High-cost Credit

Meg Hillier Excerpts

Thursday 5th September 2013 Commons Chamber

[Jackie Doyle-Price]

The reality is that people will follow regulation if it is economical to do so, otherwise they will go elsewhere. My evidence is that people are accessing these loans in the first place. We have a failure in the market to extend affordable credit, and that is the issue that we are trying to tackle today. I remind the hon. Lady of what was said earlier. The rules and the tools are already in place, but the regulator has failed to use them. This is not about more burdensome regulation; it is about regulators being prepared to use their teeth and the tools that they have to do the job.

[Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

Further to that intervention, the hon. Lady may remember that the PAC heard evidence from Fair Finance, which explained that if the interest rate was capped, as a social enterprise it would have to lend a higher amount to individuals, so risking greater indebtedness. So we have to get the balance right to make sure that people without a credit record get the loan that they need but are not over-indebted.

[Jackie Doyle-Price]

The hon. Lady is quite right. The cost of extending small amounts of credit is higher, pound for pound. We have to be sufficiently grown-up to realise that when we are considering regulation. I have not yet come across one consumer organisation that is in favour of caps. They all recognise that there is a market failure and a need to clean up the industry, but caps are not their preferred tool. However, there are some measures that they would like to see. The first is a ban on excessive default fees and charges. Again, this is not the preserve of the payday lenders. Unauthorised overdraft users also experience punitive charges, which again illustrates that these are issues that extend throughout the credit market, which the regulators need to grips with. In fact, Which? has found that unauthorised overdraft users suffer more from excessive charges than payday loan users: more than 20% of overdraft users are surprised by the level of charges they face. Again, we need to look at using the regulatory tools available. The FCA’s requirement will be that any institution has to treat its customers fairly, and that would extend to not having excessive charges. The regulatory power is there; it just needs to have the guts to use it.

Secondly, the FCA must give a clear signal that it really will implement the rules on irresponsible lending. We have seen that 48% of payday loan users and 44% of unauthorised overdraft users have taken out credit that it turned out they could not afford. It is clearly irresponsible lending for any firm to continue extending credit with roll-over loans or to let an overdraft get ever worse. It must be clear to lenders that they will face penalties from the regulator if they continue to exploit vulnerable consumers.

We all need to think about what more we can do to support effective debt management and encourage people to take appropriate advice, because when people are desperate the only place they can go is to those lenders. We need to make it much easier for them to access advice that will help them, so that they do not get into a worse situation.

There also needs to be a clear sign to lenders that they must give clearer information on what the consequences will be if people default. We know that many consumers are over-optimistic about their ability to pay off credit on time and in full, so clear warnings are needed about what the consequences will be if they do not. Those warnings need to be given in a simple and clear way, such as by stating the amount of cash it will cost per £100 if the loan is not paid on time, so that people really understand the deal they are getting into. Again, that is consistent with the Public Accounts Committee’s recommendation. Even mortgage statements, and indeed any credit, should come with clear health warnings explaining the consequences of missed payments. All costs must be transparent.

I believe that those measures would greatly strengthen the protections for consumers. That is what we really need to focus on today. I agree that we must look at what more we can do to support credit unions. I think that employers have a big role to play, because we know that many payday loan customers are in jobs. If employers can be encouraged to have relationships with their local credit union, that would be a good way of signposting people to more reputable lenders. We need to use the tools we already have for the job: tough rules on responsible lending, tough action on default charges and much more regulatory activism.

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[Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

This has been an interesting debate. I congratulate my hon. Friend the Member for Islwyn (Chris Evans) on calling it and all hon. Members who have spoken.

Owing to time constraints, I will not comment on most of those speeches, but I think we are all clear that there is a world of difference between those of us in this place, as well-off MPs, able to access interest-free credit cards or get loans at 5% or under these days, and many of our constituents, who have no savings and no credit record or a poor credit record, for whom the options are limited. It is important that there is a sector that can lend to people who have a crisis when the washing machine breaks down or, typically—I hear this a lot in my constituency—when they have to pay for a funeral, which is a huge expense, and have nowhere to go. We need to ensure that the system works.

