Financial Services Bill

Lord Mitchell Excerpts

Wednesday 24th October 2012 Lords Chamber

Moved by

[Lord Mitchell]

196B: After Clause 91, insert the following new Clause—
“Power of the FCA to make further provision about regulation of consumer credit
(1) The FCA may make rules or apply a sanction to authorised persons who offer credit on terms that the FCA judge to cause consumer detriment.
(2) This may include rules that determine a maximum total cost for consumers of a product and determine the maximum duration of a supply of a product or service to an individual consumer.”

[Lord Mitchell]

My Lords, by any criteria, 4,214% being charged on a personal loan is outrageous. It is usury par excellence. Yet this is the rate of interest being charged by one of our largest and most popular online payday lenders. There are many others who are charging similar amounts. This amendment does not seek to ban payday lending because it fulfils a role and, for many people, they have no choice. What we do seek is to permit the Financial Conduct Authority to place a cap on the total cost of any loan if it judges that that loan will cause consumer detriment.

Payday lending has gone viral. Noble Lords need only stand in Parliament Square this evening and see the advertising copy plastered on London buses—one says “Go on. Get money. Go on”, while another one says “Arrives in 15 minutes”—in order to realise that this really is big business. Or they can do what I did, and go to Walthamstow in north-east London and there on the high street see the plethora of payday lending shops, all of which seem to be doing good business. Or they can go on to the Blackpool FC website, there to see that this football club is selling replica kits with “Wonga” plastered all over the shirts. You can even buy a baby Blackpool FC shirt so that your baby has “Wonga” on full display.

Until a year ago, I knew nothing about payday loans. Of course I had heard about loan sharks and I knew that this is an illegal, murky underworld where desperate people seeking immediate cash can get it quickly from backstreet dealers. I also knew that if you did not repay your loan, nasty people with black gloves and baseball bats would come round and make you an offer you could not refuse. I decided to look up the definition of “loan shark”, which the OED defines as,

“a moneylender who charges extremely high rates of interest, typically under illegal conditions”.

The truth be told, loan shark is an ugly expression and baseball bats are unacceptable, so many of the new generation have gone upmarket and spruced up their image. They have become illegal and, like any good marketing company, they have rebranded their product. Now their offerings are called “payday loans”, and if you do not repay, it is no longer the baseball bat but the bailiff and the threat that your personal credit rating will be shot to pieces. Some 4 million people are using these loans, and the amounts advanced exceed £2 billion. This is an industry that is enjoying stratospheric growth—no double dip here. It is a world where the companies have jaunty, blokey names like “Quick Quid”, “The Money Shop”, “My Advance Loan” and “Wonga”. Need a few quid over Christmas? It is easy-peasy.

But I have seen another side of the fun-filled world of easy loans. I have met people whose lives have been destroyed as they are sucked into the payday loan vortex. For some of them, it becomes a never-ending cycle of payment and repayment, payment and repayment, shuffling credit cards, borrowing from one payday loan company to meet the never-ending demands of the other, and all the time the inexorable clock of compound interest keeps ticking away. It is a Kafkaesque nightmare. Once you are in, it is hard to get out. I know it shows my age, but the words from the song “Hotel California” keep reverberating in my brain:

“You can check-out any time you like,

But you can never leave”.

I am in a beneficial position to understand what is going on as I come from an asset finance background. In my day, we financed capital equipment to large companies, which is clearly not the same as consumer credit, but the fact is that I totally understand the workings of compound interest and I know the games that people play.

Wonga is a good example to examine. The payday loan companies have taken to the internet like ducks to water—no shops, more upmarket and they have become very slick. They have turned loan sharking from a shabby backstreet activity into a recreational pursuit. I decided to do my own investigation. Wonga itself has no history of illegal loan sharking. It is a true 21st-century online payday loan company and is by far and away the most well known and maybe the most successful, so it made sense for me to go on to its website. It is brilliant. In terms of user friendliness, it is right up there with Apple and Google; it is very seductive. To test it out, I set out to borrow £300 for a 21-day period. It was so easy. Wonga wanted my personal details—where I live and where I work—and required details of my debit card so that it could capture the repayment after three weeks. So far, so good.

