Payday Loan Companies

Robin Walker Excerpts

Monday 20th January 2014 Commons Chamber

[Mr Robin Walker (Worcester) (Con)]

It is a pleasure to follow what I thought was an excellent speech by the hon. Member for Belfast East (Naomi Long). I am pleased that the Backbench Business Committee has requested this debate about an important report and a subject in which I have taken an interest for a long time. I first spoke about this issue in a Backbench Business Committee debate, and it is particularly appropriate that this subject should have received time for debate, given the essential role played by Back Benchers of all parties in driving forward the debate on high-cost credit and the regulation of the payday loan industry—a role that has been acknowledged by the Government in the past.

I congratulate the Chair of the Business, Innovation and Skills Committee, the hon. Member for West Bromwich West (Mr Bailey) on the report we are discussing and on his powerful speech in opening the debate. He made the point about television advertising extremely well, and one of the most memorable moments in evidence to the Committee was when Martin Lewis made his passionate case about grooming by payday lenders.

Over the past year a number of steps have been taken, which will be welcomed across the House, to tighten and improve the regulatory regime for high-cost lenders, to mandate a cap on the cost they can charge their customers, and to protect consumers. The FCA provided a helpful briefing for today’s debate that enumerates many of the improvements it intends to introduce, and given the rapid growth of the industry since 2008, such action is not only welcome but necessary. Nevertheless, there remains a high degree of concern about the prevalence and ease of access to very high-cost loans, and a good deal of evidence that they are causing real problems to many of our constituents.

When the Select Committee took evidence from payday lenders, they were at pains to point out that the number of people driven to default was only a small proportion of the total number who use such loans. That may be the case, but given the enormous scale of the industry, that small proportion represents a significant number of people whose lives have been profoundly affected for the worse, whose credit ratings may have been destroyed, and who will have been left permanently worse off and—as the hon. Member for Glasgow North (Ann McKechin) pointed out—sometimes unable to get a mortgage as a result of short-term credit. I therefore speak for all members of the Committee when I say that we feel that we need to go further in regulating the sector.

The report sets out some important points, and I wanted to focus on two: real-time data sharing and the importance of the FCA levy to fund free debt advice. For real-time data sharing, and taking on board the point made by my hon. Friend the Member for East Hampshire (Damian Hinds) that it is not a total solution, affordability is key, and it can play an important role in ensuring that payday lenders better assess affordability in the future. Representatives of the industry who gave evidence to the Committee went to great lengths to argue that they apply strenuous and rigorous affordability tests, but we also heard a great deal of evidence to the contrary. Perhaps one of the most illustrative points was the example cited by my hon. Friend the Member for Edinburgh West (Mike Crockart) about Bo Peep applying for a payday loan—an extraordinary story.

Charities such as Citizens Advice and StepChange were able to demonstrate too many cases where the same person was able to take out irrational numbers of loans from different providers, and the evidence both on defaults and roll-overs suggests that affordability is still not properly assessed. Although the spokesman for Wonga argued that the proportion of its debts written off had been overstated in some media coverage, he admitted that there was £77 million of bad loans, which represented almost 10% of lending by that company, or 300,000 customers. In another answer he suggested that only 3% of customers got into financial difficulties and could not afford to repay, but even if we take that 3% as a fair assessment, we would be talking about tens of thousands of people.

I think that real-time data sharing—unglamorous and perhaps wonkish as it is—is one of the keys to making the short-term credit industry work better and more fairly. Not only would it mean that existing lenders could avoid giving loans to those who might already be overcommitted elsewhere, but it would allow new entrants to the market to lend at a better rate, increasing competition and providing a real alternative to some of the sky-high costs out there in the market. That is because they would be able to avoid lending to people with large numbers of outstanding short-term loans, and thereby reduce their default rates. I have met potential market entrants who believe that if a proper system of real-time data sharing were available they could offer short-term loans at not much more than the roughly 39% APR allowed to credit unions.

The industry has suggested that it is in favour of such a system. Callcredit, one of the main players in the credit reference agency sector, has recently announced that it is piloting a data sharing scheme. That is to be welcomed, but there are a number of concerns with that voluntary approach. One credit reference working on its own with its clients will be unable to provide an accurate picture of the whole market. Its suggestion is an improvement, in that it reduces the interval between filings on lending, but it is not a real-time system. There is still a chance that customers could apply for one loan after another in a short time interval, and that lenders will be unaware of the loans outstanding at the time of their lending decisions.

More seriously, as long as credit reference agencies continue to provide lending data to their paying customers only, and as long as they compete on which agency has the best client list, there will be gaps in the picture of the market they can present. There is no guarantee that that voluntary approach will make lenders or the FCA aware of all the loans an individual has outstanding at any moment in time. Unless there is a firm agreement for all the credit reference agencies to work together and share their data, which is inimical to their reason for being and their way of doing business, some form of Government or regulatory intervention will be necessary.

I was pleased that both the regulator and the Minister, in their evidence to the Committee’s inquiry, expressed a willingness to intervene should it become necessary to do so, and I welcome the recognition they gave to the importance of real-time data sharing, but I reiterate the question I asked then: what time line will they set before taking action to mandate real-time data sharing? The Committee’s report suggests a deadline of July 2014 for the FCA to step in if the industry has not delivered. Notwithstanding the decision of Callcredit, I believe that that is likely to be necessary.

I do not want to give an exhaustive list of the Committee’s recommendations, which I support, but hon. Members who have followed debates on payday lending will know that the funding of the free debt advice service through the FCA levy is dear to my heart. There is a great deal of evidence that the high-cost credit sector is driving demand for free debt advice services. I have previously advocated a levy on their charges to help to finance the sector. The current mechanism is the FCA levy. I want to put in a quick advertisement to hon. Members in the Chamber. Tomorrow morning, we will have a debate in Westminster Hall. I do not want to put all my arguments on the levy tonight, but I hope many in the Chamber will join me in advocating the case, as the Committee has recommended, for the additional levy for payday lenders to be passported to the free debt advice sector. That will be crucial in making the sector work better.

I pay tribute to hon. Members on both sides of the House who have worked on this issue. My hon. Friend the Member for North Swindon (Justin Tomlinson) has worked on improving financial education; the hon. Member for Sheffield Central (Paul Blomfield) has run a cross-party campaign; my hon. Friend the Member for East Hampshire (Damian Hinds) has done important work on credit unions; and the hon. Member for Makerfield (Yvonne Fovargue) has worked with Citizens Advice and the debt advice sector. By working together, hon. Members have achieved good things, and we can go much further.