marketing styles of payday loan companies in particular, such as using cutesy cartoon characters, are to my mind not really appropriate to people possibly getting themselves into financial trouble.
Jacob Rees-Mogg
I am very much enjoying my hon. Friend’s speech. It puzzles me that payday lenders seem to be exempt from the normal rules of “know your client” and money laundering. They prevent any investment house from receiving money, and it seems strange that companies can lend money without being obliged to follow them.
Damian Hinds
As ever, my hon. Friend makes a perceptive point.
I do not think that health warnings on advertising will solve every problem, but I do believe that there is a role for them. If we have health warnings on all sorts of other things now, it is reasonable that we have them on debt advertising.
We must also consider the representation of costs. APR is not a particularly helpful measure in many ways—once it goes past the first 1,000%, people start to think, “What difference does that make?” There is a natural argument for saying that there should be a cash cost comparison instead. However, there is no perfect solution. The formula that Which? proposes of pounds per 30 days seems to deal with the immediate issue, which is the growth of payday loans. It does not necessarily help with the comparability of all products, however, and with any cash comparison—the amount-to-pay-back figure—there is still the issue of how to deal with behavioural charges, which are an additional way of making money out of the customer. Companies can in theory charge a relatively low headline payback rate in the knowledge that they will make more money from missed payments and various other behavioural penalties. We may in the end decide that a cash comparison is useful, but we will still need the representative APR figure, and we will also need to have a proper analysis and debate about which behavioural and other charges should be reflected within that.
On agencies and intermediaries, I support the Bill’s provisions on credit brokers, underwriters and guarantors, and the Amigo model, but there is something else we need to be aware of: as the online market develops even further, there is a tendency in every sector—I saw this in my old sector of hotels and travel—for intermediaries to come in, particularly on paid search, and intermediate, and there is a natural inflationary pressure in that process, which in the end only ever gets passed on to the consumers. Whereas the internet is supposed to make things cheaper for consumers, and comparisons easier and markets freer, it actually tends to concentrate power with other people and add other costs, a lot of which end up going to search engine providers.
Affordability and cost limits is another important issue. Two types of limit can be applied. One is a limit on the cost of the loan—on how much companies can charge to anybody. The other is a limit on affordability, or how much credit can be extended to an individual given their circumstances. Both of them are very complex, which is implicitly acknowledged by the fact that the hon. Member for Sheffield Central says in his Bill that the FCA would have to decide exactly how these things work.
There are big arguments against having a cost cap, because of all the unintended consequences that I have mentioned, but if there is to be a cost cap, it ought to reflect the actual cost structure of extending a loan. In principle there are three elements of cost in extending a loan. The first is the initiation cost, including customer acquisition and credit checks. The second is the actual cost of capital. The third is the risk element, which will vary by customer-type.
If we recognise that and want to reflect it in a limit on the amount of interest that can be charged, we should end up having two elements to the cost cap. One of them is to cover the initiation of the loan, and the second is to cover the cost of capital and risk factor. The figure here would be something like a cap of 15% of the capital as a one-off, plus 30% as an annual interest rate. Sub-prime and high-cost credit providers that offer a range of loans seem to follow that sort of formula.
Philip Davies
My hon. Friend talked about assessing affordability and I just wondered whether he had any views about what information should be provided to the lender in terms of bank statements, proof of income and so forth. If this was just done on a self-verification basis, people could say anything they wanted to make sure they got the loan.
Damian Hinds
As ever, my hon. Friend tees me up nicely for my next point, which is about affordability. This is different from the issue of an overall cost cap. People need a bank account to get a payday loan, and payday lenders will typically require proof that they have a pay day on which a regular amount of income comes in. The Bill proposes a single real-time database. For myself, I think that is a step too far. This would be a database of every loan that everybody in the country has, and to be effective it would need to cover not only payday loans, but credit card debt, mortgage debt, car debt and all sorts of other debt. There are massive worries in that, relating to privacy, civil liberties, the concentration of data and, of course, what happens when, inevitably at some point, it goes wrong. I do think we need to look at serious reform of the existing credit reference agency system, however. It does not seem to work as it should when people who are overstretched and who have had eight, nine or 10 lines of credit extended to them go to debt advice agencies.
Another issue is making sure the loan actually gets paid down over time. There is a big fashion for restricting roll-over. We need to be careful about that, however, because it deals with the immediate issue we happen to face in 2013. I remind Members that 10 years ago roll-over was something we understood only in the context of the national lottery and 20 years ago we understood it only in the context of “10 in the bed and the little one said”. In terms of loan products, it is a new thing, therefore, and I would rather we instead had a general duty to make sure the loan gets paid down over time. That should apply to instalment credit and revolving credit as well as to payday loans. A product that is advertised as a 30-day loan should, therefore, be paid down fully by 60 or 90 days, but the payback should start before that 60 or 90 day point is reached.
Damian Hinds
I had better not, as I am about to conclude.
On debt advice referral, I agree with the hon. Member for Sheffield Central that signposting at points of risk is vital, but there are even simpler things we could do, such as making sure that when people are actively trying to signpost themselves to debt advice, they find it more easily. I am thinking in particular about internet search engines, where keywords can be purchased by commercial providers when we might prefer the search went immediately to not-for-profit organisations.
Finally, I want to talk very briefly about three issues that are not covered by the Bill, but which are closely related to it. I mentioned our not being able to beat something in the market until we come up with something better. The first issue relates to mainstream banks and the fact that part of the reason why payday loans are popular is because of the behavioural charges people incur at mainstream banks and the bounce charges. We need to work on that, and if possible remove the cause at source. There is no such thing as free banking; there is only banking which is paid for by different people in different ways at different times. There is cross-subsidy from people with more complex, perhaps even chaotic, banking affairs to people who have simpler banking affairs—or to put it another way, banks make money out of people going overdrawn accidentally and being charged for it.
