Philip Davies
Main Page: Philip Davies (Conservative - Shipley)
Jo Swinson
I absolutely agree with the hon. Lady: that is exactly the point I was making. We have tried to work with the industry and it has produced its voluntary codes, but the Citizens Advice survey suggests that it is not sticking to them. The industry also committed at the time to monitor the compliance with those codes by this summer. Only one of the four main trade associations in the industry has said that it will do that monitoring; the others have not even agreed to comply with that. That is why we are transferring consumer credit regulation to a new independent regulator, the Financial Conduct Authority, which will have real teeth to clamp down on the problems in this market.
Jo Swinson
I will give way to my hon. Friend the Member for Shipley and to the hon. Member for Foyle (Mark Durkan), and then I will make a little more progress.
Philip Davies
I am not sure whether I am Batman or Robin in the Minister’s mind, but perhaps she can expand on that in a moment.
My understanding is that, a week or so ago, the Government and Ministers held a summit on this issue with interested parties. Will the Minister give us an update on any results of that summit?
Jo Swinson
Absolutely. I will mention the summit; my hon. Friend anticipates my remarks. If he has a little patience, I am sure that he will have the information that he is looking for. I will not comment on whether he is Batman or Robin. Hon. Members can make up their own minds.
Jo Swinson
I welcome the hon. Gentleman’s contribution and his constructive approach to this matter, but I would say that his Bill limits the independence of the Financial Conduct Authority. It is not helpful for us to set that out or to mandate exactly what it should do. The FCA is producing a draft rule book for September, which is only two months away—we are not talking about this going into the long grass—and it will be consulted on. I am sure that the hon. Gentleman and other hon. Members will want to contribute to that consultation. That rule book will then be finalised in advance of the transfer of consumer credit regulation, which, of course, happens in April, so it will be in place then.
Of course, the Financial Conduct Authority will have really tough new powers. The Office of Fair Trading, the current regulator, was mentioned earlier and I will come to its action shortly. We have recognised that stronger powers are needed. The FCA will have new powers to make binding rules on firms, including to ban certain products if necessary. It will have tougher sanctions—for example, the ability to impose unlimited fines and to order redress for consumers who have been ripped off. It will also be setting a higher bar for entry in the first place, so when it is granting a consumer credit licence, the applicant will have to prove that its business model is not based on ripping off consumers. We had the discussion earlier about roll-overs and whether, if some companies are making significant proportions of their profit from roll-overs, their business model in fact depends on people’s not repaying in time, and whether that is an acceptable business model. The FCA will be able to look into these issues before people get a consumer credit licence.
The FCA has made it clear that it is committed to plugging gaps in payday regulation and has outlined four specific areas that it wants to target: first, affordability checks; secondly, continuous payment authority; thirdly, advertising; and fourthly, roll-over loans—all of which hon. Members have rightly raised today as issues of deep concern, and which the FCA has said it is keen to tackle as a priority. Indeed, the chief executive of the FCA, Martin Wheatley, has written to me to outline its work on that, and I will place a copy of that letter in the Library so that Members can have a look.
The Office of Fair Trading, the current regulator, recently announced a crackdown on payday lenders and has been delivering real results. It has also referred the market to the Competition Commission, to investigate the root causes of problems with payday lending and it can, of course, use its powers to fix that. An investigation by the Competition Commission is a serious thing. It takes a bit of time, which is why we are ensuring that we take other action at the moment—it is important to do that at the same time. However, it is important that fundamental problems within the payday lending market are looked at, and the Competition Commission is well placed to do that.
The National Audit Office report into the OFT was mentioned. Of course, one of our responses to that has been to ensure that the OFT has further powers. For example, in February, we gave the OFT further powers to suspend a credit licence immediately, if it had reason to believe that that was necessary to protect consumers, rather than waiting to go through the whole process of revoking a licence. We are also transferring the regulation to the FCA, which will have more powers. It is important, in the spirit of balance, to recognise that the NAO also said in its report that it was encouraged by the action that the OFT had been taking on this issue since March. I should like to share with the House a little bit more about where that has got to, because the situation is changing every week owing to the action that is being taken.
In March, the OFT completed its review into compliance in the payday lending industry. It identified the top 50 firms, which between them make up more than 90% of the market, and did a significant investigation into the practices of each of those. Those 50 lenders were sent a detailed dossier of where their practices were not up to scratch, with a 12-week deadline to sort out the problems that they were causing or face losing their licence. That has brought real results. Those 12-week periods, which are on a rolling basis to enable the OFT to process the responses, have been coming to an end and will all be finished by the end of this month.
So far, 28 of those 50 have responded to the OFT. I am sure that hon. Members will be interested to hear that 10 of those 28—more than a third—have left the payday lending market altogether as a result of that action, either by giving up their consumer credit licence entirely or by continuing to operate in other areas of consumer credit but no longer in payday lending. In addition, a further three licences have been revoked from lenders outwith the 50 largest and one further licence has been handed in. So since March, 14 payday lenders, including 10 of the biggest 50, have left the payday lending market. That shows that the tough action is starting to work. Market exit can be a good thing in a market where there are significant concerns about unscrupulous behaviour.
To respond to my hon. Friend the Member for Shipley, last week I called the payday lending summit to take stock of the progress that we had made since March and to look ahead to the new FCA regime. We delivered a strong message to the payday industry that it must get its house in order in preparation for the transfer next April. The meeting included regulators from the OFT, the FCA and the Advertising Standards Authority, which has a role in advertising that I will come to. It also involved charities and campaign groups such as Citizens Advice, Which? and those who provide debt advice to individual consumers. It was a successful summit. It was helpful to have that kind of event as the FCA produces its rule book that is due in September. I was very encouraged by the responses from the regulators.
