High-cost Credit

Jackie Doyle-Price Excerpts

Thursday 5th September 2013 Commons Chamber

[Jackie Doyle-Price (Thurrock) (Con)]

It is a great pleasure to follow the hon. Member for Islwyn (Chris Evans), who has given an excellent introduction to the debate. I pay tribute to colleagues on both sides of the House who have done so much to shine a light on some of the more irresponsible practices that have sadly become all too commonplace in this industry.

My remarks today will focus on what I think we would all agree has been a regulatory failure in this section of the market, and I want to refer to a Public Accounts Committee report which some hon. Members present today were involved in producing. We looked at the regulation of consumer credit earlier this year, and we reached the firm conclusion that the Office of Fair Trading had been found wanting in getting to grips with tackling some of the more unpleasant practices of high-cost lenders. The message that I would like Parliament to send out today is that we are now at a crossroads with the regulation of this sector. The Financial Conduct Authority is preparing to take responsibility for it from the OFT, and bearing in mind that the OFT has been so slow in getting to grips with this, I want us to send a clear signal that we all expect the FCA fully to use the regulatory tools at its disposal to challenge the sector, and to be fleet of foot in intervening where we see poor practice.

The OFT has had a number of tools that it has failed to use, and there are clear breaches of rules. There are powers under the unfair contract terms regulations that could easily have been used to tackle some of the more unacceptable levels of fees and penalties for default, which are probably the most acute cause of additional cost to anyone who takes out these loans. Equally, every credit provider is required to follow responsible lending rules. As the hon. Member for Islwyn outlined in some of his examples, the advancing of credit to people in such situations was far from responsible lending. The OFT has the power to withdraw credit licences, but it has failed to use it, resulting in irresponsible lenders and unscrupulous companies exploiting the vulnerable and laughing all the way to huge profits. That is not acceptable, so Parliament needs to give a clear signal about what we expect the FCA to do in future.

Much of the debate in the past has focused on how we control some of the costs. As I have said, I believe that the unfair contract terms regulations give regulators the power to intervene to control some of them. However, we have a real problem with the consumer credit directive, which has prescriptive rules about how firms advertise costs of credit with reference to APRs. The reality is that APRs are meaningless in this sector, because we are talking about loans that are advanced for a short period. The real issues are how much the credit will cost and the transparency of additional charges. I have seen one example of a payday lender who charged £25 for each reminder letter sent when a customer defaulted. That would not be caught by any regulation regarding APRs. It is an unfair contract term and a clear exploitation. The powers exist to control such activities. The PAC stated explicitly that we wanted the misleading APR rules to be ditched and replaced with clear guidance on and responsibility for publishing the cost of credit in amounts repayable in cash.

I also associate myself with the hon. Gentleman’s comments on credit unions. As we all readily understand, the only reason customers access credit in this way is because they cannot get it from anywhere else. Unfortunately, mainstream lenders are not interested in providing small loans for short periods. However, we have to be careful about prescribing additional regulation for the sector, because if people cannot get credit from it they will go elsewhere and that will send them into the hands of some very unscrupulous people.

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

Will the hon. Lady give her evidence for that assertion? It is a myth that many of the lenders propagate. Where does her evidence come from to show that if caps were introduced, people would go elsewhere?

[Jackie Doyle-Price]

The reality is that people will follow regulation if it is economical to do so, otherwise they will go elsewhere. My evidence is that people are accessing these loans in the first place. We have a failure in the market to extend affordable credit, and that is the issue that we are trying to tackle today. I remind the hon. Lady of what was said earlier. The rules and the tools are already in place, but the regulator has failed to use them. This is not about more burdensome regulation; it is about regulators being prepared to use their teeth and the tools that they have to do the job.

[Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

Further to that intervention, the hon. Lady may remember that the PAC heard evidence from Fair Finance, which explained that if the interest rate was capped, as a social enterprise it would have to lend a higher amount to individuals, so risking greater indebtedness. So we have to get the balance right to make sure that people without a credit record get the loan that they need but are not over-indebted.

[Jackie Doyle-Price]

The hon. Lady is quite right. The cost of extending small amounts of credit is higher, pound for pound. We have to be sufficiently grown-up to realise that when we are considering regulation. I have not yet come across one consumer organisation that is in favour of caps. They all recognise that there is a market failure and a need to clean up the industry, but caps are not their preferred tool. However, there are some measures that they would like to see. The first is a ban on excessive default fees and charges. Again, this is not the preserve of the payday lenders. Unauthorised overdraft users also experience punitive charges, which again illustrates that these are issues that extend throughout the credit market, which the regulators need to grips with. In fact, Which? has found that unauthorised overdraft users suffer more from excessive charges than payday loan users: more than 20% of overdraft users are surprised by the level of charges they face. Again, we need to look at using the regulatory tools available. The FCA’s requirement will be that any institution has to treat its customers fairly, and that would extend to not having excessive charges. The regulatory power is there; it just needs to have the guts to use it.

Secondly, the FCA must give a clear signal that it really will implement the rules on irresponsible lending. We have seen that 48% of payday loan users and 44% of unauthorised overdraft users have taken out credit that it turned out they could not afford. It is clearly irresponsible lending for any firm to continue extending credit with roll-over loans or to let an overdraft get ever worse. It must be clear to lenders that they will face penalties from the regulator if they continue to exploit vulnerable consumers.

We all need to think about what more we can do to support effective debt management and encourage people to take appropriate advice, because when people are desperate the only place they can go is to those lenders. We need to make it much easier for them to access advice that will help them, so that they do not get into a worse situation.

There also needs to be a clear sign to lenders that they must give clearer information on what the consequences will be if people default. We know that many consumers are over-optimistic about their ability to pay off credit on time and in full, so clear warnings are needed about what the consequences will be if they do not. Those warnings need to be given in a simple and clear way, such as by stating the amount of cash it will cost per £100 if the loan is not paid on time, so that people really understand the deal they are getting into. Again, that is consistent with the Public Accounts Committee’s recommendation. Even mortgage statements, and indeed any credit, should come with clear health warnings explaining the consequences of missed payments. All costs must be transparent.

I believe that those measures would greatly strengthen the protections for consumers. That is what we really need to focus on today. I agree that we must look at what more we can do to support credit unions. I think that employers have a big role to play, because we know that many payday loan customers are in jobs. If employers can be encouraged to have relationships with their local credit union, that would be a good way of signposting people to more reputable lenders. We need to use the tools we already have for the job: tough rules on responsible lending, tough action on default charges and much more regulatory activism.