Stella Creasy
Main Page: Stella Creasy (Labour (Co-op) - Walthamstow)(13 years, 10 months ago)
Commons ChamberRead Full debate Read Hansard Text
Stella Creasy (Walthamstow) (Lab/Co-op)
I beg to move,
That this House notes with alarm recent evidence showing a fourfold increase in the use of payday lending since the beginning of the recession and that high cost credit lenders advanced approximately £7.5 billion to low and middle income consumers in 2008 alone; recognises the problems of financial exclusion, lack of financial and debt management education, lack of price competitiveness in the unsecured lending market and the near monopoly positions of many large lenders which contribute to the high costs of borrowing; considers that without action these factors could worsen family debt, poverty and financial difficulties to the detriment of the economic recovery; therefore calls upon the Government to introduce, alongside measures to increase access to affordable credit, regulatory powers that put in place a range of caps on prices in areas of the market in unsecured lending which are non price-competitive, likely to cause detriment to consumers or where there is evidence of irresponsible practice; and believes that such caps should take account of the desirability of maintaining access to affordable and responsible credit, the likely impact on the supply of credit and the cost of enforcement, that they should be regularly reviewed and that they should use the total cost of credit, calculated on a yearly basis, to ensure that lender avoidance and distortions in price are prevented.
It gives me great pleasure to present to the House today an opportunity to put on record its support for the introduction of caps on the total cost of lending, and so protect Britain’s poorest consumers from the practices of so-called legal loan sharks. My introductory remarks are set out in three sections. I shall address, first, the problems; secondly, how the proposals would tackle them; and thirdly, in seeking people’s support for the motion, the concerns that they might have about the proposals.
To begin with, however, I shall tackle what we are not talking about today. The proposal is not about a usury law or about setting a single cap for interest rates. Previous Governments rightly concluded that that would not be the right thing to do. All the briefings that Members have received from industry lobbyists have been about such proposals, and the often cited Office of Fair Trading research is also about such an idea, but let me stress that there are flaws in that proposal, which is why we suggest that something different needs to take place. I shall also be clear that this is not a debate about how we abolish the high-cost lending market, or about stopping people borrowing. Credit is a vital part of the economy and, clearly, a part of the UK lifestyle. Indeed, one challenge that we face during our economic recovery is to encourage people to take a sensible and sustainable approach to credit, because, given how we live in the UK, it is a key part of our future.
Debt and credit is a much greater part of the UK’s psyche than any other country’s. As Third Sector Foresight points out, Britain has double the debt of continental European countries, and personal savings are at their lowest levels since the 1940s. In April last year, private debt in the UK stood at a whopping £1.4 billion, and living that way has its own consequences. Surveys by PricewaterhouseCoopers show that debt levels in our society mean that the average household is paying 15% of its net income purely on the interest it owes to service such debts.
Our focus in this debate is on a very specific aspect of credit provision. The high-cost credit market is very different in its practices in comparison with other, more mainstream forms of lending. We are talking about the payday loans of £100 until the end of the month that keep getting repeated, the doorstep lending of £200 that is offered to people so that they can buy a new sofa, and the hire purchase agreements offering deals that people sign so that their kids can have a new TV.
Above all, this debate is about the spiralling costs at the heart of such loans, because it is the rates that people charge that make this a billion-pound industry. It is all legal, and it is all growing. While some forms of high-cost lending have been with us for generations, we have also seen in this country a rapid expansion in the scale and use of these forms of credit in the past few years alone. That is driven in part by the drying up of mainstream credit. PricewaterhouseCoopers reports a staggering 79% drop in secured lending in the past year. Research by Consumer Focus predicts a rise in payday lending alone of 40% to 45% in the next few years. There has also been a fourfold increase in payday lending since 2008.
