High-cost Credit

Debate between Damian Hinds and Justin Tomlinson
Thursday 5th September 2013

(11 years, 2 months ago)

Commons Chamber
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Justin Tomlinson Portrait Justin Tomlinson
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I thank my hon. Friend for that intervention, because it relates to my very next point and means that I now have longer than seven seconds to summarise that.

The Government should do more to promote a savings culture to prevent consumers from finding themselves in positions of stress in which they do not have the time to make an informed decision. Also, as many Members have said, we should strengthen credit unions and examine innovative products that come along involving community-based people who know the interests of their local community. There are many good examples that we should champion.

Finally, we must consider the mainstream institutions. They were caught sleeping, and the market has changed. It has gone online. People do not necessarily want to turn up at a bank in a suit to justify themselves. The market developed because there was a gap and the consumer wanted online services. We all instinctively trust the traditional institutions to do a better job, but they need to be in a position to do so.

Damian Hinds Portrait Damian Hinds (East Hampshire) (Con)
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I am grateful to my hon. Friend for giving way during his persuasive speech. Does he agree that the traditional, mainstream financial institutions could and should also innovate in the area of budgeting accounts, or jam jar accounts? Those accounts help to prevent people from tripping into debt in the first place and can also help to foster the savings culture that he mentioned. By siphoning off small amounts of money on pay day, people can build up a small savings account.

Justin Tomlinson Portrait Justin Tomlinson
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I thank my hon. Friend, who has been a champion of plans for jam jar banking. It is a fantastic idea, because we all know people who, even with the best will in the world and the best financial education, are not fantastic at handling money—that is true of many of us. At times of distress, such as death, family breakdown, partnership break-ups or unemployment, they can quickly be overwhelmed. Products that can help people manage as well as possible on limited money give the consumer power. As I said, we need to ensure that the consumer is in the driving seat. If we can do that, the market will respond in a way that is better for the consumer.

Financial Services Bill

Debate between Damian Hinds and Justin Tomlinson
Monday 10th December 2012

(11 years, 11 months ago)

Commons Chamber
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Damian Hinds Portrait Damian Hinds (East Hampshire) (Con)
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It is an honour to follow the hon. Member for Walthamstow (Stella Creasy), and to speak in favour of the spirit of Lords amendment 78.

The problems of high-cost sub-prime debt are widely acknowledged. Although they have come much more to the fore through opinion-formers of late because of payday lenders, they are not, of course, new, and by extension—this is somewhat at variance with what the hon. Lady said—it is not new that Government are not capping the cost of problem credit. It worries me slightly that we use the term “payday” as a catch-all shorthand for all these problems, and I hope that the Minister will reassure us that we are not just talking about payday lenders.

Dealing with problems of this kind requires an integrated approach involving financial capability and the provision of alternatives for people who need access to credit, but it also requires regulation. Disclosure is not enough in this market, especially as it often involves very vulnerable consumers and the ready, easy availability of credit. It could be said that supply sometimes creates its own demand. Some people tend to opt not for the solution that best suits their needs, but for the most recent that they have seen. In seeking to address these costs, however, we need to look at costs in the broadest sense. This is not just about interest rate charges.

Justin Tomlinson Portrait Justin Tomlinson
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On the question of percentage charges, if we displayed everything in cash terms it would be far easier for even the most vulnerable consumer to make an informed decision.

Damian Hinds Portrait Damian Hinds
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Yes, total cost of credit information is a good way forward—although, ironically, that would please a lot of payday lenders because, relatively speaking, they would not look quite so bad.

This is not only about interest rates; it is also about ensuring that credit is eventually paid down, and about behavioural charges, which can be difficult to pin down under the annual percentage rate as they apply to some consumers, but not others. An APR cap on its own might seem like a panacea, but, as Members on both sides of the House realise, it is not. Unfortunately, there are ways around caps. The experience of some states in the United States where there has been a 30% cap on payday loans is that the rent-to-own sector gets a great boost, because money can be made in another way: by whacking up the base price of the goods.

