Consumer Credit and Debt Management

Nia Griffith Excerpts

Thursday 3rd February 2011 Commons Chamber

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

I rise to speak in favour of the motion. As a former policy officer for Citizens Advice Cymru—before my election to this place—I was able to see how the nature of the advice issues dealt with by the citizens advice bureaux in our communities changed dramatically during the second half of the previous decade. Although welfare benefit issues had previously been the staple diet of bureaux, personal debt cases rapidly became the largest single issue dealt with by advisers, totalling well over a third of all client issues. Citizens Advice client figures offer a detailed insight into the social problems faced by communities across the UK, and the latest quarterly figures for Wales are sobering. Total client inquiries over the year totalled nearly 390,000—a year-on-year increase of 19%, of which debt-related cases totalled more than 134,000, which was an incredible 37% of all cases and an increase of 14% on the previous year.

There is always a lag between the true human cost of any recession and a return to economic growth, and things will certainly get much worse before they get better. The current fiscal policy of the UK Government will, I am afraid, only exacerbate matters. The economic record of the previous UK Government has rightly been criticised for the manner in which the public finances were allowed to run out of control, but the manner in which consumer debt was allowed to rocket has received little attention. Consumer debt in the UK lies at around £1.4 trillion—a sum equivalent to 100% of the UK’s total annual economic output. To put this in context, in 1997 combined personal debt stood at about £500 billion. It is an incredible figure that will be a significant economic headwind for the future.

There is a great social crisis facing communities across the UK, and the UK Government cannot stand idly by. We need a comprehensive solution involving regulation of the high-interest lending market. However, central and devolved Governments also need to work together to put in place a package of support and educational services to deal with acute debt problems as well ensuring that financial capability is increased among the wider community. We welcome the decision of the UK Government to regulate the excessive interest rates of credit and store cards, but there are no plans to intervene in the high-interest lending market involving payday loans, pawnbrokers, doorstep lenders, mail-order cheque-cashing agencies and high street alternatives such as Oakam.

My predecessor, Adam Price, introduced a ten-minute rule Bill—the Interest Rates (Limits on Charges) Bill—that would have introduced a capping structure with the aim of achieving the ambitions of the motion we are debating today. People who rely on these sorts of products are often extremely vulnerable and on low incomes, and face interest charges of up to 2,500%. It is exploitation at its worst, and the lax regime that currently exists in the UK is indefensible. These sorts of business models were pioneered in the US, but in the land of the free there has been a backlash: 15 states have prohibited payday lending, and 35 states have introduced interest caps. Furthermore, in Europe, as we have heard, 14 countries have some sort of capping structure.

I would like to touch briefly on the issue of debt management plans, and the need for the sector to be subject to robust statutory regulation, including—at the very least—a cap on fees for the debt advice they offer, and subject to an independent audit funded by themselves.

[Nia Griffith (Llanelli) (Lab)]

Why is the hon. Gentleman’s party attacking Communities First, which has done some very good work on providing debt advice? Why is it suggesting that it should no longer receive funding from the Welsh Assembly Government?

[Jonathan Edwards]

I am afraid that I have no idea what the hon. Lady is talking about—perhaps we can discuss it another time.

One of the growth industries of the recession involved advice sharks, who exploit the human misery caused by the downturn. On a fee basis, individuals and families find themselves signing up for expensive debt management schemes, which only increase their problems. It is estimated that in 2010 companies would have amassed fees in excess of £250 million, often on an up-front basis and with consumers encouraged to take out further credit to pay for these fees. These matters are being considered as part of the consumer credit and insolvency review. However, we need urgent action now to protect consumers, and I would urge Ministers to act with haste.

To close, I would like to congratulate the Welsh Government on some of their exciting initiatives. The creation of the Welsh financial education unit is a step towards ensuring that future generations are more financially literate. The all-Wales lending unit is at the forefront of the fight against illegal lending in my country, and an all-Wales coverage of credit unions to provide alternative affordable lending is much to be welcomed. However, I would urge more ambition in my own country—by rolling out interest-free JAK-banking-like products in our credit unions, and through the creation of a national money advice service made up of existing providers and based on the excellent money advice and budgeting service in the Republic of Ireland.

--- Later in debate ---

[Nia Griffith (Llanelli) (Lab)]

I congratulate my hon. Friends the Members for Walthamstow (Stella Creasy) and for Darlington (Mrs Chapman) on proposing today’s motion. I especially congratulate them on recognising the complexity of the problem and on presenting us with a practical and realistic proposal for cracking down on the excessive fees and costs charged by doorstep lenders. The Opposition Front-Bench team is pleased to support the motion.

I also pay tribute to my hon. Friend the Member for Walthamstow for using parliamentary procedures and organised campaigning so effectively to highlight this problem and for seeking to find a workable solution. It is a tribute to her that her work has inspired so many other hon. Members to prioritise the issue, to do their own research and to try to think through workable ways of cracking down on extortionate charges. She is fully aware of the reasons why a single cap on interest rates—perhaps an arbitrary figure plucked out of the air—would not be the solution and could have unintended consequences.