This is politically difficult, but people ought to cover the real economic cost of their current account. If that were the case, it would pave the way for a different type of bank account—a jam jar account, or budgeting account—which would make it much less likely that people would trip into debt.
Damian Hinds
I apologise, but I had better not.
The second issue is alternatives and credit unions. I have already said I strongly support what the Government are doing, and with the 3%, rather than 2%, a month cap there is now the possibility of lending in the short-term market, but we also need to look at the costs credit unions face and make sure that in respect of loan initiation—particularly with credit checks and so on—it is possible for them to operate in that short-term market effectively.
Thirdly, on savings, if everyone had a small cushion of resilience against the car breaking down or the little things in life that go wrong and push us over the edge, there would be less likelihood of credit being needed. [Interruption.] The hon. Member for North Durham (Mr Jones) is shaking his head, and I wonder if he is saying to himself—or to me—that that was a naive thing to say.
Damian Hinds
I am grateful to the hon. Gentleman for that, but it is not a naive thing to say because we end up spending more, not less, by borrowing. I am not saying this is easy, but I am saying it is better to help people to build up that cushion, if at all possible. That is one of the things credit unions do; it is what the credit union movement is founded on.
Mr Jones
I agree with the hon. Gentleman’s point about credit unions, and I am actually a director of one. But the fact of the matter is that the people we are talking about are on low pay, intermittent pay or zero-hours contracts, which his party is in favour of, so they have no ability to save large sums. The Chancellor’s proposal on delaying the applications for jobseeker’s allowance for seven days will make it even worse for those people.
Damian Hinds
If the hon. Gentleman will forgive me, I must say that he makes political rather than helpful points on this subject. I did not say that these people had the facility to save large amounts of money. As a director of a credit union, he will know that the whole credit union movement is based, initially, on helping people to save. Many credit unions will have a “save as you pay back” process, whereby even where someone borrows from them they will find that at the conclusion of that loan they have a small savings pot, which will stand them in better stead for the future. If we move more towards budgeting-type banking—the so-called jam jar bank accounts—there will be the facility for small amounts of money to go, through payroll deduction, into a savings account. That has exactly the same effect, but at a cheaper rate, in terms of smoothing out the ups and downs of cost that people incur through the year.
In conclusion, I wish to congratulate, again, the hon. Member for Sheffield Central, who has done a great service in bringing all these issues to the House. We have a new regime and we have a lot going on from the Government, so we have to see how that beds down, but I am sure that today’s debate will push that forward.
Ann McKechin
I was interested to hear what the hon. Member for East Hampshire (Damian Hinds) said about the rate of interest, but it actually includes the risk of roll-over loans. So if someone does not take out a roll-over loan, they are actually paying more than the market should be charging them. I am very pleased that we have the inquiry by the Competition Commission, and I hope that that is one of the factors it will examine.
Damian Hinds
I think that the economics work the other way round. Lenders make a lot more money on the roll-over loan than on the previous loan, in general.
Ann McKechin
The hon. Gentleman is right, but the lenders build the risk into the interest rate they charge, so that rate is probably higher than it should be. If we controlled roll-overs, we could also control the amount of APR that the lenders then charge.
The inquiry by the regulator found that companies were making up to 50% of their money from customers who extended or rolled over loans, or who incurred late payment charges. That suggests that this market is out of control. It said that borrowers using payday loans have
“poor credit histories, limited access to other forms of credit and/or a pressing need to borrow”.
The Government need to look at the role of our major banks and, in terms of the unsecured credit market, why so few options are available to many borrowers. This is about extending the market options, through not only credit unions, but our high street banks.
Self-regulation, as in the US previously, has not worked. The Citizens Advice survey since the introduction of the good practice customer charter showed that payday lenders are regularly and systematically breaking their own promises; they are still not making adequate affordability checks or giving proper advice if debtors get into difficulties. We need a real-time recording system, paid for by the industry, not by the Government. Such systems already operate in many other international sectors and there is no reason why these self-same companies could not offer to install such a system in this country without delay.
The watchdog has been criticised. The Public Accounts Committee found that it had been “ineffective” and “timid”, and that it has failed to identify risks of malpractice. I spoke recently to someone who has worked in the US high-cost credit sector and he was astonished at the regulator’s lack of concern over recent years. Frankly, this has been perceived as a peripheral problem affecting “little people” who could not cope with their weekly finances. But in the meantime, huge numbers of people have, since the financial crash, seen their household finances severely squeezed. The growth in food banks and in the number of people who are distressed is increasing week on week. At the end of February, outstanding consumer unsecured credit lending in this country stood at £158 billion.
We have failed to invest enough in regulation. We have failed to control this sector properly. This Bill provides us with an opportunity to install proper regulation. I welcome the decision by the Government to move regulation to the Financial Conduct Authority, but that needs to happen sooner and it needs proper direction from Ministers. I am concerned that agencies such as Money Advice Service are still wasting time and money on useless adverts, one of which I watched last night, about mortgage advice—that sector is highly regulated and there is no sign of abuse in it—yet they are not actually tackling vulnerability. The Government cannot abdicate responsibility to a quango; they need to make it clear where those quangos’ priorities lie and that vulnerability has to be central to them.
I hope that the Government will take the opportunity to participate actively in the Bill to make sure that we can start to crack the problem, which is affecting every community in this country.