Consumer Credit Regulation

Debate between Stella Creasy and Andrew Smith

Tuesday 9th November 2010 Westminster Hall

[Stella Creasy (Walthamstow) (Lab/Co-op)]

I have tabled this debate for a simple reason. As a new MP, it seems to me to be the best way to get some answers from the Government about a matter that I know is very important to many of us in Westminster Hall today: how we support the poorest consumers in society.

Despite the pressure applied by Compass, the End Legal Loan Sharks campaign, the Better Banking Coalition and myself and others, as yet Ministers have not made any commitment to act on the issue of consumer credit regulation. I hope we can change that today, especially after the show of support by the number of Members here for this debate. I want to show how and why the Government should act, through regulation of consumer credit. I want also to highlight how important it is that that be undertaken in conjunction with a range of other measures to support people who get into debt, and ultimately to help break the cycle of debt that blights the lives of too many people in Britain.

I have a lot of detailed evidence on these matters that I want to put on the record and I know that a lot of other Members also want to speak out. Nevertheless, I hope that in 90 minutes we can make progress and have a constructive debate, and I am keen to hear what other people have to say on this issue.

At the heart of this debate is a concern about debt and how it defines the financial situation of millions of families in our country. During the past 30 years, households have become more reliant on credit as a means to secure homes, invest in education and skills and smooth out the fluctuations in income and expenditure that everybody experiences. Let me say at the outset that this is not a debate about the wearing of hair shirts or a musing on the nature of contemporary consumer society. The uses of credit that I have just described can be a powerful driver for economic growth. Therefore, ensuring access to credit and confidence in credit markets is vitally important, especially when public spending is so constrained.

However, a growing number of people have problems using credit, and the ease of access to credit also makes it much more likely that people can end up using the wrong kind of credit for their needs or taking on more debt than they can service, so that their financial fortunes become far too sensitive to changes in their circumstances. That creates a toxic mix of the wrong kind of banking and credit services, the ups and downs of life, and a small amount of financial comfort with which to cover the difference between income and expenditure.

A study by The Observer newspaper earlier this year found that for 26% of men and 34% of women, living beyond their means was the cause of insolvency. However, for many more people—indeed, for 50% of women—insolvency was caused by unplanned changes to their personal circumstances, such as divorce or job loss. So, for many people the problem is being caught suddenly with an additional expense—replacing a broken-down washing machine or a car—that means a cost to their monthly budget that they cannot afford, or being unable to manage a sudden loss of income through redundancy or family breakdown. All these factors then lead to over-indebtedness, default and insolvency.

Just how bad is the debt problem? The UK now has one of the highest levels of personal debt in the world. In April this year, people in Britain owed more than £1.4 billion in private debt and in recent years personal insolvency has reached record highs, with more than 130,000 individuals entering a formal insolvency process this year alone. These official statistics can tell us about formal insolvency, but it is clear that that is just the tip of an iceberg. Industry estimates are that about 500,000 people are currently in a debt management plan, and independent research by R3—the Association of Business Recovery Professionals—shows that a further 600,000 people say that they have contacted their creditors for help as a result of struggling with their debts. R3 also estimates that another 960,000 people are struggling with debts but do not seek help.

Debt has become the norm in our lives in Britain, with most of us owing money on credit cards, loans and overdrafts. However, it is when those debts become unsustainable and overbearing that trouble happens. According to R3, as a result of the recession four in 10 people are now worried about their current level of debt, with 3 million people fearing redundancy and 2 million people having taken on more debt in recent months. One in 10 people frequently struggles to make it to pay day, with money tending to run out around the twentieth day of each month.

There is every indication that these problems will only get worse, especially for those who can least afford indebtedness. The Government’s deficit reduction programme will put millions of people who are on low incomes under severe financial pressure, as they face reduced public services, a greater threat of unemployment and public sector pay freezes. Family Action has identified how a total of 21 different cuts, from changes to the working tax credit to the rise in VAT, will hit low-income families hardest. Crucially for those of us who are concerned by these issues, many of those are people for whom debts are a daily fact of life and for whom unemployment and cuts in income will be even more likely in the coming years, with banks and building societies remaining out of reach as a source of credit.

So it is welcome news that the Government have announced a review of credit and insolvency, and that they have made firm commitments to considering capping interest rates on credit and store cards. However, this debate is about what is not in the credit review, what the Government have not done and what they have failed to make firm commitments about. It is the millions of the poorest consumers, who end up using the so-called home credit, hire purchase and pay day loan sector, whom I want to talk about today.

The Better Banking Coalition estimates that some 6 million people are in that position. Many of them are people for whom the illegal loan sharking industry may once have been an option, and the progress made by the previous Government in addressing loan sharking must be recorded. The work of the Department for Business, Innovation and Skills itself shows that about 300,000 individuals, representing about 3% of the poorest families in Britain, used to borrow about £120 million a year from illegal moneylenders, on which they ended up paying back £450 million. The work of the taskforce on illegal moneylending should be commended, and I hope it will be supported. Indeed, its work should be protected within the budget of BIS, especially as it has been judged as delivering value for money.

[Mr Andrew Smith (Oxford East) (Lab)]

I congratulate my hon. Friend on securing this very important debate and on campaigning so vigorously in this vital area. Does she agree with me that in combating the loan sharks, the work of local trading standards departments has been absolutely critical? Furthermore, does she agree that it would be an absolute tragedy if, as a result of the Lib Dem-Tory cuts that will affect local government, trading standards officers were held back from doing that vital work?

[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.