I want to touch on some of the concerns, as I see them, and what needs to be done; to highlight some of the organisations in my constituency and how they work to achieve things; and also to pick up on the point that the hon. Member for North Swindon (Justin Tomlinson) made about the disgraceful withdrawal by the major financial institutions of products for poorer, riskier borrowers.

It is now harder even for people with good ratings to get products from the banks, as many of my local businesses will testify, while those who do not have a good credit record cannot get products from anywhere. We need to be careful, because the vilification of payday lenders means that there is a huge reputational risk for mainstream lenders entering the quick, short-term loan market. We have to think responsibly and in the round about how we act and how we ensure that there is something out there for those who will be a higher risk and will therefore face a higher cost. There is a place, as we have all agreed, for short-term lending of fixed sums at high rates.

We heard on the Public Accounts Committee about how Provident works. For many people, it is a psychological thing. A nice woman—they are nearly all women—comes to the person’s door and asks for the money. It might be £185 to borrow £100, but it never goes up: even if someone misses a payment, there is no penalty. Many of my constituents—they are often the same sort of people, and rely on meter keys—do not want the surprise or worry of a bill they are not expecting. I agree with the hon. Member for North Swindon that there is a worry about secondary selling, but that certainty and direct contact are important.

It is interesting that ABCUL—the Association of British Credit Unions Limited—has sent round a note about interest rate comparisons, which says:

“A £300 loan over 52 weeks from Provident Financial home-collected…at 272% APR costs £246 in interest while the same loan from a credit union at the maximum 26.8% APR costs £38 in interest.”

However, it is not really right to make the comparison, because if the credit union went round to people’s doors in person, there would be an increase in the cost and the interest rate would be much higher than the 26.8% quoted. We need to be careful when comparing products to be aware that there are different products out there. I agree with all colleagues that the focus on APR and percentage rates is confusing for people. We need to change that—I will touch on my suggested changes at the end.

My hon. Friend the Member for Makerfield (Yvonne Fovargue) mentioned BrightHouse, which has a really invidious system, providing high interest on credit via purchases and then tacking on insurance. Indeed, the insurance costs for one item of furniture or a television can be as much as the insurance for a whole household, yet it is sold in a shop-front environment in places such as Dalston Cross shopping centre. Worse still, BrightHouse is often recommended by social landlords. When someone moves in and says, “But I’ve got no furniture,” they are often told—by people who are not qualified to give financial advice—“Oh, why don’t you just go down to BrightHouse?” They think they are giving shopping advice—often, probably in good faith—but have no idea that they are indebting their tenants for a long time to come.

On the high street in Dalston, we have every type of high street lender that could be imagined, from the legitimate banks to the loan sharks, who do not exactly have shop frontages, and the swish, nice-looking frontages of the Money Shop, Oakam and so on. I want to touch on Oakam, which has an interesting business model that is different from many of the other high street lenders. It is based on an American model, which is fairly newly arrived in the UK, and works with people who are themselves fairly newly arrived in the UK who are trying to build a credit record or set up a business, but do not have access to credit from mainstream institutions. Typically, someone from Poland—we have a lot of Poles in Hackney—or people from parts of west Africa, having arrived in the UK, will spend six months building up their credit record at a higher interest rate than many others, but then move to the high street bank over the road to get a loan. Oakam provides a service that people need—it is at a higher interest rate, but people know what they are doing. Oakam says that a lot of its customers are clearly building their records.

Fair Finance is a social enterprise that gave evidence to the Public Accounts Committee. It has a base in Hackney and provides face-to-face loan advice, but has taken nearly nine years to reach break-even point. One of Fair Finance’s worries is that if interest rates were capped, it would have to provide loans to people at higher levels and further indebt them, so if someone came wanting to borrow £5,000, it might have to call it £10,000 to cover their costs, because it costs a lot. Fair Finance has a model that trains advisers to sit face-to-face with someone, talk them through all their financial issues and ensure they can manage the loan and the repayments. Fair Finance feels that talking face-to-face is one of the reasons why it gets the money back.

