High-cost Credit

Guy Opperman Excerpts

Thursday 5th September 2013 Commons Chamber

[Chris Evans]

I agree entirely with my hon. Friend. As I said before, we are faced with an absolute juggernaut of advertising. A credit union might promote itself to 70 people whereas a payday loan company can promote itself to 7 million if it puts its advert on television at the right time. As I develop my argument, I shall suggest strategies to take on the goliath that is the payday lenders.

[Guy Opperman (Hexham) (Con)]

I wholeheartedly congratulate the hon. Gentleman on securing this important debate. Does he agree that just as we wish to expand and enhance credit unions we should also consider local community banks? They are trusted providers backed by the local community, and profits go back to the community after a limited time. They have strong local representation and an ability to lend at a better rate than even credit unions.

[Chris Evans]

I agree wholeheartedly. If the hon. Gentleman proposed that, he might gain cross-party support. As my hon. Friend the Member for Telford (David Wright) said, payday lenders have been extremely innovative in using advertising and the internet to reach people and we, as supporters of the credit union movement and community banks, must take a leaf out of their book, become innovative and consider other ways to reach the vulnerable people who see short-term lenders as the only solution to their problems.

After I was granted the debate, a constituent wrote to me about the problems he has faced with short-term lenders. When we met, he told me how payday loan companies added a range of administrative charges, interest and fees on top of initial loans. He borrowed in an attempt to pay back some of the money, but he fell further into debt as he took out loan after loan. He borrowed £400 from Wonga, but now must pay back £739. If he cannot afford the initial £400, how is he to afford £739? Where is the logic in that? It baffles me that payday loan companies seem to think that if someone is unable to pay back a loan, the answer is to take out another one. With Wonga breathing down his neck, he was forced to borrow £100 from QuickQuid, but now he owes that company £201.

My constituent told me that at no stage when taking out the initial loan was he asked about his income or expenditure, which bears out the findings of the Office of Fair Trading’s compliance review that only six of the largest 50 firms in the market made any attempt whatsoever to carry out proper income checks. That is simply not good enough. Had I not carried out such checks when I worked at Lloyds TSB, I would have faced disciplinary action—and rightly so—but such companies continue to follow those discredited practices.

The Office of Fair Trading also found that 75% of payday lenders renewed loans without checking whether they would be affordable, despite the fact that rolling over loans is a strong indicator that the borrower cannot pay back the money. It is especially worrying that each time someone fails to pay back a loan and takes out another one, they are committed to paying not only the interest on the initial loan, but admin fees and hidden charges on the new one.

My constituent was the victim of the culture of multiple loans, but he is not the only one. Some 30% of the people who contact StepChange Debt Charity for urgent help hold four or more loans. Parts of the industry are getting people into a vicious cycle of borrowing from one creditor to pay another. UK borrowers can end up paying back 74% of their initial loan in charges and administration fees on top of the money they borrowed. That figure is capped at 7% in Canada, meaning that the maximum payable in default interest and charges for a £300 loan is just £25. That practice needs further study in the UK. The consumer group Which? has called on the Financial Conduct Authority to replicate existing rules for mortgages and other credit products to help borrowers struggling with repayments. There is already a cap on default charges and fees in the credit card and mortgage markets, and we must consider extending such a cap to credit consumers.

I have further examples of how payday loans mean just piling on the debt. A payday loan company issued a man with a claim for £1,830 in penalty charges that were incurred for defaults on a loan of just £120. Each time the company went to his bank and was unsuccessful in recovering the money, it cost him £5, and the company made 330 attempts to get back the money. On top of that, the lenders added £178 of interest. It would be farcical if it was not true, but for many people in communities such as Islwyn, that is a sad fact of life each and every day. A Which? survey found that one in five users of payday loans were hit by unexpected charges and that, in the past 12 months, more than half of payday loan users had incurred charges because of missed or bounced payments.

We need to accept that borrowing from a payday lender is not like borrowing from a bank. When I worked in a bank, I would meet someone to discuss their needs. We would look at their income and expenditure, and talk about the affordability of loan and why they needed it, but even if the customer credit scored for a loan, I would still have no hesitation in saying no. However, with payday loans, because of the internet and fast access through iPhone technology, there is no one at the end of the line to say no, and what is worrying is that a person taking out such a loan may have the money in their bank account within 10 minutes.

For many, payday loans are a last resort. Many of the people I talk to have basic bank accounts that do not credit score for financial products. They have never got into mainstream banking, principally because they have seldom come across a bank in their lives. They see walking into a bank as a scary experience, so when they find themselves in dire straits and see the friendly advertising of Maud and Errol and the granny puppets from Wonga, or Amigo Loans, they think that there is a friendly place to go and they pick up the phone—they find it so easy. I therefore welcome the Government’s actions to investigate the effects of advertising and the year-long study of the market. I also look forward to the Financial Conduct Authority formulating a strategy in the autumn. However, I and others who have campaigned on the matter find the speed of implementing such measures frustrating.