Wonga was able instantly to assess my credit rating, which enabled it to accept or reject my application within minutes. It highlighted the fact that it offers straight-talking money and promotes responsible lending. It told me that it would give me a decision in six minutes and that the £300 would hit my bank in 15 minutes. It also told me clearly and upfront that I would have to repay £365 in 21 days’ time. It stated, as it must, that this loan was equivalent to an annualised interest rate of 4,214%—totally transparent and totally exorbitant. Noble Lords will be pleased to hear that I did not click the “Accept” button.

Payday loan companies are correctly obliged by law to display their APR. As I say, in Wonga’s case, it is 4,214%. Some are more, others are less. Most of them claim that APR is an unjust measure. “After all”, they say, “how can you apply an annualised rate of interest to a loan that lasts for just a matter of days?”. But the fact is that you can apply an annualised rate of interest to any loan, whether it lasts for one day or 100 years. It is the only comparative measure. Attempts to rename interest and call it a fee payment must be resisted. Payday lenders are obliged to display APR on their websites but for some reason they do not have to show it on their advertising. I think they should. Imagine a bus advertisement where one panel says, “Straight-talking money”, and the other says, “APR 4,214%”.

Payday lending and loan-sharking are not going to disappear. This sector provides a vital service to those in our community who cannot get credit elsewhere. In these straitened times, it is only going to get worse. This amendment gives the Financial Conduct Authority the power to act where it sees that the terms on offer cause “consumer detriment”. I hope that the Government and noble Lords are able to support this amendment. I beg to move.

[Baroness Kramer]

My Lords, I will speak very briefly to this amendment, with which I have great sympathy.

I understand that the Government are carrying out a review of payday lending. I have two concerns. First, we really need to nail the banks, frankly, because I suspect that if the various fees charged for unauthorised overdrafts were translated into an APR, they might not be so different from that charged by Wonga. Secondly, we need to understand this dynamic between companies like Wonga and the kind of loan sharks that come after their clients with a baseball bat, because the last thing any of us want would be to see people driven back to those illegal lenders and subject to their violent and aggressive behaviour.

Would the noble Lord, Lord Mitchell, not agree that the most important way to combat this kind of exorbitant charging is to make sure that there is a proper alternative for individuals, whether it is through a credit union, community development banks—which we do not have this in this country—or some other mechanism where there is a legitimate provider that serves this particular market? Would he not agree that one of the frustrations with much of the language in this Financial Services Bill is that it is not taking the necessary actions to promote those kinds of organisations coming forward and to provide regulator backing to ensure that the alternatives are in place so that people do not have to resort to Wonga or to banks charging exorbitant fees for unauthorised overdrafts?

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I reassure the noble Lord that the powers that he seeks for the FCA already exist in the Bill. The lack of specific provision on the face of the Bill in no way reflects how seriously the Government take these issues.

[Lord Mitchell]

My Lords, I thank noble Lords who have participated in this short debate. To the noble Baroness, Lady Kramer, I say that credit unions are very interesting. They have started very slowly. As to the rates of interest they charge, I think that it is presently 2% per month of the capital cost and they are pushing hard for it to go to 3%. I do not know what that is when it is compounded out—I do not have my calculator with me—but it is probably about 50%. That strikes me as a reasonable amount to charge given the credit involved.

To the noble Lord, Lord Flight, I say that I think that Guernsey has probably got it right and we should pay attention to it. There is a lot of financial expertise there. I thank my noble friend Lord Kennedy for his support for the amendment. He lives in a deprived borough of London where, exactly as we saw in Walthamstow, payday loan shops are to be found everywhere.

To the Minister, I should like to make just a couple of comments. First, with online payday loan companies, ease of use is a significant issue. It is a bit like online betting: it is so easy to do; it is so fast. Let us think of people who perhaps do not have self-control or need the money quickly. It is frightening what people can do in the privacy of their front room to get money very quickly. It is not like it was before, when you would go into a payday loan company on the high street not knowing who was watching and perhaps not wanting to be seen there. This is between you and your computer, and it is very difficult.

I heard what the Minister said about compliance and licensing, but I am not sure that the issue of interest rates has been taken as the cost. It is the interest rate aspect of it that we are trying to push in this amendment, so that the FCA would have the power to control the effective interest rates being charged.

I shall reflect on the comments made and perhaps return to the matter on another occasion. I beg leave to withdraw the amendment.

Amendment 196B withdrawn.