I see for myself the impact that this has on my community in Walthamstow. Our high street now has a large number of shops offering short-term loans, hire purchase agreements and credit deals. That is a badge of poverty. These companies see our fragile economic conditions as fertile ground. The aptly named Mr Crook, who is the chief executive of Provident Financial, the largest home credit company, says that he expects a growth in his target market as a direct result of the comprehensive spending review. Who does he mean by that? He means those with poor credit histories and those with no credit histories. In my cosmopolitan corner of London, one of these companies employs only people who speak more than two languages, so that they can target newly arrived residents who do not understand or know the British banking system. He also means those who are facing redundancy or are newly unemployed.
Indeed, as we see higher levels of unemployment, the need to act quickly becomes even greater. As a lady from Leicester who recently contacted me pointed out, as a public service employee on a redundancy notice she could not borrow from either her bank or her local credit union, so what other option does she have? That is when this kind of lending becomes a problem. Some can manage such credit, but the toxic mix of low incomes, perpetual interest payments and no choice affects too many people in our country.
Helen Goodman (Bishop Auckland) (Lab)
My hon. Friend is making her case most eloquently. My constituency also has shops where people pay possibly three times as much for white goods, furniture and so forth. Is she aware that, although the problem is intensifying, it is not new? I wonder whether she has read Proverbs 22:
“If you have nothing with which to pay, why should your bed be taken from under you?”
When people cannot pay, their beds and their fridges are taken from them.
Stella Creasy
My hon. Friend makes an eloquent point. Indeed, I am grateful for the support that we have had from Church Action on Poverty for the campaign and for the proposals before the House.
Neil Carmichael (Stroud) (Con)
Does the hon. Lady agree that the Bills of Sale Act 1878, which enables lenders to go into people’s homes and take property, should be reviewed, because that is an unintended consequence of the Act?
Stella Creasy
The hon. Gentleman raises an interesting point which Members might want to cover during the debate.
Most importantly, we are looking at the principle of how we could stop people getting into such high levels of debt because of the rates they are charged for the borrowing that they undertake.
Mr Jim Cunningham (Coventry South) (Lab)
Has my hon. Friend noticed that these businesses and shops are advertised on television? Does she have anything to say about that?
Stella Creasy
I do indeed, but I will leave that to my much more eloquent colleague, my hon. Friend the Member for Darlington (Mrs Chapman), who has done some sterling work in introducing proposals on how we might address some of the problems caused by advertising.
It is the captive nature of this market that makes intervention so key. The lack of competition for these products keeps prices artificially high, along with profits. The Office of Fair Trading says that there is not enough of what it calls “substitutivity”. Let me put it more simply. As the industry itself admits, 25% of home credit users and 23% of payday users have no other credit option. Consequently, these companies can extract what might be termed an economic rent. They set the terms of the trade in what they will lend at a risk that is much too high for consumers. In this context, I pay tribute to the work of the right hon. Member for Welwyn Hatfield (Grant Shapps), who is now a member of the Government, and who published a report in 2009 highlighting the lack of competition in this market and its consequences. As he said,
“We think it is obscene that anyone should end up paying 10,000% APR, particularly when the evidence suggests that these loans are targeted at some of the most vulnerable members of our society”.
These are people for whom such repayments become a weight on their finances and their families—people who do not have large amounts of disposable income and for whom any change in circumstance, be it divorce, job loss or increases in rent, can tip them into destitution. The Consumer Credit Counselling Service says that one in eight people who contacted it for help with such unsecured debts in the first half of last year were on jobseeker’s allowance. Contrary to what might have been suggested this morning on the “Today” programme, one in 10 payday loan customers are on £11,000 per year or less. These are people like the man who contacted me because he currently has nine payday loans that he is trying to pay off. One company, Wonga, is chasing him for £1,600 for an £800 loan that is 40 days overdue. The first loan was meant to be a stop-gap to bridge the gap between one job and the next pay cheque, but the interest in itself quickly becomes the long-term debt. If those are the problems, what are the solutions?
Barry Gardiner (Brent North) (Lab)
I am grateful to my hon. Friend for the very powerful argument that she is making. Does she agree that part of the problem is that a vicious cycle develops, whereby companies use the rate of default to justify the increasing percentage that they are charging on the loans? That is a completely fallacious argument, but one that they always advance to the regulator.
