Stella Creasy
Main Page: Stella Creasy (Labour (Co-op) - Walthamstow)(11 years, 2 months ago)
Commons ChamberRead Full debate Read Hansard Text
Jackie Doyle-Price (Thurrock) (Con)
It is a great pleasure to follow the hon. Member for Islwyn (Chris Evans), who has given an excellent introduction to the debate. I pay tribute to colleagues on both sides of the House who have done so much to shine a light on some of the more irresponsible practices that have sadly become all too commonplace in this industry.
My remarks today will focus on what I think we would all agree has been a regulatory failure in this section of the market, and I want to refer to a Public Accounts Committee report which some hon. Members present today were involved in producing. We looked at the regulation of consumer credit earlier this year, and we reached the firm conclusion that the Office of Fair Trading had been found wanting in getting to grips with tackling some of the more unpleasant practices of high-cost lenders. The message that I would like Parliament to send out today is that we are now at a crossroads with the regulation of this sector. The Financial Conduct Authority is preparing to take responsibility for it from the OFT, and bearing in mind that the OFT has been so slow in getting to grips with this, I want us to send a clear signal that we all expect the FCA fully to use the regulatory tools at its disposal to challenge the sector, and to be fleet of foot in intervening where we see poor practice.
The OFT has had a number of tools that it has failed to use, and there are clear breaches of rules. There are powers under the unfair contract terms regulations that could easily have been used to tackle some of the more unacceptable levels of fees and penalties for default, which are probably the most acute cause of additional cost to anyone who takes out these loans. Equally, every credit provider is required to follow responsible lending rules. As the hon. Member for Islwyn outlined in some of his examples, the advancing of credit to people in such situations was far from responsible lending. The OFT has the power to withdraw credit licences, but it has failed to use it, resulting in irresponsible lenders and unscrupulous companies exploiting the vulnerable and laughing all the way to huge profits. That is not acceptable, so Parliament needs to give a clear signal about what we expect the FCA to do in future.
Much of the debate in the past has focused on how we control some of the costs. As I have said, I believe that the unfair contract terms regulations give regulators the power to intervene to control some of them. However, we have a real problem with the consumer credit directive, which has prescriptive rules about how firms advertise costs of credit with reference to APRs. The reality is that APRs are meaningless in this sector, because we are talking about loans that are advanced for a short period. The real issues are how much the credit will cost and the transparency of additional charges. I have seen one example of a payday lender who charged £25 for each reminder letter sent when a customer defaulted. That would not be caught by any regulation regarding APRs. It is an unfair contract term and a clear exploitation. The powers exist to control such activities. The PAC stated explicitly that we wanted the misleading APR rules to be ditched and replaced with clear guidance on and responsibility for publishing the cost of credit in amounts repayable in cash.
I also associate myself with the hon. Gentleman’s comments on credit unions. As we all readily understand, the only reason customers access credit in this way is because they cannot get it from anywhere else. Unfortunately, mainstream lenders are not interested in providing small loans for short periods. However, we have to be careful about prescribing additional regulation for the sector, because if people cannot get credit from it they will go elsewhere and that will send them into the hands of some very unscrupulous people.
Stella Creasy (Walthamstow) (Lab/Co-op)
Will the hon. Lady give her evidence for that assertion? It is a myth that many of the lenders propagate. Where does her evidence come from to show that if caps were introduced, people would go elsewhere?
Jackie Doyle-Price
The reality is that people will follow regulation if it is economical to do so, otherwise they will go elsewhere. My evidence is that people are accessing these loans in the first place. We have a failure in the market to extend affordable credit, and that is the issue that we are trying to tackle today. I remind the hon. Lady of what was said earlier. The rules and the tools are already in place, but the regulator has failed to use them. This is not about more burdensome regulation; it is about regulators being prepared to use their teeth and the tools that they have to do the job.
