High-cost Credit

Yvonne Fovargue Excerpts

Thursday 5th September 2013 Commons Chamber

[Yvonne Fovargue (Makerfield) (Lab)]

It is indisputable that everybody needs access to credit, but it has always seemed perverse to me that the people who can least afford it pay the most and therefore need the most protection, because they are the most likely to be vulnerable to exaggerated claims and to be in need of a very quick solution to the immediate need for cash.

Payday loans are not always the illogical choice, despite the rate of interest. If someone’s washing machine breaks with two weeks to go until their payday and they know they will have an overtime payment in their next pay packet, it makes sense for them to shop around and buy another washer for £200 with a short-term loan—at a total cost of £267—than to go to BrightHouse, pay £600 for the same product, have a mandatory five-year guarantee for £400 and pay it back over five years at about 30% interest, which would result in a total cost of about £1,500. But—and it is a big but—although such loans provide a service, they cause detriment to tens of thousands of people each year and their providers have been, and still are, guilty of bad practices that cause much concern.

The Office of Fair Trading report highlighted bad practice by the vast majority of the industry and warned a number of them that either they clean up their act voluntarily or action would be taken, and they have been referred to the Competition Commission. I am pleased that some have had their licences revoked, but I hope that stricter enforcement will continue until the Financial Conduct Authority takes over in 2014. That transfer of responsibility gives us a golden opportunity to clean up the market and protect vulnerable consumers, but what are the payday lenders suggesting? A voluntary code of conduct devised by the industry.

There are two things wrong with that. First, it is voluntary. It is not even a requirement to be a member of a trade body. If consumers do not even research the cost of paying back a loan, they certainly do not research whether their lender is a member of a trade body—that is if they are aware of who the lender is, a point I will return to later. Secondly, the code has been devised by the industry and I am not totally convinced that it will put protection before profit. Statutory regulation and a constant review of the market are absolutely necessary.

I will outline the main issues that I think are causing problems. The market is ever changing and new practices emerge almost daily, so we need a flexible regulator. The first and most important issue—it is probably more important than headline-grabbing high interest rates—is the continuous payment authority. People who do not know what this is are not alone, because the banks, let alone the consumers, do not know, either. What it means is that the loan company can access someone’s bank account at any time, for any amount of money, as many times as it wishes. It is not just a blank cheque; it is a continuing, unending number of blank cheques. A constituent of mine had her account debited four times just before Christmas. Her account was cleared completely, leaving her with no money for Christmas, and she only became aware of this when she tried to pay for her Christmas food shopping and could not. It is clear in all the guidance that the customer should be able to cancel the CPA with either the lender or the bank, but Citizens Advice has numerous examples of the banks telling people that it cannot be cancelled by the customer because it is different from a standing order, and of the lender preventing people from cancelling.

Another practice I have recently become aware of—I am looking into this at the moment, because I heard about it only two days ago—is that of companies asking for a borrower’s online bank account details, including their PIN number and password, which makes the matter even more problematic. The lender can see when the individual is paid and when the rent and bills go out and take advantage of the gap, plunging the borrower into even more serious debt.

The other major problem with the continuous payment authority is that it reduces the incentive to perform a thorough and proper affordability check. After all, if a lender has unlimited access to someone’s bank account, why bother too much about checking whether they can afford it? The lender can dip into their bank account at any time, for any amount. Continuous payment authority has been described to me as the one thing that the payday lenders really want to keep. On that basis—as I used to say when disciplining my daughter—it is probably the one thing they should not have.

There is an issue with the industry writing its own code. Wonga has given 10 commitments and I have evidence—I do not have time to give it—that demonstrates how its code needs to be thoroughly examined. Even given the three extensions and the 60-day interest at 1% of the principal under commitments 6 and 7 of the code, the total repayment amount for a loan of £200 would be £588. That is a cause for concern.

Too many people delay the evil day when they have to sit down and face the difficult fact that they cannot afford their outgoings. As a result, they use payday lenders, because it is hard to admit to family or anyone that they cannot afford to keep going.

[Stella Creasy]

Is my hon. Friend, like me, worried about the evidence that a quarter of payday loans are taken out to pay off other forms of credit—not just other payday loans, but credit cards and other bills? People get caught in a trap and that becomes the only way for them to try to manage the situation.

[Yvonne Fovargue]

I agree with my hon. Friend. Citizens Advice and StepChange say that in the last quarter the number of people with six or seven payday loans has gone up tenfold.

This situation cannot continue. There must be an obligation on payday lenders to signpost customers to free sources of debt advice if they fail the affordability check, which should be thorough, or miss a loan repayment. Of those who responded to the Citizens Advice survey who had repayment problems, only 18% felt that the lender dealt with them sympathetically and only 8% were told that they could get free debt advice.

This is an industry that contributes to the debt problems of individuals, as my hon. Friend said. It is welcome that it pays a levy and I do not disagree with the very interesting suggestion that they should pay more. It is vital that that additional contribution represents an increase in the funding of the Money Advice Service to assist the rising number of people seeking help with their debts.

It is only right that the industry pays the levy, which is a drop in the ocean compared with the amount it spends on advertising. My two-year-old grandson can recognise the Wonga grannies; I have taught him to boo at them every time they appear—and they appear so often between children’s programmes. This blatantly targets young families, who can easily be vulnerable to sudden income pressures. As is the case with gambling, there should be a sector-specific code that limits such broadcasts until after 9pm, and companies should be expressly prohibited from advertising during any programme likely to appeal to anyone under the age of 18.

I mentioned new products and I want to raise a note of caution about a company that my hon. Friend the Member for Islwyn (Chris Evans) has mentioned, namely Amigo Loans. There are no credit checks for the borrower, but the friend might have to repay all the loan and end up with a damaged credit record. I wonder how many people remain friends after that happens. New products are emerging all the time—often they are old products with a new spin—so careful monitoring and transparency are key.

One of my constituents thought that they had borrowed money from Cash Lady, when that is actually a broker. We need to prevent more people from finding themselves in that situation. When my constituent wanted to contact the lender, they had great difficulty in finding out who it actually was.

The trade and exchange of consumer details have to be curbed. It cannot be right that when a friend of mine applied for a loan as a test, without completing the transaction, they had 24 unsolicited texts offering high-cost loans within the next 48 hours.

The cap on the total cost of credit has been ably and comprehensively covered by my hon. Friend the Member for Walthamstow (Stella Creasy). I support the decision of my hon. Friend the Member for Sheffield Central (Paul Blomfield) to choose this topic for his private Member’s Bill. The interest that his work is generating is helping to shine a light on the industry. Hopefully, that will assist the FCA in devising and enforcing a proportionate but firm regime to protect the consumer.

There are vast profits in this industry, as we have seen this week. Let us have commensurate protection.