If there is to be a cap—and I think there can be a place for a cap—we must talk about what sort of cap it will be. I have always argued that a blunt general cap is a bad idea, because it can only be set either so high as to make no difference or so low as to put some parts of the market out of existence entirely and thereby run the risk of driving more people into the unlicensed part of the market, where someone’s idea of a late payment penalty is a cigarette burn to the forearm.

Jam Jar Bank Accounts

Debate between Damian Hinds and Justin Tomlinson
Tuesday 28th February 2012

(12 years, 9 months ago)

Westminster Hall
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Damian Hinds Portrait Damian Hinds (East Hampshire) (Con)
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It is a great pleasure to see you in the Chair this afternoon, Ms Osborne.

For most of us, using a current account is as natural and normal a part of modern life as indoor plumbing, but it was not always so. Many hon. Members will remember their parents coming home with weekly wages in cash, in an envelope with little holes in it so people could count the money when it was given to them. On arrival at home, the cash would be divided into amounts for the rent, the bills, housekeeping and, hopefully, savings for an unexpected bill, school uniforms or Christmas. The sub-divided amounts would typically be kept in separate boxes, tins or jam jars, from which this debate takes its title.

Most households have changed a lot since then, and there are many advantages to that evolution. For most jobs now, people need a bank account to accept their salaries or wages, and people also need an account to pay the rent or the mortgage. People’s money is also safer in a bank than on the kitchen windowsill. As payments through direct debits and standing orders cost less for financial institutions to process, bank accounts give people access to better deals. A bank account also becomes a gateway to other financial services.

Much progress has been made over the last number of years on that front. The number of people without a transactional bank account, including a basic bank account, fell by about a half between 2003 and 2010 to just 1.5 million households.

As I said, there are many advantages to the transition, but there are also some drawbacks. For a start, there is loss of control, particularly with things such as direct debits. Although people set them up, they happen subsequently without people actively having to do anything.

Justin Tomlinson Portrait Justin Tomlinson (North Swindon) (Con)
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My hon. Friend has secured a fantastic debate.

Our extensive research in my all-party group on financial education for young people highlighted loss of control as a particular problem. Some 91% of people who got into financial difficulty did so because they kind of lost control, and my hon. Friend has highlighted exactly why that is happening.

Damian Hinds Portrait Damian Hinds
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My hon. Friend goes right to the heart of the matter. There can also be a feeling of being rather flush on payday and a danger of people not making provision for unexpected, or sometimes even expected and known, subsequent liabilities.

Although most of us enjoy free in-credit banking, nothing in life is free; there is a cost to operating bank accounts. The point made by my hon. Friend the Member for North Swindon (Justin Tomlinson) also goes to the heart of that issue. The provision of free banking relies on people making mistakes and incurring penalty charges. Research for the financial inclusion taskforce has shown that low-income families that move to have a bank account in order to save money through direct debits and so on found that those savings were entirely wiped out by penalty charges, which averaged £140 in the first year. That combination of factors, as my hon. Friend says, can lead to people tripping into debt, which can then spiral. I mentioned people who do not have a transactional bank account, but many choose to manage in cash even if they have a bank account.

Energy Prices

Debate between Damian Hinds and Justin Tomlinson
Wednesday 19th October 2011

(13 years, 1 month ago)

Commons Chamber
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Damian Hinds Portrait Damian Hinds
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The fact that the hon. Lady made those points does not make them bad points, and there will be further detail to come. Things do not necessarily have to be on the face of the legislation. As the green deal is introduced, I am sure that ensuring that the most vulnerable households share the benefits will be high on Ministers’ list of priorities.

The second point that I want to cover briefly is about complexity in the market. We know that there are hundreds of tariffs on the market—one of which, slightly inexplicably, involves getting a free football shirt. In some ways, complexity in the energy market is a reflection of increasing complexity in consumer markets in general. Those visiting the Sainsbury’s wine aisle now need to take a Hewlett Packard scientific calculator to work out the best deal, whereas those looking for a savings account or a credit card deal need to spend quite a long time working out the best deal in the first place and, more importantly, need to be sharp and ensure that they cancel it at the right time to get the savings. Things are becoming harder for consumers, but they are especially difficult with energy because it is that much less tangible and has that much more complexity to it.

