High-cost Credit

Robin Walker Excerpts

Thursday 5th September 2013 Commons Chamber

[Mr Robin Walker (Worcester) (Con)]

It is a pleasure to follow the impassioned speech by the hon. Member for Walthamstow (Stella Creasy). I congratulate the Backbench Business Committee and the hon. Member for Islwyn (Chris Evans) on securing this very important debate. He took a sensible and non-partisan approach, and I appreciate that. There is cross-party consensus on the mood for taking action on payday lenders. Many Members from all parties came to this Chamber to support the private Member’s Bill on the subject introduced by the hon. Member for Sheffield Central (Paul Blomfield)—I would call him my hon. Friend—which I still hope can make some progress in forming Government policy.

Other Members have mentioned constituency cases. I have recently been particularly moved by a couple of cases in my own constituency. In one, someone had six separate loans from payday lenders, which clearly cannot be justified on the basis of seeing them through until payday, and they were being absolutely crippled by the interest. In another, a pensioner living on the basic pension got thousands of pounds in debt to payday lenders—a clear sign that some of these businesses are not looking at the affordability criteria. It is right that we should express our concern about such cases.

I am sorry that the Bill did not get voted on on Second Reading; a number of us were here to support it. In responding, the Minister expressed some understandable concerns on the part of the Government, which were shared by the previous Government, as regards not wanting to tie the hands of regulators. However, this House has been clear in its desire that regulators consider caps. It is very important that we give guidance to regulators about what we expect them to do. The Government are right to have launched investigations into the impact of advertising in the sector, but many of us are a little frustrated by the pace of action on that front and would like more to be done. The hon. Member for Islwyn made some good points about that.

We have to acknowledge that high-cost lending goes much wider than the payday loan industry. It also covers doorstep lenders and credit cards where they are not used appropriately; people can build up enormous amounts of high-cost debt through that sector. As the hon. Gentleman pointed out, there is also a large informal sector that we should be wary of encouraging or supporting. Many Members have noted that when banks generate overdraft charges they can raise the cost of borrowing to exceptionally high levels. His comment about moving people into mainstream banking was absolutely right, but we need to find tools to do that which protect them from such charges. In a recent discussion with Six Towns credit union, I was interested in a ring-fenced bank account that it was considering launching which would allow people, in effect, to set aside rent and energy bill payments and only then access money to spend on other things. Innovative financial products like that can help to move people towards mainstream finance.

We need to look at the overall level of debt. Any debt is high-cost if it is unaffordable. We still need to do more work on deleveraging the economy as a whole. Some progress has already been made on that front. It would be wrong for anyone to pretend that overall debt problems are greater now than they were in 2008, at the height of the boom. Credit Action produces monthly reports that show a significant decline. In July 2013, overall unsecured debt was £158 billion. That sounds an awful lot, but in 2008 it was £231 billion. In the 1980s, during the boom years under Lawson, household debt as a percentage of income rose from 70% to 80%. During the period when the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) was Chancellor and Prime Minister, it rose from 80% to 170%. It is now falling back to 145%, but that is still too high. There is significant progress to be made on the level of debt as well as its quality.

On quality, we need tools to help people to access the better lenders and to ensure that customers are well informed on the real costs. As many Members have said, percentage rates do not tell the whole story: hidden costs and charges are important. We should pay tribute to the many financial advice services that work in the voluntary sector and the state sector to try to provide that information, including Citizens Advice, which we all know well in our constituencies. I am delighted that the Archbishop of Canterbury has entered this debate and offered support to the credit union movement and the voluntary sector in taking on the loan sharks. The Church can play a very important role in this, as Christians Against Poverty and many other religious groups already do.

[Ian Swales (Redcar) (LD)]

The hon. Gentleman is making a very good speech. He talked about the percentage rates that are quoted. Does he agree that there should be much clearer ways of explaining to people what they will have to pay back, given that only about 10% of people understand percentages?

[Mr Walker]

My hon. Friend is absolutely right. The work that my hon. Friend the Member for North Swindon (Justin Tomlinson) has done on financial education will be crucial in getting people to understand the reality of what taking out a loan means and all the potential hidden costs, including the real cost of interest over whatever period it is charged, which is often far more directly important than levels of APR.

I had an interesting meeting about debt issues with members of Worcester’s Tolladine mission, which works with a number of local churches in one of the poorest areas of my constituency. They strongly supported the initiatives we have heard about to support credit unions and make them more accessible. They also made it absolutely clear that financial education will be key. It is a huge victory for my hon. Friend and his cross-party campaign to have secured financial education in the national curriculum, but that is only the start. We should not kid ourselves that writing something into the national curriculum will solve the problem. We will have to make sure that it is taught well and that a generation of teachers who came through the system when financial literacy was not a key component get the best opportunity to take it forward. There will be real challenges along the way in doing that.

