Debt Advice and Debt Management

Debate between John Pugh and Damian Hinds

Thursday 1st December 2011 Commons Chamber

[Damian Hinds (East Hampshire) (Con)]

I congratulate the hon. Member for Stockton North (Alex Cunningham) and my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch) on securing this important debate, and I thank the Backbench Business Committee for granting the time.

With almost £1.5 trillion of personal debt in the country and £200 billion of unsecured consumer lending, debt can clearly be a problem at all levels of society. In common with others who have spoken, I am particularly concerned about the less well-off members of society accessing sub-prime and high-cost credit. It is worth reminding ourselves that although to many opinion formers, journalists and others, this is a relatively hidden market, it is not at all a small one. The leader in home credit provision claims to visit one in 20 UK households every week. The leader in the rent-to-own sector has almost 250 stores and hopes to double that number. Payday Loans—as we have heard, a relative newcomer on the scene—already has between 1 million and 2 million customers a year.

Most people who look at this issue end up concluding that we need a three-pronged strategy to deal with it. The first is about education and advice, both before the fact and when people get into trouble; the second is about smart regulation, including disclosure to make it obvious to people what they are taking on; the third is the provision of alternatives. All three are vital, either directly or indirectly, to the provision of debt management advice—directly because advice is one prong, and indirectly because they impact on the need to have that advice. I shall talk briefly about these three in reverse order.

Starting with alternatives, hon. Members will not be surprised to hear me mention the importance of credit unions. Credit is a fact of life. Although we all occasionally meet people who say, “Well, if you haven’t got much money, you shouldn’t borrow”, the fact of the matter is that it happens at every level of society to help people get through the ups and downs of life. Childbirth and Christmas can happen to anybody—[Interruption.] I accept that childbirth is unlikely to happen to me. We need affordable and responsible lenders to operate in the market. Credit unions provide affordable loans, promote financial inclusion, get more people to have bank accounts, which has a big knock-on effect, and encourage savings. With savings, people are much less likely to find themselves getting into debt problems later.

I congratulate both the current Government and their predecessor on their support for the credit union sector. They have taken different but equally positive approaches. The new legislative reform order will mean the liberalisation and potential growth of the sector; the coalition’s £73 million modernisation fund will help it to become self-sustaining over the medium term; there is a possibility of its working with the post office network—for instance, introducing “jam jar” budgeting accounts—and there are many other interesting and exciting opportunities.

Many Members have spoken about aspects of regulation. This is clearly not the occasion on which to go into detail about the regulation of the high-cost and sub-prime credit markets, because we do not have enough time, but I should like to touch on some key points. Other Members have mentioned the potential for caps on the cost of credit. At times during our debates about this subject in the Chamber it has seemed that there may be a simple answer to the problem, but there is not.

A blunt and general cap on the cost of credit would have few positive results and many negative ones. It would, for example, push a large number of people out of the legal credit market and into the arms of those whose idea of a late-payment penalty is a cigarette burn on the forearm. It remains true, however, that some form of usury limit exists both in the European tradition, in countries such as France, Germany and Italy, and in the Anglo-Saxon tradition, in countries such as Australia and Canada and—as we heard earlier—many American states. That does not mean that they are all correct and we are wrong, but it should at least make us ask, as the hon. Member for Makerfield (Yvonne Fovargue) did earlier, what we can learn from abroad. I know that the Minister and the Government as a whole are keen on that idea. A variable cap may well be possible, and I know that Bristol academics are considering that as we speak. I have my own particular hobby horse: I think that a limit to the annual interest rate and a separate one-off introductory or set-up fee, also limited, would be a successful formula.

Members have mentioned the way in which debt mounts up as a result of rollovers and the accumulation of behavioural problems, and that too needs to be considered. Perhaps most important of all is the need to ensure that debt is affordable by imposing a requirement to that effect on lenders. The hon. Member for Makerfield mentioned the Centre for Responsible Credit. She and I attended the launch of a report that laid bare the massive difference between the affordability of credit at the high-cost or sub-prime end of the market and its affordability at the mainstream end.

In some American states there is a requirement for operators to pool data with a central agency. That is specifically in the payday sector—the distinction is important—but in any case I do not think that there would be any appetite for such an operation in this country. It does not accord with our way of doing things, and even if it did, there would be huge IT problems, My God, imagine trying to hook up every sub-prime and high-cost credit provider in this country—not just in the payday sector—into a database. It would be a nightmare, and the fact that the credit reference system seems to work so poorly at present—some people have eight, nine or 10 loans by the time they seek help from the likes of the Consumer Credit Counselling Service—does not bode particularly well. There may be possibilities, however.

[John Pugh (Southport) (LD)]

The hon. Gentleman’s speech is teaching me a great deal, but is he implying that debts can be affordable without a usury cap, or that a usury cap is necessary for them to be affordable?

[Damian Hinds]

Obviously credit can be affordable without a usury cap. It depends on the price that is set. I am increasingly of the view that there probably is room for some form of cap, but that it should not be a blunt and general cap that would have all sorts of unintended consequences. As I said a moment ago, I do not believe that there would be any appetite in this country for an enormous central database storing credit transactions involving every conceivable type of provider and every single citizen of the United Kingdom so that loan applications could be compared with earlier ones.

Affordability is now a principle in the OFT guidelines. There is an argument that lenders should have a general duty of care to make reasonable efforts to ensure that the loans they provide are affordable to the consumer, and also that the loan does, indeed, get paid down over time.