Financial Services Bill

Lord Mitchell Excerpts

Wednesday 28th November 2012 Lords Chamber

Moved by

[Lord Mitchell]

114D: After Clause 98, 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, yesterday I had tea with a dear friend here in your Lordships’ House. Unsurprisingly, the subject of payday loans came into the conversation. He told me about his son, who has mild attention deficit disorder, is frequently unemployed and had taken out two payday loans. The loans were for £800. His son could not pay them back and, to cover his embarrassment, rolled them over several times. In a few months, the amount due to be repaid had escalated to £5,000. My friend reluctantly had to settle the bill. That is the essence of the amendment that I put down at Committee stage, and which I have put down today. It is this that we are seeking to control.

Ten years ago, this amendment probably would not have been tabled, but today it is very much of the hour. The fact is that legalised loan-sharking, or payday lending—call it what you will—has gone viral. It is out of control, dangerous and is causing great distress to many vulnerable people. Two developments have come together to cause the rapid growth of this lending industry. The first is the dreadful state of the economy. People are desperate for money and they will take it from whatever source they can, whatever the price. Take a walk down any high street, particularly in deprived areas—payday loan shops are abundant. Recently, I went to Walthamstow with my honourable friend Stella Creasy MP and my right honourable friend Ed Miliband. There, on the high street, we saw more than 15 money shops of one form or another. Business was brisk.

The second development has been the astronomic growth of online lending. As I said in Committee, I went on to one of the most successful websites and what struck me was the slickness of the process: just some cursory information to fill in and the money would have been in my bank in 15 minutes. It is simply too easy. A straitened economy and the ease of usage of online lending have combined to create this booming business sector.

One online company—Wonga—is projected to be making more than £70 million profit this year, probably valuing the company well in excess of £1 billion if it were to go public. The annual size of the payday lending industry is at least £2 billion; it is growing at a fast clip and in time will become a major source of consumer credit in this country. I do not understand why this Government—who are determined to reduce personal indebtedness at the macro level—are at the same time allowing this sector to grow unchecked. I would have thought that both parties opposite would be encouraging me on this amendment, rather than opposing this very important piece of legislation. Perhaps the Minister will have some good news for me when he replies.

Payday loan customers, by their very nature, are people with very low credit ratings, who have no other options open to them. They borrow money on an unsecured basis at extortionate rates of interest. Does this not strike a familiar chord? Uncontrolled lending to people who are barely able to meet their repayments in a marketplace that is expanding at a massive rate: does that not sound like what happened in the United States with sub-prime lending? Sub-prime was off everybody’s radar screen until it hit the US and world economy like a hurricane. It was the initial cause of the financial crash of 2007 and few saw it coming. If Her Majesty’s Treasury does not buy into the moral repugnance that most of us feel about the dangers of payday lending, at least it should be on its guard about the economic consequences of this ticking bomb.

However, it is the moral argument that concerns us this afternoon. I am delighted that the right reverend Prelate the Bishop of Durham has added his name to this amendment. He has spoken previously on this subject and I am sure he will be making his views very clear. I am pleased that the noble Baronesses, Lady Howe of Idlicote and Lady Grey-Thompson, have also added their names to this amendment. Both have long records of standing up for the vulnerable and I await their speeches with anticipation.

I want to make one point very clear. This amendment does not seek to ban payday lending; it seeks to give the FCA the power to cap interest rates when they are causing consumer detriment. It is a “may”, not a “must”. It puts the responsibility squarely into the hands of the FCA. I will go further: we need payday lenders; they fulfil a vital role. There are many people who cannot get credit from traditional sources, and without legalised payday lenders, their alternative is the backstreet loan sharks whose penalty for non-payment is often pretty brutal.

