I have tabled this debate for a simple reason. As a new MP, it seems to me to be the best way to get some answers from the Government about a matter that I know is very important to many of us in Westminster Hall today: how we support the poorest consumers in society.
Despite the pressure applied by Compass, the End Legal Loan Sharks campaign, the Better Banking Coalition and myself and others, as yet Ministers have not made any commitment to act on the issue of consumer credit regulation. I hope we can change that today, especially after the show of support by the number of Members here for this debate. I want to show how and why the Government should act, through regulation of consumer credit. I want also to highlight how important it is that that be undertaken in conjunction with a range of other measures to support people who get into debt, and ultimately to help break the cycle of debt that blights the lives of too many people in Britain.
I have a lot of detailed evidence on these matters that I want to put on the record and I know that a lot of other Members also want to speak out. Nevertheless, I hope that in 90 minutes we can make progress and have a constructive debate, and I am keen to hear what other people have to say on this issue.
At the heart of this debate is a concern about debt and how it defines the financial situation of millions of families in our country. During the past 30 years, households have become more reliant on credit as a means to secure homes, invest in education and skills and smooth out the fluctuations in income and expenditure that everybody experiences. Let me say at the outset that this is not a debate about the wearing of hair shirts or a musing on the nature of contemporary consumer society. The uses of credit that I have just described can be a powerful driver for economic growth. Therefore, ensuring access to credit and confidence in credit markets is vitally important, especially when public spending is so constrained.
However, a growing number of people have problems using credit, and the ease of access to credit also makes it much more likely that people can end up using the wrong kind of credit for their needs or taking on more debt than they can service, so that their financial fortunes become far too sensitive to changes in their circumstances. That creates a toxic mix of the wrong kind of banking and credit services, the ups and downs of life, and a small amount of financial comfort with which to cover the difference between income and expenditure.
A study by The Observer newspaper earlier this year found that for 26% of men and 34% of women, living beyond their means was the cause of insolvency. However, for many more people—indeed, for 50% of women—insolvency was caused by unplanned changes to their personal circumstances, such as divorce or job loss. So, for many people the problem is being caught suddenly with an additional expense—replacing a broken-down washing machine or a car—that means a cost to their monthly budget that they cannot afford, or being unable to manage a sudden loss of income through redundancy or family breakdown. All these factors then lead to over-indebtedness, default and insolvency.
Just how bad is the debt problem? The UK now has one of the highest levels of personal debt in the world. In April this year, people in Britain owed more than £1.4 billion in private debt and in recent years personal insolvency has reached record highs, with more than 130,000 individuals entering a formal insolvency process this year alone. These official statistics can tell us about formal insolvency, but it is clear that that is just the tip of an iceberg. Industry estimates are that about 500,000 people are currently in a debt management plan, and independent research by R3—the Association of Business Recovery Professionals—shows that a further 600,000 people say that they have contacted their creditors for help as a result of struggling with their debts. R3 also estimates that another 960,000 people are struggling with debts but do not seek help.
Debt has become the norm in our lives in Britain, with most of us owing money on credit cards, loans and overdrafts. However, it is when those debts become unsustainable and overbearing that trouble happens. According to R3, as a result of the recession four in 10 people are now worried about their current level of debt, with 3 million people fearing redundancy and 2 million people having taken on more debt in recent months. One in 10 people frequently struggles to make it to pay day, with money tending to run out around the twentieth day of each month.
There is every indication that these problems will only get worse, especially for those who can least afford indebtedness. The Government’s deficit reduction programme will put millions of people who are on low incomes under severe financial pressure, as they face reduced public services, a greater threat of unemployment and public sector pay freezes. Family Action has identified how a total of 21 different cuts, from changes to the working tax credit to the rise in VAT, will hit low-income families hardest. Crucially for those of us who are concerned by these issues, many of those are people for whom debts are a daily fact of life and for whom unemployment and cuts in income will be even more likely in the coming years, with banks and building societies remaining out of reach as a source of credit.
So it is welcome news that the Government have announced a review of credit and insolvency, and that they have made firm commitments to considering capping interest rates on credit and store cards. However, this debate is about what is not in the credit review, what the Government have not done and what they have failed to make firm commitments about. It is the millions of the poorest consumers, who end up using the so-called home credit, hire purchase and pay day loan sector, whom I want to talk about today.
