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Doorstep Lending

Volume 454: debated on Tuesday 5 December 2006

Motion made, and Question proposed, That this House do now adjourn.—[Steve McCabe.]

I am pleased to have secured the debate. The subject is straightforward. As the title on the Order Paper implies, it is about doorstep lending and the interest rates that follow from that.

Doorstep lending lies far away from the mainstream of conventional lending as most people know it—the bank loans, the credit card debts and the mortgages that we hear about in the press. It often involves sums that would be considered trifles in that world. A typical doorstep lending sum is about £350, the sort of amount that someone with a flexible card or a good credit rating will navigate as a matter of course, but of course the people who avail themselves of such sums from doorstep lenders do not have access to those financial devices by and large. Indeed, many have no access to any financial devices. They may have no bank accounts, no credit rating or no savings. Most will not be home owners, and they will probably be among the estimated 2 million or so people in the United Kingdom with no access to mainstream financial services.

Doorstep lending fills that gap, at a cost. It may involve small loans, but it is not small business. It is estimated to have an annual turnover of about£1.8 billion, and one doorstep lending company, Provident Financial, has about 60 per cent. of the market. Companies such as Provident Financial will say that the costs of servicing door-to-door collections, usually on a weekly basis, and the credit risks involved in such lending mean that they will charge a higher annual percentage rate than the more familiar credit card companies and high street banks, but the question that we ought to ask immediately is “How much higher is reasonable?”

Provident Financial is by no means the highest-rate lender, but its average APR—which is also roughly the industry average—is 177 per cent., and some APRs are as high as 800 per cent. That means that those least able to shop around for their financial services and least able to carry the consequences of debt repayments are charged APRs that are not just higher than high street credit rates, but astronomically higher. It is estimated that, even when collection and risk factors are taken into account, the industry overall overcharges customers by about £75 million a year, or about £7 on each £100 lent.

Does my hon. Friend agree that the lie is given to the arguments advanced by the doorstep lending companies by the role of credit unions, which are able to lend to families with poor saving records at ordinary rates, often lower than those found in the high street?

My hon. Friend is right. I shall say a little about credit unions, which do indeed have a very good record for lending at affordable rates.

The consequence of doorstep lending as I have described it—and, of course, I exclude credit unions from that—is people getting deeper and deeper into debt, often as a result of a very modest foray into credit, and rapidly reaching a point at which repayment seems out of the question. I can cite two cases of people in my part of the world who have experienced precisely that.

Mrs. D is a tenant of a housing association based in Hampshire, which—as a number of housing associations are beginning to do—actively helped her to manage her debts when they were uncovered. Mrs. D. is a single mother with four children. She receives income support, tax credit and child benefit, but she took out an initial loan of £500 from a doorstep lending company to buy household appliances and things for her children. The first loan cost her £2,500 to pay back, and the next loan that she took out—also of £500—cost £3,000 to pay back. When her smallest child was born, she went to another company for a third loan, which cost £4,500 to repay. The loan companies collecting her repayments on the doorstep pressed her to pay that money instead of her rent, and she rapidly went into substantial arrears. She could see no way out of her spiralling debt and became depressed and suicidal. She was eventually rescued by the intervention of her landlord, the housing association, which helped her with benefits and arranged for her to pay the money back at a reduced rate; but she will be paying it back for a number of years.

Three years ago a disabled lady called Sheila, also in my part of the world, opened the door to a friendly looking gentleman who offered her a loan of a few hundred pounds. She took out a £200 loan, but the amount owed soon expanded to more than £5,000. She then found herself subject to threats of physical violence, and even threats to destroy her wheelchair. She was helped by a community organisation, the South Coast Money Line, which lent her enough money to repay her debt at a manageable rate of interest. She has now repaid the whole amount.

Those examples are not isolated, and do not exaggerate the depths of misery that unregulated interest rates on small loans collected on doorsteps can bring about, especially as their destinations are often people with no resources with which to extricate themselves from the trap in which they find themselves. They certainly have no access to the consumer credit choices that are available to most of the population.

That observation is why I give two cheers—but not yet three—for the various measures that have been undertaken, or are being undertaken, in this field. The Consumer Credit Act 2006 introduces an unfair credit test that makes it easier for people to take unfair lenders to court, but many people in the position I have described would no sooner take lenders to court than they would fly to Mars. The Competition Commission has just published proposals that will go some way towards ensuring transparency in doorstep lending, with comparative rates posted on the internet and lenders required to spell out the annual costs of loans, but many doorstep borrowers will not have access to the internet and will not have the credit rating or the mobility to shop around for loans, so the man on the doorstep will still have a monopoly in respect of them.