I will turn to the various issues that are raised in the Bill. First, advertising is something that I feel strongly about. People should not be lured into taking out a payday loan when it is not the right thing for them to do. [Interruption.] I am not sure whether the hon. Member for Harrow West (Mr Thomas) wants to intervene. I am happy to be generous if he does.
Philip Davies
I am surprised that the Minister glossed over so quickly the summit that she held on 1 July. According to the statement from the Department for Business, Innovation and Skills, the summit included a “frank exchange of views”, which slightly flies in the face of the picture that she is trying to paint. One of the trade association representatives who attended the summit and highlighted information from a report called “Credit, debt and financial difficulty in Britain” said that those present did not appear to have read the report and were not interested in its findings. Would the Minister like to comment on that part of the summit?
Jo Swinson
I know exactly who my hon. Friend is referring to. I would merely point out that they were very selective in their use of statistics. For example, they ignored the fact that the payday lending market has doubled in recent years. The fact that there was a frank exchange of views in no way contradicts what I said about our delivering a clear message to the payday lenders about what they have to do to get their house in order.
My hon. Friend the Member for East Hampshire (Damian Hinds) spoke well about how adverts pretend that such loans will solve problems that they will not solve. The adverts suggest that a payday loan is the answer to problems such as not having enough money towards the end of the month. If people find themselves in that position, the answer is not to take out a payday loan, but to get some good financial and debt advice.
When legislating on advertising, the evidence base for what should be brought in and what will work needs to be strong. The FCA will have powers to ban misleading financial promotions and to create rules on advertising payday loans. At the press Q and A after the summit, the chief executive of the FCA made it very clear that he would consider all sorts of rules that could be made with regard to advertising, including on the timing of adverts and the content that needs to be included. The FCA is very clear that it is looking at that issue.
It is important to proceed on the basis of research and evidence. BIS has commissioned Ipsos MORI to conduct qualitative research into the impact of advertising on consumer behaviour because we want to know what changes would be most effective in helping consumers. It would be easy to pull something out of the air and say, “This is what we should do on advertising,” but we want to know what works.
My hon. Friend the Member for East Hampshire talked about the wallpaper of life: the little annotations that we hear and see in adverts all the time, such as “terms and conditions apply” and “shares may go down as well as up”. Do we actually respond to all those things or would other things be more effective? The research will look at what health warnings or wealth warnings might work on such adverts, whether signposting debt advice might be more effective, and what is the best way of simply explaining the cost to people. There is a range of reasons why APR is not the most relevant figure in the context of payday and short-term credit advertising, not least of which is that many people do not understand what APR is. Is there an easier way to get that information to the consumers? That research will provide evidence to inform the FCA as it develops its rule book. We will publish the findings in the autumn.
The next issue is roll-overs. The hon. Member for West Ham (Lyn Brown), who is no longer in her place, made an interesting intervention in response to my hon. Friend the Member for Shipley. She was right to say that people are often not lending £150 at a high interest rate for just two weeks. If it was just for—[Interruption.] I do apologise. The hon. Lady is in her place but I could not quite see her behind the Table. She was right to highlight this issue. If somebody is lending money over a very short period at a high interest rate that basically covers the administration cost of setting up the loan arrangement, that is not necessarily problematic. The problem arises when that short-term loan is no longer short term, but becomes medium or long term because it is rolled over from one month to the next. That is when the APR is much more relevant, because people are taking out a much longer-term form of credit. Roll-overs are therefore problematic. In some cases, even one roll-over is too many.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
It is a pleasure to follow the hon. Member for Castle Point (Rebecca Harris), and I apologise to her for having missed the first part of her remarks. She certainly made an important point at the end of her speech about alternatives, in particular credit unions, and I shall return to that subject.
It was good to hear the Minister’s contribution. She rightly praised the work of the Office of Fair Trading, but she will understand our considerable disappointment that the Government are set to reject the Bill of my hon. Friend the Member for Sheffield Central (Paul Blomfield), which provides an opportunity to introduce tough new rules to tackle some of the worst excesses in the payday lending and high-cost credit industry. Nevertheless, I commend him for the manner in which he has introduced his Bill.
My interest in the Bill is sparked partly by the number of people in my constituency who have taken out high-cost payday loans, ended up in financial trouble and had to turn to local debt advice charities for assistance. Two particular cases stand out for me, and in neither was the person doing the wrong thing; both were in employment, trying to bring up their families without relying on anyone else. But such is the cost-of-living crisis being faced by too many families across the country, including some in my constituency, that these people got into financial difficulty and made the mistake of applying for payday loans, which has made their situation so much worse.
The first case involves a single mum, whom I will call Emma. She works part-time and has a 12-year-old son. She was managing fine until her elder daughter, who was contributing to the household bills, left home to get married. The bills did not reduce much when she left and as a result Emma’s wages alone were no longer sufficient to cover them all. Unable to get any help, Emma got behind on her rent and fuel bills, and resorted to taking out payday loans. She took out five, with five different companies, paying interest rates of between 1,700% and 2,900% APR.
The excellent Harrow citizens advice bureau pointed out to me, with commendable understatement, that anyone who had looked properly at Emma’s overall financial situation would have seen that there was no way in which she would have been able to repay these loans. Interestingly, when the CAB got involved in discussions with her landlord and the utility companies they were both willing to make reasonable arrangements to help her clear her arrears with them over time. The payday loan companies, however, were very different; they took notice only when formal complaints about their behaviour by the CAB to the Office of Fair Trading were threatened.