The Better Banking Coalition estimates that some 6 million people are in that position. Many of them are people for whom the illegal loan sharking industry may once have been an option, and the progress made by the previous Government in addressing loan sharking must be recorded. The work of the Department for Business, Innovation and Skills itself shows that about 300,000 individuals, representing about 3% of the poorest families in Britain, used to borrow about £120 million a year from illegal moneylenders, on which they ended up paying back £450 million. The work of the taskforce on illegal moneylending should be commended, and I hope it will be supported. Indeed, its work should be protected within the budget of BIS, especially as it has been judged as delivering value for money.
I congratulate my hon. Friend on securing this very important debate and on campaigning so vigorously in this vital area. Does she agree with me that in combating the loan sharks, the work of local trading standards departments has been absolutely critical? Furthermore, does she agree that it would be an absolute tragedy if, as a result of the Lib Dem-Tory cuts that will affect local government, trading standards officers were held back from doing that vital work?
My right hon. Friend makes an incredibly important point. With local authorities facing cuts of 25% or more to their budgets, it is clear that those cuts could affect trading standards and that the action now being taken on illegal loan sharking could therefore be put at risk.
We should not free communities from one form of exploitation only to allow another form to grow unchecked. Indeed, as more effort is put into cracking down on the criminal activity of loan sharks, it is all the more vital that there be greater access to affordable credit, an issue I will return to at the end of my comments.
We are here today to talk about the growth of the high-interest legal home credit market—a relatively recent phenomenon in the UK, and an industry that originated in America. As a result, many of the companies operating here are “exporters”, either working online or in our town centres. A good example is Dollar Financial, a US-based lender that operates under the trading name of the Money Shop in the UK. The Money Shop has expanded from just one store in the UK in 1992, which dealt primarily with cheque cashing, to 273 stores and 64 franchises across the UK by 2009. Now, in communities such as mine in Walthamstow, these companies litter our high streets.
I want to set out the sort of products such companies sell. We are talking about pay-day lenders, organisations such as Oakum or Wonga.com. In August, the Consumer Focus group published research into the use of pay-day lending. It estimated this market to be worth £1.2 billion a year and that it was used by around 1.2 million people. Its report went on to forecast a significant growth in the market. Such loans are often short-term ones with technical interest rates of anything up to 3,500% for a five-day loan—another point I want to return later.
The Consumer Finance Association, which represents pay-day lenders in the UK, estimates that these companies’ customers have an annual income of between £12,500 and £30,000, with £18,000 being the approximate average. However, research for the Friends Provident Foundation found that one in 10 UK pay-day customers had incomes of less than £11,000 per year. These are the people who can least afford to borrow at such high rates, even if it is only for a short time. The price of such lending is often as much as £35 in interest for every £100 borrowed, which simply drives these people further into debt, especially as these loans are often rolled over, one after another.
Furthermore, these companies make a point of targeting those who are unable to access the UK banking market. Indeed, in my own constituency Oakum makes a point of hiring people who can speak two languages, so that they can target their services at communities who are new to Britain and for whom the British banking system is still alien.
In the “home credit” market, people are approached on their doorsteps and offered loans. Generally, such loans range from £200 to £500 and have to be paid back over the course of a year. Although the companies involved claim not to charge for missed or late payments, if someone borrows £300 they have to pay back about £10.50 a week, which adds up to some £540 over the course of a year. That means a typical annual percentage rate of 272%, compared with the 9% or 10% APR that is often offered by mainstream banks.
One of these companies, Provident, has 11,500 “agents” who visit some 1.8 million people a week to collect payments and offer credit. Agents work with each person they serve to judge how much credit they can buy. Some 70% of both customers and agents are women. Critically, agents are paid according to how much they collect, not how much they lend, creating even more pressure to keep people borrowing at such rates.
Or consider the antics of hire-purchase companies such as BrightHouse. Such organisations target those on low incomes who have been refused credit and offer goods for sale on hire-purchase terms. The goods, which often have a high mark-up already, are leased out at high interest rates, so that a computer costing £800 or £900 ends up costing £2,000 or £3,000. Should someone default on a week’s payments, the company often imposes high penalty charges and requires the following week’s or month’s payments straight away, making it even harder to catch up.
Opportunities to expand resulting from the comprehensive spending review have not been lost on many of those who work in the market. Indeed, Provident’s chief executive publicly stated that he expects growth in his target market as a direct result of the CSR. Another factor driving today’s debate is the failure in the credit market for such consumers. The lack of competition to serve them means that it is a seller’s market. Six lenders account for 90% of the home credit market—Provident accounts for 60%—so there is little competition to drive down interest rates.
Clearly, credit lent must be repaid. It is therefore inevitable and fair that interest should be charged to cover the cost of providing credit. It is not disputed that many of those on low incomes or with bad credit histories are a higher lending risk, so interest rates on products aimed at them will be higher than those for the mainstream. However, the terms on which such transactions take place are critical. It is right for both parties that credit should be affordable, which means that both sides must judge what is possible.
