Consumer Credit and Debt Management

Debate between John Pugh and Stella Creasy

Thursday 3rd February 2011 Commons Chamber

[Stella Creasy]

Indeed, in the spirit of cross-party support, I was delighted to hear the Mayor of London say that the rates that these companies charge are extortionate. I hope that I can convince him to take more action on the matter for Londoners.

I have been struck by the response to our market from people from other countries. As a local MP, I regularly leaflet for my local credit union outside the premises of the legal loan sharks in my high street. Last Friday, I spent 20 minutes trying to explain to an outraged Polish woman that the companies could charge her such rates; something that does not happen in her country. As her English was not great and my Polish was even less so, my gesticulations about where the credit union could be found were perhaps unclear. However, her anger and amazement that this was legal in Britain was easy to translate.

I am not asking hon. Members to come and stand on a chilly high street in Walthamstow with me. Recent European Commission research shows what we should do and what we should not do. Members may have been told the edited highlights of that 500-page research document. Having read the whole thing, I will offer them some more. It says that we should learn from the experience in America, where interest rate caps that were set too low have caused problems for lenders and consumers. By contrast, it highlights the benefits of a European model. Perhaps that is not a winning proposition for some Government Members, but I hope that they will bear with me.

The document shows that many ways of capping are used in different countries. Britain is increasingly isolated in not dealing with this market in the same way. Fourteen European countries have a form of capping system or a ceiling on charges. In France, the cap is a third over the market average. In Slovenia, there is a spread of caps, with 13% for a long-term loan and 453% for a shorter-term loan. In Belgium, the cap is based on the amount that is lent, rather than on the rate. There are different levels for loans below and above €1,250. Some countries, such as Ireland, cap only part of the market, whereas others, such as Germany, have limits on all forms of lending. The motion draws on what has been learned from the examples of what works and what does not. It calls for a regulator to introduce a series of caps in the areas of the unsecured lending market in the UK that are not price competitive and where there is evidence that not doing so would cause consumer detriment.

It is worth considering the nature of the UK high-cost lending market. A range of products is available from short-term payday loans, to complicated hire purchase agreements and home credit arrangements. Because there are no caps in our system, the rates can range from 271% and 440% to an eye-watering 4,000% or more. None of the companies can provide pricing data to explain why it has arrived at such rates. Under the proposal, the regulator would step in and look carefully at these markets to determine, on the basis of the evidence, how best to proceed.

Competition is a clear challenge. Just six companies operate in the home credit industry, one of which owns 60% of the market. The motion calls for intervention where there is evidence of a lack of competition. It also highlights the need to intervene when there is evidence of consumer detriment. Consumer detriment is littered throughout the practices that the companies get away with: the rolling over of loans and the compound interest that that generates; the administration fees; and setting the level of loans well beyond the realistic reach of their clients’ incomes so they cannot pay them off. Friends Provident today admitted that 29% of payday loans are refinanced, and that on average the refinancing rolls over twice. Some 15% of home credit loans are refinanced and rolled over into a new loan before the end of the term. Those practices are designed to ensure that consumers pay, but that they never end the relationship. Instead, they are caught in a never-ending cycle of payments and loans.

[John Pugh (Southport) (LD)]

The hon. Lady keeps mentioning these companies. She may not be aware that in my constituency, it is national banks that have exploited migrant workers. The advantage, which we secured, is that they have a regulatory body that called them on it and got the system adjusted.

[Stella Creasy]

The hon. Gentleman makes a good case for regulation, which is what the motion would introduce. However, it would be considered regulation that takes account of the market and of how it affects consumers. That is why I have confidence that the proposals would be effective if they were taken forward by the Government.

Markets change and the motion is about being responsive to that. It takes into account how consumers and lenders interact with the market. It draws its effectiveness from an evidence-based process. It is regulation at its best and boldest. Crucially, the proposals overcome the problems associated with previous proposals, which calculated the interest rate. Instead, the total cost of credit would be considered. That difference makes all the difference.

There is strong evidence from countries with caps that lenders have tried to avoid them or to compensate for their profit loss by applying higher charges. In Poland, following the introduction of caps, lenders introduced a mysterious convenience fee to make up the difference. The European Commission report shows that there is support—although not from providers, of course—for capping all the costs associated with loans to tackle such behaviour across the sector. The key to that measure will be how the caps are calculated. We have proposed that they should be annualised for ease of comparison and based on the total cost of the loan, rather than the interest rate alone. Calculating on the total cost makes it clearer to consumers what they will actually pay. There would be no small print and no nasty surprises that undermine people’s attempts to budget for repayments.

The motion is deliberately open about who would regulate. That is because changes have been proposed that would involve a number of bodies in the process, including the Office of Fair Trading and Consumer Focus. The Members who tabled the motion are open on how the regulatory process should be taken forward, but we want it to be taken forward.

The regulator would work with all stakeholders in the industry, including the lenders. I know that the industry is frightened by the proposals because of the amount of spin that they have sent to hon. Members. That is a pity because if they had been involved, we could have learned from their experience in considering the appropriate levels of capping. Their churlish opposition to any form of price capping and their attempts to conflate concern about interest rate caps with this matter highlight a disgraceful attitude towards vulnerable consumers. That is why self-regulation is not an option and why we as politicians must move towards intervention.

We have seen in other industries that where there is a lack of competition, regulators can work with consumer representatives and providers to set effective frameworks. That has happened in the water industry, the energy industry and the financial services industry. The proposals therefore build on the best practice in market intervention. I believe that British consumers deserve the best practice.

Having set out the proposals, I will take on some of the arguments that have been made against them. In doing so, I urge hon. Members to learn from that most famous of Dickensian characters, Gradgrind, who argued:

“Facts alone are wanted in life. Plant nothing else, and root out everything else.”

Some people have argued that capping the costs of credit would cut lending in the industry and put firms out of the market—a market that Consumer Focus estimates is worth £35 billion a year. I urge hon. Members to read the European Commission research that investigated that very point and found no evidence to support it. Indeed, the OFT research that is often quoted is based on an industry study, which says that people could end up borrowing from friends and family. Furthermore, the EU research found that countries with no caps had higher levels of illegal lending than those with some form of cap.

Some people fear that if caps were set, there would be a race to the top for all lenders. That suggests that caps would encourage all banks and building societies to start charging 4,000% interest rates. When Policis considered the matter in 2004, it found no evidence to support that concern. The motion calls for a range of caps to reflect different types of loans. That reflects the fact that mainstream banks would not compete with lenders in the unsecured market.