Payday Loan Companies

Mark Tami Excerpts

Monday 20th January 2014 Commons Chamber

[Justin Tomlinson (North Swindon) (Con)]

I pay tribute to those Members who have already spoken for what has been a balanced and well-informed debate so far. I also pay tribute to the hon. Member for Sheffield Central (Paul Blomfield), who has been leading a cross-party push to influence and shape policy in this extremely important area. I have been proud to work with and support him. I am delighted that my borough council has achieved cross-party support, so we are leading nationally and locally, and with cross-party support—perhaps it is the future.

I have talked about this subject on a number of occasions, particularly the need to empower consumers to make informed and savvy decisions. I recently read an interesting report on consumer markets by my hon. Friend the Member for South Thanet (Laura Sandys). It states:

“Good markets put consumers in the driving seat to make, shape or break products. Bad markets disguise, mislead or control consumer choice”.

How true that is of this market. It is absolutely key, because there is a fundamental information asymmetry in the payday lending market, and that is at the root of why it does not work in the consumer’s interest. The market distorts decision making so that, rather than making an informed decision based on price, the consumer is led into favouring other factors above all others in making their decision—a point that has been made by a few Members today.

The Office of Fair Trading investigated 50 payday lenders, and 60% of the consumers who responded emphasised speed and quick access. For the industry itself, the FCA produced an informative and useful video and talked with some of the consumers. They said that traditional mainstream banking was often too formal. There was a perception that they would have to turn up in a suit and justify their demands, wishes and financial actions.

[Mark Tami (Alyn and Deeside) (Lab)]

Does the hon. Gentleman accept that many who have tried with the normal banks, regardless of whether they were wearing a suit, were turned away or found it very difficult, and that is why they have ended up with payday loan companies?

[Justin Tomlinson]

I thank the hon. Gentleman for that intervention. I will be moving on to the failings of mainstream banking shortly.

It is also a recognition of how consumer habits have changed. With 24/7 internet shopping becoming increasingly popular, if consumers see something online at 3 o’clock in the morning and want to purchase it, they would like to be able to access the funding right away. Society is geared up for consumers wanting something, and wanting it right away. That market adapted to consumer demand and stepped in where the mainstream banks were not looking. Clearly, value for money for the consumer is not paramount, and that needs to be addressed.

I welcome the positive steps that the Government have started to take, working with the FCA. I will comment briefly on the various things that I would like to see. The first one, and it is often the simplest, but the one on which I am not sure we are there yet, is that the total cost of a loan should always be displayed in cash terms. I suspect that not even Treasury Ministers can calculate an APR rate, which involves a hugely complex formula. Therefore, a customer should be able to say, “I want to borrow £100, and it will cost me £20.” Even those without a particularly good grasp of mathematics would then be able to make a reasonably informed decision on whether that represents good value for money.

To encourage competition, we need a standardised unit for comparison. In the energy market and in mobile phone contracts there are standard units, so consumers can visit price comparison websites to find the best product. That is very difficult with payday loan companies.

--- Later in debate ---

[Naomi Long (Belfast East) (Alliance)]

Debt is a growing issue faced by many people in my constituency, just as it is in those of other hon. Members. As a result of both the recession through which we have laboured during recent years and changes in employment practices, people find themselves increasingly unable to make their income stretch to the end of the week or the month to cover necessities such as rent, heat, food and clothes, and desperately seek a source of credit to tie them over from one pay cheque to the next. Particularly for those who are financially vulnerable and find access to mainstream credit difficult or impossible, due to the risk of defaulting, payday lenders offer the illusion of quick and easy credit, but in many cases at significant cost in the long term.

Unmanageable debt has a corrosive effect on people’s lives. Servicing high levels of debt repayment has been linked to rent and mortgage arrears, rates and utility arrears, constraints on jobseeking behaviour, poor diets, cold homes, and mental and physical health problems that are not limited to distress and depression.

Several things that can be done to tackle the problem have been mentioned by right hon. and hon. Members, and I want to touch on a few of them. First, we need to acknowledge and address the growing poverty in our country. It affects not only those who rely entirely on benefits, but—and, in some cases, more so—the working poor who struggle to make ends meet on low and irregular pay. The rise in the uptake of payday loans has been accompanied by a growth in the number of food banks, which is evidence of the financial stress with which many families have to contend in trying to afford the basics.

Raising the level of the minimum wage and lifting the poorest out of taxation are two very positive measures that the Government are considering and have committed themselves to doing. However, the impact of welfare reform is likely to hit hard precisely those same families who are struggling now, which will increase the risk of their getting into unmanageable debt. One alternative source of help that has been available for those in difficult financial circumstances is the social fund. Although it has certain eligibility limitations, I am concerned that it will go under welfare reform, and that there is little information about what will replace it.