The Government have allocated £35 million from the financial inclusion fund to assist in the expansion and administration of credit unions and community development financial institutions.

I come now to the important points made by my hon. Friend the Member for Bridgend (Mrs. Moon). I consider the development of credit unions and CDFIs to be very important. Credit unions are a quietly expanding success in the field of small loans and they have twice as many members as they had in 2003. However, they suffer from a lack of ability to finance the funds that they will advance for loans, and in most instances they require people to be regular savers with the union before small loans will be advanced.

Perhaps my hon. Friend will be interested to know that a housing association in my constituency has loaned £15,000 to my credit union so that, thanks to the Farepak debacle, it can allow people who have not got a credit history to take out loans that will get them through Christmas and take them out of the reach of loan sharks. When that £15,000 is repaid it is to remain within the credit union, perhaps to help people get out of rent arrears debts and to fund future financial advice and guidance for families on low incomes in my constituency.

My hon. Friend gives us an example of commendable action by a housing association. It is important to address overcoming the problem of credit unions having the money to loan to people even if they have not previously been savers with the credit unions. In terms of the organisation of credit unions, it is generally true that there must be a community of both haves and have-nots to fund them: those who are investing because they want them to work and those who are saving because they want to avail themselves of a loan at some stage.

When they work, they make an enormous difference. A typical loan of £250 from a credit union over 26 weeks would be repayable at £10.18 per week, which is £135 cheaper than a typical, but not top-end, doorstep lending company. So I hope that the £35 million will go some way towards enabling credit unions to play a far wider role in terms of small loans, and particularly in advancing loans without a saving requirement first. I know that the Commission on Unclaimed Assets is looking into the possible use of unclaimed assets in the banking system partly to assist with that kind of funding. It is important that the funds are there for credit unions to lend from, and this could be an important route to achieving that.

I would like to see, as is the case in a number of other countries, a basic bank entitlement introduced to the UK banking system, just as there is a basic service obligation on utilities—a basic account not for borrowing, but so that money can be administered by people with sparse means without recourse to the cheque advances, the pawnshop or the doorstep lender.

If this raft of measures comes in—in the case of the Competition Commission’s proposals, that will not happen for another two years—the landscape will be brighter for people needing small loans in the way I have described. So it may well be the case that many of the problems I have described will eventually begin to be overcome, but why not tackle the issue head-on and regulate the amount of interest that may be charged on the doorstep in the first place? Taken in conjunction with the good and important measures that I have described, we would certainly have the change of terrain that we need, and at an early stage.

I am not the first person to make this suggestion, either in this Chamber or elsewhere. It is, for instance, a central suggestion of the National Housing Federation, which is undertaking a great amount of work in this field, and of the “debt on our doorstep” campaign. The Government have to date not warmed to the idea that interest rates should be regulated. The most recent Competition Commission report did not endorse the idea. It is argued with some force that regulation might make things worse for borrowers by driving the legitimate and reputable doorstep lenders out of business and leaving the market to illegal and criminal usurers.

It is reasonable to seek to ensure that doorstep lending companies can make a living and can take properly into account the overheads with which they work, but there is compelling evidence that the present lending arrangements go well beyond that requirement. The priority, therefore, should be to look at ways in which lending rate regulation can work with the grain of good lending companies and not against them, rather than throwing the baby of indebtedness out with the bathwater of financial regulation.

A fruitful way of approaching this issue that I certainly endorse, as put forward by the National Housing Federation, is to look at capping in terms of the total credit charge of the loan, rather than the annual percentage rate for the loan, as we more normally do. As most loans are for short periods—less than 35 weeks—the issue for the borrower is knowing what the overall sum borrowed is, including all repayments. A limit on the total credit charge for short-term loans of, say, 44 per cent. of the principal sum loaned—and of perhaps 69 per cent. of the principal sum loaned for longer-term loans—would ensure that reputable companies could stay in business and keep repayments to a higher but manageable amount. It would also establish a transparent context for the loan, and information on alternatives could be provided.

The proposal would allow reputable companies to stay in business because, calculated in that way, all of Provident Financial’s business would be unaffected and it would be able to manage its loan structure within these limits. It is companies closer to the limits of legality, which charge the astronomical rates that I have mentioned, that would feel the heat of the change—and frankly, about time, too.