There are concerns on that point, because many companies, however ethical and caring they may profess to be, are not. They operate in ways that undermine that profession. A pawnshop in my constituency rings customers back to offer them unsecured loans. Some lenders make a virtue of the fact that they do not consider previous credit history or assess whether a household can afford repayments. Such lenders take high-risk customers not out of the goodness of their hearts but because they know they can hook families on their services, creating a long-term cash cow.
High-interest lending also adds to the difficulties faced by the public purse. Lending at high rates to people on low incomes serves only to deepen their poverty. Credit dependency, whereby such debts can never be paid off, results in debts elsewhere, such as on rent, council tax and fuel bills. It results in cold homes and people going without food. I am sure the Minister recognises that the public purse can end up picking up the pieces.
Some 10 years ago, I raised the crucial point of the capping of interest rates on loans to vulnerable households with the Office of Fair Trading, and my arguments were rebuked. The OFT maintained that, given the risk profile of the individuals involved, if usurious rates could not be charged, no credit would be available to those communities, and that some credit, even at usurious rates, was better than none. I was not completely convinced at the time that those arguments were valid, and I am not convinced at all in post-credit crunch Britain. I am pleased that the hon. Lady is raising the issue.
I thank the hon. Gentleman for his point. I will certainly come to that, as there is concern about how we might intervene in the market, but I am confident that we can and should, and that the Government should be considering it.
We are discussing, in particular, the mix of a lack of competition and a rising demand for credit, but it is better to consider the people at the heart of the issue. We can all talk about statistics, but many of us will have seen in our surgeries the people who get into such debts. There are women who get into years of debt at high rates because their next-door neighbour is a Provident home seller who tells them week after week that they need to borrow more. A constituent of mine had loans from Provident, BrightHouse and Oakam, as well as a purse full of store cards. She missed a few payments and her interest rates soared as a result. She tried to juggle all of them but did not have enough money, and ended up running up an expensive overdraft that accrued £10 a day in charges.
The costs affect not just individuals but our communities as well. A Centre for Responsible Credit survey of the Meadowell estate in 2001 found that more money was going out of the estate on payments to door-to-door lenders than the Government were putting in via regeneration budgets. Given the nature of the market and the evidence that I have put on record, will the Minister admit that many of the practices involved in high-interest, short-term money lending are exploitative and unacceptable, and that the Government should intervene to protect people vulnerable to loan sharking?
Has my hon. Friend heard today’s news that the Government will not be proceeding with the people’s bank planned for the Post Office? Does she not agree that that is further bad news for people trying to access fair and affordable financial services?
I agree absolutely. It is a travesty. This debate is not just about cracking down on loan sharks; it is also about increasing access to affordable credit, as I shall discuss later. That decision will not help the people whom we are discussing. It is one thing to say that we are concerned about the market, but the proof of the pudding is in the eating: what are we doing to ensure that more people can access credit?
Given that and the concerns expressed by Members here, will the Minister make a firm commitment to consult on action to cap the total cost of all forms of borrowing—including the high-interest credit industry, rather than just suppliers of credit and store cards—in his Department’s ongoing credit review? I hope he will commit to so expanding the scope of the credit review, because it would make a difference to consumers.
Before the Minister makes that commitment, I will address an issue on which many MPs have been lobbied, and which the hon. Member for North West Leicestershire (Andrew Bridgen) mentioned earlier. It is possible to act on interest rates. I know that some of the companies concerned contacted Members before this debate claiming that such measures, although well-intentioned, would have unintended consequences. They use such arguments to justify the astronomical interest rates that they charge, arguing that any reduction in those rates would be impossible.
To tackle that point head-on, yes, concerns have been expressed not just by legal loan sharks but by organisations that work for those in debt, such as Citizens Advice. I am also aware of the work of the Office of Fair Trading and Consumer Focus, which have both expressed reservations about the impact of introducing a uniform cap on interest rates. They fear that it would close down or reduce pay-day lending, pushing people into the illegal loan sharking market.
Those difficulties—which, it must be said, are disputed by other organisations with counter-evidence—do not mean that we cannot act. We know from legislation dealing with dangerous driving, the introduction of a minimum wage and fireworks safety that there will always be people who point to those who will not abide by the rules. The arguments against a cap presume perfect consumers of the services in question who can make price-sensitive judgments about what loans they can access and their own credit situation, and competition for their custom. I hope I have shown that that is simply not the case. The problems with a rate cap do not mean that we cannot act. Rather, we must work harder and learn from others how best to act.