Stella Creasy
I strongly agree with my hon. Friend. Few companies have been able to explain to me precisely how they manage to set their rates; they seem to pick a number out of the air and go with that. However, I will return to that point in some of my suggestions for solutions.
There is a new proposal that we, as a House, can take forward to address this phenomenon, and that is what the motion is about. It is based on new evidence about what would work in addressing the impact of such loans on our constituents. That is why I come to the House today not to speak on my own but to speak with the backing of many different organisations from a wide range of sectors. I want to put on record my thanks to Citizens Advice, which has opposed other measures such as interest rate caps, but in contrast believes that these proposals could offer a way forward; to Consumer Focus, who says of this motion that it is
“a different, and more considered, approach than the blanket application of a blunt interest-rate-cap”;
to Martin Lewis, a passionate advocate for financial education, as many Members may have found out earlier this week, who had also opposed interest rate caps but supports these proposals as “much more sensible”; and to the Better Banking campaign, London Citizens, the Co-operative movement, Compass, the GMB, Unison, Church Action on Poverty, the New Economics Foundation, the Centre for Responsible Credit, and countless others, especially those on Twitter, who have supported these proposals.
All those people agree that we can have an effective, evidence-based policy, and that we can learn about what works from other countries where such measures have been introduced. Nothing that I am proposing today is rocket science or untried or tested. When we talk to people outside the UK, we find that they are surprised that we have not dealt with the problem so far.
Steve Rotheram (Liverpool, Walton) (Lab)
We, as parliamentarians, should congratulate my hon. Friend on this debate. Is she aware that today is the centenary of the death of Robert Tressell? I am sorry that I am unable to stay for the whole debate because I am going back to Liverpool—where he was buried, unfortunately in a pauper’s grave—where there is a series of events. A hundred years on, people are still being exploited. Does my hon. Friend agree that this issue should garner cross-party support to stop the exploitation of ordinary working families?
Stella Creasy
Indeed, in the spirit of cross-party support, I was delighted to hear the Mayor of London say that the rates that these companies charge are extortionate. I hope that I can convince him to take more action on the matter for Londoners.
I have been struck by the response to our market from people from other countries. As a local MP, I regularly leaflet for my local credit union outside the premises of the legal loan sharks in my high street. Last Friday, I spent 20 minutes trying to explain to an outraged Polish woman that the companies could charge her such rates; something that does not happen in her country. As her English was not great and my Polish was even less so, my gesticulations about where the credit union could be found were perhaps unclear. However, her anger and amazement that this was legal in Britain was easy to translate.
I am not asking hon. Members to come and stand on a chilly high street in Walthamstow with me. Recent European Commission research shows what we should do and what we should not do. Members may have been told the edited highlights of that 500-page research document. Having read the whole thing, I will offer them some more. It says that we should learn from the experience in America, where interest rate caps that were set too low have caused problems for lenders and consumers. By contrast, it highlights the benefits of a European model. Perhaps that is not a winning proposition for some Government Members, but I hope that they will bear with me.
The document shows that many ways of capping are used in different countries. Britain is increasingly isolated in not dealing with this market in the same way. Fourteen European countries have a form of capping system or a ceiling on charges. In France, the cap is a third over the market average. In Slovenia, there is a spread of caps, with 13% for a long-term loan and 453% for a shorter-term loan. In Belgium, the cap is based on the amount that is lent, rather than on the rate. There are different levels for loans below and above €1,250. Some countries, such as Ireland, cap only part of the market, whereas others, such as Germany, have limits on all forms of lending. The motion draws on what has been learned from the examples of what works and what does not. It calls for a regulator to introduce a series of caps in the areas of the unsecured lending market in the UK that are not price competitive and where there is evidence that not doing so would cause consumer detriment.
It is worth considering the nature of the UK high-cost lending market. A range of products is available from short-term payday loans, to complicated hire purchase agreements and home credit arrangements. Because there are no caps in our system, the rates can range from 271% and 440% to an eye-watering 4,000% or more. None of the companies can provide pricing data to explain why it has arrived at such rates. Under the proposal, the regulator would step in and look carefully at these markets to determine, on the basis of the evidence, how best to proceed.
