Payday Loans

Lord Hollick Excerpts

Thursday 20th June 2013 Lords Chamber

[Lord Hollick]

I thank my noble friend Lord Kennedy of Southwark for giving the House the opportunity to discuss and debate this important topic. High-cost lending is a booming business. The demand for short-term payday loans and longer-term high-interest loans is being driven by the crushing impact that the very tough economic climate is having on personal and family budgets. The fall in real incomes and the above-inflation increases in the price of essentials such as utilities and food are leaving many people short of the money they need to make ends meet, so they turn to the payday lenders.

The Bureau of Investigative Journalism recently published a report on high-cost lenders, which showed that they had enjoyed a 30% growth in turnover over the last 12 months and were achieving 30% profit margins on that turnover. Harsh economic circumstances might be the driver of demand, but the secret of the high profit is the mix of simple and instant loan availability, lax regulation, the absence of competition and eye-watering interest rates. Desperate borrowers—and it is estimated that there could be up to 5 million such customers—many with poor or no credit histories, can get instant cash, often without credit checks, documentary evidence or, as the noble Lord, Lord Kennedy, said, checks on affordability.

The lenders’ business model is to recruit borrowers and then to increase the number of loans, thereby maximising the yield per customer. So begins the awful debt spiral that traps so many payday borrowers. For the lenders, the high bad-debt experience, estimated at up to 25%, is more than compensated for by the stratospheric interest charges.

Unsurprisingly, this booming sector has caught the eye of international investors, most notably from the United States. The expansion of the payday loans industry in the US has been curtailed by the growing clampdown on high interest rates by state regulators, with some states going so far as to ban payday loans completely. Others, such as Pennsylvania, have capped interest rates on short-term loans at 30%. Similar initiatives are under way in other states.

The vanishingly light regulatory environment here in the UK is a big incentive to US investors, many of whom also take advantage of aggressive transfer pricing to ensure that, like Google and Amazon, the bulk of their profit is made in a tax haven. This combination allows investors to make spectacular tax-free or very low-tax returns at the expense not only of our most hard-pressed citizens but of our taxpayers generally. Could the Minister confirm that that is indeed the outcome of the coalition’s policies and its failure to put in place serious regulation to curb high interest loans, a measure that is commonplace in most developed countries?

Such a lucrative market would typically see high levels of competition, which would benefit borrowers with lower interest rates, but that is not the case, one reason being the complete absence of the major UK banks from this market place. That is all the more surprising, since the one thing that every high-cost borrower must have is a bank account to receive the money borrowed and to pay the interest and repay the principal by direct debit or similar arrangement. The millions of payday borrowers are all existing customers of our major banks, with known financial profiles and transaction histories. Yet the banks have failed to provide small loans to their existing creditworthy customers on terms that would almost certainly be substantially less expensive to the borrower than those currently available while being very profitable to the bank itself. To compound this failure and add insult to injury, it is reported and widely understood that the banks actually downgrade the credit rating of customers who take out payday loans.

The failure of our major banks to provide products to their existing customers is part of their wider failure to meet the demands of their customers generally. Despite the exhortations of the Government and the provision of low-cost funding for lending by the Bank of England, loans to SMEs have shrunk in each of the last three years, and loans to individuals are difficult to obtain and often prohibitively complex. Although the banks do not lend to their existing hard-pressed customers, they are happy to participate in this lucrative market by providing funds directly to the high-cost lenders. The Royal Bank of Scotland and Barclays have lent substantial sums to a range of payday lenders that are often secured on the very loans made by these lenders to the customers of the very bank providing the funds. This perverse behaviour speaks volumes about the banks’ lack of concern for the needs of their existing customers, their general lack of business acumen by failing to seize a business opportunity right on their doorstep, and their very confused attitude to corporate social responsibility.

The Chancellor has been keen to intervene in the affairs of the Royal Bank of Scotland and Lloyds to the point of becoming meddlesome. Could the Minister tell us if the Chancellor, or any other Minister, has asked either of these banks—RBS and Lloyds—to explain their failure to offer their individual customers loans at reasonable rates and thus provide competition to the rapacious payday lenders? Could he please also explain why it is acceptable for banks owned by the public to fail to lend to their creditworthy customers but acceptable for them to make loans to high-cost lenders?

I want to end on a happier note. Not all high-cost lending is actually high cost. Indeed, if you are the right borrower, the terms can be very attractive. An example of this is the Arbuthnot Banking Group, which owns high-cost lender Everyday Loans, which typically charges between 50% and 200% interest. However, Arbuthnot has made a loan facility of £5 million to the Conservative Party at the very attractive rate of 3.5%. I have no doubt that all the appropriate steps were taken by Arbuthnot to satisfy itself as to the creditworthiness of the Conservative Party. Then again, it probably helps that Arbuthnot is run by Mr Angest, a former Conservative Party treasurer and major donor to the party; so it is who you know that matters.