Consumer Credit Regulation

Debate between Stella Creasy and Andrew Bridgen

Tuesday 9th November 2010 Westminster Hall

[Stella Creasy]

My right hon. Friend makes an incredibly important point. With local authorities facing cuts of 25% or more to their budgets, it is clear that those cuts could affect trading standards and that the action now being taken on illegal loan sharking could therefore be put at risk.

We should not free communities from one form of exploitation only to allow another form to grow unchecked. Indeed, as more effort is put into cracking down on the criminal activity of loan sharks, it is all the more vital that there be greater access to affordable credit, an issue I will return to at the end of my comments.

We are here today to talk about the growth of the high-interest legal home credit market—a relatively recent phenomenon in the UK, and an industry that originated in America. As a result, many of the companies operating here are “exporters”, either working online or in our town centres. A good example is Dollar Financial, a US-based lender that operates under the trading name of the Money Shop in the UK. The Money Shop has expanded from just one store in the UK in 1992, which dealt primarily with cheque cashing, to 273 stores and 64 franchises across the UK by 2009. Now, in communities such as mine in Walthamstow, these companies litter our high streets.

I want to set out the sort of products such companies sell. We are talking about pay-day lenders, organisations such as Oakum or Wonga.com. In August, the Consumer Focus group published research into the use of pay-day lending. It estimated this market to be worth £1.2 billion a year and that it was used by around 1.2 million people. Its report went on to forecast a significant growth in the market. Such loans are often short-term ones with technical interest rates of anything up to 3,500% for a five-day loan—another point I want to return later.

The Consumer Finance Association, which represents pay-day lenders in the UK, estimates that these companies’ customers have an annual income of between £12,500 and £30,000, with £18,000 being the approximate average. However, research for the Friends Provident Foundation found that one in 10 UK pay-day customers had incomes of less than £11,000 per year. These are the people who can least afford to borrow at such high rates, even if it is only for a short time. The price of such lending is often as much as £35 in interest for every £100 borrowed, which simply drives these people further into debt, especially as these loans are often rolled over, one after another.

Furthermore, these companies make a point of targeting those who are unable to access the UK banking market. Indeed, in my own constituency Oakum makes a point of hiring people who can speak two languages, so that they can target their services at communities who are new to Britain and for whom the British banking system is still alien.

In the “home credit” market, people are approached on their doorsteps and offered loans. Generally, such loans range from £200 to £500 and have to be paid back over the course of a year. Although the companies involved claim not to charge for missed or late payments, if someone borrows £300 they have to pay back about £10.50 a week, which adds up to some £540 over the course of a year. That means a typical annual percentage rate of 272%, compared with the 9% or 10% APR that is often offered by mainstream banks.

One of these companies, Provident, has 11,500 “agents” who visit some 1.8 million people a week to collect payments and offer credit. Agents work with each person they serve to judge how much credit they can buy. Some 70% of both customers and agents are women. Critically, agents are paid according to how much they collect, not how much they lend, creating even more pressure to keep people borrowing at such rates.

Or consider the antics of hire-purchase companies such as BrightHouse. Such organisations target those on low incomes who have been refused credit and offer goods for sale on hire-purchase terms. The goods, which often have a high mark-up already, are leased out at high interest rates, so that a computer costing £800 or £900 ends up costing £2,000 or £3,000. Should someone default on a week’s payments, the company often imposes high penalty charges and requires the following week’s or month’s payments straight away, making it even harder to catch up.

Opportunities to expand resulting from the comprehensive spending review have not been lost on many of those who work in the market. Indeed, Provident’s chief executive publicly stated that he expects growth in his target market as a direct result of the CSR. Another factor driving today’s debate is the failure in the credit market for such consumers. The lack of competition to serve them means that it is a seller’s market. Six lenders account for 90% of the home credit market—Provident accounts for 60%—so there is little competition to drive down interest rates.

Clearly, credit lent must be repaid. It is therefore inevitable and fair that interest should be charged to cover the cost of providing credit. It is not disputed that many of those on low incomes or with bad credit histories are a higher lending risk, so interest rates on products aimed at them will be higher than those for the mainstream. However, the terms on which such transactions take place are critical. It is right for both parties that credit should be affordable, which means that both sides must judge what is possible.