We have talked a lot about credit unions, too. As a Co-op MP, it saddens me that too often we see credit unions failing. Having to save before a loan is one issue. In Hackney, our credit union collapsed. We are now working with the Tower Hamlets credit union, which has taken over the space. One of the challenges was that a lot of people were basically using the credit union as a bank account for their benefits. They never really saved and were therefore never able to take out a loan, although they had no great interest in taking out a loan either. The service quality was poor, and too often the credit union was badly managed and there was a lack of advertising, as is the case for other credit unions. We need to work with the credit union sector to get it to step up to the mark. If credit unions are to compete with flash shops such as the Money Shop, which people can walk into and get good quality service—whatever the issues with the products—they need to remember that people will shop around.

I want to touch on what needs to be done and to refer colleagues to the Public Accounts Committee report, which the hon. Member for Thurrock (Jackie Doyle-Price) highlighted. I will not repeat them, but its recommendations clearly show that there is an issue with a lack of regulation from the regulator. The work of the regulator—we now have a new regulator, so there is some hope in this—needs to focus more on consumer protection, ensuring that those with a licence to lend have the right protections and checks in place, so they do not over-lend and over-extend people. There should be a limit on roll-overs. There is sometimes talk as though everyone is always rolling over all the time. There are legitimate payday lenders that limit roll-overs. We need to recognise that there is a range of providers.

There also need to be proper affordability checks. People should not be able to walk down the high street and get three payday loans on the same day. The whole point about the speed of many payday lenders is that they can make online checks quickly, so the system needs to be updated. It is interesting that one’s own credit record is sometimes not updated very quickly, so there is a basic IT issue. Continuous payment authority is an invidious system and needs to go. We also need a change from APR to clearer costs. These are all things that need to be done.

Let me end on a cautionary note by quoting Mark Hannam, the chair of Fair Finance:

“Those who campaign on this issue need to decide whether they want a well run, well regulated market with a few dominant providers (who are very profitable); or a highly diverse and less well regulated market, with lots of smaller providers who are under less pressure to treat their customers well. From the consumers’ point of view, the former seems a better outcome.”

When we look at regulation, we need to be careful that we do not throw the baby out with the bathwater.

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[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to be called to speak in the debate. I congratulate my hon. Friend the Member for Islwyn (Chris Evans) on securing it, and the Backbench Business Committee on scheduling it to take place in the Chamber today.

I was particularly struck by the honest and frank contribution from the hon. Member for Chatham and Aylesford (Tracey Crouch). I was also pleased to be reminded by my hon. Friends the Members for Blaenau Gwent (Nick Smith) and for Hackney South and Shoreditch (Meg Hillier) of the context in which our constituents face difficulties with high-cost credit. There was a danger that we might forget that these problems do not occur in a vacuum. The reasons for people being forced into using high-cost credit include the decline in wages, which has accelerated over the past three years. We have seen a £1,500 real-terms reduction in the mean level of wages over that period and, as we discovered yesterday, the median wage in Britain is now £3,300 less than it was in 2006-07.

The presence of the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for East Dunbartonshire (Jo Swinson) on the Treasury Bench prompts me to talk about the context in which the debate is taking place. She and I are parliamentary neighbours, and there is a road—Colston road—that divides her constituency from mine. On one side of that road, in my constituency, is the ward with the highest level of child poverty in Scotland, at 51%. On the other side of the road, in the hon. Lady’s constituency, the level of child poverty is only 9%. That is a yawning gap. I have constituents visiting my office who are in dire need of food because they do not have enough money to get through the day. That explains the surge in the use of high-cost payday lenders in my constituency and those of many other hon. Members across the country.