Is not my hon. Friend trying to make the point that in communities such as ours—Tottenham is next door to Walthamstow, and it is very similar—people need to know who they can trust? We have heard today’s decision on the people’s bank. In years gone by, my mother felt that she could trust the national savings scheme with the Post Office. It is not just about providing poor people with more information; they need the state to step in and take a view on what is excessive and exploitative in that area of the market.
My right hon. Friend is absolutely right. We know that it is possible to intervene effectively in such markets, and I shall come to that next.
In the Consumer Credit (Regulation and Advice) Bill, which is my private Member’s Bill, I suggest not a blunt cap on interest rates, but a cap on the total cost of lending, which is vital. Given the experience in other countries, it seems likely that focusing solely on capping interest rates would lead some companies simply to recoup their profits through administrative and late repayment charges.
Also, as I said, the situation in the short-term loan market can be very different from the long-term compound interest that many people face. That creates perpetual rolling debts in which families get stuck. It is worth highlighting exactly what that difference is and what it means for interest rates. Some short-term loans have an annual interest rate of 2,000% or 3,000%. If I were to lend someone £100 and ask for £10 at the end of a week, it would equate over a year to an interest rate of approximately 3,500%.
We need more sophisticated tools than a blunt cap on interest rates to get around the maths and also to ensure that emergency loans are not rendered illegal or impossible when they are manageable, and that is why I propose two forms of intervention. The first is powers to intervene on the total cost of borrowing over the lifetime of a loan to set parameters within which any company can be expected to act. Such a process would examine the total lending charge and give the Government the power to stop a single loan from exceeding a certain percentage of the original value through all the costs associated with it. That could be done through the Office of Fair Trading or whatever remnant of Consumer Focus the Government leave as protection following their decision to disband it.
Secondly, within those parameters, the Government should consider caps on the interest rates that firms charge for different forms of loans—whether they are pay-day loans, longer term or for hire purchase. That would avoid inadvertently killing off the short-term emergency loan market and address the impact of compound interest.
As hon. Members have pointed out, these are not back-of-the-envelope proposals without any foundation. Just last week in Montana, alongside the mid-term elections, the public voted to cap the interest rate that lenders can charge. That makes Montana the 16th US state in which pay-day lending is effectively banned because of a 36% limit on the annual interest rate that lenders can charge. Indeed, 15 states in America have essentially eliminated pay-day lending altogether by introducing a ban or cap on the maximum amount of credit at a low level, which has driven such lenders out of business. Some 35 US states and eight Canadian provinces have introduced higher caps on the price of pay-day loans, which allows such loans to operate but protects consumers from extortionate lending. For example, in a number of Canadian provinces, caps have been set at between $21 and $23 per $100 lent.
Such legislative interventions have been put in place not only in America and Canada, as 14 European states have some form of ceiling on interest rates. Countries often have more than one ceiling because they are set according to the different type or size of loan. For example, there is a different loan category in Belgium for those under €1,250 and those over. Alternatively, ceiling levels are set according to the terms or nature of the loan, such as depending on whether they are mortgages, credit cards or auto loans. The number of parameters can make some ceiling designs complex and difficult to understand. Indeed, the most straightforward are the absolute ceilings found under the past tradition of usury laws, but their impact is not as effective as some of the more targeted ceilings. There are differences between what has happened in Greece and Malta, and in some of the other countries that have brought in more complicated caps, such as Belgium, Portugal, Poland and the Netherlands. Many of those are based on a reference rate, under which a multiple of average market rates can be used to set the ceiling. In France, the ceilings are set at 133% of the market average—in other words, one third above the average.
A report on the effects of rate caps in Europe is due to be published by the European Commission in February 2011. I understand that it will support the case for caps, provided that the form and level of the caps are carefully constructed. Those issues—what form the cap could take and where it could be set—need proper and full discussion. It does not take the debate forward to say that because some caps have not worked, we therefore should never have them. We should be asking where caps have worked well, how we can learn from that, and how we can apply them so that we effectively help people on low incomes in the UK. Frankly, what is the credit review for if it is not to examine how and if such approaches could work here?
The Government could learn from other countries about ways of preventing compound interest’s connection to debt dependency. Indeed, that is why it is all the more surprising that the credit review does not consider such matters. America and Canada have experimented with restricting the amount that can be lent—for example, Illinois and Nevada have put in place clear requirements that a loan should not exceed 25% of a borrower’s income. In Arizona, California, Colorado and Florida, the number of loans that can be provided has been limited to just one at a time. In addition, Indiana prohibits more than one loan from a single lender and limits the total number of loans to two. Alabama restricts the total number of times a loan can be rolled over to just one. Alaska allows just two, while Illinois, Kentucky and Louisiana prohibit the practice entirely.
