Consumer Credit and Debt Management

Stephen Lloyd Excerpts

Thursday 3rd February 2011 Commons Chamber

[Stephen Lloyd (Eastbourne) (LD)]

I echo my colleagues in paying tribute to the hon. Member for Walthamstow (Stella Creasy) for pushing this issue and bringing the motion to the House for us to debate. It is incredibly important.

When I first heard about the astronomical APRs charged by the payday loan firm, I was extremely concerned. When I discovered that the precise APRs charged were way beyond what I had feared or even imagined possible, ranging up to 2,000% in some cases, I was absolutely staggered. However, having carried out research over the past few months, I have discovered that the subject is horrendously complicated. Others have talked about that complexity, and I shall do so as well.

We all know that there is one primary factor that maintains the status quo of iniquitous social exclusion for those at the very bottom of the income ladder—one primary factor that stops people from advancing socially and economically. That factor is financial exclusion, as the hon. Member for Walthamstow so brilliantly identified. Many people in disadvantaged areas have no formal savings, access to credit or even a bank account. In 2011, in one of the richest countries on Earth, that is an absolute travesty.

I wrote to a number of the companies that provide payday loans and met their representatives; I also spoke with a number of constituents who have been on the receiving end of those companies’ wares. I inquired robustly about their business model. I checked it, went through the process and had my team research it. Frankly, I was surprised by what I discovered: there are not necessarily large groups of our poorest citizens paying through the nose for higher interest loans, and the business model does not necessarily target people who habitually default before their loans are compounded. In the main, I found that lenders—the main suppliers—went to great efforts to ensure that their customers were able to pay back loans by building up trusting relationships with them. That was not the reality that I had expected, so it was a learning experience for me. It is important that debates in this House are informed by facts, and the fact that I have taken on board is that some of those firms play a vital role in certain communities.

[Yvonne Fovargue (Makerfield) (Lab)]

Could the hon. Gentleman explain to a constituent of mine who has six loans from payday loan companies, each one borrowed to pay off the other, how that could take place if the companies are targeting people to ensure that they have the ability to pay?

[Stephen Lloyd]

The hon. Lady raises a good point, and an important one. There will be some anomalies, but when I did the research I found that the majority of people who use payday loans pay them back regularly, otherwise the business model would collapse. I hope to be able to explain that as I go through my remarks.

The companies offer credit to those who are financially excluded by larger and seemingly more reputable financial institutions, such as those banks that are now owned by the taxpayer. Although some of those loan companies have been associated with inescapable cycles of debt, as my hon. Friend the Member for Chippenham (Duncan Hames) mentioned earlier, and with poverty, as noted by pressure groups such the excellent End Legal Loan Sharking, I now recognise that the whole issue is simply not as black and white as it has been painted.

[Duncan Hames]

Does my hon. Friend accept that the huge growth we have seen in the sector recently is an indication of how profitable this business is for those organisations?

[Stephen Lloyd]

My hon. Friend is absolutely right. The figures I have show that the sector is worth in excess of £1 billion per annum, and heading towards £1.5 billion, so it is clearly very profitable. That is the point I want to make, if Members will bear with me.

The blunt reality is that many disadvantaged people simply do not have access to high street banks, which we all take for granted, and consequently they are forced to look elsewhere. They have no choice, and there is the rub. It is not simply people with poor credit ratings who seek the services of firms offering payday loans. A reality check is needed, because in modern society across the UK there is a real and present demand for quick, short-term loans to bridge the gaps between when individuals need money and when they are paid.

Those people need the money for quite normal transactions, such as paying for a grocery bill or for an MOT, and they need it for the short term, just a couple of days before they get their payday cheque. The money is for mundane expenses that everyone has experienced, but they can be very different for people who need payday loans, because in that area a failure to find the money can quickly lead to a crisis that will take them from normality to abnormality in the space of 24 hours. That is a problem, because if well-meaning pressure groups are successful and able to see off established payday loan companies or force some of them to withdraw from the market, where will people turn?

The hon. Member for Walthamstow made the point in her Westminster Hall debate that just six companies are responsible for 90% of business in that market. Although I do not necessarily agree that that constitutes an uncompetitive market—six major supermarkets in this country control 90% of their whole sector—I feel that regulating the market further might make it even less competitive. I think that greater monitoring of payday loan providers by the Office of Fair Trading to ensure that they are acting in a moral and responsible way and in the best interests of the consumer would be the right way forward. Financial exclusion is a horrible and vicious cycle, and poorer families can spend an additional £1,000 per year on essentials.

That brings me to our high street banks, which are an integral part of this country’s economy and vital to our recovery. All the banks in this country, however, are still in existence thanks to the massive 2008 bail-out at huge cost to the taxpayer—all of them. Yet, those banks continue to ignore a great number of taxpayers to whom they owe so much. In the banks’ defence, they claim that such customers are high-risk and unprofitable, but banks are unable to understand their needs and inaccurately assess the risks they pose.

The sector is worth £1.2 billion and clearly profitable, as my hon. Friend the Member for Chippenham said, but it ignores those 6 million people, so they are left to the payday loan companies, none of which I should want to be great friends with. My point is, however, that because the banks do not step in, the payday loan companies have to, and without them the situation might be catastrophic for the many millions of people who need them so desperately.