High Cost Credit Bill
Debate between Gregg McClymont and Paul Blomfield
Paul Blomfield
Some people would call for that.
My Bill does not go that far, but it would require that all advertising carries a health warning about the nature of these loans and signposts people to free and impartial debt advice, as an option before they proceed.
The OFT highlighted the problem of
“a pattern of advertising that emphasised speed and easy access to cash, at the expense of giving customers balanced information about the cost of lending, the risks if things go wrong and the consequences of non-payment.”
The Bill, therefore, would require that advertising complies with rules set and regulated by the FCA, which would be absolutely in line with Government thinking; the Department for Business, Innovation and Skills has already commissioned a study on advertising of payday loans, and the FCA is keen to look into it. The Bill does not prescribe the rules, but it states that there must be rules. The advertising code for gambling illustrates the sort of approach that might be adopted as well as a possible restriction on the sponsorship of certain activities.
The Advertising Standards Authority recently banned three text messages promoting loans to young people out clubbing. The Bill therefore would require texts and phone calls not to be used to promote high-cost credit. It would also require lenders properly to explain liability to guarantors, where loans asked for them, and the signing of consent forms; credit brokers to provide borrowers with the names and details of lenders; and lenders to disclose details of lead generators to the FCA.
Following on from the point made by my hon. Friend the Member for Worsley and Eccles South (Barbara Keeley), the second set of issues covered by the Bill relate to affordability. Although most lenders claim to assess affordability, the OFT’s recent report said that
“the vast majority of those we inspected were unable to provide us with satisfactory proof that they applied such assessments.”
Citizens Advice found that only 36% of respondents were asked questions to check whether they could afford to pay back the loan. The Bill therefore would require lenders to assess the affordability of loans and introduce an affordability ceiling to be determined by the FCA, either based on credit repayment as a proportion of monthly income or on the total value of loans.
The Bill would also provide for the FCA to set a cap on default charges and the circumstances in which those charges could be applied. It would require lenders to share information with credit reference agencies as an interim measure, pending the establishment of a central real-time database requiring lenders to log details of loans and to seek information to ensure that they do not lend above the affordability ceiling determined by the FCA. It would also provide for a levy on the sector to run such a database, which would be a powerful tool to aid regulation and support evidence-based decision making.
As hon. Members have mentioned, we need to consider a cap on the total cost of credit, which Parliament has empowered the FCA to impose. The Bill does not seek a cap, but it would require the FCA to report on how it intended to exercise that power and to keep the issue under review. As mentioned, central to the concerns of spiralling debt is the issue of loans being rolled over. The OFT found that 28% of loans were rolled over at least once and that they accounted for 50% of lenders’ revenues. Furthermore, 19% of revenue comes from the 5% of loans rolled over four times or more; roll-overs are profitable business. As I mentioned earlier, the OFT said:
“Our evidence suggests that encouraging roll-overs is a deliberate commercial strategy of some firms”.
Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)
Is this roll-over issue not an example of predatory capitalism of the very worst kind?
Paul Blomfield
It is indeed, and the Bill seeks to promote responsible capitalism of a better kind. It would also require the Financial Conduct Authority to determine a limit on roll-overs. We are not specifying at this stage what that limit should be, but looking for a solid, evidence-based decision.
The Bill also includes measures on debt collection, particularly with regard to continuous payment authorities. One case brought to me in Sheffield was of a single jobseeker’s allowance claimant who had obtained while working a payday loan from The Money Shop. Once out of work, he was unable to cover the £250 due from his bank account, but his bank told him that he could not stop the payment being made, which had deeply difficult consequences for him. Another case shared with me was of someone whose account was drained by a payday lender using a CPA, leaving him with no money for rent and facing eviction.
These are common problems, as other Members will be aware, so the Bill requires lenders to give customers three days’ notice of every CPA withdrawal and to ensure that customers are clear on their right to cancel CPAs. The Bill also has measures to ensure that lenders are not allowed to make charges for the administration of CPAs—a practice used by some—and includes a more general provision to allow the FCA to determine the circumstances under which CPAs should not be used, which might include cases where that would lead to essential bills going unpaid, which is an approach adopted in other countries.
As has been said, those who turn to payday lenders are often desperate. Before getting deeper into debt, they would benefit from advice, so the Bill seeks to promote debt support more effectively. It includes a number of triggers that would require lenders to signpost customers to free and impartial debt advice and, where a debt adviser is engaged, to require lenders to freeze charges and put in place an agreed payment plan. Some credit unions—including Birmingham’s Citysave credit union, which has launched a product to help people to pay off their payday loan debts over a 12-month period with a credit union loan—have found some payday lenders to be obstructive. The Bill therefore includes a provision for lenders to accept offers from third parties, specified by the FCA, to settle outstanding debts. The Bill also provides for the FCA to have the power to establish a new levy to support debt advice, about which I know the hon. Member for Worcester (Mr Walker) will speak in more detail. Finally, the Bill requires the FCA to determine enforcement powers to be used in the case of breaches of the Bill.
I would like to conclude—and to give other Members the opportunity to contribute to the debate—with an example from Sheffield of someone caught by the problems that the Bill aims to tackle.