Competition is a clear challenge. Just six companies operate in the home credit industry, one of which owns 60% of the market. The motion calls for intervention where there is evidence of a lack of competition. It also highlights the need to intervene when there is evidence of consumer detriment. Consumer detriment is littered throughout the practices that the companies get away with: the rolling over of loans and the compound interest that that generates; the administration fees; and setting the level of loans well beyond the realistic reach of their clients’ incomes so they cannot pay them off. Friends Provident today admitted that 29% of payday loans are refinanced, and that on average the refinancing rolls over twice. Some 15% of home credit loans are refinanced and rolled over into a new loan before the end of the term. Those practices are designed to ensure that consumers pay, but that they never end the relationship. Instead, they are caught in a never-ending cycle of payments and loans.
John Pugh (Southport) (LD)
The hon. Lady keeps mentioning these companies. She may not be aware that in my constituency, it is national banks that have exploited migrant workers. The advantage, which we secured, is that they have a regulatory body that called them on it and got the system adjusted.
Stella Creasy
The hon. Gentleman makes a good case for regulation, which is what the motion would introduce. However, it would be considered regulation that takes account of the market and of how it affects consumers. That is why I have confidence that the proposals would be effective if they were taken forward by the Government.
Markets change and the motion is about being responsive to that. It takes into account how consumers and lenders interact with the market. It draws its effectiveness from an evidence-based process. It is regulation at its best and boldest. Crucially, the proposals overcome the problems associated with previous proposals, which calculated the interest rate. Instead, the total cost of credit would be considered. That difference makes all the difference.
There is strong evidence from countries with caps that lenders have tried to avoid them or to compensate for their profit loss by applying higher charges. In Poland, following the introduction of caps, lenders introduced a mysterious convenience fee to make up the difference. The European Commission report shows that there is support—although not from providers, of course—for capping all the costs associated with loans to tackle such behaviour across the sector. The key to that measure will be how the caps are calculated. We have proposed that they should be annualised for ease of comparison and based on the total cost of the loan, rather than the interest rate alone. Calculating on the total cost makes it clearer to consumers what they will actually pay. There would be no small print and no nasty surprises that undermine people’s attempts to budget for repayments.
The motion is deliberately open about who would regulate. That is because changes have been proposed that would involve a number of bodies in the process, including the Office of Fair Trading and Consumer Focus. The Members who tabled the motion are open on how the regulatory process should be taken forward, but we want it to be taken forward.
The regulator would work with all stakeholders in the industry, including the lenders. I know that the industry is frightened by the proposals because of the amount of spin that they have sent to hon. Members. That is a pity because if they had been involved, we could have learned from their experience in considering the appropriate levels of capping. Their churlish opposition to any form of price capping and their attempts to conflate concern about interest rate caps with this matter highlight a disgraceful attitude towards vulnerable consumers. That is why self-regulation is not an option and why we as politicians must move towards intervention.
We have seen in other industries that where there is a lack of competition, regulators can work with consumer representatives and providers to set effective frameworks. That has happened in the water industry, the energy industry and the financial services industry. The proposals therefore build on the best practice in market intervention. I believe that British consumers deserve the best practice.
Having set out the proposals, I will take on some of the arguments that have been made against them. In doing so, I urge hon. Members to learn from that most famous of Dickensian characters, Gradgrind, who argued:
“Facts alone are wanted in life. Plant nothing else, and root out everything else.”
Some people have argued that capping the costs of credit would cut lending in the industry and put firms out of the market—a market that Consumer Focus estimates is worth £35 billion a year. I urge hon. Members to read the European Commission research that investigated that very point and found no evidence to support it. Indeed, the OFT research that is often quoted is based on an industry study, which says that people could end up borrowing from friends and family. Furthermore, the EU research found that countries with no caps had higher levels of illegal lending than those with some form of cap.
