High-cost Credit

William Bain Excerpts

Thursday 5th September 2013 Commons Chamber

[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to be called to speak in the debate. I congratulate my hon. Friend the Member for Islwyn (Chris Evans) on securing it, and the Backbench Business Committee on scheduling it to take place in the Chamber today.

I was particularly struck by the honest and frank contribution from the hon. Member for Chatham and Aylesford (Tracey Crouch). I was also pleased to be reminded by my hon. Friends the Members for Blaenau Gwent (Nick Smith) and for Hackney South and Shoreditch (Meg Hillier) of the context in which our constituents face difficulties with high-cost credit. There was a danger that we might forget that these problems do not occur in a vacuum. The reasons for people being forced into using high-cost credit include the decline in wages, which has accelerated over the past three years. We have seen a £1,500 real-terms reduction in the mean level of wages over that period and, as we discovered yesterday, the median wage in Britain is now £3,300 less than it was in 2006-07.

The presence of the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for East Dunbartonshire (Jo Swinson) on the Treasury Bench prompts me to talk about the context in which the debate is taking place. She and I are parliamentary neighbours, and there is a road—Colston road—that divides her constituency from mine. On one side of that road, in my constituency, is the ward with the highest level of child poverty in Scotland, at 51%. On the other side of the road, in the hon. Lady’s constituency, the level of child poverty is only 9%. That is a yawning gap. I have constituents visiting my office who are in dire need of food because they do not have enough money to get through the day. That explains the surge in the use of high-cost payday lenders in my constituency and those of many other hon. Members across the country.

We have heard that the average APR for payday lender loans is about 1,737%, but some of our constituents are facing an APR of nearly 5,000% on even relatively small loans. In many parts of Glasgow, this demand for high-cost credit is, in my experience, clearly linked to financial hardship and the lack of available alternatives for finance. We saw previously that crisis loans proved to be a stop-gap, but even in the run-up to the period during which the arrangements were devolved by the DWP to local councils—and, in Scotland, to the Scottish Parliament—we saw the significant pressures caused by cuts in crisis-loan funding. Between 2011 and 2012, crisis-loan funding fell by almost £90 million, which led to an explosion in demand for payday lending, particularly in Scotland.

In recent months, the Resolution Foundation has evidenced a number of key facts that show the extent of financial exclusion across our country. About 4% of UK households have no bank account at all; one in 10 does not have a current account; and it has been estimated that people on very low incomes pay a poverty premium of around £1,000 a year just to access basic financial services. Some 7.8 million in our country are unable to access mainstream credit, while 60% of adults among the poorest fifth of the population would like to save just £10 a month, but are unable to do so. Growing numbers of people are only a broken washing machine or a broken fridge away from stepping over a very steep financial cliff indeed, while 3 million households in social housing do not have any contents insurance despite the fact that they are twice as likely to be burgled as people who live in privately owned properties.

We have heard about the scale of the payday loans market over the last couple of years, and the average loan is between £265 and £270 and borrowed over 30 days, but we have also seen an explosion in the market in recent years, with between 7.4 million and 8.2 million new loans in 2011-12, up from an estimated £900 million-worth of new loans in 2008-09.

The debate has been useful in focusing the eyes of the Government—and, I hope, those of the Competition Commission, too, in its inquiry—on the need to take concrete action on misleading advertising, the irresponsible roll-over of loans, about which my hon. Friend the Member for Walthamstow (Stella Creasy) spoke so lucidly, the targeting of vulnerable customers and the unfair treatment of customers who are in arrears and default. It is the charges for these defaults on which I believe urgent action is particularly needed by the Competition Commission and, perhaps, by the Financial Conduct Authority next April when it takes over regulation of this sector. The Bristol study, which reported to the Minister’s Department, said that having tighter lending practices and a restriction on default charges could result in short-term lenders exercising less forbearance than they currently do on lenders who are very much in need.

I am pleased that we have heard such a focus on credit unions in this debate. I recently held a summit of small credit unions in my constituency, and they came up with practical suggestions about how the Government could help. They told me that, in their view, the Government’s fund through the DWP does not do enough to support small, community-based credit unions. They consider that the lion’s share of the funding had gone to the larger credit unions and said that the smaller credit unions were often run exclusively by volunteers, and they lack IT expertise and permanent staff. Credit unions from Haghill, Ruchill, and Greater Milton and Possilpark in my constituency have told me about the huge impact they could have and the huge extension in services they would be able to provide to constituents if only they had the possibility of having a staff member on board.

[Meg Hillier]

Does my hon. Friend not think that that is one of the problems and it is why people go to those other companies? With credit unions, on a customer service level, they often get what seems to be a second-rate service.

[Mr Bain]

My hon. Friend is absolutely right in the sense that community-based credit unions often have much more personal knowledge of the people who use them and who save in them, and it can often lead to much more responsible lending practices, borrowing and issuing of loans.

My local credit unions also said that it was very important that the savings-loans link was maintained because it encouraged a sustainable business model and lending. They welcomed the fact that finance for a financial education worker was available, which they said had been pulled in the past sometimes after just six months, and argued that the Government needed to be much more consistent in their support. They raised an important final point—that credit unions are often seen as low priority in comparison with banks when customers become bankrupt. They asked the Government to think about reviewing the law in this area to bring them equality of treatment, which would very much help the credit unions’ provision of services.

The hon. Member for Banbury (Sir Tony Baldry) mentioned the influence of the credit unions in Ireland, which is also true of Australia, Canada and the northern states of the US. We need to expand the services available and end the stigma that has led credit unions to be seen as of second order, which they are certainly not.