Stella Creasy (Walthamstow) (Lab/Co-op)
I am pleased to follow the hon. Member for Thurrock (Jackie Doyle-Price), because I genuinely believe that there is now a clear divide between the political parties on how best to approach something that we all agree is a problem. I am pleased that Government Members are now talking about the problems payday lending causes and recognise that there is a problem with the market. Our disagreement is over how to deal with those problems and what the challenges are.
It will come as no surprise to the hon. Lady that my perspective on how to deal with the incentives in the market is very different from hers. In the time available, I want to try to explain why I think that tackling the incentives is so important and why the evidence on how caps work shows that they are the best answer, given the challenges we now face.
In talking about those challenges, we must remember that in the past three years we have seen a tenfold increase in the number of people going to a citizens advice bureau for whom debt involving payday lending is a problem. When I started campaigning on this issue, along with many colleagues, we were looking at 1 million people borrowing in that way, but the figure is now 5 million, and 20 million people in this country are desperately worried about their debt picture, with the cost of living continuing to rise. We know that people need access to credit and that these loans are causing problems with gaining that access. I absolutely accept that not everybody who borrows from a payday lender gets into financial difficulty, but enough of them do, as a result of the terms of the loans and how the market works, that it is right for Parliament to intervene and to try to learn from the experience of other countries about what works in tackling that kind of credit.
In this industry people do not make money by lending at a high rate of return; volume is what matters. If lenders can lend to people in a way that makes them more likely to keep coming back to borrow more, because the following month they are a little short again, and the month after that, that is when they make their profit. Indeed, market analysts have pointed out that 50% of the revenues of those companies come from just a small number of their customer base, their repeat borrowers. Indeed, one company operating in the UK makes 23% of its profits from just 34,000 people. Who are those 34,000 people? They are the people who are constantly indebted because every month they have to borrow, because borrowing from those companies means that they are more likely to borrow the following month.
It is the spiralling principle that we have to tackle. When we look at that principle, we must ask what incentive it creates for the market and how the companies make their money. The OFT research shows something that many of us have been warning about: debt is positive in this industry. If companies can get people to keep rolling over their loans and borrowing from them, that is how they make their profit. That is why we are seeing Wonga making £1 million a month more in this country. It is not just Wonga; there are now four companies in the UK making over £100 million a year by working in that way, pushing people into debt, constantly extending their loans and pushing them with their marketing and advertising. They know that because those people have borrowed from them once, they will probably need to borrow from them again, because that is the way in which the loans are constructed.
Some people borrow £300 but end up owing £811 in interest alone by the end of the year because they get caught in that spiral and because of the price of the credit. That means that the average payday lending customer, who earns £18,000 a year, would pay 6% of their entire annual income to pay off a £300 loan. It is little wonder that the OFT research shows that few of those companies are doing affordability checks, because affordability does not matter once they have people hooked. It means that they can always get some money from them.
Who are the people who take out payday loans? There is the nurse who came to see me. She borrowed £100 because she had a flat tyre. She ended up paying back £17,000. Thankfully her mother, because she got a redundancy settlement, was able to help her out. There is the father who came to see me. He has tried to tell Kwik Quid multiple times that his son has mental health issues and asked it to please to stop lending to him because he cannot afford to keep paying the bailiffs when they turn up at his doorstep. But of course they keep marketing, because once they have someone hooked they are more likely to have to keep coming back again and again.
Yes, all those practices break the self-regulatory codes that those companies have come up with, but that should tell us something. Just as it is no point asking turkeys to organise Christmas, it is no good asking companies to act themselves when they can make those kinds of profits by setting their own terms, hooking people in and continuing to charge them to set the limits. It makes no sense. That is why we have to learn from other countries where intervening on price is what has changed behaviour. Yet those countries still have payday lending industries and have not seen the exit that the companies threaten. They also have lower levels of illegal lending and personal debt.
Which countries am I talking about? There are multiple examples we can learn from when it comes to total cost capping—not interest rate capping, which I have never argued for, and which nobody else I know could credibly argue for. Whether we learn from Japan, the American States such as Indiana and Washington, from the Canadian states of British Columbia, Alberta and Manitoba, or from Australia, which has brought in new models, there are examples out there of how we could tackle the problems that people in our country are facing now with the cost of credit without removing their ability to get hold of credit.