I hope that my right hon. Friend the Minister and the Government therefore feel able to look at such a proposal in a different light than hitherto—not as a cap that prevents lending or drives people underground, but as a cap that provides, as in a number of other countries with such an arrangement, an honourable place for fair lending on the doorstep, and no place for those who effectively suck the life blood out of the victims to whom they lend via their own front doorstep. That is, after all, the direction of travel of the very welcome reforms heralded by the Consumer Credit Act 2006, the funding for credit unions and the Competition Commission’s proposals. A cap on the total charge for credit would be the star on the Christmas tree of a better way forward.

What I want—I am sure that this aim is shared by all Members—is successfully to replace what almost amounts to mediaeval usury with a modern and fair approach to lending. People need to borrow, and those in the positions that I have described tonight willoften need to do so in gravely disadvantageous circumstances. We should seek to ensure that fair lending on the doorstep helps to solve the problems they have borrowed in order to address, rather than adding, sometimes irretrievably, to them.

First, in the traditional but a sincere way, I congratulate my hon. Friend the Member for Southampton, Test(Dr. Whitehead) on securing this topical and timely debate. I also congratulate my hon. Friend the Member for Bridgend (Mrs. Moon) on her intervention supporting credit unions, particularly her own, which has helped those who have suffered at the hands of Farepak. I shall return to that issue on Thursday and give further information to Members and to you, Mr. Speaker, on the final arrangements for assistance in the form of a good-will gesture to help those people through Christmas.

I want also to put it on the record that I am a member of my local credit union and in fact helped to set it up;my membership number is 16. It has grown to a membership of more than 2,000 in the past decade. So I come to the House not just with knowledge of the issues raised by my hon. Friend the Member for Southampton, Test, but empathising with them. If time does not allow me to deal with all the issues that he raised, both intellectually and politically, I undertake to write to him and to my hon. Friend the Member for Bridgend and to place that response in the Library for Members to consider.

As my hon. Friend the Member for Southampton, Test noted, it was only last week that the Competition Commission published its report on home credit. I very much welcome the work that the commission has done in investigating this market, and its producing recommendations on how to make it work better for consumers. Home credit lenders lent about £1.3 billion to 2.3 million customers in 2005. Most home credit loans are for small sums paid in cash, and 70 per cent. are for less than £500. As my hon. Friend said, people who take out home loans are more likely to be young women with families, living in a low-income household in housing rented from a local council or housing association.

There is no doubt that the home credit industry fulfils a real need for small, short-term loans. Research shows that customers are generally very satisfied with the service that they get from home credit lenders. However, because such borrowers include many who may be vulnerable and who have no alternatives in obtaining credit, it is particularly important that the home credit industry should be fair, competitive and organised in a transparent way for the benefit of those who borrow from it.

There have long been concerns that that is not the case and that the charges for that form of credit are excessive. Those concerns led the National Consumer Council to make a super-complaint to the Office of Fair Trading, which in turn referred the industry to the Competition Commission, which reported last week.

The commission found that there was indeed a lack of competition in the market, whether from other credit products, new entrants to the market or among existing home credit providers. That means that customers are paying higher prices for their loans than would be expected in a competitive market. The commission found that, overall, home credit customers paid £75 million a year more than they should have. That is a matter that should concern all of us, because those customers are the people who can least afford to pay such high prices.

The report sets out four measures to increase price transparency and promote competition in the market. The commission will require lenders to share data on customers’ payment records with other lenders. As my hon. Friend noted, lenders will be required to publish details of their prices on a website, and ensure that the terms for early settlement of home credit loans are fairer.

As part of the implementation of the Consumer Credit Act 2006, we will require lenders to give borrowers a yearly loan statement, which will have to include the original loan amount, the interest rates for the statement period, the start date and remaining term of the loan, the opening balance, payments made, debits and closing balance. The competition has recommended that for home credit loans the statement should also give the total cost of the loan and should tell borrowers that they are entitled to settle the loan early, and that they can contact the lender to find out how much that would cost. It should also inform borrowers about the price information website and that they can obtain additional statements from the lender.

We shall look carefully at that recommendation, alongside the responses to our consultation on the proposed statements, which has just closed. In the meantime, I can tell the House that I believe that it is very important to ensure that customers have clear information about their rights and about the remedies when things do not work out.