The hon. Lady makes much play of the evidence from individual American states. Does she accept that one of the consequences of what happens in America is that lenders that are set up in other states are able to sell their services perfectly legally in the states in which such practices are banned? That increases the risk of illegal lending, so I am not sure that the fact that such things happen in some American states particularly strengthens her case.
The Minister expresses concern about the nature of federal government in America, but he ignores the evidence from European states with a national system of governance that have introduced interest rate caps effectively. The best possible comparison for the UK is European states, rather than states in America and Canada, although I mentioned those cases as examples of where caps have been introduced and differential rates have been used. Frankly, the Minister should be considering such issues in his credit review, rather than them simply being raised as part of an Adjournment debate. I hope that he will rethink the credit review and expand it to consider such issues and the way in which they might apply in the home context. I mentioned such detail to show that it is possible to legislate to deal with the worst excesses of the markets and that such an approach does not increase the market for illegal loan sharks, as that is not demonstrated in the evidence from other countries.
I am extremely sympathetic to the hon. Lady’s aims and cause. However, does she agree that some of the previous Government’s policies did not help people get out of debt but, in fact, trapped them in it? In the days of easy credit, the complex working tax credit system allowed people to get into debt. Given the withdrawal of benefits, and with marginal rates of taxation of 60%, 70%, 80% and 90%, people were trapped in debt because they could never work their way out of it.
I would be interested if the hon. Gentleman could produce evidence for that, as opposed to making a supposition. It is easy to claim that working tax credit put people into such dependency, but let us consider what the loan sharks themselves have said about the comprehensive spending review. They have argued that it will increase the number of people coming to them because those people will not have money to help their families grow. That is where I look for evidence.
Considering the evidence on how we tackle legal loan sharking in and of itself is not enough to help these families. We need to stop the exploitation of low-income households in the credit market and legislate on the cost of borrowing. As Labour Members will understand—they know these problems well because they have had to deal with them—we also need to increase access to affordable credit. Those two issues go hand in hand. We cannot expand access to affordable credit while millions of people are trapped in relationships of credit dependency.
I congratulate my hon. Friend on a powerful and excellent speech. When considering help for such families, we also need to think about credit and money advice. The previous Government provided significant amounts of extra money to deal with the consequences of the recession. Clearly, we must do that if we are to deal with the problems that have arisen as a result of the CSR. An important part of this process is to have more money advice. People need proper advice about how to manage their money, how to avoid getting into debt, and how to make the right decision on loans.
As ever, my hon. Friend makes an incredibly practical and important point on these issues, which I shall come back to at the end of my comments when I consider the third component of the action that we can take to protect the poorest consumers in Britain.
I shall quickly return to my point about access to affordable credit. We must learn lessons and consider how to increase affordable credit access through the existing UK market. We know that that can be done, because people are already doing it. Credit unions and social enterprises such as Fair Finance are demonstrating that it is possible to lend at reasonable rates, to provide money advice services, and to help people to make credit work for them.
I thank my hon. Friend for securing the debate and I know that many of my constituents will be watching it closely. Does she agree that credit unions—including the Leeds City credit union, which has been operating for more than 20 years in my city, and the Bramley credit union—offer an excellent alternative to loan sharks? The Government could do more to support credit unions to grow, for example by enabling them to operate at all post offices and at local council facilities such as benefit offices and local libraries.
My hon. Friend is absolutely right and makes exactly the point I wanted to mention about how important it is to support and promote credit unions. There is certainly scope for British credit unions to grow, and we are behind other nations in that respect. In Ireland, 50% of the population are members of a credit union. In America and Canada, the figure is around 40%. In Australia and New Zealand it is around 25%, but it is closer to 2% in the UK. Despite that, at least 86% of people are eligible to join a credit union in England, Scotland and Wales on the basis of where they live and the working areas that are served by credit unions. That is not just in Bramley—my excellent Waltham Forest community credit union has more than 4,000 customers.
There is clearly interest in accessing credit through such bodies. Membership of credit unions in Britain increased by 35% between March 2008 and March 2010. The challenge we face is how to scale up credit unions extremely quickly, given the CSR and the level of debt that we are facing. The question of the future of the post office network provides therefore both an opportunity and a threat to some of the excellent work that can be done in this field, which several hon. Members have mentioned.