Like my hon. Friend the Member for Islwyn (Chris Evans)—I pay tribute to him for the work he has done in the all-party group to promote credit unions—I am a passionate defender of credit unions. I have one in Walthamstow that is working as hard as it can against 18 of those credit companies on my high street, and that is before we even get to online lending. He is absolutely right: it is not a fair fight. That future credit market that works for everyone contains payday lenders, credit unions and social finance organisations.
Sheila Gilmore (Edinburgh East) (Lab)
I am glad that my hon. Friend has raised the issue of imbalance, because one of the answers frequently given to me is that we need credit unions, but when volunteers are pitted against professionals that is very difficult. Would it not be helpful if far more financial support was given to credit unions to back that up?
Stella Creasy
I absolutely agree. In that future model of a finance system that will work for people struggling in a system in which the cost of living is continuing to rise, credit unions absolutely need to be supported to expand and grow—we know that they make up only about 6% of the total finance market in this country— but that is alongside a capping process.
The time for arguing about whether capping is the most effective intervention in this market is over, because the evidence from other nations is overwhelming. The question we should be asking ourselves is what we can learn from that for the UK, because the UK credit market is different. We have always been a nation of people who are much more willing to borrow, and so the terms and reference frames for any kind of cap must reflect that. That is where the Financial Conduct Authority could come in. That is why we fought so hard to give it the power to cap, and why I am pleading with the Government not to sit on their hands yet again on this issue.
The Financial Conduct Authority takes over in April next year. It is hampered by the fact that it needs to see the evidence about the UK credit market. It needs the credit reference data and other evidence from the companies, all of which claim that they are responsible lenders, yet about all of which we have heard stories of bad conduct. Indeed, Citizens Advice has shown that some are not even following 10 of the 12 good practice codes. If we are really serious about resolving the problems in this market, let us ask the FCA to do its job but also give it the data so that it can do so from the get-go in April. We should tell the companies to give it the data about their credit market, their profit ratios and how they are operating so that we can see how and where a cap would influence the UK credit market from April next year. Let us not kick this issue into the long grass yet again, because we now have a window of opportunity.
I am sure that many Members, like me, have people in their communities who have £10,000 or even £15,000-worth of unsecured personal debt hanging over their families. Asking those families to make long-term choices about education, social care and housing costs is a non-starter in that context. Those debts are racking up because of these kinds of practices. We could help them to manage the cost of living, to manage their borrowing and to make ends meet if we do our job today and get the regulator the information that it needs so that it can make the choice about what kind of cap would work in the UK. I think that the Japanese model is the way forward, because it has been done in practice along with the industry and consumer groups. Let us not have another three years of talking about how terrible these problems are and having to work in our communities with fantastic groups such as Movement for Change, the trade unions and the credit unions to try to deal with them when we could do something to avert them in the first place.
I hope that Ministers will today make the commitment to push the industry to give the information to the Financial Conduct Authority so that it can hit the ground running from April 2014 and finally bring in the cap that British consumers deserve.
Yvonne Fovargue (Makerfield) (Lab)
It is indisputable that everybody needs access to credit, but it has always seemed perverse to me that the people who can least afford it pay the most and therefore need the most protection, because they are the most likely to be vulnerable to exaggerated claims and to be in need of a very quick solution to the immediate need for cash.
Payday loans are not always the illogical choice, despite the rate of interest. If someone’s washing machine breaks with two weeks to go until their payday and they know they will have an overtime payment in their next pay packet, it makes sense for them to shop around and buy another washer for £200 with a short-term loan—at a total cost of £267—than to go to BrightHouse, pay £600 for the same product, have a mandatory five-year guarantee for £400 and pay it back over five years at about 30% interest, which would result in a total cost of about £1,500. But—and it is a big but—although such loans provide a service, they cause detriment to tens of thousands of people each year and their providers have been, and still are, guilty of bad practices that cause much concern.
