Consumer Credit and Debt Management

Duncan Hames Excerpts

Thursday 3rd February 2011 Commons Chamber

[Duncan Hames (Chippenham) (LD)]

I should first declare an interest as a member of the West Wilts credit union.

I congratulate the hon. Member for Walthamstow (Stella Creasy), who has done so much to raise the profile of this issue in a matter of months since we have been in the House, and all Back Benchers who helped to secure this timely and important debate. I also acknowledge that my hon. Friend the Minister has an admirable track record on financial inclusion that is far longer than mine.

I understand that the Government seek to make policy on the basis of strong evidence and wide consultation, and that my hon. Friend must properly consider all the submissions that his Department receives. However, I have long been clear in my mind about the moral imperative for action, as well as to the practical case for certain caps on the total cost of borrowing.

Back at the hustings meeting at which I was first selected as the Liberal Democrat candidate for Chippenham, I was asked this popular and well-worn question: “If you could make any new law, what-would it be?” I said that I would cap the cost of consumer lending. I am not generally inclined—[Interruption.] Opposition Members who are looking to establish some consensus in the House would do well to welcome those who support the motion. As I said, I am not generally inclined to rely on new laws and regulations, but it seems to me that capping the cost of consumer lending would be a suitable exception.

High-cost consumer credit works for some people. It can provide a useful bridge across a difficult period. Some consumers use such services in a fully informed and responsible manner and derive benefit from them. However, I also see too many of my constituents caught up in vicious cycles of debt and trapped by unscrupulous and irresponsible lending.

It can be particularly difficult for people to resist taking on further unaffordable borrowing when a representative of the lender is in their home, seemingly innocently chatting about what will get them through Christmas or a child’s birthday. Those tactics will be familiar to colleagues across the House from their surgeries and casework. In my view, they are exploitative.

In advance of this debate, I was contacted by Glenis Ansell, a financial inclusion officer from Wiltshire’s Community First, who works with constituents of mine in Chippenham. Through the Wiltshire Money Line, she works closely with the county’s four credit unions and its housing associations to deliver responsible and reasonable lending to local people. That is an excellent example of efforts to expand access to affordable credit, which we are calling for in both the motion and the amendment. Last year, they saved £250,000 in interest payments alone, and I commend them for their work.

In her work, Glenis sees first hand the appalling toll taken on some vulnerable people, who are targeted by doorstep lenders. She reports cases in which vulnerable adults become too scared to open their own front doors for fear that they will be confronted again by agents demanding repayment. She put to me this perfectly straightforward question: what protection is there for vulnerable people who are targeted by legal but unscrupulous lenders? I hope the Minister answers that for her today.

A range of caps on the total cost of loans would go some way to addressing that very point. I am aware that the Government have some anxieties about prejudging the outcome of their consultation, but I would not want those anxieties to prevent the House from taking a positive view towards the proposed cost-of-credit caps. I therefore intend to support the amendment tabled by my hon. Friend the Member for Worcester (Mr Walker).

--- Later in debate ---

[Stephen Lloyd]

The hon. Lady raises a good point, and an important one. There will be some anomalies, but when I did the research I found that the majority of people who use payday loans pay them back regularly, otherwise the business model would collapse. I hope to be able to explain that as I go through my remarks.

The companies offer credit to those who are financially excluded by larger and seemingly more reputable financial institutions, such as those banks that are now owned by the taxpayer. Although some of those loan companies have been associated with inescapable cycles of debt, as my hon. Friend the Member for Chippenham (Duncan Hames) mentioned earlier, and with poverty, as noted by pressure groups such the excellent End Legal Loan Sharking, I now recognise that the whole issue is simply not as black and white as it has been painted.

[Duncan Hames]

Does my hon. Friend accept that the huge growth we have seen in the sector recently is an indication of how profitable this business is for those organisations?

[Stephen Lloyd]

My hon. Friend is absolutely right. The figures I have show that the sector is worth in excess of £1 billion per annum, and heading towards £1.5 billion, so it is clearly very profitable. That is the point I want to make, if Members will bear with me.

The blunt reality is that many disadvantaged people simply do not have access to high street banks, which we all take for granted, and consequently they are forced to look elsewhere. They have no choice, and there is the rub. It is not simply people with poor credit ratings who seek the services of firms offering payday loans. A reality check is needed, because in modern society across the UK there is a real and present demand for quick, short-term loans to bridge the gaps between when individuals need money and when they are paid.

Those people need the money for quite normal transactions, such as paying for a grocery bill or for an MOT, and they need it for the short term, just a couple of days before they get their payday cheque. The money is for mundane expenses that everyone has experienced, but they can be very different for people who need payday loans, because in that area a failure to find the money can quickly lead to a crisis that will take them from normality to abnormality in the space of 24 hours. That is a problem, because if well-meaning pressure groups are successful and able to see off established payday loan companies or force some of them to withdraw from the market, where will people turn?

The hon. Member for Walthamstow made the point in her Westminster Hall debate that just six companies are responsible for 90% of business in that market. Although I do not necessarily agree that that constitutes an uncompetitive market—six major supermarkets in this country control 90% of their whole sector—I feel that regulating the market further might make it even less competitive. I think that greater monitoring of payday loan providers by the Office of Fair Trading to ensure that they are acting in a moral and responsible way and in the best interests of the consumer would be the right way forward. Financial exclusion is a horrible and vicious cycle, and poorer families can spend an additional £1,000 per year on essentials.

That brings me to our high street banks, which are an integral part of this country’s economy and vital to our recovery. All the banks in this country, however, are still in existence thanks to the massive 2008 bail-out at huge cost to the taxpayer—all of them. Yet, those banks continue to ignore a great number of taxpayers to whom they owe so much. In the banks’ defence, they claim that such customers are high-risk and unprofitable, but banks are unable to understand their needs and inaccurately assess the risks they pose.

The sector is worth £1.2 billion and clearly profitable, as my hon. Friend the Member for Chippenham said, but it ignores those 6 million people, so they are left to the payday loan companies, none of which I should want to be great friends with. My point is, however, that because the banks do not step in, the payday loan companies have to, and without them the situation might be catastrophic for the many millions of people who need them so desperately.