My hon. Friend has understood the evolution of our thinking, from first having reviews when we were in government, to the position in our manifesto in which we pledged to clamp down on such practices. She has used her own research and has come up with a practical solution, which she has explained in her speech and the motion, which comprises a range of powers that the regulator needs to tackle the problem. As my hon. Friend the Member for Streatham (Mr Umunna) has said, we are asking the Government to consider the matter now precisely because they have been looking at regulation. Those are the reasons why it is particularly appropriate that the motion should have been brought forward today, with its practical solution to the problem.

Many of those on low incomes have no reserves to help them get through difficult times. They struggle to make ends meet and pay their bills. Any loss of income or small change in circumstance can lead to their having to choose between putting the heating on and putting food on the table, driving them into the hands of those offering payday loans. It is therefore not surprising that there has been a particularly rapid increase in the payday loan market over the past few years. In 2009, the payday lending industry was worth more than £1.2 billion, more than three and a half times what it was worth in 2006. There are now some 1.2 million people using the payday lending market and more than 3 million people using the home credit market. The problem has been further exacerbated in the past couple of years by the tightening up among mainstream lenders. People have found their credit limits from mainstream lenders suddenly curtailed, and they have been forced to look elsewhere, thereby swelling the numbers of those relying on high-cost doorstep borrowing or home credit firms.

Those on low incomes often have the least choice. Those with the lowest incomes often end up paying the highest prices for goods and services. They often do not have the spare cash to bulk-buy or take advantage of special offers; nor do they have the credit ratings to walk into high street stores and use a credit card. Many on low incomes do not have access to the internet, and even if they do, many do not have the credit cards to enable them to go internet shopping. It is the lack of choice that makes people particularly vulnerable. They have no option but to turn to the doorstep lenders and home credit companies, which charge exorbitant rates on their cash loans or hire purchase agreements. The lack of choice or competition in the market makes it particularly important that the Government should step in and regulate.

There is a parallel between this debate and what we did in government to tackle the scandal of the high unit cost of electricity charged to those who pay using prepayment tokens. When we were in government, my right hon. Friend the Member for Doncaster North (Edward Miliband), the then Secretary of State for Energy and Climate Change, put considerable pressure on the regulator Ofgem to tackle the energy companies with sustained pressure itself. The energy companies eventually reduced the unit costs paid by those using prepayment meters—reduced, yes; but admittedly not reduced to the very cheapest rates, which are paid by those who can shop around and choose to pay by direct debit, in recognition of the fact that, as the energy companies pointed out, there is a higher cost involved in the administration of prepayment meters. Nevertheless, there was a recognition that the charges had been too high, and they were reduced.

The motion that we are debating today asks the Government to intervene in a similar way in the high-cost doorstep lending market. By introducing new regulatory powers, a regulator can work with the industry, taking account of the legitimate extra costs of collecting frequent small payments in person, and can work to achieve realistic reductions in exorbitant interest rates and charges. This is not about imposing an arbitrary interest rate cap that would drive companies to slap on other charges; nor is it about driving legal companies out of the doorstep-loan markets, leaving vulnerable customers prey to the illegal loan sharks. This is about working with the industry to reduce the overall cost that the customer has to pay for payday loans and home credit.

As the hon. Member for South Norfolk (Mr Bacon) has so forcefully reminded us, regulators need teeth, and it helps if they also have strong backing. That is precisely why it is so important to have the stronger wording of the motion proposed by my hon. Friend the Member for Walthamstow, which refers to

“regulatory powers that put in place a range of caps,”

rather than the weaker wording suggested by the amendment. Our experience with prepayment meters was that it took strong leadership and firm pressure to effect the necessary changes. I strongly suspect that tackling the excessive charges of doorstep lenders and home credit companies will also require strong powers and political will.

As the motion says, it is important to increase access to affordable credit. When we were in government, we took concerted action to promote access to alternative sources of credit through the growth fund. That increased the availability of affordable personal loans by third sector not-for-profit lenders such as credit unions and community development finance institutions. Between 2006 and 2010, 350,188 loans were approved and payments amounting to £152 million were made. I hope the Minister will tell us whether the Government plan to continue that provision beyond April 2011.

Let me return to the issue of regulation. As my hon. Friend the Member for Streatham pointed out, this is a particularly appropriate time for the Government to introduce regulatory powers. It is bad enough that low-income communities are bearing the brunt of taxation changes and the Government’s savage cuts to entitlements and public services. The very least that the Government could do is accept our modest proposal, and protect people from excessive charges for doorstep loans.

What we are asking today is for the Government not to pass by on the other side of the road—not to ignore those who are being ruthlessly exploited—but to take some simple, straightforward steps to clamp down on this callous exploitation.