The other case involves a single mum who has two teenage girls at school—I will call her Sonika, but, again, it is not her real name. She is in full-time employment but, again, her household budget has been squeezed by the combination of rising prices, notably those for food and fuel in this case, and the fact that her wages have not risen. She was managing okay until a couple of years ago, when she began to fall behind with her rent. She took out a loan to help her pay the rent but then got behind again and took out another one. Soon she could not pay the rent because she was servicing some seven payday loans and by the time she went to see the Harrow CAB she was in absolute despair, facing eviction and homelessness.
Sonika, too, benefited from the CAB’s support in negotiating repayments on her rent arrears, so she was able to save herself from eviction. But, again, when the CAB came to negotiate on her behalf with the payday loan companies, even though it had her written authorisation for this, initially they refused to negotiate until a complaint to the OFT was threatened. Again, responsible lenders would have seen that she could not afford extra payday loans and would not have advanced the credit. Indeed, they would perhaps have pointed her much earlier towards the debt advice charities. She is gradually getting back on track with her finances, but it will be a long time before she clears her debts.
What is striking is the huge growth in the industry in the past few years alone. Consumer Focus has estimated that the number of payday loan borrowers in 2006 was comparatively small, at 300,000, whereas, as my hon. Friend the Member for Sheffield Central said, by 2011-12 the OFT was suggesting that some 7.5 million to 8.2 million loans had been taken out. Others in the debate have highlighted the considerable concern about the way in which payday lenders are operating, be it the misleading advertising, the fact that they are not doing proper affordability checks, the irresponsible roll-over of loans or the way in which vulnerable consumers get targeted.
Philip Davies
There is lots of talk about irresponsible lending and I am sure that nobody would advocate that. Will the hon. Gentleman at least concede that one of the lessons learned from the banking crash was that when people indulge in irresponsible lending the biggest victims are the people who are lending the money in the first place? There is no great incentive for people to lend money to people who have no prospect of paying it back.
Mr Thomas
With all due respect to the hon. Gentleman, the payday loan companies seem to have done rather well despite the problems many people have in paying them back. Let me use his intervention to suggest that these are issues we might usefully debate in Committee and an occasional rebel against those on his Front Bench might be tempted to recognise the benefit of further debate, in Committee, on irresponsible lending.
Mr Walker
I agree with the hon. Gentleman.
This Bill deserves our support, first because it is a good and well-drafted Bill; secondly, because it addresses a hugely important issue that really matters in our constituencies; and thirdly, because of the polite, sensible and reasonable way in which the hon. Member for Sheffield Central has set about building a cross-party coalition of support for it. He has support from members on both sides of our Select Committee and, as far as I know, from all parties in this House, although the Liberal Democrats have not yet offered any.
This should not be a party political issue, but an issue on which we are all acting in the best interests of our constituents. As the hon. Gentleman clearly set out, there is a need for measures to protect the most vulnerable consumers from unaffordable loans. The many organisations on the front line, such as Citizens Advice, StepChange, Which? and Christians Against Poverty, have set out a powerful case for change to the way in which the sector works.
In rising to support this Bill, I pay tribute to the hugely important work of volunteers in providing debt advice, research into the problems of high-cost lending and the steps necessary to protect the most vulnerable from the risks of high-cost credit. Local organisations in Worcester that have contacted me about the issue include Worcester citizens advice bureau, Two Pennies Money Advice, St Paul’s hostel and the Tolladine mission, all of which, alongside numerous church and religious groups, provide invaluable support to my constituents and vital community services. I am very grateful for their support in drafting this speech and the information they have provided to me.
I have also received a number of letters of support for the Bill from a number of individual constituents and, indeed, from Unite the Union, an organisation with which I do not always find myself in agreement—at least in its national aspect—but whose local representatives I have always found to be reasonable, sensible people who want the best for their members and with whom I have been working closely lately on a couple of issues in the constituency.
Philip Davies
I, too, receive representations from Unite representatives. Does my hon. Friend agree that if this is such a big issue for the Unite union, perhaps it would be better employed withdrawing the £8 million it donates to the Labour party and lending it at low cost to some of its members who otherwise have to go to payday loan firms?
Mr Walker
I would be very happy to do so. I have already praised Unite for some of the work it does in my constituency. I have no issues whatsoever in doing that.
Although I am sure many of the companies in the payday and high-cost loans industry will protest that they merely provide a service that their customers want, there are too many examples of people who have been trapped into loans they cannot afford to repay and of vulnerable people who have acted without sufficient advice or without the understanding that we would want them to have of the real costs and risks that they are taking on.
Research by Which? has shown that nearly 24% of people taking on so-called payday loans are using them to repay other forms of credit. StepChange tells me that constituents from Worcester who have contacted it owed as much as £1,717 on payday loans, which is much more than they are likely to receive in monthly income.
I have spoken in previous debates in support of the broad concept of capping the cost of lending, but I am aware of the controversies involved. I know that some colleagues warn—and, indeed, that many non-governmental organisations and charities argue—that there is a real risk in setting caps that more people could be driven into a black market and into the hands of illegal money lenders who would charge even more and offer less recourse.
Philip Davies
My hon. Friend has mentioned the number of people who have difficulties with payday loans. We certainly all sympathise with that, but surely in the interests of balance he should also refer to the number of people who are satisfied with their payday loan companies and the 90% or so who say that they would recommend their payday loan company to their friends.
Mr Walker
It is fair to acknowledge, as my hon. Friend suggests, that some people are satisfied, but I am concerned that briefings from these companies tell us that 75% of the people they are lending to are in employment. What about the 25% who are not? We should be worried about them, and about the ones who are trapped in unaffordable loans. The Bill sets out sensible measures to deal with that problem.