We need to provide good alternatives to payday lenders for those in need of credit. The role of credit unions and community banks, which has already been referenced, could be significant. There are some excellent credit unions in my constituency, and they have a greater presence in Northern Ireland than in the UK generally, due to the Irish League of Credit Unions and the Ulster Federation of Credit Unions, but more work could be done to promote what credit unions have to offer. That service extends beyond access to credit, because it covers work with adults and children to support good financial habits and to encourage saving and good literacy and planning, which are hugely important.

That leads to another thing that we can do, which is to invest in financial literacy, as other hon. Members recognised in their speeches. We need to give better financial advice, guidance and education to everyone, young and old. Many people simply do not understand the implications of taking out a payday loan, the potential impact on their credit rating or the rapidity with which their debt can escalate if they fail to meet all the conditions.

A levy on payday loan companies’ profits to fund advice services would be one way to expand the advice available to people with financial problems. I have raised that with the FCA. Given that companies have made such massive profits due to charging extortionate interest rates, they could well afford it. Such advice is particularly important because people are also facing changes in their benefits and in their workplace arrangements, and yet much of the advice that is available has also been hit by austerity measures. It is hugely important that people get financial education, but it is also important that clear, transparent information is available from the loan companies themselves on how the payments will be collected and on what charges will be incurred.

There needs to be much more regulation of the operation and marketing of payday loans. Other Members have spoken about advertisements during programmes that are aimed at children—even the tone of the advertising is aimed specifically at children.

[Mark Tami]

Is the hon. Lady concerned not only about payday loan companies, but about companies such as BrightHouse that offer access to high-value products? The costs are extraordinary by the time people finish paying for those products. To all intents and purposes, it is the same sort of arrangement. People are being charged a high amount of interest to have access to those products.

[Naomi Long]

I agree that it is not only payday lenders who are at fault. People are offered a range of credit facilities. Part of the difficulty is that people do not understand what the APR means in real terms when they take out a loan. We really need to work on that. People must also have transparent information when they make such decisions.

On advertising, I want to bring to the attention of the House an experience that I had of late. I received an unsolicited letter from Wonga. I will name the company because I have already done so on Twitter. That was the only way that I could get a reply to my original letter of more than a month ago, in which I asked why I had received the letter. I wrote to it because I was concerned to receive what appeared to be a marketing mailshot, claiming that I had applied for credit with the company, which I had not. It offered me terms on which I could apply for a loan.

Wonga claims that the information of mine that it possessed had been used fraudulently to try to obtain credit in my name. It had retained my details on file for the purpose of excluding that, but had mistakenly sent me the mailshot as part of a marketing test. I asked whether the matter had been reported to the police and why Wonga did not contact me directly to say that my details had been used, given that it had my address. I also asked whether it could tell me when the incident had taken place and whether it was only people in the same category as me who had received the marketing shot or whether it was more general.

I intend to pass on my experiences to the FCA and the Information Commissioner’s Office, because although some people will realise that they had not sought the unsolicited mailshots, such abuse could fool others into thinking that they have previously applied for a loan and that it is something that they may want to take up. It is hugely important that aggressive marketing tactics are stamped out and dealt with through proper regulation.

There needs to be a cap on the total cost of payday loans. That has been referred to by a number of Members. I welcome the FCA’s ongoing consultation on such a cap. It is worth noting that other EU states have imposed a cap, as have many states in America. Given the mobility of payday loan companies, if the UK does not have a cap on a par with those of other EU states, we might find that companies move to the UK to capitalise on that.

Other Members have said that competition does not really work in this marketplace. I think that that is true. Six lenders account for about 90% of the market share. There is no incentive for them to offer competitive interest rates because convenience seems to drive demand, rather than interest rates.

The regulation of charges is required, in tandem with an overall price cap, so that the costs are not passed on in that way. I welcome the work that Which? has been doing to expose the excessive default fees that are charged by many companies. It has described that as exploiting borrowers and potentially illegal. Such fees are often well above the costs of administration for the default and are one of the biggest factors that tip people into a debt spiral. The Which? research shows that one in five payday loan users has been hit with unexpected charges and that more than 50% of payday loan users have incurred late payment charges over 12 months, compared with 16% among all credit users.

For the information to be effective and meaningful, we need a real-time lending database. Some payday loan companies have worked together to implement that, but it needs to be mandatory if it is to be meaningful. It would hopefully stop multiple loans and prevent people from taking out one loan to pay off another, thus compounding their problems.

I hope that in raising these issues tonight and in keeping the public focus on payday loans, we will be able to do something worth while to protect those in our society who are financially very vulnerable.