Rent-to-own Sector

Debate between Damian Hinds and Yvonne Fovargue

Tuesday 14th July 2015 Westminster Hall

[Damian Hinds]

I will have to write to the hon. Lady about the details of the regulation on bundling. In general, price bundling in markets is not illegal, but on the specifics of this market I will have to get back to her.

The Government have set up the Money Advice Service, which provides a single point of debt advice for consumers and allows those who face problems with debt to obtain free and impartial money advice. This year, MAS will spend £47 million on debt advice, delivering through its third sector partners an increase of almost £9 million on the previous year.

It is important to take a joined-up approach to the provision of free debt advice. Following the independent review of MAS, the Government welcomed the creation of a debt advice steering group, which will help to improve the effectiveness and efficiency of free debt advice provision by bringing together senior representatives of the debt advice charities, high street banks, water and energy bodies and devolved organisations.

[Yvonne Fovargue]

I welcome the fact that there will be a body, but is it not appropriate to get local authorities involved as well, because they quite often fund free debt advice in their areas? I also feel that the Local Government Association needs to be involved in the body.

[Damian Hinds]

The steering group will be an open forum to involve all relevant and interested parties, and I take on board the point that the hon. Lady makes. I wanted to come back to a point that she raised earlier, which my hon. Friend the Member for Blackpool North and Cleveleys also mentioned: where the consumer stands in relation to part-paid goods. The Consumer Credit Act 1974 states that in a hire purchase agreement, a court order is required to repossess goods if a third of the total cost has been repaid. Furthermore, where 50% of the total price has been repaid, a consumer can return a product without penalty and the agreement will finish.

Debt Advice and Debt Management

Debate between Damian Hinds and Yvonne Fovargue

Thursday 1st December 2011 Commons Chamber

[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.

--- Later in debate ---

[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.

Finance (No. 3) Bill

Debate between Damian Hinds and Yvonne Fovargue

Monday 4th July 2011 Commons Chamber

[Yvonne Fovargue]

At any one time there are 5 million to 7 million people in this country who are unbanked or who do not have a credit history. In the main, they are the people who turn to high-cost lenders, because they do not have a credit history and they have nowhere else to go. Personal debt is rising, with 46% struggling until pay day, up 8% this year. Again, they are the people turning to the payday lenders.

I take issue with the claim that the rate has grown in the last decade. When I started in the advice field 20 years ago, there was one high-cost lender, Provident, which targeted a specific market. Provident went round the estates, using neighbours and talking to people. The company would go in—here I also take issue with the claim that people use the money on luxuries—and find people who needed to replace their broken cooker. The neighbour would come in, look at the cooker and say, “Oh yes, I can lend you that money.” When the loan was nearly repaid, Provident would come back and say, “Tell you what, your sofa’s looking a bit shabby. It won’t cost you much more to get a sofa,” and people would get trapped in a cycle of debt. However, in one respect, Provident was reasonably easy to deal with, because there was one company with a specific target group. It was possible to go round and talk to individuals, target schools and visit the residents groups that the people concerned attended. It is much more difficult now. The explosion of advertising and the normalisation of the process have made it so much more difficult to control the market and tell people what the dangers are.

I had a constituent come to me in February, as soon as he realised my interest in the subject. He could not quite manage to the end of the month—I think his car tax was due—and he had taken out a payday loan. The company immediately took the payment and the interest out of his bank account the next month. He realised that he could not get to the end of that month either, so he took out another payday loan. That carried on and in the end he had 10 payday loans and all his salary was being taken from his bank account. That was a man who was working. Such companies are supposed to check that people can afford to pay the money back and that they do not have other credit, but that did not happen in this case. For such companies, self-regulation absolutely is not working. That company was not an illegal loan shark: it was a legal company and it did not threaten to break the man’s legs, but it left him in a cycle of stress and depression that he found very hard to get out of.

I am also concerned about the double whammy that these companies are operating, as many of the companies that put people into debt are opening debt-management arms to get people out of debt as well. When the financial inclusion fund was finishing last year, those companies were circling like sharks. I cannot tell hon. Members how many companies contacted me basically gloating and saying, “There will be no, or very limited, free debt advice, so people will have to turn to us and you will have to deal with us now.”

I welcome the Money Advice Service because any advice on budgeting is welcome, but that service does not replace face-to-face debt advice. There is a need for that kind of service to be available—and more freely available than it is now. People have what I call behind-the-clock syndrome. They get into debt and cannot face opening the letter about their debt so they put it behind the clock. When they get the next letter, that also goes behind the clock. I cannot tell hon. Members the number of people who used to come into the bureau with a carrier bag whom I would look at and think, “They are in debt”. They would have a carrier bag full of letters that they could not face opening. People are not going to deal with a telephone or online service if they cannot even open a letter. There is a need for free, impartial, face-to-face debt advice and for regulation of debt management companies. Self-regulation is not working. It did not work in America, and when America regulated, those companies started coming over here because they like what they see.

[Damian Hinds]

Does the hon. Lady agree that while the availability and accessibility of free debt advice are important, visibility is also important? When people do get around to opening letters and starting to seek help, if they search on internet search engines for debt advice, Citizens Advice and the Consumer Credit Counselling Service ought to come at the top of the list even though they cannot afford to compete with debt management companies on pay-per-click rates. Should we not exhort Google and others to make sure that those services are duly highlighted?

[Yvonne Fovargue]

I think that is an excellent suggestion, but there also have to be appointments available when people need them. It is no use searching for citizens advice bureaux if appointments are not available for six to eight weeks because funding to provide the very specialist advice that is needed has dried up. We have to make sure, first, that people get information about where they can go, and, secondly, that appointments are available.

Regulation of debt management companies is needed. They come at the top of Google and other search engines on the basis that they will be going out of business in two years’ time anyway, so they might as well make as much money as possible by charging up-front fees and charging as much as they can. If they do go bust, as two have recently, it does not really matter to them. I had a client come to me who had been paying £40 a month to a debt management agency for 18 months, at the end of which he owed his creditors more than when he had started. Those companies need to be regulated.

The new clause is one of the range of measures we need. We have to keep this issue high on the agenda because the longer we leave it, the more people will go to high-cost lenders and debt management companies and the more people will get themselves into a spiral of unaffordable debt. We have to act now. It is no use leaving this for another five or six months—how many thousands more will have got themselves into debt in that time?