High-cost Credit

Ian Swales Excerpts

Thursday 5th September 2013 Commons Chamber

[Mr Robin Walker (Worcester) (Con)]

It is a pleasure to follow the impassioned speech by the hon. Member for Walthamstow (Stella Creasy). I congratulate the Backbench Business Committee and the hon. Member for Islwyn (Chris Evans) on securing this very important debate. He took a sensible and non-partisan approach, and I appreciate that. There is cross-party consensus on the mood for taking action on payday lenders. Many Members from all parties came to this Chamber to support the private Member’s Bill on the subject introduced by the hon. Member for Sheffield Central (Paul Blomfield)—I would call him my hon. Friend—which I still hope can make some progress in forming Government policy.

Other Members have mentioned constituency cases. I have recently been particularly moved by a couple of cases in my own constituency. In one, someone had six separate loans from payday lenders, which clearly cannot be justified on the basis of seeing them through until payday, and they were being absolutely crippled by the interest. In another, a pensioner living on the basic pension got thousands of pounds in debt to payday lenders—a clear sign that some of these businesses are not looking at the affordability criteria. It is right that we should express our concern about such cases.

I am sorry that the Bill did not get voted on on Second Reading; a number of us were here to support it. In responding, the Minister expressed some understandable concerns on the part of the Government, which were shared by the previous Government, as regards not wanting to tie the hands of regulators. However, this House has been clear in its desire that regulators consider caps. It is very important that we give guidance to regulators about what we expect them to do. The Government are right to have launched investigations into the impact of advertising in the sector, but many of us are a little frustrated by the pace of action on that front and would like more to be done. The hon. Member for Islwyn made some good points about that.

We have to acknowledge that high-cost lending goes much wider than the payday loan industry. It also covers doorstep lenders and credit cards where they are not used appropriately; people can build up enormous amounts of high-cost debt through that sector. As the hon. Gentleman pointed out, there is also a large informal sector that we should be wary of encouraging or supporting. Many Members have noted that when banks generate overdraft charges they can raise the cost of borrowing to exceptionally high levels. His comment about moving people into mainstream banking was absolutely right, but we need to find tools to do that which protect them from such charges. In a recent discussion with Six Towns credit union, I was interested in a ring-fenced bank account that it was considering launching which would allow people, in effect, to set aside rent and energy bill payments and only then access money to spend on other things. Innovative financial products like that can help to move people towards mainstream finance.

We need to look at the overall level of debt. Any debt is high-cost if it is unaffordable. We still need to do more work on deleveraging the economy as a whole. Some progress has already been made on that front. It would be wrong for anyone to pretend that overall debt problems are greater now than they were in 2008, at the height of the boom. Credit Action produces monthly reports that show a significant decline. In July 2013, overall unsecured debt was £158 billion. That sounds an awful lot, but in 2008 it was £231 billion. In the 1980s, during the boom years under Lawson, household debt as a percentage of income rose from 70% to 80%. During the period when the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) was Chancellor and Prime Minister, it rose from 80% to 170%. It is now falling back to 145%, but that is still too high. There is significant progress to be made on the level of debt as well as its quality.

On quality, we need tools to help people to access the better lenders and to ensure that customers are well informed on the real costs. As many Members have said, percentage rates do not tell the whole story: hidden costs and charges are important. We should pay tribute to the many financial advice services that work in the voluntary sector and the state sector to try to provide that information, including Citizens Advice, which we all know well in our constituencies. I am delighted that the Archbishop of Canterbury has entered this debate and offered support to the credit union movement and the voluntary sector in taking on the loan sharks. The Church can play a very important role in this, as Christians Against Poverty and many other religious groups already do.

[Ian Swales (Redcar) (LD)]

The hon. Gentleman is making a very good speech. He talked about the percentage rates that are quoted. Does he agree that there should be much clearer ways of explaining to people what they will have to pay back, given that only about 10% of people understand percentages?

[Mr Walker]

My hon. Friend is absolutely right. The work that my hon. Friend the Member for North Swindon (Justin Tomlinson) has done on financial education will be crucial in getting people to understand the reality of what taking out a loan means and all the potential hidden costs, including the real cost of interest over whatever period it is charged, which is often far more directly important than levels of APR.

I had an interesting meeting about debt issues with members of Worcester’s Tolladine mission, which works with a number of local churches in one of the poorest areas of my constituency. They strongly supported the initiatives we have heard about to support credit unions and make them more accessible. They also made it absolutely clear that financial education will be key. It is a huge victory for my hon. Friend and his cross-party campaign to have secured financial education in the national curriculum, but that is only the start. We should not kid ourselves that writing something into the national curriculum will solve the problem. We will have to make sure that it is taught well and that a generation of teachers who came through the system when financial literacy was not a key component get the best opportunity to take it forward. There will be real challenges along the way in doing that.

The Government are doing a lot to support credit unions, as did the previous Government, but there is still much further to go to catch up with the levels of credit union engagement in other countries. Achieving that should be a constant challenge. Tragically, in Worcestershire we lost our local credit union, not necessarily because it did not have support but, unfortunately, because of bad lending. Capacity in credit unions is another vital aspect. I am very glad that Six Towns credit union, from elsewhere in the midlands, is now looking to move into our area.

On overall levels of debt, it is important that all Governments set out policies that help people not to get into debt, which the coalition Government are trying to do by making sure that people keep more of the money they earn and by raising the income tax threshold.

We need an incentive to support the growth of credit unions and responsible lenders. As I argued when we debated the Bill, I think it would be wrong for the Government directly to subsidise the credit union industry, because that would undermine its business model when we want such businesses to be able to stand on their own two feet. I suggest that we should go further than even the CAB argues in its briefing paper, which welcomes the extension of the Money Advice Service levy to payday lenders, and consider putting a higher levy on high-cost lenders. We should create an incentive for people to go to credit unions, and the higher levy would create a fund to support financial advice services, financial education and all the other good things that can help people. Yes, we should support the credit unions, but we should do so indirectly by giving them that competitive advantage.

There is a straightforward way to do that. The Government have set a cap on lending for credit unions. If we start the levy at the top of that cap and apply it to all lending over that amount, it could create a valuable revenue stream to support the free financial advice industry and the financial education industry. I urge the Government to look again at the provisions in the Bill and to examine what they can take from it, because it made some well-thought-through recommendations.

I welcome today’s debate and the consensual way in which it is being conducted. Parliament can do a lot on this issue and we should continue to concentrate on it.