Viscount Younger of Leckie
Main Page: Viscount Younger of Leckie (Conservative - Excepted Hereditary)Payday Loans
Viscount Younger of Leckie Excerpts
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
My Lords, I welcome the opportunity to set out the Government’s position on payday lending and to explain how we are tackling some well recognised problems and promoting alternatives for consumers. I am grateful to the noble Lord, Lord Kennedy, for tabling this debate, and indeed for his work in this whole area, and to noble Lords who have raised important points today.
In line with the coalition principles of freedom, fairness and responsibility, the Government believe that people should be free to borrow. However, we also want more people to take responsible decisions about their finances. The Government recognise that not all people who use high-cost credit can get credit elsewhere. The Bristol University report on high-cost credit found that just over three-quarters of payday customers had no access to alternative credit. We therefore agree that finding different solutions to short-term, high-cost finance is important.
Payday loans are a relatively new phenomenon. They should be used only for an emergency short-term fix and never for longer-term debt problems. For some, payday loans can be a way of managing a short-term cash flow problem—for example, a sole trader who needs to buy supplies for the next job before being paid for a previous job, or someone who needs to pay their MoT simply to get their car back on the road so that they can commute to work or perhaps for the painting and decorating fraternity in the most reverend Primate’s diocese.
The spiralling cost of credit is not the main crux of the problem. Problems arise when people take out this kind of short-term, high-cost loan when it is not suitable for them and they cannot afford to repay. As the strength of the evidence shows, part of the issue is, first, that lenders are not always conducting adequate assessments of potential borrowers’ ability to afford the loan. This was a key finding of the OFT’s payday compliance review. Secondly, as the Citizens Advice payday consumer survey found, there is poor compliance with the voluntary codes implemented by lenders last November and 82% of loans did not meet the commitment to,
“treat customers sympathetically if in financial difficulty”.
Thirdly, the Bristol report found that 60% or more of payday customers felt that it was too easy to borrow in this way and that more than four in 10 customers showed signs of financial distress. Here I echo the opening comments of the noble Lord, Lord Kennedy, that these reports show that the payday market is not functioning in the interests of consumers. The Government are therefore deeply concerned about the scale of consumer detriment identified, the speed and ease with which loans can be accessed, the frequency with which loans are rolled over, the grave financial and social problems arising from defaults, and the calling in of such repayments. I hope this goes some way to reassuring the noble Lord, Lord Mitchell, that the Government are taking these matters extremely seriously.
Since the last significant debate on this issue in this House, we have begun to tackle these problems; my noble friend Lady Wilcox touched on this. In March, the Government and regulators announced a joint action plan to tackle the key problems, taking tough enforcement action against unscrupulous lenders and ensuring a strong robust regulatory framework for the future. Also since March, the OFT has begun clamping down on irresponsible lending practices across the payday industry as an enforcement priority. First, they have given no less 50 firms 12 weeks each to change their business practices or risk legal requirements or loss of their licence. Two firms have already surrendered their licences. Secondly, the OFT has revoked the licences of three payday lending firms and has three further investigations open. Thirdly, the OFT has consulted on referring the sector to the Competition Commission for market investigation and expect to announce a decision soon.
A further point is that the new regulator from next April—the Financial Conduct Authority—will have tough new powers to tackle early signs of consumer detriment and is looking at additional regulation on payday lending. The FCA will have powers to make binding rules, such as banning products or specific product features. It will have tougher sanctions, including imposing unlimited fines on firms and ensuring that customers can recover their loss. We will also have a more stringent bar for market entry.
The essence of this debate is the alternatives to payday lending. The Government have committed to further investment of up to £38 million to March 2015 to support and expand the credit union sector. Credit unions are community focused, and to this extent touch on the big society ethos. They are also non-profit making. Members share a common bond and often save before borrowing. The investment will enable them to provide financial services, including affordable credit, for up to 1 million additional consumers on lower incomes. Our ambition is to save low-income consumers up to £1 billion in total in loan interest repayments by March 2019. I am most grateful to the most reverend Primate for his generous support for community-based solutions, including the use of volunteers both in the church and outside.
As my noble friend Lady Wilcox so eloquently put it, an underlying issue is that we still have a culture of people wanting and expecting to be able to buy items on credit when they cannot afford them. Better financial education, raising awareness and signposting to sources of advice are key to helping people understand the alternatives to payday loans. That is why we set up the Money Advice Service to promote financial capability and to provide the tools that customers need to make informed decisions about their money. In 2013-14, the MAS is retaining its spending on debt advice provision at £27 million to maintain its target of helping around 150,000 people. In addition, MAS research found that industry invests around £25 million annually in 36 programmes, most targeted at the under-18s. The MAS is also actively engaged with the Department for Education in promoting financial education—a most important point.
The introduction of a single monthly payment of universal credit should also support the Government’s aim of encouraging people to live within their means and to take personal financial responsibility. We are working closely with the MAS and consumer advice groups to ensure that universal credit claimants are able to access budgeting support services.
Wider government work to reform the consumer landscape and to strengthen consumer rights and protections is also important. The consumer reforms that we have been bringing forward since 2010 will help markets work better, improve consumer protection and give greater clarity about where consumers should turn for help and advice.
A large number of questions were raised by noble Lords, and I will attempt to answer them all. The noble Lord, Lord Kennedy, raised an important point about concerns about payday loan advertising. The Government are also particularly concerned about the advertising of payday loans. People should not be lured into taking out a payday loan when it is not right for them. We have also commissioned additional research to look at the effect of payday lending advertisements on consumers’ borrowing decisions. This will report by early autumn. From April 2014, the FCA’s strong new powers will enable it to restrict the form and content of advertising. My department, BIS, is commissioning research to inform the FCA’s thinking on that.
