Payday Loans

Lord Kennedy of Southwark Excerpts

Thursday 20th June 2013 Lords Chamber

Asked by

[Lord Kennedy of Southwark]

To ask Her Majesty’s Government what assessment they have made of the alternatives to the payday lending industry available to consumers.

[Lord Kennedy of Southwark]

My Lords, I am delighted to have secured this debate today. I am looking forward to all the contributions from noble Lords, in particular from the most reverend Primate the Archbishop of Canterbury. I am delighted that he has found time in his very busy schedule to take part in this afternoon’s debate.

We are in a very desperate and difficult situation. The payday lending industry is making a small group of people very rich by lending to people who struggle to get access to reasonably priced financial products to meet their needs at the most exorbitant and outrageous rates of interest. As the most reverend Primate told the House when he spoke during the passage of the Financial Services Act, this is nothing more than usury. A loan becomes usurious because of the excessive or abusive interest rates applied, and the payday lending industry does just that.

I am extremely disappointed that the Government have done next to nothing on this issue following the cross-party agreement on an amendment to cap interest rates which was passed in this House last year. Will the noble Viscount tell the House why the Government have done so little on this issue? Yes, we are living in tough times, but I get the feeling that for some people times are tougher than for others. I do not feel that we are all in this together. Rip-off Britain is alive and well. The payday lending industry is one of the worst examples of exploitation of the poor and the vulnerable, and we all need to do something about it. Government, Parliament, banks and other financial service providers, the Office of Fair Trading, other regulators, the Church and civil society all need to say, “Enough is enough. We are not going to let you treat people like this any more”.

The Government should be doing a number of things and should use their influence to get others to take action as well. We find ourselves in a situation where the alternatives to the payday lending industry are few, and the alternatives that exist need active help and support to grow in strength to be able to deliver and provide real and effective choice for consumers.

The Government have had plenty of advice, seen plenty of studies, and lots of work has been done to identify the problem for them, but so far their response has been poor. Some of the worst practices of this industry include poor lending checks—when there is no proper assessment as to whether the applicant for a loan has enough disposable income to repay the loan in full. Payday lenders often roll over loans without checking whether they will be affordable, even though rollovers should be seen as a clear indication that the borrower may be experiencing financial difficulties. The Office of Fair Trading noted that payday lenders have a strong incentive to roll over loans, making as much as half of their revenues this way.

Multiple loans are also a key indicator of acute repayment problems and should ring alarm bells—but they do not. The misuse of continuous payment authorities has seen situations where money is taken from people’s accounts, leaving them with no money to cover food, housing and other essential bills. Default interest and charges make the cost of rollovers very expensive for borrowers, who cannot repay their loan on time. Again, this is another huge source of revenue for payday lenders.

The aggressive targeting of students and young people is wrong. I was horrified to learn of young people using their smartphones to get a payday loan to buy another round of drinks on a Saturday night. I could go on with this list of bad practices and horror stories but I am sure that other noble Lords will have further examples that they will want to share with us. I will speak about some of the things that could be done to regulate the industry more effectively and get it to act responsibly.

I invite the Prime Minister to call a summit at No. 10 to get the leaders of the payday lending industry, the banks and other financial services providers, including credit unions, the churches, the regulators and the representatives of civil society to sit down together to come up with an agreement on what is acceptable and what is not, what can and what cannot be done and, if need be, to enshrine that in law.

When I joined this noble House just over three years ago almost every Minister who spoke from the Dispatch Box told us that the answer to most of our problems was the big society. Today we never hear the term mentioned, as if it had been banished from the book. If the concept ever meant anything, surely it means people coming together, supporting their community and the most vulnerable, working together, opposing injustice and unfairness, and not letting people be ripped off. What happened to the big society? I hope the noble Viscount will be able to tell the House how this concept is helping people in financial hardship.

What can we do? At a minimum, we could create a situation where no one is struggling to pay off multiple payday loans. No one should owe more than £500 in payday loans. Lenders recovering payday loans should never leave borrowers without the means to meet basic expenditure such as rent, food and council tax. The use of continuous payment authorities should be stopped, and replaced with payment authorities that are controlled by the customer only. If that is not possible because the type of basic bank account the customer has will not allow that, the bank should change the rules and permit it. If a customer notifies the payday lender that they are in financial difficulties, then default charges and interest payments should be stopped for at least 30 days while they get help to deal with their debts. The default charges and other punitive charges should never exceed 30% of the original loan.

Every payday lender on the high street should be required to provide details of where people should go for debt advice, and online lenders should also provide similar information. I would like to see all payday lenders carry a health warning on their advertisements in whatever medium. These warnings should be about 20% of the size of the advert. Similar rules used to apply for cigarette companies, before they were banned from advertising. Payday lenders should tell customers where to go for debt advice, and notify them that cheaper alternatives are available.

For all those measures, other measures are being introduced by payday lenders. We need a plan, and we need to support the alternatives to the payday lending industry. Credit unions have a role to play, and noble Lords will be aware of my active support for the credit union movement over many years. However, only the biggest credit unions will be in a position to provide immediate help. The London Mutual Credit Union, one of the biggest in the country and the biggest in London, has taken up that challenge. The legislative reform order the Government passed on credit unions was very welcome, as is the Treasury’s recent announcement of a rise in the interest rate cap.

The credit union expansion project is good news, and on many occasions I have praised the Government for their work here, but a £35 million fund is not going to provide the solution to our problems. It is a drop in the ocean, and much more needs to be done. In this House I have previously called on the banks to actively support the credit union movement. They must do so not only with a bit of sponsorship or small sums of money, although that would be welcome, but by making a commitment to build these organisations and make them financially robust. Banks should use the skills and expertise of their own staff, working on long term secondments to help the credit union movement grow and develop. The aim is to build what we see on both sides of the border in Ireland and in the United States of America: financially robust institutions, owned by their members, which deliver locally tailored financial products at a reasonable price.

We also need the support of the wider business community, and in fact every employer in the public and private sector. Simply advertising the availability of their local credit union to staff and allowing them to save with it through check-off would be a big step in the right direction. Some of our biggest companies and the Government should take a lead in this with an advertising campaign in support of the credit union movement.

It would also be very helpful if local government as a whole took a proactive role in supporting local credit unions. There are some fantastic examples in places such as Southwark, Islington and Sandwell, to name just three. We need the whole of local government to play its role. If every local authority pledged to deliver a place on the high street for their local credit union, what a welcome sight that would be.

I was surprised to learn how basic some basic bank accounts are. In an age where you can get a payday loan on your smartphone in minutes, some of these accounts do not allow people to get cash back at a supermarket when going shopping, forcing them to use cash machines. If your local bank branch has closed and taken its cash machines away, you are left with the corner shop where you have to pay to use the cash machine. These machines charge £2 or £3 to get out a £10 note. Why can the banking industry not look at some sort of basic loan of up to £500? That could make a huge difference here. Why can the Government not work with banks to provide them with protection and support if they work to help people get away from the payday lending industry?

The point I want to make in this debate is that if whole communities are abandoned then they will become the victims of the payday lending industry. To stop that, there must be a full range of financial products available. We must ensure that you are not discriminated against because of where you live or because you are poor. There need to be viable alternatives to payday lenders. Credit unions are part of the solution, but not all of it. Other financial providers need to step up, and civil society as much as government needs to say that enough is enough.

I thank all noble Lords who are about to speak in this debate. I look forward to their contributions and to the reply from the Minister.