Gareth Thomas
Main Page: Gareth Thomas (Labour (Co-op) - Harrow West)
Jo Swinson
It is delightful to be able to return to the issue of high-cost credit and payday lending after that short interlude for the urgent question on tobacco packaging.
Before we were interrupted, I was saying that I really appreciate the particularly constructive way in which the hon. Member for Sheffield Central has brought forward this Bill, working with not only the wide range of campaigners outside this House but MPs across the House, including me. I am delighted to accept his request to have further meetings with him and campaign groups to continue to discuss the issue and how we solve the problems that he raises. I would also be happy to extend an invitation for him to meet the chief executive of the Financial Conduct Authority, which will obviously play a crucial role in the industry as it moves to become the regulator. I am sure that the hon. Gentleman would find that useful, as would the FCA.
It is important to say from the outset that the hon. Gentleman is spot on about the problems in the industry and I agree with him on roll-overs and affordability assessments. We know from the evidence that my Department has commissioned, the Bristol report and ongoing Citizens Advice surveys that all those issues are causing difficulty. I think there is a huge amount of agreement on the issues we are trying to tackle, but we disagree slightly on the solutions and on whether legislation is necessary at this point or whether the Government’s tough action, which was announced in March and has been taken up by the FCA since April, is a better way of tackling the problems. I believe the latter to be the case and the hon. Gentleman disagrees, but it is important to recognise that there is a huge amount of agreement on what the problems are and that they need to be tackled.
Jo Swinson
I will confirm that we do not believe that this Bill is the best way to tackle the significant problems in the industry. Obviously, it is up to the House to decide, as is always the case with such matters, whether the Bill should go into Committee, but I and my Government colleagues will not support it if it goes to a vote.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
It is a pleasure to follow the hon. Member for Castle Point (Rebecca Harris), and I apologise to her for having missed the first part of her remarks. She certainly made an important point at the end of her speech about alternatives, in particular credit unions, and I shall return to that subject.
It was good to hear the Minister’s contribution. She rightly praised the work of the Office of Fair Trading, but she will understand our considerable disappointment that the Government are set to reject the Bill of my hon. Friend the Member for Sheffield Central (Paul Blomfield), which provides an opportunity to introduce tough new rules to tackle some of the worst excesses in the payday lending and high-cost credit industry. Nevertheless, I commend him for the manner in which he has introduced his Bill.
My interest in the Bill is sparked partly by the number of people in my constituency who have taken out high-cost payday loans, ended up in financial trouble and had to turn to local debt advice charities for assistance. Two particular cases stand out for me, and in neither was the person doing the wrong thing; both were in employment, trying to bring up their families without relying on anyone else. But such is the cost-of-living crisis being faced by too many families across the country, including some in my constituency, that these people got into financial difficulty and made the mistake of applying for payday loans, which has made their situation so much worse.
The first case involves a single mum, whom I will call Emma. She works part-time and has a 12-year-old son. She was managing fine until her elder daughter, who was contributing to the household bills, left home to get married. The bills did not reduce much when she left and as a result Emma’s wages alone were no longer sufficient to cover them all. Unable to get any help, Emma got behind on her rent and fuel bills, and resorted to taking out payday loans. She took out five, with five different companies, paying interest rates of between 1,700% and 2,900% APR.
The excellent Harrow citizens advice bureau pointed out to me, with commendable understatement, that anyone who had looked properly at Emma’s overall financial situation would have seen that there was no way in which she would have been able to repay these loans. Interestingly, when the CAB got involved in discussions with her landlord and the utility companies they were both willing to make reasonable arrangements to help her clear her arrears with them over time. The payday loan companies, however, were very different; they took notice only when formal complaints about their behaviour by the CAB to the Office of Fair Trading were threatened.
The other case involves a single mum who has two teenage girls at school—I will call her Sonika, but, again, it is not her real name. She is in full-time employment but, again, her household budget has been squeezed by the combination of rising prices, notably those for food and fuel in this case, and the fact that her wages have not risen. She was managing okay until a couple of years ago, when she began to fall behind with her rent. She took out a loan to help her pay the rent but then got behind again and took out another one. Soon she could not pay the rent because she was servicing some seven payday loans and by the time she went to see the Harrow CAB she was in absolute despair, facing eviction and homelessness.
Sonika, too, benefited from the CAB’s support in negotiating repayments on her rent arrears, so she was able to save herself from eviction. But, again, when the CAB came to negotiate on her behalf with the payday loan companies, even though it had her written authorisation for this, initially they refused to negotiate until a complaint to the OFT was threatened. Again, responsible lenders would have seen that she could not afford extra payday loans and would not have advanced the credit. Indeed, they would perhaps have pointed her much earlier towards the debt advice charities. She is gradually getting back on track with her finances, but it will be a long time before she clears her debts.