I am glad that the Bill sets out to remind the FCA of its responsibility to consider a cap. That is something that Parliament has previously urged it to do, in an unopposed motion. I would gently point out to the hon. Member for Foyle (Mark Durkan) that the Government have not opposed a cap, and that their MPs have voted for a motion that urged regulators to consider capping. That matter is still very much on the agenda.
The Bill proposes a number of other measures that could make a real difference, with or without a cap being imposed. Measures to improve the transparency of costs and ensure that advertising carries reasonable warnings seem to be a reasonable and proportionate starting point. Limiting roll-overs of short-term loans will be essential if the payday loan industry’s own argument that the relatively small cash cost of a short-term loan is to be believed, and if the argument that theoretical APR is irrelevant is to be accepted.
If roll-overs are allowed to happen too often, at the very high interest rates that some lenders charge, debts can spiral. It is not in the interest of borrowers or lenders for people to be trapped in a situation in which they cannot pay off their debts. I see no good reason for anyone to object to a limit on roll-overs. Indeed, the Consumer Finance Association tells us that it already carries such a provision in its terms of membership. However, not all payday lenders are members of that association and, furthermore, its terms of membership do not seem to be as rigorously enforced as they might be.
There are many other positive provisions in the Bill but the one that I want to focus on and which I think could make the biggest practical difference is the idea of a levy. The hon. Member for Sheffield Central has kindly acknowledged my long-term interest in this idea. I have long argued that it is unreasonable that banks and credit unions pay towards the provision of debt advice services but that payday lenders do not. This is a hangover from the regulatory regime that existed under the last Government, and, given the growth of the payday loan industry and other forms of high-cost credit, this matter will need addressing in any event.
However, I would be inclined to go further than simply putting payday lenders on the same level as lower-cost lenders. We have a responsibility to ensure that consumers are properly informed, but much of the evidence that we have heard today shows that they are not. We need to ensure that every consumer—particularly the most vulnerable—has access to free debt advice and an understanding of all their options when it comes to borrowing.
The coalition Government have rightly supported the growth of credit unions, as did their predecessor. Credit unions can often provide credit at a much more reasonable rate than payday lenders, as the hon. Member for Harrow West illustrated very well in his speech. However, they do not necessarily have the resources to advertise widely, and their coverage of the country is patchy. I want to see a credit union offering support to my constituents, but since the sad demise of the Black Pear union, we do not have a local organisation in Worcester with the capability to do so. We would welcome credit unions from elsewhere coming in, and I am glad that the Six Towns credit union has entered talks to do so, but it will take time for it to establish its presence and to scale up.
In previous debates, we have heard the argument that Governments do not set caps for lending costs, and that it would be wrong to interfere in the market by doing so. However, we have a good, recent example of the Government setting out a cap for lending, which has attracted broad support. The proposed 3% monthly APR limit for credit union lending has allowed credit unions to increase the interest that they can charge on loans, and thereby to reach a wider audience. That is still seen as a reasonable rate, as it is far lower than that charged by many payday lenders.
I would advocate using that cap on credit union lending as the base for a new levy. Organisations that lend above that rate should pay a levy proportionate to the amount of interest and costs that they charge, beyond the level charged by credit unions. That levy could then be used to fund free financial advice services. If the levy were set at a percentage of all interest above the 3% monthly rate, it could raise a substantial amount, given some of the rates being charged by payday lenders. Just 5% of Wonga’s profits would equate to £3 million that could be used to provide free financial advice.
This approach could create a virtuous circle whereby either the market share of the high-cost lenders would be reduced by the prevalence of better and more widely available free advice services, or the amount of free advice to support the most vulnerable consumers would grow as the industry did. It would also have the advantage of providing a financial disincentive for lenders to set their rates too high, and a competitive advantage to the credit unions. It could provide a valuable new source of income for a sector that has faced many challenges in recent years.
There is a precedent for such an approach in the voluntary support of major players in the gambling industry for GamCare, but in this case, it is important that any levy should be imposed by the regulator and backed by legislation, rather than being put forward by the industry on a voluntary basis. The industry has had plenty of time to consider making a contribution to free financial advice, and so far it has largely failed to do so. There is no evidence that the industry would act in concert to provide the level of support that the financial advice services needed, and I support the idea in the Bill that a levy should be managed by the regulator. I hope that the Government and the FCA will pay careful attention to the case for a levy, whatever the outcome of today’s debate and the progress of the Bill.
How the levy should be distributed could be a matter for debate. Some might argue, as the hon. Member for Harrow West did, that it should be used to fund credit union expansion, but I believe that a subsidy of any sort would distort the business model of credit unions and could risk making them less sustainable. I have discussed this point with representatives of the credit unions, including Six Towns. It would be better for the levy to provide them with a competitive advantage in being set above their lending cap, and to fund the financial advice that might direct more people to them as customers.
Some will argue that the levy should be directed towards financial education for young people and the most vulnerable. I would welcome some of it being available for that purpose, but I hope that its primary use would be to fund the valuable work of the voluntary sector in providing free financial advice and to ensure that the type of services that the hon. Member for Sheffield Central has signposted are sustained, supported and expanded so that they reach the people who need them most. I have no doubt that a substantial part of any such fund would be likely to go to Citizens Advice, and rightly so, but it must reach a wider range of voluntary organisations that provide free financial advice and help with debt, including the many valuable faith-based groups that engage in this area.
I believe that the best mechanism for allocating the proceeds of a levy would be a challenge fund, perhaps managed by the Big Lottery Fund, to allocate funding to debt advice services and financial education initiatives according to their reach in communities around the country, with the aim of encouraging support for the most vulnerable.