The Office of Fair Trading report highlighted bad practice by the vast majority of the industry and warned a number of them that either they clean up their act voluntarily or action would be taken, and they have been referred to the Competition Commission. I am pleased that some have had their licences revoked, but I hope that stricter enforcement will continue until the Financial Conduct Authority takes over in 2014. That transfer of responsibility gives us a golden opportunity to clean up the market and protect vulnerable consumers, but what are the payday lenders suggesting? A voluntary code of conduct devised by the industry.
There are two things wrong with that. First, it is voluntary. It is not even a requirement to be a member of a trade body. If consumers do not even research the cost of paying back a loan, they certainly do not research whether their lender is a member of a trade body—that is if they are aware of who the lender is, a point I will return to later. Secondly, the code has been devised by the industry and I am not totally convinced that it will put protection before profit. Statutory regulation and a constant review of the market are absolutely necessary.
I will outline the main issues that I think are causing problems. The market is ever changing and new practices emerge almost daily, so we need a flexible regulator. The first and most important issue—it is probably more important than headline-grabbing high interest rates—is the continuous payment authority. People who do not know what this is are not alone, because the banks, let alone the consumers, do not know, either. What it means is that the loan company can access someone’s bank account at any time, for any amount of money, as many times as it wishes. It is not just a blank cheque; it is a continuing, unending number of blank cheques. A constituent of mine had her account debited four times just before Christmas. Her account was cleared completely, leaving her with no money for Christmas, and she only became aware of this when she tried to pay for her Christmas food shopping and could not. It is clear in all the guidance that the customer should be able to cancel the CPA with either the lender or the bank, but Citizens Advice has numerous examples of the banks telling people that it cannot be cancelled by the customer because it is different from a standing order, and of the lender preventing people from cancelling.
Another practice I have recently become aware of—I am looking into this at the moment, because I heard about it only two days ago—is that of companies asking for a borrower’s online bank account details, including their PIN number and password, which makes the matter even more problematic. The lender can see when the individual is paid and when the rent and bills go out and take advantage of the gap, plunging the borrower into even more serious debt.
The other major problem with the continuous payment authority is that it reduces the incentive to perform a thorough and proper affordability check. After all, if a lender has unlimited access to someone’s bank account, why bother too much about checking whether they can afford it? The lender can dip into their bank account at any time, for any amount. Continuous payment authority has been described to me as the one thing that the payday lenders really want to keep. On that basis—as I used to say when disciplining my daughter—it is probably the one thing they should not have.
There is an issue with the industry writing its own code. Wonga has given 10 commitments and I have evidence—I do not have time to give it—that demonstrates how its code needs to be thoroughly examined. Even given the three extensions and the 60-day interest at 1% of the principal under commitments 6 and 7 of the code, the total repayment amount for a loan of £200 would be £588. That is a cause for concern.
Too many people delay the evil day when they have to sit down and face the difficult fact that they cannot afford their outgoings. As a result, they use payday lenders, because it is hard to admit to family or anyone that they cannot afford to keep going.
Stella Creasy
Is my hon. Friend, like me, worried about the evidence that a quarter of payday loans are taken out to pay off other forms of credit—not just other payday loans, but credit cards and other bills? People get caught in a trap and that becomes the only way for them to try to manage the situation.
Yvonne Fovargue
I agree with my hon. Friend. Citizens Advice and StepChange say that in the last quarter the number of people with six or seven payday loans has gone up tenfold.
This situation cannot continue. There must be an obligation on payday lenders to signpost customers to free sources of debt advice if they fail the affordability check, which should be thorough, or miss a loan repayment. Of those who responded to the Citizens Advice survey who had repayment problems, only 18% felt that the lender dealt with them sympathetically and only 8% were told that they could get free debt advice.
This is an industry that contributes to the debt problems of individuals, as my hon. Friend said. It is welcome that it pays a levy and I do not disagree with the very interesting suggestion that they should pay more. It is vital that that additional contribution represents an increase in the funding of the Money Advice Service to assist the rising number of people seeking help with their debts.
