Consumer Credit and Debt Management

Helen Goodman Excerpts

Thursday 3rd February 2011 Commons Chamber

[Stella Creasy (Walthamstow) (Lab/Co-op)]

I beg to move,

That this House notes with alarm recent evidence showing a fourfold increase in the use of payday lending since the beginning of the recession and that high cost credit lenders advanced approximately £7.5 billion to low and middle income consumers in 2008 alone; recognises the problems of financial exclusion, lack of financial and debt management education, lack of price competitiveness in the unsecured lending market and the near monopoly positions of many large lenders which contribute to the high costs of borrowing; considers that without action these factors could worsen family debt, poverty and financial difficulties to the detriment of the economic recovery; therefore calls upon the Government to introduce, alongside measures to increase access to affordable credit, regulatory powers that put in place a range of caps on prices in areas of the market in unsecured lending which are non price-competitive, likely to cause detriment to consumers or where there is evidence of irresponsible practice; and believes that such caps should take account of the desirability of maintaining access to affordable and responsible credit, the likely impact on the supply of credit and the cost of enforcement, that they should be regularly reviewed and that they should use the total cost of credit, calculated on a yearly basis, to ensure that lender avoidance and distortions in price are prevented.

It gives me great pleasure to present to the House today an opportunity to put on record its support for the introduction of caps on the total cost of lending, and so protect Britain’s poorest consumers from the practices of so-called legal loan sharks. My introductory remarks are set out in three sections. I shall address, first, the problems; secondly, how the proposals would tackle them; and thirdly, in seeking people’s support for the motion, the concerns that they might have about the proposals.

To begin with, however, I shall tackle what we are not talking about today. The proposal is not about a usury law or about setting a single cap for interest rates. Previous Governments rightly concluded that that would not be the right thing to do. All the briefings that Members have received from industry lobbyists have been about such proposals, and the often cited Office of Fair Trading research is also about such an idea, but let me stress that there are flaws in that proposal, which is why we suggest that something different needs to take place. I shall also be clear that this is not a debate about how we abolish the high-cost lending market, or about stopping people borrowing. Credit is a vital part of the economy and, clearly, a part of the UK lifestyle. Indeed, one challenge that we face during our economic recovery is to encourage people to take a sensible and sustainable approach to credit, because, given how we live in the UK, it is a key part of our future.

Debt and credit is a much greater part of the UK’s psyche than any other country’s. As Third Sector Foresight points out, Britain has double the debt of continental European countries, and personal savings are at their lowest levels since the 1940s. In April last year, private debt in the UK stood at a whopping £1.4 billion, and living that way has its own consequences. Surveys by PricewaterhouseCoopers show that debt levels in our society mean that the average household is paying 15% of its net income purely on the interest it owes to service such debts.

Our focus in this debate is on a very specific aspect of credit provision. The high-cost credit market is very different in its practices in comparison with other, more mainstream forms of lending. We are talking about the payday loans of £100 until the end of the month that keep getting repeated, the doorstep lending of £200 that is offered to people so that they can buy a new sofa, and the hire purchase agreements offering deals that people sign so that their kids can have a new TV.

Above all, this debate is about the spiralling costs at the heart of such loans, because it is the rates that people charge that make this a billion-pound industry. It is all legal, and it is all growing. While some forms of high-cost lending have been with us for generations, we have also seen in this country a rapid expansion in the scale and use of these forms of credit in the past few years alone. That is driven in part by the drying up of mainstream credit. PricewaterhouseCoopers reports a staggering 79% drop in secured lending in the past year. Research by Consumer Focus predicts a rise in payday lending alone of 40% to 45% in the next few years. There has also been a fourfold increase in payday lending since 2008.

I see for myself the impact that this has on my community in Walthamstow. Our high street now has a large number of shops offering short-term loans, hire purchase agreements and credit deals. That is a badge of poverty. These companies see our fragile economic conditions as fertile ground. The aptly named Mr Crook, who is the chief executive of Provident Financial, the largest home credit company, says that he expects a growth in his target market as a direct result of the comprehensive spending review. Who does he mean by that? He means those with poor credit histories and those with no credit histories. In my cosmopolitan corner of London, one of these companies employs only people who speak more than two languages, so that they can target newly arrived residents who do not understand or know the British banking system. He also means those who are facing redundancy or are newly unemployed.

Indeed, as we see higher levels of unemployment, the need to act quickly becomes even greater. As a lady from Leicester who recently contacted me pointed out, as a public service employee on a redundancy notice she could not borrow from either her bank or her local credit union, so what other option does she have? That is when this kind of lending becomes a problem. Some can manage such credit, but the toxic mix of low incomes, perpetual interest payments and no choice affects too many people in our country.