To make such a levy workable, it would be necessary to have a central register for payday loans. As the Bill sets out, such a register is desirable in any case. It would help lenders to establish whether their customers have outstanding loans and to avoid overloading people with a range of different debts. This is one area in which I disagree with my hon. Friend the Member for East Hampshire. I point out to him that such a system appears to be working well in Canada.
If I were to suggest one improvement to the Bill, it would be that it should provide a means for people whose only recourse is to high-cost credit to build up their credit rating so that they can return to the mainstream market. That is something that we might address another time.
I do not wish to detain the House longer because this is an important Bill and I want it to progress. There is strong cross-party support for the Bill. I hope that Government Members will recognise the value that it brings to an issue of grave concern and the potential that it has to raise substantial revenues for the voluntary sector in a way that can only benefit our constituents. I hope that Ministers will reflect on the many valuable propositions that it contains. I know that some of my hon. Friends are wary of private Members’ Bills and are wont to criticise legislation that they feel is informed by a “something must be done” approach. The case for this Bill, however, is not that something must be done, but that it is the right thing to do.
Mr Kevan Jones (North Durham) (Lab)
May I begin by declaring an interest? I am a non-remunerated director of the Prince Bishops community bank, which is a credit union in my constituency.
I congratulate my hon. Friend the Member for Sheffield Central (Paul Blomfield) on introducing the Bill and on coming second in the private Members’ ballot. Having promoted a private Member’s Bill myself, I know the amount of work that is involved. He has picked a subject that has clear relevance not only to his constituency, but to the constituencies of many Members on both sides of the House.
There have been three excellent speeches from Conservative Members, including the last one from the hon. Member for Worcester (Mr Walker), and I will refer to those in a moment. However, it is disappointing that although the entire parliamentary Conservative party was here last Friday, very few Conservative Members are here today. That shows what their priorities are. This Bill would make a real difference to our constituents, unlike the Bill that they lauded last week, which will make none at all.
I accept that some Government Members support the Bill and want it to proceed to Committee, where it can be amended, but I doubt whether that will be achieved, because the Minister has said that the Government will oppose it. That is clearly an attempt to keep the channels clear for the Bill that the Conservative party want to proceed, which is the European Union (Referendum) Bill. It is unfortunate that the Liberal Democrat Minister, the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for East Dunbartonshire (Jo Swinson), cannot be here. I understand that she has had to leave the Chamber because of family commitments. This is not the first time in the past three years that the Liberal Democrats have been hoodwinked by the Conservative party, but it is a classic example of it. A ComRes poll found that about 90% of Labour Members supported further regulation, but that 64% of Government Members opposed it. That shows the priorities that Government Members have, with the honourable exceptions of the Members who have spoken today.
My hon. Friend the Member for Sheffield Central and others have spoken of the heartache and misery that payday loans are causing in many constituencies. First, I will talk about interest rates and pick an example. For no apparent reason, I will decide on Stockton in the north-east—I am not sure whether the hon. Member for Stockton South (James Wharton) is here today. Let us look at the number of payday lenders on Stockton high street: Cash Krazy, No. 1 Currency, Cash Generator. The Money Shop, Cash Converters, and Ramsdens 4 Cash. Rates of APR—I checked the websites last night—range from 2,400%, to the lowest rate of 897%. That shows the scandal surrounding payday loans. Industry spin says that such loans are for short periods, but as we have heard, and as I know from my constituency, they are not. I will mention roll-overs later in my remarks.
Philip Davies
I tried to get this information earlier from the hon. Member for Sheffield Central (Paul Blomfield), without any success, so I wonder whether I can tempt the hon. Gentleman. According to moneysupermarket.com, borrowing £100 for one month will lead to a repayment of somewhere between £125 and £135. If he thinks that is excessive, what figure does he believe would be an acceptable amount for someone to repay after a loan of £100 for a month?
Mr Jones
That is an interesting point. The Bill suggests it is for the regulator to determine that and I will give some examples in a minute. I find the hon. Gentleman’s position very strange. I have a copy of the Telegraph & Argus from 7 March 2013—not that long ago. It has a very flattering photo of the hon. Gentleman and the headline:
“MPs welcome crackdown on payday lenders”.
That seems a little at odds with what he has been saying today, so perhaps he should go back to the Telegraph & Argus—which I understand is a reputable newspaper—and correct its possibly misleading headline. No doubt this weekend he will explain to his constituents that he is not actually that much in favour of a crackdown on payday lenders.
Can someone get interest rates that are cheaper than those I have described? Yes, they can. Credit unions have been highlighted already, and as the hon. Member for Worcester (Mr Walker) said, we must also do more to encourage high street banks to contribute to the pot, or offer some type of facilities for these people. Another way of getting a cheap loan is knowing one of the payday lenders. Everyday Loans is owned by a friend of the Prime Minister, Henry Angest, who lent £5 million to the Conservative party before the last general election. On average, Everyday Loans charges 74.8% interest, but the Conservative party paid 3.5% interest.
Mr Jones
Given the mess that the Chancellor is making of the economy, I am not sure I agree with the hon. Gentleman. The point is that the Conservative party can accept a cheap loan from a person involved in payday lending, at the same time as many of our constituents and ordinary hard-working families are being charged 74% interest. It goes further. Adrian Beecroft is a major stakeholder in Wonga which, as has been mentioned, charges up to 4,000% interest. He wants us to deregulate more—zero-hours contracts, the minimum wage and all the other things that he wants put forward in a deregulation Bill—but that will cause more of the problem. I am not surprised that he is in favour of it, because it will lead more people to payday loans at exorbitant rates from the likes of Wonga. I am a bit baffled by the Government’s approach to the Bill. It would be sensible to send it to Committee, debate it and if they want to amend it, they can bring forward proposals.