Payday lenders fill a vital gap, but they need to be controlled. Interest rates charged by many payday lenders go well beyond the obscene. Any lender is bound by law to display the annual percentage rate—the APR—that it is charging. In many cases, payday lenders are charging an APR in excess of 4,000%. These lenders avoid the use of the term APR whenever they can; they say it is not appropriate for a short-term loan. I have heard them say to me that quoting APR on a payday loan is as relevant as quoting APR if you hire a car for a week or stay in a hotel for a similar period. We must not buy this argument and we must not let them get off the hook. Hiring a car or staying in a hotel is a rental of an asset and its associated services. It incurs no repayment of principal and is not a loan.

Payday lenders say that quoting APR on a short-term loan is inappropriate—how can you use the word “annualised” to measure something that lasts just a few weeks? That is exactly what the finance industry does every day. If one bank borrows £100 million from the money market on an overnight basis, the charge is quoted as an annualised interest rate. Stating that APR is the wrong measure is simply disingenuous. APR is there for an express purpose and in my opinion it should be included in all advertising, but that is a debate for another time.

Last Sunday, we saw an interesting development. In an article in the Sunday Telegraph, Wonga was reported as saying that its rate of interest is equal to 1% per day. This is a big change from a company which has previously refused to admit that its repayments should be quoted as a rate of interest. What it says is true—it does charge 1% per day, or thereabouts—but it is playing games. If you borrow £100 from Wonga for seven days, the simple interest that you pay will be 1.82% per day. If you borrow £100 for a month, the simple interest will be 1.21% per day. For its maximum of 43 days, it will be 1.16% per day. The game it is playing is that this is calculated on the basis of simple interest, but interest is seldom calculated on a simple basis. The accepted measure is of course compound interest. A loan that costs just 1% per day becomes 4,000% per annum when aggregated in compound interest terms, which is exactly what APR is all about.

--- Later in debate ---

[Lord Barnett]

My Lords, I have a couple of points. Throughout the Bill, my noble friend Lord Peston and I have constantly raised the question of “may” and “must”. That question arises in this amendment, too. The amendment, moved so wonderfully by my noble friend, states:

“The FCA may make rules”.

That could be “must” because the amendment is already constrained by the end of that sentence,

“on terms that the FCA judge to cause consumer detriment”.

That is why it is so important, as my noble friend Lord Peston said, that we see the Minister’s amendment as soon as possible. I am not a lawyer but I do not distrust them; however, the lawyers who advise Governments can make mistakes, which are usually resolved by lawyers on both sides eventually having an argument, at great cost to everyone including the courts, until someone decides in court who was right. On this occasion we have to try to get it absolutely right. I regard what the Minister said as very helpful.

My noble friend said that we must see the amendments as soon as possible. However, nothing is built in stone. No law states that we have to have Third Reading next Wednesday. If necessary it could be delayed a little. The important thing is to get it right. I hope that the noble Lord, Lord Sassoon, will consider having a discussion with the authorities, or with the Leader of the House or whoever, about whether, if we do not get sight of the amendments as soon as possible, we should delay Third Reading until we are sure that we have got it right. That is crucial. I hope that the noble Lord, Lord Sassoon, can inform us that he will do that.

[Lord Mitchell]

My Lords, I thank all noble Lords who took part in this discussion, particularly those who are co-signees of the amendment. It has been a powerful and focused debate and I hope that the payday lending companies are listening. My guess is that they are glued to their screens.

The Minister has made a welcome statement of intent and to be honest that is as much as we could have hoped for. With the Government’s cast-iron acceptance of the principle of my amendments, as well as the effective force of veto that the three other signatories to the amendment will have over the revised amendment at Third Reading, this issue is now where it should be: beyond party politics. The winners are those who have tirelessly campaigned for this change in the law. I must mention my honourable friend Stella Creasy MP, who has been relentless in her pursuit of justice.

The other most welcome winners are those who live in the hellhole of grinding debt. Their lives will become a little easier. The losers are clearly the loan sharks and the payday lending companies. They have tried every trick in the book to keep this legislation from being approved and they have failed. Their failure is our victory. On the basis of the Government’s assurances, I beg leave to withdraw the amendment.

Amendment 114D withdrawn.