Payday Loan Companies

Gregg McClymont Excerpts

Monday 20th January 2014 Commons Chamber

[Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)]

This is a timely debate. The issue has captured the public’s imagination because people cannot understand why apparently high and exploitative interest rates are charged on short-term loans, and the Government have faced mounting pressure. It is important to pay tribute to Members on both sides of the House, but particularly my hon. Friends the Members for Sheffield Central (Paul Blomfield) and for Walthamstow (Stella Creasy). Their work, in combination with the public’s feeling that this is somehow unfair and wrong, has brought the issue to the Government’s attention. The Government have recently crossed the Rubicon in announcing that an intervention in this market would be justified. They said not only that the FCA now has the power to impose a cap on the total cost of credit, but that they feel that that will happen.

In a moment, I will draw an analogy with the pensions market, which I know something about. I was struck by the fact that the hon. Member for East Hampshire (Damian Hinds) said that Conservatives were against caps in general, but that this was an exceptional case. I am sure that he is aware that the Government are consulting on a pension price cap for somewhat similar reasons, particularly the fact that consumers in the marketplace are not sovereign because they do not know what they are being charged.

A few reasons have been given for why we find this to be such an issue in 21st century Britain. My hon. Friend the Member for Glasgow North (Ann McKechin) noted the extraordinary growth in short-term loans being taken out. Members on both sides of the House have suggested that that is something to do with either bank overdraft charges or, perhaps more fundamentally, the growth of a low-wage economy. The latter is absolutely true. We cannot understand this problem without reference to the growth of low-wage employment. However, it is important to refer not only to low wages but to irregular and insecure employment.

What we see in the 21st century phenomenon of payday loans is something that we commonly found 100 years ago in the form of the pawnbroker: the debt-credit cycle, which appears in economies and contexts where low pay and insecure and irregular employment are a reality. One hundred years ago, the pawnbroker was ubiquitous for a simple and straightforward reason: weekly wages did not cover outgoings. Therefore, in a world where weekly wages could not meet the cost of living, what was the rational response of people in that position, of whom there were many millions? The rational response was to pawn their good claithes at the point in the week when their wages were exhausted and then to redeem their good claithes—that is, clothes, for non-Scottish Members of Parliament—when their wages were paid. That continued week after week. They pawned when their weekly wages were exhausted but their outgoings had not been met, and they redeemed when they were paid—over and again, week after week.

Of course, the world has changed enormously in the past 100 years. Everyone’s standard of living has increased significantly. I would argue that it is not coincidental that that happened at the same time as the Labour party was formed to advance the interests of people in those situations. [Interruption.] Government Members are laughing. I did not even think that that would be a point of controversy. Surely, the past 100 years have seen a significant—[Interruption.] The hon. Member for Brigg and Goole (Andrew Percy) shouts something. The point is that, 100 years ago, the pawnbroker was a reality; in the 21st century, the payday lender is a reality. The standard of living is much higher of course, but we find this problem emerging once again. It used to be a weekly problem; it now might be a monthly, six-weekly or bi-monthly problem.

[Ann McKechin]

There is one advantage of the pawnbroker: at least, the debt could only go so far—the amount of credit that someone put up. The problem with payday lending is that interest rates keep increasing and people are caught in a vicious cycle of debt, which is why it is becoming even more difficult for ordinary people to cope with it.

[Gregg McClymont]

My hon. Friend takes the words right out of my mouth. That, indeed, is the big difference. This is a much more exploitative form of lending than pawnbroking.

The hon. Member for East Hampshire, in a thoughtful speech, got on quickly to what sort of cap one should look to the Government to construct. I mentioned that the Government are consulting on a pension cap, and my involvement in that from the Labour side leads me to make a couple of observations that might seem obvious. The most obvious is that one must be absolutely clear about what one is encompassing in the cap—a point that he made very well—while being clear about when the cap will be introduced. As things stand, we have an undertaking from the Government to move towards a cap on the total cost of credit, but until we are clear what the total cost of credit includes, the dangers of leakage are significant.

Alongside that, we must be clear about what the objective of regulation is in that context. It must be to end the exploitation that is widely thought to be taking place—Members on both sides of the House feel that, and the public certainly do—but at the same time to ensure that legitimate access can be maintained to short-term loans that are not exploitative. That is the principle from which the Government must proceed.

However, to pick up on a point made by more than one Government Member today, when all that is done and exploitation through payday loans has been reduced, or hopefully ended, we will still not solve the problem unless we can build securer and more regular forms of employment with a higher wage. My hon. Friend the Member for Glasgow North is absolutely right that that form of lending can be much more exploitative than pawnbroking has been over the past 150 years, but the lesson from the era when pawnbroking was ubiquitous in working class communities is straightforward: as long as there is low pay and irregular and insecure employment, it is rational for people to have to find a way to make ends meet.

We welcome the view that the Government have taken on regulation. It is fair to say that they are moving on to the territory that the Opposition have staked out, but I think that we can agree—we might disagree about the method of achieving it—that unless we can a securer and more regular employment economy with a higher wage, the problem will not disappear.