Consumer Credit and Debt Management

Steve Rotheram Excerpts

Thursday 3rd February 2011 Commons Chamber

[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.