The heart of my point is how policy is influenced. The Prime Minister said this week that nobody buys Conservative party policy. We have heard very good contributions from Conservative Members who are clearly in touch with what is happening on the ground. However, while the Conservative party chairman, the Minister without Portfolio, the right hon. Member for Welwyn Hatfield (Grant Shapps) has described payday lenders as “obscene”, he is not afraid to accept their money.
Representatives from Wonga attended an event at the Conservative party conference that was described as a “speed dating event”, at which the Economic Secretary to the Treasury, the hon. Member for Bromsgrove (Sajid Javid), the Exchequer Secretary to the Treasury, the hon. Member for South West Hertfordshire (Mr Gauke) and the Minister of State, Department for Business, Innovation and Skills, the right hon. Member for Sevenoaks (Michael Fallon) spent 20 minutes at each table. The idea of speed dating two of them might not seem too bad, but the idea of speed dating the right hon. Member for Sevenoaks is taking things too far.
Philip Davies
The hon. Gentleman is thrashing around, trying to throw mud in every direction. In relation to the mud he was trying to throw at me, when I think he was alleging that I was acting in an inconsistent manner, he clearly does not read the mud he has been throwing. If he read the article he would know that I said:
“I am sure everyone supports the OFT in their aim to have an industry which operates responsibly. However, we must tread carefully. Removing legal lenders through well-meaning legislation and regulation will not reduce the demand for their services, it will just push people to illegal loan sharks whose way of operating is often utterly unacceptable and much worse for their customers.”
Did the hon. Gentleman read what I actually said in the article he quoted, or was he just hoping that if he threw enough mud some would stick?
Mr Jones
I think the mud is firmly stuck on the hon. Gentleman. From his comments today, I would suggest that he has been an apologist for the payday lenders rather than someone calling for a crackdown. All I am saying is that he might want to correct the Telegraph & Argus headline. He has used this debate to support the payday loan industry, rather than support a crackdown.
Philip Davies
The hon. Gentleman is just highlighting his own ignorance. If he read the article, which he clearly has not, he would know that it quoted all the Bradford MPs. The article was not specifically about me; it was about what all five MPs in the Bradford district said. The headline was a reflection of that, and not what I said. My views were made perfectly clear then and they are consistent with the points I have been making today.
Mr Jones
The hon. Gentleman must have a very good relationship with the Telegraph & Argus—I do not have the piece here; I just wrote it down—because there is a blooming big photograph of him next to the “crackdown” headline, when it is not a crackdown but the back-down that he has put forward today.
Returning to the speed dating initiative and the influence on Conservative party policy on this area, the party’s response was:
“It is essential for good regulation that ministers and others meet with and listen to the views of the businesses they regulate as well as those who campaign for tougher measures.”
I do not think that anyone would disagree with that, but why should the option to meet Ministers cost £1,250? Will my local credit union or some of the victims of payday lenders have access to those Ministers? No. This is privileged access to senior Ministers bought by raising money for the Conservative party. Payday lenders indicated that they wanted light-touch regulation, despite ordinary people suffering at their hands.
As others have said, payday lenders look like Robin Hood in reverse; they take money from the poor and give it to the rich, and some of the Government’s policies will only make it worse. If people have to wait seven days to apply for jobseeker’s allowance, it will be a bonanza for the payday loan industry. If someone is made redundant and has no savings, what do they live on? They will go to a payday lender and get into the cycle of debt already described. The hon. Member for East Hampshire (Damian Hinds) made a good speech, but I do not think he understands that a lot of people do not have savings, have no recourse to family members with large savings and are living from week to week—in some cases from day to day. I work with credit unions encouraging people to save small amounts—I accept his point about that—but, as the hon. Member for Worcester said, credit unions will not solve the problem, unless we make an effort to expand them.
There is another problem waiting to hit this country big time, and it does not just concern people suffering now: an increase in interest rates. Yesterday, The Times reported that if mortgage interest rates rose by 2%, 800,000 people would be spending more than 50% of their income to pay off their debts, and that if they rose by 4%, that figure would be 1.2 million. This is a time bomb. Currently, we rely on low interest rates, but if they rise, the situation will get serious, with a lot of people struggling now needing support, and a bonanza for the payday loan companies. I am not surprised that, as someone said, many American companies have moved away from that regulated market to what must seem to them like the Klondike.
I want to raise a question I have come across in my constituency, and one that has been raised already: can these people afford to pay back this money? In most cases, the answer is no; and the lenders know that. Their record on background checks is poor. It is like with heroin addicts. These payday loan companies get people on to it, and then keep them on it. That brings us to roll-overs, which the OFT, like my hon. Friend the Member for Sheffield Central, have criticised. Once people get into debt, it just carries on, so it is a bit like heroin. People get hooked and never get off the treadmill. That must be stopped.
The hon. Member for Castle Point (Rebecca Harris), who is no longer in her place, mentioned the misuse of the continuous payment authority. This comes down to financial education. People are not aware that these debts need not be the priority. Often, they are treated as the priority, however, because people have been led to believe that they have to pay them off before their mortgage and other debts. That definitely needs explaining and regulating, which the Bill would do.
Mr Jones
I am going to do an unusual thing now and agree with the hon. Member for North East Somerset (Jacob Rees-Mogg), who said that this House should have control of those things. The de facto position under this Government—and, I have to say, the previous Government—is that the best way to do these things is to create an arm’s length regulator, which will somehow sort the problem out. I am not opposed to that—although the episode involving the Independent Parliamentary Standards Authority this week has shown that it can backfire a little—but if we are to have a regulator, Parliament has to set clear guidelines. I am therefore not opposed to external regulation, as long as it operates according to a clear set of guidelines, which this Bill would set out. Indeed, that is the strongest aspect of this Bill.