What is striking is the huge growth in the industry in the past few years alone. Consumer Focus has estimated that the number of payday loan borrowers in 2006 was comparatively small, at 300,000, whereas, as my hon. Friend the Member for Sheffield Central said, by 2011-12 the OFT was suggesting that some 7.5 million to 8.2 million loans had been taken out. Others in the debate have highlighted the considerable concern about the way in which payday lenders are operating, be it the misleading advertising, the fact that they are not doing proper affordability checks, the irresponsible roll-over of loans or the way in which vulnerable consumers get targeted.
Philip Davies
There is lots of talk about irresponsible lending and I am sure that nobody would advocate that. Will the hon. Gentleman at least concede that one of the lessons learned from the banking crash was that when people indulge in irresponsible lending the biggest victims are the people who are lending the money in the first place? There is no great incentive for people to lend money to people who have no prospect of paying it back.
Mr Thomas
With all due respect to the hon. Gentleman, the payday loan companies seem to have done rather well despite the problems many people have in paying them back. Let me use his intervention to suggest that these are issues we might usefully debate in Committee and an occasional rebel against those on his Front Bench might be tempted to recognise the benefit of further debate, in Committee, on irresponsible lending.
Rebecca Harris
As I rattled through my speech, the point I was trying to convey was how those lending companies often ensure that they put themselves in the position of being the priority lender. They ensure that they get their money back and it is the children who go hungry or the mortgage that goes unpaid otherwise. That is the problem.
Mr Thomas
The hon. Lady makes an extremely good point and I hope that even at this late stage her words might encourage the Minister to encourage the Whips to allow the Bill to progress to Committee so that we can talk these issues through in more detail.
The OFT’s report in March demonstrated the clear need for many of the measures proposed by my hon. Friend the Member for Sheffield Central. Indeed, I was struck in late June by the fact that the OFT, in the rationale behind its reference of the payday lending industry to the Competition Commission, asserted that payday lenders appear to derive up to 50% of their revenue from loans that are unaffordable. Borrowers essentially pay far more than expected through roll-overs, additional interest and charges. The OFT seems to be saying, albeit very politely, that £1 billion of the £2 billion the industry was worth in 2011-12 was made by exploiting the most vulnerable. Those are business practices of which the sheriff of Nottingham would be proud.
Important as the Competition Commission’s work will be, my hon. Friend’s Bill gives the House an opportunity to put in place a series of sensible reforms. He shrewdly allows time for consultation on the details and I welcome the opportunity the Bill gives for new powers for the FCA to restrict the amount of high-cost credit that can be advanced to an individual, to limit the level of charges, to deal with the roll-over lending issue that many Members have talked about as well as the way in which advertising takes place, and to require lenders to help fund debt advice.
It is important to acknowledge that there is clearly a market for short-term lending and that the alternatives to high-cost credit are either not available or not as flexible or responsive as many consumers would like. Clearly in our collective response as policy makers we need to avoid being so draconian that we completely kill off interest from responsible businesses as that would make people vulnerable to illegal moneylenders—loan sharks.
As well as the actions advocated by my hon. Friend the Member for Sheffield Central and the work of the OFT and Competition Commission to root out the worst behaving businesses, more action is needed to create viable alternatives to the payday lending business model. In days gone by, the social fund might have offered a credible alternative to a payday lender, but the cuts to the fund and its devolution to local authorities mean that access to social fund loans is increasingly a postcode lottery.
Credit unions are the other key alternative. The cost of a single loan with a credit union can be hundreds of pounds cheaper than a high-cost credit loan. Two examples are worth sharing. A £300 loan taken out over 52 weeks from Provident Financial at 272% APR costs £246 in interest. The same loan from a credit union for the same period at their maximum 26% APR costs just £38 in interest. That is dramatically cheaper. A £300 payday loan from Wonga at 4,214% APR over just one month costs £95.89 in interest. The same loan from a credit union costs just £6 in interest.
Sadly, in this country credit unions are still too limited in their reach and coverage. The Government, to be fair, have continued, like the last Labour Government, to invest in credit unions and to make sensible reforms, but a bolder set of measures is needed to reform the reach of credit unions. In the UK, just over 1 million people are members of credit unions, and I declare an interest as a member of the Rainbow Saver Anglia credit union and Harrow’s M for Money credit union.