[Helen Goodman (Bishop Auckland) (Lab)]

My hon. Friend is making her case most eloquently. My constituency also has shops where people pay possibly three times as much for white goods, furniture and so forth. Is she aware that, although the problem is intensifying, it is not new? I wonder whether she has read Proverbs 22:

“If you have nothing with which to pay, why should your bed be taken from under you?”

When people cannot pay, their beds and their fridges are taken from them.

[Stella Creasy]

My hon. Friend makes an eloquent point. Indeed, I am grateful for the support that we have had from Church Action on Poverty for the campaign and for the proposals before the House.

--- Later in debate ---

[Ian Murray (Edinburgh South) (Lab)]

I, too, congratulate my hon. Friend the Member for Walthamstow (Stella Creasy). Since we became Members, she has been a stalwart campaigner on the issue, and to have a political issue of such like trending on Twitter—if Government Members would like to look up that term later, they are very welcome to—is a great credit to the campaign that she has run and to her for representing not only her constituents, but the constituents of all of us.

Many people on both sides of the House support the measure, and I was interested to hear the hon. Member for Chippenham (Duncan Hames), who is in his place, bring to the Chamber his great deal of experience on the issue. I am disappointed that he is going to put that all to the back of his mind when wandering into the Lobby this afternoon, but I hope that in the next hour he will change his mind and support what is one of the most valuable things that we can do in the Chamber.

The issue affects many of my constituents and constituents throughout the country. Debt breaks up families, demolishes relationships and, all too often, leads to suicide and death, something that has not been highlighted this afternoon. Rarely are high-interest services used as a one-off; the spiral of debt, through chasing the tail of debt as others have said, can lead to families throughout the country becoming caught in a debt trap and, all too often, a death trap.

I have been struck by the APR and total credit costs that we have heard about this afternoon. My hon. Friend the Member for Glasgow Central (Anas Sarwar), who is not in his place, spoke about 4,000% APR, and although I appreciate that the motion is not just about capping APRs, but about the total cost of credit, I think that such figures should send a shiver down the spine of every Member in the Chamber.

Moreover, the hon. Member for North Swindon (Justin Tomlinson) explained that a mere 17.9% APR can take up to 40 years to pay off if someone makes just the minimum payment, so even small APRs, which attract people to credit, can have significant consequences if there is no education to resolve the issue.

Short-term credit companies advertise aggressively. We just have to walk down our local shopping streets to see posters, advertising boards and window displays publicising payday loans and credit. Many of us know about such aggressive advertising, and Members have already described how lenders can create relationships in a person’s own living room, but the main concern about advertising is that many people look for authorities on the issue and then give the adverts credence because of them. Indeed, adverts for payday loans with APRs of almost 3,000% have been carried on the website of the Department for Communities and Local Government—an authority to which people might look and say, “If they’re saying it, this must be acceptable.”

Rising unemployment, housing costs and the VAT increase could leave families and ordinary people in a far worse situation, pushing them towards higher credit costs when paying for birthdays, Christmas, household repairs or just everyday living.

[Helen Goodman]

My hon. Friend mentioned the significance of the personal relationships that firms build up with borrowers. Does he agree that the network of people who are on incentivised contracts with the companies, and incentivised to maintain people in debt, is one of the biggest market barriers to the conventional banks coming into the sector?

[Ian Murray]

I am grateful to my hon. Friend for mentioning that. One would think we had rehearsed it, because I was about to go on to say exactly that. The chief executive of the country’s largest payday lender, Peter Crook, recently said that he was likely to see a large increase in his target audience owing to the rising levels of unemployment. That highlights the relationships that are created not only to keep people in the spiral of debt but to keep the people who are pushing the debt in the spiral of commissions and maintaining their own lifestyles. That shows that strict regulation is required, not a code of conduct that could easily be dismissed by some of the more unscrupulous lenders. It also shows that those who are least able to pay are being charged the most at a time when they are least able to pay for this kind of credit.

Of course, capping the total cost of credit is not an idea that has been plucked out of the air. As my hon. Friend the Member for Walthamstow demonstrated, there is evidence from around the world showing that it is perfectly possible to regulate the payday and home credit markets without adverse effects—all it takes is the political will to do so. There are undoubtedly detailed issues that would have to be resolved, but we are elected to this House to find solutions to problems, not to find problems to stop solutions, which is how I read the well-intentioned amendment. The political will is in the Chamber today to do something about this, and we should all grasp the moment and do what is right for our constituents.