Philip Davies
The hon. Gentleman seems to be saying that he wants roll-overs banned. I wonder whether he can answer the question asked by my hon. Friend the Member for Christchurch (Mr Chope) earlier. If somebody comes to the end of a loan and cannot pay it back, for whatever reason, what does the hon. Gentleman suggest they should do?
Mr Jones
There are two issues about the situation the hon. Gentleman describes. He asks, “Would it work?”, but he should look at Canada, where there is already a limitation of, I think, four months. First, I would ask the lender, “What credit checks did you do on the individual in the first place to lend the money?” Secondly, the company should try to work out how that individual could pay—whether over a longer period or something like that—but certainly not sucker them into another loan, which is what happens now. The hon. Gentleman is being naive—he is obviously not keen to crack down as hard on payday lenders as the headline suggests. The point is that if someone cannot pay back the first loan, how on earth are they going to pay back the second one? These companies know that. I do not want to call the hon. Gentleman naive—he is certainly not naive—but he is being naive in arguing that payday lenders somehow do not know that once they have got people hooked on that line of credit, it is in their interests to keep them on it.
Let me turn to credit unions. The hon. Member for Worcester made some good points about credit unions. I agree with him on one point: I am opposed to giving money to credit unions to top them up. However, he also raised some good points about a levy and how it could be used. Financial education and promoting access to credit unions would be a good idea. If they became beholden to the grant as such to keep them going, that would be a mistake. He therefore raised a good point. He has certainly thought about the issue and is right.
Finally, the issues that this Bill addresses are affecting millions of our constituents. Frankly, what is happening is a national scandal. These companies are taking money from the poorest and most deprived communities and individuals in this country and making millions of pounds out of them. I do not know how these people sleep at night; they are causing absolute misery. One thing that we in this House can do is to take steps to put right any injustices we see.
It is absolutely appalling that the Government oppose this Bill and will not allow it to go into Committee. This has nothing to do with the Bill itself; it has more to do with another Bill that the Government want to get through—the European Union (Referendum) Bill. They want to kill this Bill and allow the other one through. I hope that the millions of people up and down this country who support regulation will recognise what the Conservatives are doing. They put party politics over Europe higher than the misery of millions of our constituents, which is a complete disgrace. I have to add that it is not just the Conservative party, because not for the first time the Liberal Democrats have been hoodwinked into supporting the Tories.
I support this Bill because millions of people need the protections it provides. It should be allowed to go into Committee. It is not perfect; it can be amended and the Government could actively work to improve it in line with some of the sensible suggestions that have come from Conservative Back Benchers, including those of the hon. Member for Worcester, which would help to solve the problem of injustice. Am I angry that the Government are killing this Bill today? Yes, I am, and I think many other people will be, too.
Jacob Rees-Mogg
The hon. Gentleman makes an interesting point, but knowing your client is not knowing a group of clients or a class of clients; it is knowing your client as an individual—as a person. That has been in the rule book of the FSA before and of the FCA now, and of the Investment Management Regulatory Organisation before them. It is a fundamental rule of financial services that we should know the counter-party with whom we are dealing and we should not deal with that counter-party if we do not, because we have a regulatory obligation to ensure the product we are offering is suitable to them. This seems to me to be a matter not of legislation, therefore, but merely of the FCA covering the bodies that are making the payday loans through its existing regulations, which would need very little change. That is a very straightforward means of putting this anomaly right.
Philip Davies
I am, as ever, very interested in what my hon. Friend is saying, but to what extent should payday loan companies get to know their clients? Is he simply asking that they get evidence of people’s bank statements or pay slips, or does he envisaging something more onerous?
Jacob Rees-Mogg
I suggest that the know your client obligation should be as strong on payday lenders as on somebody who was receiving an investment of a similar amount—that they should have an obligation upon them to know who their client is and to understand whether what they are offering is suitable. It would be as if someone went to Hargreaves Lansdown to get investment advice; they should know the customer as well as Hargreaves Lansdown would.
The second count is to do with an absolutely standard part of all financial service regulation: money laundering. It is drummed into anybody who works in the City that money laundering is one of the most dangerous things they can be involved with, and that anything to do with money laundering—any passive participation in money laundering—is a very serious offence subject to high penalties. The basic rule for an investment firm is, “If you hear about money laundering or have the vaguest suspicion of money laundering, you must inform the senior person—the money laundering officer—in your business, who will then decide whether to report that to the police.” The payday lenders clearly have no obligation to follow the money laundering laws that are already on the statute book, however. We do not need more laws; we need existing laws to be used.
Why do I think that? Let me go back to the example of my constituent and the £300. If the lender were paying it into a bank account of which they had no real evidence—no proper knowledge—that was a golden opportunity for money laundering. If someone can just ring up and say, “I would like to borrow a few hundred pounds,” and it is instantly put into an account in the name of someone who is not necessarily the person who has rung up, and is then paid back with a cash deposit, that is the most fantastic way of money laundering. Not only that, but the price paid of a month’s interest is a modest amount to pay to wash the money through the system. So this aspect of payday lenders’ operations would allow money laundering to take place—I have no evidence on whether or not it is taking place—in a very easy and straightforward way.
Philip Davies
Again, I bow to my hon. Friend’s expertise in this sector that I do not have. Do the money laundering regulations relate to moneys above a certain amount? Is that why payday lenders, which are generally lending very small amounts, do not appear, as he says, to be covered by that legislation and regulation?
