High Cost Credit Bill
Debate between Gareth Thomas and Rebecca Harris
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?