My hon. Friend suggested that the Government should go beyond the remedies that the Competition Commission concluded are appropriate to address the adverse effect on competition that it found in the market. We introduced wide-ranging reforms of competition law in the Enterprise Act 2002. Among the main aims of the reforms were to take politics out of competition decisions and to provide for more transparent and accountable decision making by the competition authorities. We established the commission and the OFT as independent competition regulators, so I cannot second-guess the commission’s conclusions and introduce further measures before the remedies it identified, after long and careful consideration and consultation, are put to the test. To do so would go against the aims of the Act, but I recognise what my hon. Friend said: we might take politics out of competition, but we cannot take politics out of poverty.

My hon. Friend proposed interest rate caps of44.24 per cent. on loans of less than 35 weeks and of 69.26 per cent. on loans of more than 35 weeks. I am not sure why the amounts are so precise or what their effects would be, but perhaps we can talk about that at a later date. When the commission carried out its investigation, it gave careful consideration to whether a cap on interest rates should be imposed in the home credit sector. It consulted widely on that proposed remedy but concluded that it was not the right way forward.

We also thought carefully about the matter during our review of consumer credit legislation and commissioned research into the effectiveness of interest rate ceilings. Like the Competition Commission, we are not convinced that introducing interest rate ceilings will help the consumers they are supposed to protect. I am particularly concerned about the fact that if access to home credit was less easy, it might force many vulnerable consumers to use inappropriate products, or even to go outside the regulated market and end up at the mercy of illegal loan sharks, which evidence shows is a real risk.

The research we commissioned looked at the impact of interest rate ceilings in a number of countries. In France and Germany, where there were interest rate caps, vulnerable consumers had less access to legitimate lenders and twice as many consumers admitted to borrowing from illegal moneylenders as in the United Kingdom.

Consumers benefit from a competitive market offering choice, where information is available to enable them to make the right choices. The commission decided that we should set out to achieve such a market. None the less, the commission and the Government said that we will keep the issue under review. I welcome this important opportunity to ask my hon. Friends the Members for Southampton, Test and for Bridgend to submit any relevant evidence, which will be dealt with effectively in any subsequent review.

My hon. Friend suggested that it is not enough to require only larger home credit lenders, with more than 60 agents or a £2 million turnover, to share data within nine months. He suggested that a wider, faster introduction of data sharing is needed to help borrowers build a suitable credit rating. As I said before, the Competition Commission has considered that. There are costs to lenders in getting data into the right format and setting up the systems needed to exchange data with credit reference agencies. That should be introduced in a way that is effective for customers, ensuring that there is no excuse for the industry.

My hon. Friend believes that the website proposed by the commission is a good idea, but is concernedthat the most vulnerable lenders have limited internet access and may have problems understanding the information. Finance is not an easy subject to understand, which is why I am so supportive of the measures being developed by the national strategy for financial capability, led by the Financial Services Authority. They include making financial education part of the school curriculum, providing financial education in further and higher education, rolling out seminars for employees in the workplace and providing information packs for parents.

I also recognise something else. To tackle the clear inequality of access to the internet, we have invested in bringing the internet into every community. There are now more than 6,000 UK online centres—places where people can access the internet in a safe, secure environment and where they can receive technical support and training. UK online centres have targeted areas where they are likely to have the most impact on inequality. They operate in all 88 neighbourhood renewal areas and in 2,000 deprived wards in England and Wales. Centres are in diverse venues, ranging from community centres to libraries, colleges and cyber cafés. Some 95 per cent. of household are within 5 km of a centre and virtually all households in the United Kingdom are within 10 km of a UK online or Learndirect centre. My hon. Friend is correct: there is an issue, but I hope that he can see that we are actively engaged in ensuring that there is no inequality in access to the internet and the capacity to use it effectively.

I said that there would be a serious risk of driving more people to use loan sharks if we put interest rate caps on. However, we are committed to tackling loan sharks. It is often some of the most vulnerable and excluded who fall prey to illegal moneylenders, so we have been funding pilot projects in Birmingham and Glasgow to investigate the impact of strong enforcement against those moneylenders. We have invested £2.6 million over two years in the project. Both pilots are performing well and prosecutions have already been secured in the midlands and Scotland, with more to follow.

Over the years, my constituency has been bedevilled by illegal loan sharks, who terrorise individuals and communities. They have no place in our communities, or on our streets or doorsteps. Such prosecutions and subsequent ones will send a clear message that there is no hiding place for those people. They do not own or control our communities and we want them out of them. They inflict misery on families and communities, particularly the elderly and other vulnerable people who are their targets, such as single mothers on benefits, those with drug and alcohol addiction, and people with mental health issues.