The Government are doing a lot to support credit unions, as did the previous Government, but there is still much further to go to catch up with the levels of credit union engagement in other countries. Achieving that should be a constant challenge. Tragically, in Worcestershire we lost our local credit union, not necessarily because it did not have support but, unfortunately, because of bad lending. Capacity in credit unions is another vital aspect. I am very glad that Six Towns credit union, from elsewhere in the midlands, is now looking to move into our area.

On overall levels of debt, it is important that all Governments set out policies that help people not to get into debt, which the coalition Government are trying to do by making sure that people keep more of the money they earn and by raising the income tax threshold.

We need an incentive to support the growth of credit unions and responsible lenders. As I argued when we debated the Bill, I think it would be wrong for the Government directly to subsidise the credit union industry, because that would undermine its business model when we want such businesses to be able to stand on their own two feet. I suggest that we should go further than even the CAB argues in its briefing paper, which welcomes the extension of the Money Advice Service levy to payday lenders, and consider putting a higher levy on high-cost lenders. We should create an incentive for people to go to credit unions, and the higher levy would create a fund to support financial advice services, financial education and all the other good things that can help people. Yes, we should support the credit unions, but we should do so indirectly by giving them that competitive advantage.

There is a straightforward way to do that. The Government have set a cap on lending for credit unions. If we start the levy at the top of that cap and apply it to all lending over that amount, it could create a valuable revenue stream to support the free financial advice industry and the financial education industry. I urge the Government to look again at the provisions in the Bill and to examine what they can take from it, because it made some well-thought-through recommendations.

I welcome today’s debate and the consensual way in which it is being conducted. Parliament can do a lot on this issue and we should continue to concentrate on it.

--- Later in debate ---

[Tracey Crouch]

I agree with the hon. Lady. To be perfectly honest, I was stupid. I learned a lesson. It took me seven years to pay back my debt. I learned that lesson thanks to the bank. I got to the stage of hiding from the bills and not going out. I was in a miserable place, and—the hon. Member for Islwyn will be pleased to hear this—Lloyds TSB took me aside and said, “Your credit rating is dreadful. You keep going over your overdraft limit. You will be in serious trouble if you don’t deal with this now.” The bank cut up my credit and store cards, which was incredibly upsetting, and put me on a repayment programme. The problem today is that banks do not necessarily provide the personal banking they did back in 1996-97 when I was getting myself into debt, and people are finding alternative ways in which to deal with their debt problems.

[Mr Robin Walker]

My hon. Friend is making an interesting speech. She mentioned being put on a repayment programme. Does she agree that one of the more pernicious things happening in the sector is that some high-cost lending companies are masquerading as a way out and as a repayment mechanism for debts? That needs to be carefully considered when it comes to regulation.

[Tracey Crouch]

I agree with my hon. Friend—I will talk about debt advice later in my speech.

We have heard a lot about charges for people who go into unauthorised bank overdrafts. I was recently charged for going into my authorised overdraft, which I found incredibly shocking. I did not know the bank could do that, but it did. The charge was the equivalent of taking out a £100 loan from Wonga for five days. I can see why people turn to payday lenders if they sometimes get charged by their bank for going into an authorised overdraft.

We need to be aware of people’s problems when it comes to debt. We should not judge people for getting into debt or for trying to get themselves out of it. We also need to be aware of the scale of the problem. I have two wards of deprivation in my constituency, and there is an increase in the number of people turning to payday lenders. The local citizens advice bureau tells me that the average debt in Medway is £43,000. It also tells me that people from more affluent areas are turning to payday lenders for the reasons the hon. Member for Walthamstow has outlined—they find it easier to meet their everyday needs by turning to those lenders.

When used correctly, those loans can be a help. When someone needs that short-term boost—when something is broken and they need to borrow £100—it is easier for them to go to a payday lender than it is to go to their bank. We need to be clear that such loans serve a purpose. However, problems arise when they are not used correctly. That is why we need to address problems such as rollovers, which the hon. Lady and the hon. Member for Sheffield Central have mentioned.

We need to be concerned about the proliferation of shops on our high streets. It is incredibly easy for the people to get the credit they need. Thank goodness payday lending companies were not around when I was in debt. Nothing would have stopped me going in to borrow £200 to get what I wanted. I have learned my lesson, but it took a long time to do so.

On the positive measures we could take, it is important that we consider sharing data. Real-time data are incredibly important. Currently, someone who has taken a Wonga loan in the morning can go to the Money Shop or Cash Converters or the next place on the high street in the afternoon and get money out. Nobody knows how much they are getting out on any given day. We also need to look at restricting access to online credit services overnight. Many years ago, I lay awake at night worrying about debt. When people come to see me, they tell me that they cannot sleep and are hiding from their bills. They know they can go online at 2 am, when they are not thinking straight, and access instant relief of their fears. We should look carefully at that.

