Payday Loan Companies

Debate between Justin Tomlinson and Mark Tami

Monday 20th January 2014 Commons Chamber

[Justin Tomlinson (North Swindon) (Con)]

I pay tribute to those Members who have already spoken for what has been a balanced and well-informed debate so far. I also pay tribute to the hon. Member for Sheffield Central (Paul Blomfield), who has been leading a cross-party push to influence and shape policy in this extremely important area. I have been proud to work with and support him. I am delighted that my borough council has achieved cross-party support, so we are leading nationally and locally, and with cross-party support—perhaps it is the future.

I have talked about this subject on a number of occasions, particularly the need to empower consumers to make informed and savvy decisions. I recently read an interesting report on consumer markets by my hon. Friend the Member for South Thanet (Laura Sandys). It states:

“Good markets put consumers in the driving seat to make, shape or break products. Bad markets disguise, mislead or control consumer choice”.

How true that is of this market. It is absolutely key, because there is a fundamental information asymmetry in the payday lending market, and that is at the root of why it does not work in the consumer’s interest. The market distorts decision making so that, rather than making an informed decision based on price, the consumer is led into favouring other factors above all others in making their decision—a point that has been made by a few Members today.

The Office of Fair Trading investigated 50 payday lenders, and 60% of the consumers who responded emphasised speed and quick access. For the industry itself, the FCA produced an informative and useful video and talked with some of the consumers. They said that traditional mainstream banking was often too formal. There was a perception that they would have to turn up in a suit and justify their demands, wishes and financial actions.

[Mark Tami (Alyn and Deeside) (Lab)]

Does the hon. Gentleman accept that many who have tried with the normal banks, regardless of whether they were wearing a suit, were turned away or found it very difficult, and that is why they have ended up with payday loan companies?

[Justin Tomlinson]

I thank the hon. Gentleman for that intervention. I will be moving on to the failings of mainstream banking shortly.

It is also a recognition of how consumer habits have changed. With 24/7 internet shopping becoming increasingly popular, if consumers see something online at 3 o’clock in the morning and want to purchase it, they would like to be able to access the funding right away. Society is geared up for consumers wanting something, and wanting it right away. That market adapted to consumer demand and stepped in where the mainstream banks were not looking. Clearly, value for money for the consumer is not paramount, and that needs to be addressed.

I welcome the positive steps that the Government have started to take, working with the FCA. I will comment briefly on the various things that I would like to see. The first one, and it is often the simplest, but the one on which I am not sure we are there yet, is that the total cost of a loan should always be displayed in cash terms. I suspect that not even Treasury Ministers can calculate an APR rate, which involves a hugely complex formula. Therefore, a customer should be able to say, “I want to borrow £100, and it will cost me £20.” Even those without a particularly good grasp of mathematics would then be able to make a reasonably informed decision on whether that represents good value for money.

To encourage competition, we need a standardised unit for comparison. In the energy market and in mobile phone contracts there are standard units, so consumers can visit price comparison websites to find the best product. That is very difficult with payday loan companies.