As those processes are going on, short-term loan companies are devoting huge budgets to advertising, which I talked about in response to the intervention made by my hon. Friend the Member for Telford. The many daytime adverts predominantly reach the old, the young and the unemployed. Much as I welcomed the Government’s announcement in June 2012 that the Department for Work and Pensions would proceed with a credit union expansion project and make up to £38 million available to credit unions until March 2015, that is just a drop in the ocean.

--- Later in debate ---

[Guy Opperman (Hexham) (Con)]

The question that this debate is making patently clear is whether it is the responsibility of the state to look after those who cannot look after themselves. It has also been made patently clear in the brilliant opening speech of the hon. Member for Islwyn (Chris Evans) and in other contributions that there are many different practical and relatively immediate measures that could be introduced to address the problem of high-cost credit. They include restricting advertising budgets, implementing a greater degree of financial education, doing more work on shared data, addressing the question of interest rates and improving debt advice. I endorse the comments of the Public Accounts Committee and urge the Financial Conduct Authority to do more, as requested.

I believe that everyone agrees that the Archbishop of Canterbury was right when, in July, he championed the cause of credit unions and criticised the payday loan companies. He was right to say that we needed to “compete” the payday lenders out of the market. I welcome his comments, but I would argue that this debate has shown that although we all support credit unions, they are not necessarily the mechanism by which we will succeed in competing the payday lenders out of the market.

There is cross-party agreement on specific measures that can be taken to address the problem of high-cost credit, but I suggest that the mechanism by which people ought ultimately to borrow on a long-term basis is local community banks. They have all the flexibility, the clout and the borrowing power of a bank, as well as all the sympathetic community approach of a credit union, and the amalgamation of all those qualities will produce the best way forward.

[Richard Graham]

My hon. Friend will be aware of the resurrection of TSB as a brand in a market in which it previously had a good reputation for providing small loans and deposits to people in local communities. Does he see this as offering opportunities in that space?

[Guy Opperman]

Indeed I do.

I held a conference in Gateshead only a few months ago. It was attended by 170 delegates who were trying to set up local community organisations to address the lack of lending in their communities. They wanted to enable such lending by local, trusted providers, rather than by nameless, faceless, computer-led organisations based in London, Frankfurt or wherever. The smaller providers such as the TSB, the Hampshire bank and the Cambridge and Counties bank that are beginning to be set up are clearly the way forward.

No one should dispute that the expansion of credit unions is an extremely good thing. I welcome the changes in the way in which they are to be run; the Government should take credit for that. All Members of Parliament should become greatly involved in their credit union; I certainly support the Hexham credit union, which was set up with the help of the Churches in Northumberland. However, I question whether the credit unions alone will be able to address the problems of high-cost credit. In regard to interest rates, credit unions have clearly adopted a fantastically successful approach—their lending rates are so much better—but their deficiencies might mean that it is difficult for them to go forward. None the less, debates such as these on Wonga or on the private Member’s Bill introduced by the hon. Member for Sheffield Central (Paul Blomfield) have substantially raised public awareness of credit unions in the House and in our local communities.

I want briefly to talk about local community banks. For far too long, under successive Governments, we have been dominated by the big six or seven banks. I welcome the idea of a Church bank put forward by my hon. Friend the Member for Banbury (Sir Tony Baldry), but the kind of long-term community banking that he referred to has disappeared from our high streets and rural communities. That has had a detrimental effect on the ability to lend and to get credit.

The Government have rightly addressed that problem. It used to be incredibly difficult to set up a bank. It took in excess of £50 million and the process was highly regulated, even though the smaller banks in question were in no way comparable to a Barclays-style bank. The Financial Services Act 2012 changed the approach taken by the then Financial Services Authority and its successor organisations involved in regulation, and I strongly support those changes.

Reference has been made to the platforms required to set up a credit union or a community bank. Those requirements are now changing dramatically, to enable much greater interchangeability between pre-existing accounts held with the big seven banks and those held with credit unions or community banks. The mechanisms by which we can set up those organisations are improving, and many groups now wish to get involved. They include not only local communities but local authorities and individual businessmen with a philanthropic approach to their local community. Some universities, and even the Army, are considering getting involved. There are tremendous opportunities in our local areas to set up and expand these organisations.

Over the coming winter, we will all be faced with the issue of the energy costs that our constituents will face. In my community in the north-east, we have 24% fuel poverty, and a large swathe of the community is totally reliant on either oil or liquefied petroleum gas. That is an unregulated market, with all the problems that that entails. We have now formed more than 14 separate oil-buying clubs to try to address the cost of the oil. However, the requirement to buy 500 litres involves a very large financial outlay, often when oil is at its most expensive, and we are looking at ways to address that. The credit unions are certainly being encouraged to be the providers in those circumstances.

I hope that we will all try to expand our credit unions, using the plethora of good advice on regulatory changes, and to support our constituents who need assistance on this issue.