We have heard that the average APR for payday lender loans is about 1,737%, but some of our constituents are facing an APR of nearly 5,000% on even relatively small loans. In many parts of Glasgow, this demand for high-cost credit is, in my experience, clearly linked to financial hardship and the lack of available alternatives for finance. We saw previously that crisis loans proved to be a stop-gap, but even in the run-up to the period during which the arrangements were devolved by the DWP to local councils—and, in Scotland, to the Scottish Parliament—we saw the significant pressures caused by cuts in crisis-loan funding. Between 2011 and 2012, crisis-loan funding fell by almost £90 million, which led to an explosion in demand for payday lending, particularly in Scotland.

In recent months, the Resolution Foundation has evidenced a number of key facts that show the extent of financial exclusion across our country. About 4% of UK households have no bank account at all; one in 10 does not have a current account; and it has been estimated that people on very low incomes pay a poverty premium of around £1,000 a year just to access basic financial services. Some 7.8 million in our country are unable to access mainstream credit, while 60% of adults among the poorest fifth of the population would like to save just £10 a month, but are unable to do so. Growing numbers of people are only a broken washing machine or a broken fridge away from stepping over a very steep financial cliff indeed, while 3 million households in social housing do not have any contents insurance despite the fact that they are twice as likely to be burgled as people who live in privately owned properties.

We have heard about the scale of the payday loans market over the last couple of years, and the average loan is between £265 and £270 and borrowed over 30 days, but we have also seen an explosion in the market in recent years, with between 7.4 million and 8.2 million new loans in 2011-12, up from an estimated £900 million-worth of new loans in 2008-09.

The debate has been useful in focusing the eyes of the Government—and, I hope, those of the Competition Commission, too, in its inquiry—on the need to take concrete action on misleading advertising, the irresponsible roll-over of loans, about which my hon. Friend the Member for Walthamstow (Stella Creasy) spoke so lucidly, the targeting of vulnerable customers and the unfair treatment of customers who are in arrears and default. It is the charges for these defaults on which I believe urgent action is particularly needed by the Competition Commission and, perhaps, by the Financial Conduct Authority next April when it takes over regulation of this sector. The Bristol study, which reported to the Minister’s Department, said that having tighter lending practices and a restriction on default charges could result in short-term lenders exercising less forbearance than they currently do on lenders who are very much in need.

I am pleased that we have heard such a focus on credit unions in this debate. I recently held a summit of small credit unions in my constituency, and they came up with practical suggestions about how the Government could help. They told me that, in their view, the Government’s fund through the DWP does not do enough to support small, community-based credit unions. They consider that the lion’s share of the funding had gone to the larger credit unions and said that the smaller credit unions were often run exclusively by volunteers, and they lack IT expertise and permanent staff. Credit unions from Haghill, Ruchill, and Greater Milton and Possilpark in my constituency have told me about the huge impact they could have and the huge extension in services they would be able to provide to constituents if only they had the possibility of having a staff member on board.

[Meg Hillier]

Does my hon. Friend not think that that is one of the problems and it is why people go to those other companies? With credit unions, on a customer service level, they often get what seems to be a second-rate service.

[Mr Bain]

My hon. Friend is absolutely right in the sense that community-based credit unions often have much more personal knowledge of the people who use them and who save in them, and it can often lead to much more responsible lending practices, borrowing and issuing of loans.

My local credit unions also said that it was very important that the savings-loans link was maintained because it encouraged a sustainable business model and lending. They welcomed the fact that finance for a financial education worker was available, which they said had been pulled in the past sometimes after just six months, and argued that the Government needed to be much more consistent in their support. They raised an important final point—that credit unions are often seen as low priority in comparison with banks when customers become bankrupt. They asked the Government to think about reviewing the law in this area to bring them equality of treatment, which would very much help the credit unions’ provision of services.

The hon. Member for Banbury (Sir Tony Baldry) mentioned the influence of the credit unions in Ireland, which is also true of Australia, Canada and the northern states of the US. We need to expand the services available and end the stigma that has led credit unions to be seen as of second order, which they are certainly not.