It is only right that the industry pays the levy, which is a drop in the ocean compared with the amount it spends on advertising. My two-year-old grandson can recognise the Wonga grannies; I have taught him to boo at them every time they appear—and they appear so often between children’s programmes. This blatantly targets young families, who can easily be vulnerable to sudden income pressures. As is the case with gambling, there should be a sector-specific code that limits such broadcasts until after 9pm, and companies should be expressly prohibited from advertising during any programme likely to appeal to anyone under the age of 18.
I mentioned new products and I want to raise a note of caution about a company that my hon. Friend the Member for Islwyn (Chris Evans) has mentioned, namely Amigo Loans. There are no credit checks for the borrower, but the friend might have to repay all the loan and end up with a damaged credit record. I wonder how many people remain friends after that happens. New products are emerging all the time—often they are old products with a new spin—so careful monitoring and transparency are key.
One of my constituents thought that they had borrowed money from Cash Lady, when that is actually a broker. We need to prevent more people from finding themselves in that situation. When my constituent wanted to contact the lender, they had great difficulty in finding out who it actually was.
The trade and exchange of consumer details have to be curbed. It cannot be right that when a friend of mine applied for a loan as a test, without completing the transaction, they had 24 unsolicited texts offering high-cost loans within the next 48 hours.
The cap on the total cost of credit has been ably and comprehensively covered by my hon. Friend the Member for Walthamstow (Stella Creasy). I support the decision of my hon. Friend the Member for Sheffield Central (Paul Blomfield) to choose this topic for his private Member’s Bill. The interest that his work is generating is helping to shine a light on the industry. Hopefully, that will assist the FCA in devising and enforcing a proportionate but firm regime to protect the consumer.
There are vast profits in this industry, as we have seen this week. Let us have commensurate protection.
Tracey Crouch (Chatham and Aylesford) (Con)
It is an honour to follow the hon. Member for Sheffield Central (Paul Blomfield). I was proud to support his Bill and am sorry that it will not make its way through Parliament. I hope that the Government are listening carefully to the cross-party support that it is getting and will take forward some of the sensible measures proposed in it.
I also congratulate the hon. Member for Islwyn (Chris Evans) on introducing this debate on an important issue about which many of us feel strongly. It is also important to congratulate the hon. Member for Walthamstow (Stella Creasy), who has done a great deal to raise the issue both inside and outside Parliament. During many parts of her speech today I was nodding furiously, as I found myself in violent agreement with her on some of the important issues that she raised.
I am sorry that my hon. Friend the Member for East Hampshire (Damian Hinds) has left the Chamber. He has done a great deal of work on credit unions. I also fundamentally support the work that my hon. Friend the Member for North Swindon (Justin Tomlinson) has done on improving financial education.
The debate has been interesting and I will try not to repeat the points hon. Members have made. My hon. Friend the Member for Thurrock (Jackie Doyle-Price) said that the sector is at a crossroads, which was an interesting comment. We must ensure that we take the right path. High-cost credit is an incredibly important issue for many of our constituents and will be in future for all the reasons hon. Members have outlined.
High-cost credit is defined as credit
“comprising of payday and other short-term small-value loans”.
However, it is important to note that it is not the preserve of alternative financial services providers. There are problems in the wider credit industry. The example I will give is highlighted by StepChange. Its research shows that
“a borrower making minimum payments for 18 months on a typical”
credit
“card for an average balance of just over £1,800 pays £44 for every £100 borrowed”.
It is important that we do not exclude from the debate means of credit other than payday loans.
