High Cost Credit Bill
Debate between Damian Hinds and Robin Walker
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.
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.