Some people fear that if caps were set, there would be a race to the top for all lenders. That suggests that caps would encourage all banks and building societies to start charging 4,000% interest rates. When Policis considered the matter in 2004, it found no evidence to support that concern. The motion calls for a range of caps to reflect different types of loans. That reflects the fact that mainstream banks would not compete with lenders in the unsecured market.
Lorely Burt (Solihull) (LD)
On the Policis research, the former Labour Minister with responsibility for consumer affairs, the hon. Member for Cardiff West (Kevin Brennan), stated:
“Government carefully considered the case for a cap on interest rates following research carried out by Policis in 2004. The research showed that imposing a cap on interest rates could result in lenders withdrawing from the riskier end of the market, including the home credit market, denying vulnerable consumers access to legitimate sources of credit”.—[Official Report, 22 March 2010; Vol. 508, c. 149W.]
Stella Creasy
It is a pity that the hon. Lady was not here at the start of the debate when I set out clearly that the proposal is not for an interest rate cap, but for a cap on the total cost of credit. As I said, that is a difference that makes all the difference to the efficacy of the proposals. That is why many groups that share the concerns in the research that the hon. Lady has set out, are not concerned about these proposals. I urge her to look closely at that distinction. I will press on now because many hon. Members wish to speak and I know that the Minister will have a substantial amount to say.
Another point that has been raised is that new provisions in the Consumer Credit Act 2006, which came into force recently, may well change the market. Although those provisions are welcome, the protection that they offer presumes that choice is open to consumers and that if they are simply equipped with clearer pricing and the chance to rethink loans, that will resolve the problems that we have discussed. Customers with no alternative, struggling to make ends meet, cannot exercise choice or avoid borrowing. If someone is tied to the train tracks, knowing when the train is coming makes only a limited difference to their chances of survival. Until we give consumers a level playing field by producing powers to cap costs, we will not change the dynamic of the relationship.
Others have argued that the powers needed already exist, and that the Competition Commission could investigate and act. Indeed, the Office of Fair Trading referred the home credit market to the commission in 2004, as the hon. Member for Solihull (Lorely Burt) pointed out, and came up with various remedies. Here I turn to the views of Citizens Advice, which argues that the problems are getting worse, not better. That shows that those powers have not worked, so it is time to strengthen the intervention that we make in the market.
Mr Deputy Speaker (Mr Nigel Evans)
Order. The hon. Lady has already indicated that a lot of Back Benchers wish to get in. It was recommended that her speech should last 15 minutes, and she is way over that. Could she please bring her remarks to a close?
Stella Creasy
I will, Mr Deputy Speaker.
Finally, people have suggested that we need to introduce more competition by encouraging affordable lending, and I agree, but I do not see that there is a choice to be made between capping the costs of credit and supporting credit unions. Furthermore, it will take a long time for credit unions to become a serious, affordable alternative. In contrast, cutting rates would have an impact on people’s debts now.
I know that some people are concerned about the concept of regulation, but in the motion I simply urge the Government to close the loophole that they have created by saying that they will commit to regulation on the costs of store cards and credit cards but leave this vulnerable market untouched.
The weight of evidence means that I will hold firm in not accepting the amendment, as much as I welcome the strong cross-party support for the proposals. We all know that that support exists, and in these days of new politics I want to celebrate it, but I fear that the warm embrace of consideration could turn into the slow of death of progress without firm direction from the House. The longer we delay affirmative action, the longer our constituents will pay high rates.
Make no mistake, the problem will get worse, not better. As Uriah King of the American Center for Responsible Lending points out,
“payday lenders are aggressively seeking new markets because they are being curtailed here in the US”.
We can all see the consequences in our communities. One example of this is the uncle who came to me last year because his 16-year-old nephew had been given a £300 loan by a home credit agency. His family will struggle to repay that debt. He is angry, you bet, but he knows that it is all legal. What chance for the next generation if we do not act now? Mr Crook will be licking his lips at their predicament.