The previous Government proposed—this is being promoted by the Association of British Credit Unions—connecting up the credit union movement and post offices, which would allow the integration of both services. A one-off investment would be needed to provide the common back-office platform that would allow the technical integration of the two services. In turn, that would allow post offices to offer a wider range of services, including those vital instant small-scale loans, as well as access to a Post Office card account. Staff at post offices could carry out transactions in real time, checking account details and giving instant pre-approved loans that were affordable and convenient. Credit union customers would be able to access their accounts and make payments through the post office. In turn, a transaction fee would be generated by each transaction that would provide a new stream of revenue for the Post Office. That could open up access to affordable credit and help consumers by breaking down the monopoly on supply. It is no wonder that the Finance and Leasing Association has briefed against that proposal and argued that it could restrict consumer choice and hinder competition, which is something that many legal loan sharks seem to think is okay for their specialist services.
Does the Minister stand with the loan sharks or the credit unions? What commitment will his Department make to fund the back-office integration of post offices and credit unions so that the post office network can provide credit union services and increase access to affordable credit for consumers? Those problems require us not only to legislate, but to look at what we can do for the families involved. We must not only clamp down on the exploitation practised by the firms, but extend access to affordable credit through credit unions.
Has the hon. Lady considered the implications of the Bill of Sale Act 1878, which effectively enables loan sharks to get away with much of their inappropriate behaviour? We all agree that we should not tolerate loan sharks—they are in my constituency as well as in hers and others.
The hon. Gentleman makes a fair comment. The point behind today’s debate is that there is overwhelming evidence that we can and should intervene, and there is certainly concern about the situation among Labour Members. The credit review offers us, if anything, an opportunity to look at how we can intervene and how the law could be amended. The fact that that is not happening is a travesty, so I hope that coalition Members will challenge the Government to expand the scope of the credit review so that it covers these issues.
I am grateful to my hon. Friend for securing the debate. Will she join me in asking the Minister to clarify the Government’s intentions on the consumer advocate? There has been some speculation that they are keen to go ahead with that position, which was first suggested in a White Paper by the previous Government, but there is still no actual detail. A consumer advocate could play a crucial role in that area, so it would be good to hear the Government’s intentions on that.
My hon. Friend makes an incredibly fair point. I certainly hope that the Minister will address that, along with the credit review and the role that credit unions could play within post offices.
I certainly want more direct financial support for organisations that provide advocacy services and support people who get into debt. The model that we can learn from is that of the drinks industry. In 2007, following public concern about alcopops and the need to address binge drinking, the industry responded by setting up and funding Drinkaware, an independent charity administering grants to tackle alcohol misuse. Each year it raises around £2.6 million from alcoholic drink makers and retailers, which is then used to raise awareness about alcohol and encourage sensible drinking. My Consumer Credit (Regulation and Advice) Bill proposes that a levy should be imposed on organisations selling credit, which would be used to fund a similar grant scheme. That could be accessed by a range of organisations providing debt management counselling or financial literacy services. Counsellors could give one-on-one sessions to families to help them get back on their feet by negotiating with creditors, helping them to navigate the support to which they are entitled and identifying how best they can live within their means.
Supporting those whose lives are ruled by debt requires more than informal advice. R3, the insolvency practitioners’ industry body, notes that one in five of their clients did not seek help earlier because they had no idea who to turn to for help. I welcome the Government’s continued support for the previous Administration’s work on a levy on dormant bank accounts for that purpose, but I hope that they will recognise the need for both financial advice services and specific advocacy services, such as the excellent work undertaken by organisations such as the Consumer Credit Counselling Service, Citizens Advice and Christians Against Poverty. The Moneymadeclear service, as it is currently set out, will not be the same thing, and we must ensure that both are available if we are to address these challenges. Does the Minister recognise the need to provide specialist financial advice and advocacy services to help people who get into debt, and will he commit to setting up a fund to support those services directly, as I propose in my Bill?
We have covered many complicated issues today. Just to be clear, I will end my remarks by repeating the three clear commitments that I want the Government to tell us, on record, whether they will make. First, will the Minister commit to expanding the credit review, to consulting on powers to cap the total lending costs, and to exploring caps on different interest rates for different types of loans? Secondly, will he commit to financing the integration of the post office network with the credit union network to enable them to share back-office technology and thus support each other? Finally, will he commit to a levy on those who sell credit to create a dedicated fund for debt advice and advocacy services?
Failure to act on those matters would not come at a worse time for many of Britain’s families. We know that if the Government are intent on pushing their Budget on Britain, they will raise the number of families in our communities living with the daily misery of debt. They therefore must take responsibility for their actions. They must give the same consideration to the needs of those for whom the never-never is a fact of life as they do for those who have Amex cards or a trust fund. I hope that the Minister will give us three yeses today so that we can make progress on those matters.
