High Cost Credit Bill

Mark Durkan Excerpts

Friday 12th July 2013 Commons Chamber

[Paul Blomfield]

My hon. Friend makes an important point, and one that has been discussed previously in the House. The role of post offices could be significant; and, yes, I am aware of John’s work in Leeds, which it might be useful to share more widely with Members; it is a very positive initiative.

[Mark Durkan (Foyle) (SDLP)]

Does the hon. Gentleman recognise the apparent contradiction on the part of some people who support legislation capping credit union interest—currently at 2% per month, although the Government propose to raise it to 3%—yet oppose any cap on the sort of predatory creditors his Bill tries to target?

[Paul Blomfield]

The hon. Gentleman makes a powerful point, and one that rankles with credit unions as they try to develop their support for people.

The first set of measures in the Bill relates to advertising and information. Citizens Advice recently published results from its payday loan survey on implementation of the sector’s own good practice customer charter. It found that 21% of respondents were not clear about total repayment costs. The Bill would therefore require lenders to display interest payable in cash terms, so that people knew and could compare the cost of borrowing in a consistent way to be determined by the FCA. The Bill would also require that lenders state all fees and charges—crucially including default charges—and the circumstances in which those charges would be invoked on loan applications, so that people were clear about what they were committing to.

Many organisations are tackling the promotion of payday lenders in their own way. I am delighted that on Wednesday the university of Sheffield announced that it was banning payday advertising from its campus, which the National Union of Students has called for nationally. Many football clubs have also taken a strong stand. I congratulate Millwall, Bolton Wanderers and, although all my life my heart has been on the other side of the city, Sheffield Wednesday on the stands that they have taken.

--- Later in debate ---

[Damian Hinds]

And there are multiple other reasons why people take out credit products, many of which are just as rational. I shall come on to some of them later in my remarks, but there is ample evidence to show that many people taking out loans—and the same applies when they access a debt management plan—choose something that is inappropriate. Even where comparative, side-by-side, costings are available—to those of us who studied economics and believe in consumer sovereignty and rationality, this is difficult stuff to get our heads round—consumers often take the more expensive option.

[Mark Durkan]

Is the hon. Gentleman’s answer to the point from his hon. Friend the Member for Shipley (Philip Davies) that the very fact that these products are advertised in a mainstream way as being so convenient is one of the things that gives them the air of reputability, which encourages people to opt for them as a standard and acceptable form of borrowing?

[Damian Hinds]

I am grateful to the hon. Gentleman. That may well be part of it. There is a range of operators in this market, stretching from the big and well known with very large ad spends—we can call them “reputable brands” if we like—through to quite iffy-looking companies at the other end of the scale. As in most markets, there is a range.

All these points—I am grateful to hon. Members of all parties for making them—bring me to the third point on which I think we should all be able to agree. Wherever people are on the political scale—whether they are a Milton Friedmanite free market economist or a socialist—they should agree that people should not have to go to excessive lengths to know that they are not being ripped off. There is, of course, a reasonable amount of due diligence that has to be applied when people make a purchase, take a loan or whatever, but they should not have to run around the block seven times to know that what they are taking out is reasonable value.

Those are the three things on which I hope we can broadly agree, and the debate largely revolves around how we achieve them. It is not always quite as straightforward as it appears. On occasion in this House and elsewhere, relatively simple solutions have been proposed that purport to deal with complex market issues in one big initiative. I suggest that that is rarely an adequate answer, as it is rather more complicated.

There are a number of rules of the road in the credit markets, and they have come into sharper focus for me as I have looked into this subject over the last few years. The first is that there are always unintended consequences—except when there are no consequences at all—of what regulatory authorities try to do. The second is that markets cannot be beaten unless something better is provided. The third is that where demand creates its own supply, supply creates its own demand. Let me explain in a little more detail what I mean in each of those cases.

On the unintended consequences, it is a beguiling and attractive prospect to say, “Let us just cap the amount of interest that lenders can charge on their loan products so that people will pay less and household budgets and benefits will go further.” The problem with a blunt and general APR cap is that companies find new products that slip outside the definition being regulated and new ways of making money that do not count as part of APR. To the extent that this cap, or something like it, is effective, its major impact is market exclusion, which inevitably means the most vulnerable and the poorest customers are those most likely to fall into the hands of illegal loan sharks and the sorts of people whose idea of a late payment penalty is a cigarette burn to the forearm.

When I say that there are sometimes no consequences at all, it can again be beguiling to think that we have done something clever, come up with an initiative, empowered consumers and so forth, but it turns out that no impact whatever was made. It is very easy for disclosures, warnings, signposting and so on to just become part of the wallpaper of life—like the bit at the bottom of the billboard chart that says, “Your home may be at risk if you do not keep up your payments on a mortgage or other loan secured on it.” In the case of this market, hon. Members may recall from the previous Competition Commission inquiry that there was, for example, a lenders-compared website, which was meant to help consumers who might be home credit borrowers to compare the price of home credit providers against credit unions and so forth. The problem, of course, is that nobody uses it. The regulatory authorities feel happy because they have provided something, but what they have provided actually does no good at all.