Let us not delay. There is evidence to support my proposals, and there is political will in the House for this to happen. Let us consider the motion a belated submission to the credit review, giving the Government a clear and urgent message that the time for capping costs has come. Voting for the amendment would dilute that message. The clock is ticking. Research by R3 shows that 44% of people in this country now struggle to make ends meet until pay day, and the problem will only get worse. Those people are our constituents, and they are our responsibility. I ask Members to please give them more than consideration—please give them action. Support the motion and protect the poorest consumers above the needs of loan sharks.
Lorely Burt
I thank the hon. Lady for her intervention, but no, I do not entirely recognise that, because I am not sure that she is distinguishing between what the two actually mean. I am not against what the hon. Member for Walthamstow is promoting, but I question her position. After 13 years—13 years in which her Government gave the matter due consideration and in which her party had an unquestionable desire to help—she seeks to introduce something now, in the middle of a Government consultation, when she knows that the Government cannot commit themselves in case they prejudice the consultation.
Stella Creasy
I just want to check that the hon. Lady understands that this is a Backbench Business Committee debate, so in theory Back Benchers could take a position that is different from that of the Government. If the Government were concerned about the consultation, they could abstain from the vote, thereby protecting themselves against any question of judicial review, whereas Back Benchers are free to express an opinion. Does she not agree?
Lorely Burt
Back in the real world, we do not want to abstain. We—the Government—want to support her proposition, so I am disappointed that she is taking the view she has.
We cannot accuse the Government of doing nothing. This week the consumer credit directive came into force, enforcing a 14-day cooling-off period. We have also increased the money going into catching, prosecuting and imprisoning loan sharks—these pariahs who feast on the misery of the desperate. The illegal money-lending teams are doing a great job and have been very effective, and we have also launched the consultation—the one that the hon. Lady does not seem to be interested in acknowledging.
Stella Creasy
I want to put on record my thanks to all Members who have taken part in today’s debate. The fact that 21 Back Benchers have come to speak and that there has been broad agreement suggests that this issue cannot be ignored any longer. I note the exceptions of the hon. Members for Solihull (Lorely Burt) and for Eastbourne (Stephen Lloyd) and their concerns. They might want to reflect on their ability to add heat to a subject that requires light. That is the challenge we face today.
I am deeply disappointed by the Minister’s approach to the debate. He offers so much and at the last minute takes it away. To talk about the discussion on total cost credit and then quote from an industry-led report that has been funded and supported in that way is a shame. Notwithstanding that, I hope he will accept that the broad support from Members today shows that there is agreement that there is a problem that needs to be addressed, and that the measures brought forward so far have not been satisfactory. The issue, then, is how we should proceed.
I had hoped to convince the Minister today that the Opposition’s proposals, to which the motion speaks, are rooted in evidence—recent evidence that he has previously put forward to me to support his case. I note that he has changed his mind now, but perhaps he will change it again. The big truth at the heart of this issue is that the longer the Government linger, the more problems will deepen. I go back to the point that nearly half of households, as a direct result of the economic conditions we are in, are struggling to make ends meet, and that 10% of them are borrowing from the people we have been discussing. The longer we fail to act, the more these rates will cripple families across the country, so I urge him not to reject the proposals simply because of an ideological objection to regulation. Regulation done well has been supported by Hayek.
I also urge the Government not to reject the proposal simply because it comes from the Opposition. I say to the Minister: “You may have used your party to delay progress to date, but you will not stop the pressure from the people of this country for something to happen. That has been very clear today. You have left your own Back Benchers uncomfortable by forcing prevarication, but please do not leave that wound to fester. Work with all of us who would support and encourage a form of capping. We will not let you throw these proposals out and we will do what we can to continue this debate and keep this issue alive. We will hold you to account because our constituents demand and need nothing less. If only the Government stand in the way of progress, I urge them to reconsider. Please support the motion as it is and do not amend it. Please show clear leadership and send a clear signal to our constituents that you are not in the pocket of the legal loan shark industry but that you stand as we do with the poorest consumers in this country, seeking action now.” I tell the Minister honestly that if he does that and makes a clear commitment to doing that today, we will applaud him; if he does not, we will never forgive and we will never forget.
Question put, That the amendment be made.