Justin Tomlinson Portrait Justin Tomlinson (North Swindon) (Con)
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I congratulate my hon. Friend on making an excellent speech. On empowering consumers, one of the challenges is that most people are incentivised to switch accounts when their prices are hiked, only to find a few weeks later that their new supplier has also hiked its prices. Does he agree that one solution would be to block price rises for new customers for the first six months after signing up to a new tariff?

Damian Hinds Portrait Damian Hinds
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My understanding of the recent Ofgem announcement is that there is some provision for ensuring that what it calls innovative price tariffs must have a fixed element to them—funnily enough, I was just coming to more or less that very point. I welcome Ofgem’s new requirement for a single, simple tariff per payment type, but we need to ensure that that does not beguile us. I used to work in the hotel business, and anyone who has ever stayed in a hotel might be familiar with the rack rate. That is the price pinned on the back of the door, which is nominally a perfect reference price that people can use to compare hotels. The problem is that hardly anybody pays the rack rate; rather, all the competition centres on the other rates. That does not mean that such rates are a bad thing, but we would not necessarily be able to say that we had thereby solved the problem.

When it comes to solving the problem, we have to remember that the comparison websites—all the puns about meerkats and Go Compare were getting a bit much earlier—are commercial enterprises. Although they allow people to compare, the click-through payments that they receive mean that they have an incentive for screen biasing. The Consumer Focus code and accreditation are welcome, but that is not quite the same thing as ensuring that comparison sites operate absolutely perfectly in the public interest. I hope that it might be possible to consider a new model of comparison websites to sit alongside those that already exist, which would be broadly modelled on a website called Lenders Compared. I do not know how many hon. Members are familiar with Lenders Compared—probably not that many—but it was set up as a result of the Competition Commission investigation into high-cost lending and enables consumers to compare the cost of various home credit operators and others.

Co-operatives and Mutuality

Debate between Damian Hinds and Justin Tomlinson
Thursday 30th June 2011

(13 years, 4 months ago)

Westminster Hall
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Westminster Hall is an alternative Chamber for MPs to hold debates, named after the adjoining Westminster Hall.

Each debate is chaired by an MP from the Panel of Chairs, rather than the Speaker or Deputy Speaker. A Government Minister will give the final speech, and no votes may be called on the debate topic.

This information is provided by Parallel Parliament and does not comprise part of the offical record

Justin Tomlinson Portrait Justin Tomlinson
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I thank the hon. Gentleman for his intervention. In an ideal world, we would have cash-for-cash comparisons if people wanted to borrow money. I echo the comments about doorstep lending. The Minister feels strongly about it, and it really needs to be dealt with. The sales techniques are nothing short of disgraceful.

Damian Hinds Portrait Damian Hinds
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Does my hon. Friend agree that despite the apparent attraction of straightforward interest charges being disclosed, they lack something because they do not cover any of the behavioural charges. There is no perfect way, but it would perhaps be slightly closer to perfect to have disclosure of both the set-up costs for the loan, and the interest rate on top. That twin-rate approach is much more reflective of lenders’ cost structures.

Justin Tomlinson Portrait Justin Tomlinson
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I absolutely agree. The key message is that the Government are reviewing the matter, and they should do so with time and patience to make sure that it is delivered in the right way that people can understand. We do not want to fall into the trap of obvious headlines, because that would just make the situation a lot worse.

On public services, I spent 10 enjoyable years in local government, four of them as a cabinet member making key decisions. I fully support the principle of allowing staff with front-line experience, and who are fuelled by their direct passion, to make a difference and have a greater say in how services are delivered, instead of remote politicians—this applies to all of us—without that experience.

I pay credit to the Co-operative shops—my local shop is a Co-op and its cheesy tasty bread is very good—for the way they conduct the elections to their board. Every member—I am a proud member of my local Co-op—is sent a clear booklet, and as we consider creating elected police commissioners and having other elections, that may be a model to consider, especially if we manage to ban political parties from being involved in such things.

Consumer Credit and Debt Management

Debate between Damian Hinds and Justin Tomlinson
Thursday 3rd February 2011

(13 years, 9 months ago)

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

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

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

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

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

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

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

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

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

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

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