The noble Lord, Lord Kennedy, asked why banks cannot provide low-limit loans, backed by government support. I agree and want to see banks provide alternatives to payday loans—a point that was made by other noble Lords. However, banks have said that there is no profit in short-term loans—a point that we might all be aware of. The risk premium is high and the costs associated with lending to high-risk customers and giving them small-value loans are such that it is not profitable, so the banks say. I agree with the noble Lord, Lord Hollick, that banks shy away from customers who have taken out payday loans. I had that very conversation with a senior retail executive a couple of days ago as part of my research.
The noble Lord, Lord Kennedy, asked what the Government are doing to address the lack of ATMs in localities. Again, that is a very fair point and the Government share the noble Lord’s concerns about restricted access to ATMs. Although such decisions are operational ones for banks, so the Government do not seek to intervene, we will continue to monitor the situation closely.
My noble friend Lady Kramer raised some very interesting points, focused particularly on the opportunity for us in this country to introduce community development finance institutions, a model that I understand comes from the United States. The co-operatives consolidation Bill was announced by the Prime Minister in January 2012. Work on drafting the legislation has begun and it will be introduced in December. Although it will not contain any new legislation, it will put all legislation relating to industrial and provident societies, or co-operatives, in one place, making it easier for an IPS to be set up. We are also looking at introducing a package of measures to strengthen the co-operative sector, including increasing the withdrawable share capital limit and introducing insolvency procedures for co-operatives and credit unions. This was announced in the Budget 2013.
My noble friend Lady Wilcox, in a speech largely devoted to the issue, expressed concern at the prospect of a cap on the total cost of credit. She said that it would push the poorest and most vulnerable into having no access to credit at all. I thank my noble friend for giving an interesting historical perspective on the credit market and agree with her that a cap is not the solution for the payday market at this time. The Bristol report indicated a range of unintended consequences and risks which would harm customers rather than help them, such as a reduction of access to credit, lending charges being added outside the cap and, generally, less sympathy for those in financial difficulty. However, the Government have ensured that the FCA will have the power to cap in the future, if it is needed to protect consumers at that point. The FCA will start analysis on whether to use the new power from April 2014.
My noble friend Lady Kramer asked about the government commitment to disclose banking data on a postcode-by-postcode basis. It looks as if this will be delivered on a voluntary basis. The noble Baroness referred to the voluntary agreement that the Treasury is seeking to negotiate with lenders on disclosure of postcode-level data. I, too, am confident that such a deal will be struck and I commend the noble Baroness on her sterling work in this particular area.
The most reverend Primate the Archbishop of Canterbury raised the issue of the need to cut out “legal usury” from our high streets in a general comment at the beginning of his speech. It is a most interesting comment but I do not believe that it is the Government’s role to stop or ban payday loans. As I mentioned earlier, such loans serve a purpose. They can provide emergency cash for those who can afford to repay it. In line with coalition values, we want people to remain free to make their own choices, as my noble friend Lady Wilcox said, about whether and how to borrow, if it is right for them. However, in contrast, I would say that there is a duty on government to control, regulate and curb irresponsible lending, to empower consumers to make the right choices and to protect vulnerable consumers where that is needed.
The noble Lord, Lord Hollick, raised points about including international investors and about payday lenders making profits off the most vulnerable consumers. These were interesting points. It is important to remember that payday lending is a relatively new phenomenon, as I said earlier. The market has doubled in size in just four years but is still relatively small. To put it into perspective, it is worth between £2 billion and £2.2 billion, which is less than 5% of the total credit market.
However, we must bear in mind that those affected are the most vulnerable, as I said earlier. This has meant that there is very little evidence of the problems and causes, but we now have a better evidence base, including the Bristol report and the OFT compliance report. Consumer groups have also been adding to the evidence base. That is why we announced strong action plans in March to tackle the serious problems that were highlighted very broadly in today’s debate.
My noble friend Lady Kramer mentioned the lack of alternatives. That is not a reason not to cap. It just means that we also have to work on this as well—a point she spoke passionately about. I understand the attractions on the face of it, but, as I mentioned earlier and I stress again, we do not believe a cap is the solution at the moment. The Bristol report indicated a range of unintended consequences and risks, harming the consumers we want to help.
The noble Lord, Lord Kennedy, said the figure of £35 million—I say it is £38 million—funding for credit union expansion was a “drop in the ocean”. I welcome the noble Lord’s support for recent government initiatives such as the legislative reform order, increasing the interest cap and the credit union expansion project. The project aims to help 1 million people on low incomes, to enable credit unions to reduce costs and to reduce the need for further government funding by making them more sustainable.
The noble Lord, Lord Kennedy, and the most reverend Primate asked whether the Government would host a summit on payday lending. The strong action plan announced in March by the Government and regulators, which we are taking forward, also includes discussions to see whether we can work in concert with industry and consumer groups to look towards a summit.
I have run out of time. I regret that I do not have time to answer the few further questions that were raised, but I will most certainly write to all noble Lords. In conclusion, our assessment of the alternatives to payday lending is that it is about not just improving access to more affordable credit but about making a fundamental change in our culture, so that consumers can take personal financial responsibility, borrow responsibly and live within their means. It is also about ensuring adequate support for the vulnerable who need it. We believe that the Government’s initiatives will help address these problems.