Local authorities, social housing landlords, and other parts of the public sector, such as Transport for London and the Metropolitan police, should have an obligation to promote credit union membership to their staff. In the US, Canada and Australia, and even in Ireland, more than 25% of the population are credit union members. Indeed, I think the biggest credit union in the world is Navy Federal in the US. It is the credit union for the American armed forces, with more than 3 million US servicemen and women, from special forces soldiers through to navy cooks, as members. Why do our military not have the same offer for our soldiers and sailors?
Mark Durkan
I speak as the Member of the House who has the highest rate of credit union membership among his constituents. Is my hon. Friend aware that credit unions are now reporting a concern that some debt advisers are telling people to max the loan that they can get from the credit union and use that to discharge their debt to payday lenders? Then the credit union is quickly hit with an insolvency voluntary agreement. That is having an effect now on lending decisions taken by credit unions. It is potentially limiting the good that they can do, which he is highlighting.
Mr Thomas
I am not aware of such circumstances in my area, but my hon. Friend makes a wider point about the crisis that payday lending has induced for many people, and its roll-over impact on credit unions. That seems to be another issue that would be worth teasing out in Committee.
Perhaps, when we get to Committee, I might tempt my hon. Friend the Member for Sheffield Central to look again at the wording of his clause 4 proposals for a levy on lenders to fund the Money Advice Service. Good as that is, I wonder whether a levy to help to fund the expansion of credit unions is equally urgent, particularly those credit unions in areas of deprivation that have the capacity to offer the equivalent of payday lending products, albeit with far lower interest rates, and therefore much more affordably. Perhaps if we are able to persuade the Friday wolves to allow the Bill to progress, we might have a useful debate on that point. We certainly need to be far more ambitious about the reach of credit unions.
Lastly, I gently suggest to my hon. Friend one further refinement to his Bill. We need a culture of openness across financial services, as exists, for example, in the United States. By that I mean that we need to get down to local community level—postcode level—to find out what financial services businesses are lending, how they are lending and to whom they are lending. The data should be anonymised, to protect individuals’ confidentiality. That would help us target much better where investment in debt advice, credit unions or community banking services is needed.
In Thamesmead in south-east London, not one bank branch is open. It is an area that serves some 55,000 people, and the nearest bank branch is 30 to 40 minutes away by public transport. Lack of access to bank branches limits access to mainstream credit and increases the vulnerability of people and the demand for high-cost credit products. To be fair to the Government, the banks have had some pressure from Ministers, as well as from our ranks, finally to begin to publish some of their lending data, although they are taking a long time to do so. Inevitably, the data will need refining to be useful. That openness is important. The FCA will need to be tough with the financial services industry to get useful banking openness data. We need to make sure that we include the payday lending industry within the scope of that published data so that we have a proper sense of access to financial services in each community. I hope that if the Bill gets into Committee my hon. Friend might be open to an amendment, perhaps to the schedules, that allows the FCA to impose as part of the mix of requirements a need for anonymised lending data by payday lenders to be made public.
My hon. Friend’s Bill has the potential to make a real difference in curbing the activities of the worst players in the financial services industry. His approach has been exemplary in working with Members on all sides of the House and in wanting to consult before imposing the detail of legislation. Even at this late stage, I hope that his arguments will persuade the Government to think again and allow the Bill to make progress.
Mr Thomas
I am grateful to the hon. Gentleman for giving way. Interestingly, I think that Unite is one of the funders of a banking project in Salford that is designed to encourage alternatives to payday lending. Would he like to praise Unite and the other funders of that initiative, which is a little like a community bank?
Mr Walker
I would be very happy to do so. I have already praised Unite for some of the work it does in my constituency. I have no issues whatsoever in doing that.
Although I am sure many of the companies in the payday and high-cost loans industry will protest that they merely provide a service that their customers want, there are too many examples of people who have been trapped into loans they cannot afford to repay and of vulnerable people who have acted without sufficient advice or without the understanding that we would want them to have of the real costs and risks that they are taking on.
Research by Which? has shown that nearly 24% of people taking on so-called payday loans are using them to repay other forms of credit. StepChange tells me that constituents from Worcester who have contacted it owed as much as £1,717 on payday loans, which is much more than they are likely to receive in monthly income.
I have spoken in previous debates in support of the broad concept of capping the cost of lending, but I am aware of the controversies involved. I know that some colleagues warn—and, indeed, that many non-governmental organisations and charities argue—that there is a real risk in setting caps that more people could be driven into a black market and into the hands of illegal money lenders who would charge even more and offer less recourse.