We need to look at supporting our credit unions. I am a saver at both Medway credit union and Kent Savers credit union. Hon. Members should do all we can to try to help to promote them so that they are recognised in the high street. That is incredibly important. If that means using flexible business rates so that credit unions are encouraged to go into the bigger shops on the high street so they have that presence, we should do that.

Finally, debt advice is incredibly important. The Government are doing a great deal to promote free debt advice. I have worked to keep the Insolvency Service in Medway. It was under threat, but was saved thanks to the campaign. We need to recognise that there are experts who can help to inform people who are finding it very difficult to get out of the situation they have got themselves into.

We must not judge the entire payday lending industry by the bad mistakes we read about and hear about in debates such as this one. We need to recognise that it plays a role in our wider credit industry. As my hon. Friend the Member for Thurrock has said, we are at a crossroads. We need to ensure we go down the right route.

--- Later in debate ---

[Neil Parish (Tiverton and Honiton) (Con)]

It is a pleasure to follow the hon. Member for Glasgow North East (Mr Bain). He made an interesting point, especially when he talked about some payday loan companies charging up to 5,000% interest, for which there is simply no justification. However leafy our constituencies might be—mine is quite a leafy one—there are pockets of deprivation in them and people who really need credit, but they need it at a competitive rate.

I would like to go back to the basics. For three or four years, we have had a 0.5% base rate, and the Governor of the Bank of England is hopeful that that may well stay at that level for another three years. How can anybody, legally or illegally, offer loans at 5,000% or 6,000% interest? That has got to be wrong. The old adage that we can have an umbrella if the sun is shining but that it will be taken away from us if it starts to rain is, as far as finance is concerned, correct.

I feel hugely passionate about this issue. I welcome the comments of the Second Church Estates Commissioner, my hon. Friend the Member for Banbury (Sir Tony Baldry) about the involvement of the Church of England and the Archbishop of Canterbury. One thing that the Church of England certainly has got is a great deal of assets. If people have assets, they can borrow money at a very competitive rate. I would say in all honesty to the Church of England that there is a real role for it in credit unions and community banks because they can borrow money at an effective rate, and if they lend it out at a much more competitive rate, that will help people in need.

Many Members, certainly including my hon. Friend the Member for North Swindon (Justin Tomlinson), have spoken about the need for a levy on the industry, and I agree that we need such a levy so that people can have proper financial advice, as they often go from company to company and shop to shop, being charged enormous amounts as they do.

[Mr Robin Walker]

I entirely agree with my hon. Friend. Does he agree that it is extraordinary, indeed outrageous, that there has to date been a levy on banks and a levy on credit unions, but not a levy on payday lenders? Does he not find that situation impossible to explain?

[Neil Parish]

I could not agree more with my hon. Friend. I would have thought that this wonderful Government of ours must be looking at such a levy—and if they are not, I am sure that they will do so immediately. We have got to do something about this problem. Yes, some might argue that we are saving people from themselves, but in this case, we have to do that. If people are in dire need of a loan to see them through to the end of the week or month, they should not be charged two or three times the value of that loan.

Of course, it is not just a question of whether the loan is repaid. People may reach a stage at which they are unable to repay it, and charges will then be levied for non-payment. The loan will be rearranged, another fee will be added, and they will end up paying five or six times the amount that they originally borrowed, or perhaps even more. That cannot be right. In any sort of capitalist system—or whatever system we have—there is a need for profit, but there is no need to extract money in a way that almost constitutes extortion. Someone who arrived in this world for the first time and observed that it was possible to charge such amounts of interest, or indeed—let me be blunt—to steal such amounts of money from people, would say that those who did that should be locked up. We must do something about it.

As well as the people who cannot repay their loans, there are people—although not so many—who are addicted to borrowing money, not just from payday loan companies but from, for instance, store cards that they can use in shops. They must be given more access to advice, and restrictions must be placed on the amount that they can borrow. If people are such a credit risk that they must be charged enormous amounts of interest because companies believe that that is the only way in which they can get their money back, we should ask whether we are helping those people by giving them the money.

A number of Members have rightly pointed out that, in this day and age, people need to be able to gain access to money online and from their mobile phones. Members may tell me that I am a little bit old-fashioned, but I am not certain that the ease with which credit can be obtained at any time of day or night, and regardless of people’s state of mind, is helpful. I think that it merely drives people deeper and deeper into debt.

I respect where the Government are coming from. When I last spoke about this issue, I went for the payday companies big time, and I still have them in my sights because I believe that they are making enormous profits at the expense of the very poorest members of society, but I also understand that there is a role for them. Nevertheless, they must be controlled. Their wings must be clipped.