I congratulate the hon. Member for Walthamstow (Stella Creasy) on the clear, in many ways convincing and impassioned way in which she put her case. She has had quite a double whammy over the past few days, with her ten-minute rule Bill last week and now this important debate. It is particularly timely, given the review of consumer credit and personal insolvency and this morning’s statement by the Department for Business, Innovation and Skills on the future of the post office network, which, to be fair, contained rather more of positive interest to people who care about those issues than perhaps some Members have suggested today.
Like the hon. Lady, I will concentrate on instalment credit, rather than revolving credit, although both are relevant. I am sure that the debate will be positive, but I will start with three negative points—three not’s. First, this is not a party political debate. I pay tribute to the previous Government’s work with the credit union sector, for example, which at the time had all-party support. I am also sure that measures to address those problems and help the most vulnerable people will receive support from across the House. I know that that is the case among many of my colleagues in the coalition Government, and it is evidenced to a large extent by the number of Members from both sides of the House who have attended the debate.
Secondly, this issue is not new, although, to be fair, it is changing. The leader in doorstep home credit has been around since Victorian times, but every few years the nature of the market changes a little. There are changes over time regarding the importance of priority debt and that of consumer debt, and there might in future be some change back towards priority debt. However, it would be wrong to suggest that the home credit market has been created by the comprehensive spending review, and everyone who has ever worked in communities that have such issues knows that well. It is also a dynamic market, and there is always something new to worry about: whenever we think we have got our heads around the market, something new comes along, be it the increasing problems with fee-paying debt management agencies, inertia selling, payment protection insurance, the growth in pay-day loans, the appearance of pre-paid sub-prime credit cards or the appearance of so-called credit rehab cards.
Thirdly, it is not all bad. Every segment of the market plays some sort of role. Even pay-day loans can have a role—for example, in avoiding excessive current account penalty charges. We also have in this country, much more so than in the European markets to which the hon. Lady referred, a pretty competitive and diverse market. The effect is that very few people in this country are totally excluded from the legal and, therefore, regulated—one might argue that it is not regulated well enough—and regulable part of the market.
There are always three key aspects to any debate on this subject. The first is the disclosure of information; education, so that people have the wherewithal to do something with that information; and the whole surrounding culture, particularly what we as a society aspire to regarding the balance between savings and debt to help people get through the ups and downs of life, which everyone has. I will not talk about that this morning because there is not much time and many Members wish to speak. The second area, which is the focus of the hon. Lady’s ten-minute rule Bill, is smarter regulation, and the third is alternatives to high-cost credit. I will talk briefly about each of those aspects.
When it comes to regulation, we need to understand our objectives, of which there could be one or two. It might be either to reduce the cost of credit to people on very low incomes and who have great difficulties in their lives, or to reduce the prevalence of credit and debt for those people. That is an important distinction, because it might lead to one or two different things. For example, if one just wanted to reduce the costs, one might liberalise the rules on door-to-door canvassing for cash loans, because that would allow new entrants into the market more easily, which could undercut the existing players and cut the cost. However, not many of us would want to do that. If we are trying to reduce the prevalence of lending in those sectors, we might do the opposite and ban door-to-door canvassing even for non-cash loans—meaning voucher loans—because they are used, as the hon. Lady will know, as the way in to new customers, who can then be graduated on to higher value cash loans. My assumption is that the objective must always be both to reduce the cost to people who are taking on sub-prime loans, and to reduce the prevalence of such lending.
The second key question on objectives is whether we are trying to hammer a particular segment. As I said, each segment, if handled properly and responsibly, has a role. Therefore my assumption is that we are trying to target not a particular segment—for example, pay-day loans or home credit—but the principle of people paying sky-high rates for credit when they need it.
There are perennial problems when trying to make smarter regulation in this area. In particular, because it is such a diverse and organic market, as soon as we deal with one problem, another pops up. In fact, in some ways, it is because we deal with one problem that another pops up. Let me give a couple of examples. If we manage to bear down on cash lending, we will see—this is true in some of the American states to which the hon. Lady referred—an increase in rent-to-own, voucher lending and catalogue lending, with grey pricing. That is where the base price of the item is inflated such that at a 29.9% interest rate, to use a random example, the lender is making considerably more than that in terms of margin. If we bear down effectively on interest charges, there is the automatic tendency, it seems, for lenders to rely more heavily instead on behavioural penalties, which, in many types of lending, can end up costing far more than the apparent rate of interest.