Just last week, my hon. Friend the Economic Secretary and I announced a further £1.2 million of funding for the projects. That will mean that the two existing teams will be able to continue for another year and will be able expand their operations into other areas where there is evidence of illegal loan sharks operating: for example, Liverpool, Sheffield and west Yorkshire. At the same time, I published a research report into the scope and extent of illegal moneylending and I will send my hon. Friend the Member for Southampton, Test a copy. That, along with the evaluation of illegal moneylending pilots, will give us the best way forward after 2007-08.

I welcome the fact that my hon. Friends the Member for Southampton, Test and for Bridgend welcomed the continuing growth of credit unions. They are an important source of affordable and secure loans. One of the important ways in which we have been seeking to provide people with access to such loans is through the promotion of the credit union sector. Credit unions offer an affordable source of credit for those on low incomes and/or those who are financially excluded and cannot get bank loans. We have invested £36 million from the financial inclusion fund for work on boosting the credit union movement in deprived areas in England, Scotland and Wales.

The credit union movement, however, is patchy throughout the country. As my hon. Friend the Member for Southampton, Test has quite rightly indicated, it needs a larger capital base to grow and become sustainable. The pilot projects are all about finding the most appropriate way of building a base and sustaining it. The selected credit unions were chosen to take part in the exercise on that basis. I hope that the projects will underpin the financing of loans for the poor in our communities in future years. It is absolutely right that people like ourselves should be part of the credit union movement; not to borrow, but to invest so that others can afford to borrow, while being dealt with fairly and sympathetically.

Consumers benefit from competition, but we must also make sure that the market is fair. Competition on its own will not deliver that, so we need to ensure that lenders are regulated effectively. The Government are in the process of implementing the Consumer Credit Act 2006, which is the final step in a wide-ranging reform of consumer credit regulation. The Act will improve consumer rights and redress. It will also improve the regulation of consumer credit businesses and establish a fair and competitive framework for consumer credit agreements.

Two aspects of the new Act are especially relevant to our debate. From April, we will be giving consumers the right to challenge an unfair credit relationship. We have deliberately not defined “unfair” so that the courts will be able to take account of all aspects of a credit relationship when deciding whether it is fair or not. That will include a consideration of what happened before and after a credit agreement was reached, as well as the terms of the agreement itself. We will also be giving borrowers the right to take their complaints to the Financial Ombudsman Service, which will mean that they will not have to face the cost and hassle of a court process to get their cases resolved. That represents a major step forward, so I hope that hon. Members will help to promote the purposes behind the new proposals.

I thank my hon. Friend the Member for Southampton, Test for giving us the opportunity to debate this important topic. I believe that the changes that the Competition Commission is bringing forward and those under the Consumer Credit Act 2006 will result in more competition, better value and greater rights for home credit customers. I assure him that we will be looking carefully at the impact that they have in practice to ensure that that is the case.

The Treasury’s £120 million financial inclusion fund includes £45 million for the funding of a free face-to-face debt advice service in England and Wales over the financial years 2006-07 and 2007-08. Ithas also meant that we have been able to develop16 partnerships throughout England and Wales to ensure that new debt advisers are added to those already in the system. We are building capacity and opportunity. Over the next two years, approximately 100,000 people will be helped through the new programme. The majority of those 100,000 clients will be the very people about whom my hon. Friend spoke so eloquently this evening. We are both in the same ball park and heading in the same direction.

We are also heading in the same direction on our desire to ensure that there is equal access to financial services products. It might well be that other things will have to be done in future years—I do not rule that out. However, I do rule out any continuing opportunity for loan sharks to prey on our people. I give the House a commitment and assurance that the work that we are doing through the pilots will help us to go a long way towards addressing the problems that my hon. Friend outlined. The evidence that he gave us was not about people operating in a regulated marketplace, but about people who were acting as illegal moneylenders. The local police and trading standards authorities have an important role in addressing such people. Those moneylenders prey on people because they believe that they will be too frightened to speak up and speak out, but we can do the speaking up and speaking out for them. Every illegal moneylender whom we bring to court, prosecute and send to jail is another nail in the coffin of those who prey on people in our communities.

I thank my hon. Friend for raising these issues with me. I will review Hansard tomorrow and, if necessary, I will write to him. In any event, I will send him the details and information that I outlined. I hope that he will accept what I have said in good faith and that he understands that the action that we are trying to take is along the lines that he suggests. I assure him that we will get there in the end.

Question put and agreed to.

Adjourned accordingly at six minutes to Eleven o’clock.