There are concerns on that point, because many companies, however ethical and caring they may profess to be, are not. They operate in ways that undermine that profession. A pawnshop in my constituency rings customers back to offer them unsecured loans. Some lenders make a virtue of the fact that they do not consider previous credit history or assess whether a household can afford repayments. Such lenders take high-risk customers not out of the goodness of their hearts but because they know they can hook families on their services, creating a long-term cash cow.

High-interest lending also adds to the difficulties faced by the public purse. Lending at high rates to people on low incomes serves only to deepen their poverty. Credit dependency, whereby such debts can never be paid off, results in debts elsewhere, such as on rent, council tax and fuel bills. It results in cold homes and people going without food. I am sure the Minister recognises that the public purse can end up picking up the pieces.

[Andrew Bridgen (North West Leicestershire) (Con)]

Some 10 years ago, I raised the crucial point of the capping of interest rates on loans to vulnerable households with the Office of Fair Trading, and my arguments were rebuked. The OFT maintained that, given the risk profile of the individuals involved, if usurious rates could not be charged, no credit would be available to those communities, and that some credit, even at usurious rates, was better than none. I was not completely convinced at the time that those arguments were valid, and I am not convinced at all in post-credit crunch Britain. I am pleased that the hon. Lady is raising the issue.

[Stella Creasy]

I thank the hon. Gentleman for his point. I will certainly come to that, as there is concern about how we might intervene in the market, but I am confident that we can and should, and that the Government should be considering it.

We are discussing, in particular, the mix of a lack of competition and a rising demand for credit, but it is better to consider the people at the heart of the issue. We can all talk about statistics, but many of us will have seen in our surgeries the people who get into such debts. There are women who get into years of debt at high rates because their next-door neighbour is a Provident home seller who tells them week after week that they need to borrow more. A constituent of mine had loans from Provident, BrightHouse and Oakam, as well as a purse full of store cards. She missed a few payments and her interest rates soared as a result. She tried to juggle all of them but did not have enough money, and ended up running up an expensive overdraft that accrued £10 a day in charges.

The costs affect not just individuals but our communities as well. A Centre for Responsible Credit survey of the Meadowell estate in 2001 found that more money was going out of the estate on payments to door-to-door lenders than the Government were putting in via regeneration budgets. Given the nature of the market and the evidence that I have put on record, will the Minister admit that many of the practices involved in high-interest, short-term money lending are exploitative and unacceptable, and that the Government should intervene to protect people vulnerable to loan sharking?

--- Later in debate ---

[Stella Creasy]

The Minister expresses concern about the nature of federal government in America, but he ignores the evidence from European states with a national system of governance that have introduced interest rate caps effectively. The best possible comparison for the UK is European states, rather than states in America and Canada, although I mentioned those cases as examples of where caps have been introduced and differential rates have been used. Frankly, the Minister should be considering such issues in his credit review, rather than them simply being raised as part of an Adjournment debate. I hope that he will rethink the credit review and expand it to consider such issues and the way in which they might apply in the home context. I mentioned such detail to show that it is possible to legislate to deal with the worst excesses of the markets and that such an approach does not increase the market for illegal loan sharks, as that is not demonstrated in the evidence from other countries.

[Andrew Bridgen]

I am extremely sympathetic to the hon. Lady’s aims and cause. However, does she agree that some of the previous Government’s policies did not help people get out of debt but, in fact, trapped them in it? In the days of easy credit, the complex working tax credit system allowed people to get into debt. Given the withdrawal of benefits, and with marginal rates of taxation of 60%, 70%, 80% and 90%, people were trapped in debt because they could never work their way out of it.

[Stella Creasy]

I would be interested if the hon. Gentleman could produce evidence for that, as opposed to making a supposition. It is easy to claim that working tax credit put people into such dependency, but let us consider what the loan sharks themselves have said about the comprehensive spending review. They have argued that it will increase the number of people coming to them because those people will not have money to help their families grow. That is where I look for evidence.

Considering the evidence on how we tackle legal loan sharking in and of itself is not enough to help these families. We need to stop the exploitation of low-income households in the credit market and legislate on the cost of borrowing. As Labour Members will understand—they know these problems well because they have had to deal with them—we also need to increase access to affordable credit. Those two issues go hand in hand. We cannot expand access to affordable credit while millions of people are trapped in relationships of credit dependency.