When I first spoke in Parliament about high-cost credit, I drew on my experience. When I came to London as a 21-year-old graduate, I worked as a researcher in Parliament, earning £7,000 a year. I got myself into a stupid amount of debt—£15,000—very quickly, not because I was trying to pay rent, meet bills and buy food, but because I wanted to keep up with the Joneses. I wanted to go out wearing nice clothes and to have good evenings out with my friends, all of whom worked in the City and earned a lot more money than I was earning. I borrowed a lot of money on credit cards, I was always at my overdraft limit, and borrowed money on store cards. I bought things on store cards that people normally pay for with small cash. I could not afford to live the life I wanted to lead in my not-very-well-paid job as a researcher.
Stella Creasy
I make no comment about the friendships the hon. Lady had, but does she agree that one worrying aspect of the debate on the payday loan industry—the evidence is clear—is that 80% of payday loans are for basics? They are for paying rent, and travel and food costs. People cut back as far as they can, so those costs are not equivalent to keeping up with the Joneses. It is important that we make that distinction—people are trying to cover unavoidable costs.
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.
The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson)
We have had an excellent and constructive debate, and I thank the hon. Member for Islwyn (Chris Evans) for introducing it and the Backbench Business Committee for allocating time. I appreciated his welcome for the action the Government have already taken, such as on the research into advertising and the FCA strategy that we are due to see soon with the publication of its rulebook. I understand and appreciate his concern about the speed of change, and the frustration he feels. His party colleague the hon. Member for Edinburgh South (Ian Murray) said the pace of growth of the payday lending industry has been extraordinary. The Government and regulators have, of course, been working to keep up, and I think we have seen in recent months that that has been happening.
Various alternatives have been mentioned. One of them was the possibility of introducing low-limit credit cards, and I have explored that with the UK Cards Association and others in the industry, as I think it could be one of the alternatives that might work. Of course, it would not work for everybody; as we have heard, some people who take out payday loans are keen to make sure that they get something quickly and with that level of convenience. Indeed, some may not pass the credit scoring that would be required for some of those credit cards. That underlines the importance of the affordability assessments, because people are currently passing the checks by payday lenders and perhaps some of them should not be.
My hon. Friend the Member for Thurrock (Jackie Doyle-Price) talked about the PAC report and the importance of this House sending a clear signal to the FCA that it expects it to use its powers to intervene where there is poor practice, and I absolutely agree with her. We do expect that, and I have made that abundantly clear to the FCA. Today’s debate has also been very helpful in making it clear exactly how strongly the House feels about this issue. I am sure that the FCA will be following this debate, but just in case it is not, I will happily write to it to draw it to its attention. Indeed, next week I will be meeting Martin Wheatley to have further discussions on this issue.
My hon. Friend mentioned that she was disappointed that the Office of Fair Trading had failed to use its powers to revoke licences. That was true at the point at which the PAC took evidence from the OFT, but she will be pleased to know that since that report was published it has revoked three licences—so those powers are being used.
I commend the hon. Member for Walthamstow (Stella Creasy) for all her campaigning on this issue; we had a positive meeting to discuss it earlier this week. Obviously, the profitability of payday lenders has been high up in the news this week, and we agree on the level of profits being derived from default fees, roll-overs and so on. That is why it is so important that the Competition Commission is investigating this market. It has already begun its investigation, issued its issues statement and invited comments from interested parties by later this month.
We discussed in detail the other day the points that the hon. Lady made about total cost capping. I appreciate that we perhaps have a difference of opinion on where exactly the evidence points, the possible negative impacts of fees being charged elsewhere—a displacement effect—and whether or not there would be less sympathy for lenders than difficulty. That said, it is vital that the FCA has that power and has the evidence. Her point about ensuring that the FCA can get off to a flying start when it takes on the responsibility in April 2014 is important. I have been keen to ensure that it is able to do that, and it has said it is prioritising the issue.
On the hon. Lady’s point about data sharing in the industry, I encourage lenders to liaise and share their data with the FCA in advance of its taking over that responsibility. The OFT has a data-sharing agreement with the FCA, so data that it has can be shared, with all the appropriate confidentiality protections in place, as one would expect. It would be helpful if the industry would share further data with the FCA, and when we had the summit the industry indicated its willingness to be as helpful as possible. I hope that it will be able to take that up.