Jacob Rees-Mogg
My hon. Friend is right; there are aspects of the money laundering regulations that set thresholds. For example, someone can bring only £10,000 into the country in cash—such a rule applies to many countries around the world in their equivalent currencies—and certain sums have to be reported, if they are cash transactions, by banks and so on. One part of the rules also deals with aggregations. Using a succession of small transactions is one way in which money launderers try to launder money, because the rules on higher sums have become relatively effective. Before legislating we should always want to look carefully at whether regulations that are already available could improve the system. The use of the two I have mentioned, relating to knowing one’s client and money laundering, would put a strong burden on the payday loan companies to ensure that they were lending to people they at least knew really existed and about whose financial circumstances they knew something. They would, thus, be able to lend to people who had a better chance of paying back.
The issue of people having a better chance of paying a loan back is important, because payday lenders have a cavalier approach to how they lend and so they build into their interest rate a high level of default, which means that people who can pay back, even though they may not be the greatest debtors, pay a much higher interest rate than would otherwise be necessary for them. If the business of the payday lenders was more tightly regulated so that they knew their underlying client and if the level of bad debt was brought down, the rate of interest would come down and the problem would be reduced in that natural and evolutionary way, rather than by trying to set caps and controls.
I have great difficulties with caps on interest rates, for the straightforward reason that no business is going to make a small loan if the interest rate is capped, because the administration of that loan will simply be too expensive to make it worth while. A £100 loan is likely to involve £5 to £10 of administration, whether that loan lasts for a day, a week or a month. So the rate for a week is extraordinarily high because it is being compounded over the course of a year. Setting caps is therefore not the right way to proceed, because it takes away the ability to borrow from the people who are most in need of these smaller sums at the bottom end of the scale.
The truth is that the bigger the borrower someone is, the better the interest rate they are likely to get. The hon. Member for North Durham (Mr Jones) talked about the Conservative party borrowing at 3.5%—of course it borrows at that rate. People who are borrowing millions of pounds pay low rates of interest, because usually there is some collateral against the loan, they are more likely to have a track record on lending and the interest rate covers the administrative cost. Where someone is paying 3.5% on a £5 million loan, the administrative costs are comparatively negligible. On a £100 loan repayable within a week, the 3.5% is so negligible that it would not begin to cover the administrative costs, and so what does the holder of capital do? They do not make the loan to the individual who needs it to get through that weekend. We must be careful about what we seek to regulate. If we seek to regulate one aspect of the system, we may well find that the unintended consequence is that the people who are most in need of this source of borrowing are cut out of the market altogether. In that case, they have no alternative but to go to the loan shark.
Jacob Rees-Mogg
I completely agree with my hon. Friend that it is an anomaly, but not all anomalies are corrected by adding people in to the anomaly. It is much simpler to abolish the anomaly and say that the right to levy taxation is a fundamental right of Parliament. I quoted specifically from Magna Carta, which refers to a court, and we are the High Court of Parliament. It is important to remember that fines should only come through a proper judicial process or through the will of Parliament extracting fees. As soon as we delegate that to other bodies, over which there is no democratic control, we give up something that is fundamental to this House and what it is for. The consent to taxation is what this House has done since 1265. Perhaps the last Labour Government passed it over in a fit of absent-mindedness; they were not known for their love of the history of the constitution and their strictest adherence to it.
Philip Davies
Would a solution to this rare disagreement between my two hon. Friends be for payday loan companies to volunteer a certain amount of money to help with this issue, in the same way as bookmakers voluntarily give money to charities to help with problem gambling?
Jacob Rees-Mogg
I am grateful for that suggestion; I think it is a very useful one. I would be very happy to see a levy brought in under the Finance Bill. I have no objection to a levy being placed on these people; it is just who places it. It needs to be placed by Parliament because that is a hard, constitutional right and power, not by an independent regulator.
Lyn Brown (West Ham) (Lab)
I add my hearty congratulations and thanks to my hon. Friend the Member for Sheffield Central (Paul Blomfield) on his success in securing his private Member’s Bill, and for choosing this vital topic as its subject.
I regret to say that many people in my constituency find themselves in a situation where they have to resort to payday loans and other short-term, very expensive borrowing. Of course, in my part of east London using short-term credit is nothing new. In years past, my family used the pawn shop, as did many others in their communities. It helped out when the week’s money would not go quite far enough to meet the week’s outgoings. However, payday loans are in a different, far more pernicious league, and people are in a very different and more difficult place, with precarious unemployment, falling wages, soaring house bills, the bedroom tax, the benefits cap and rising food bills, along with heating and power costs. It is an ugly and toxic web that brings anxiety and stress to households. It makes it much more difficult to have a stable and resilient family life, and it undermines the entire community.
One of the factors in my constituency that is driving these difficulties is the proliferation of the zero-hours contract, which, in my view, takes us back to Victorian days and the days of my grandfather standing as lump labour on the dockside, hoping that he might earn enough money to feed his family. These contracts are extraordinarily exploitative and need to be regulated in the same vein as the providers of high-cost credit.
After three months of working for a company and being told regularly that he was doing a really good job, one constituent—I will call him Otis—was told to buy more work shirts, only to be told that very same week not to come back the following Monday. He was given no reason, no explanation and no notice. It is for such reasons that people feel helpless and surrender to the advertised images of a friendly, carefree, kindly world in which all is well and money is plentiful and freely given.
Philip Davies
I agree with an awful lot of what the hon. Lady has said so far about the cost of living and how difficult families are finding it at the moment. Does she agree that one of the better solutions would be to try to find ways to reduce the cost of living so that they do not feel the need to go to payday lenders in the first place—perhaps, say, through abolishing the BBC licence fee or voting against the Energy Bill, as some Government Members did, which is putting up the price of energy unnecessarily?