With any cap that we put on the cost of lending, mathematically we will be disproportionately impacting on the highest-risk customers, which in this market means the lowest-income customers and usually the most vulnerable customers. At the extreme end, when we are talking about excluding those people, there is the danger that we will push them into the arms of illegal and unregulated moneylenders—the sort of people whose idea of a late-payment penalty is a cigarette burn to the forearm. Of course we all want to avoid that.
However, despite the perennial problems, there are still possibilities, many of which were outlined by the hon. Lady. APR is a widely misunderstood measure, and there is always the danger that anything we replace it with will also be widely misunderstood, but total cost of credit has more potential than APR to be understood.
On caps, I am a free-market Conservative, so in general I am not in favour of price controls. However, the hon. Lady made a good point in that regard. If we look throughout the European tradition world and the Anglo-Saxon tradition world, hardly anywhere has a market as liberal as ours in terms of the interest rate regime. Of course, before 1974—when there was a Conservative Government—there was a usury ceiling in this country. We have to ask the question: if we have got this so brilliantly right, how come other countries are not trying to copy us?
I do not think it will work to go after individual markets saying, “We’ll have this restriction on this product and that restriction on that product,” because new products will just be invented. I wonder whether it is possible to come up with a formula that does away with the market’s worst excesses, while not putting any individual segment of it entirely out of business.
I would love to hear the thoughts of my right hon. Friend the Minister on the regulation of rules and supplementary charges on loan roll-over, missed payments, minimum payments and so on. We also need to think about the way in which credit scoring works. By the time that people eventually seek help, many of them have run up eight, nine or 10 separate lines of credit. We have to wonder what the lenders of the eighth, ninth and 10th lines of credit were thinking. This is a matter of responsibility. Of course in terms of the maths, it might be perfectly rational for the lender to issue a lot of loans with relatively low credit-scoring hurdle points, in the knowledge that although they will have to write some off, that is still a more advantageous profit model than rejecting them.
Most of all, I would love to hear from the Minister on something the hon. Member for Walthamstow talked about at length—alternatives to high-cost credit, to which there are multiple aspects. For example, the social fund is probably due for a bit of root-and-branch reform. Here I am talking not about priority debts or emergency loans, but the discretionary fund. In addition, mainstream banks can be exhorted to develop bounce protection credit lines more quickly, which will stop so many people being forced into pay-day loans.
Above all, however, the opportunity is with credit unions. I welcome this morning’s statement on the post office network, which gives some positive indications. Credit unions have made great strides in the last few years. Historically, they had been very strong in the west of Scotland, Manchester, Merseyside and parts of London, but not in the rest of the country. In recent years, the situation has improved, but we are still not at the point at which everyone can access a credit union.
The range of services has also improved dramatically, with the credit union current account, cash ISAs and so on. When the legislative reform order that we all hope will come along very soon is passed, that will make further strides in liberalising the common bond—in being able to pay fixed rates of interest on savings accounts and being able to bank to groups as well as individuals, which fits well with the big society agenda.
I do not seek to make a partisan point, but will the hon. Gentleman join me nevertheless in asking the Minister to clarify the future of the growth fund, which is due to end in March 2011 and provided significant money to help credit unions and other community finance organisations expand, in order to provide the access-to-credit alternatives he has described?
I am sure the Minister has heard the question and made a note of it. What I will say about the growth fund is that of course, capitalising credit unions to expand their customer base has many positive aspects. Not all credit unions were fully geared up to make maximum use of some aspects of the growth fund, and particularly the speed of the growth fund.
I would also like to see other ways of further funds for lending going into credit unions. All of us, if we have not already done so, can open a savings account with a credit union. That is not a flippant point. We need to encourage more people at higher and middle rates of income to use credit unions as their place for savings, because then, of course, those savings become the source of loans to other people.
Credit unions do not yet exist on the critical scale at which there is mass awareness of the services available.
I particularly welcome the hon. Gentleman’s observation that this is not necessarily a party political issue and that there is support on both sides of the House for many of the elements in the Bill introduced by my hon. Friend the Member for Walthamstow (Stella Creasy). There is a renewed sense of urgency about the issue, perhaps more so among we newer Members who have come by a community-organising route and have seen at first hand the effects in our communities. One thing that prevents credit unions from expanding is that they are seen as operating in charity offices and church halls and they lack the high-street presence of organisations such as BrightHouse, which can spend a lot of money on marketing and targeting people. Integrating credit unions more with the Post Office would have given them that mainstream appeal and access in all communities.
I thank the hon. Lady profusely and will remunerate her suitably later for teeing me up for my next sentence. One of the problems for credit unions, apart from lack of awareness of them in some sections of the community, is that they lack a high-street network throughout the country. Marrying them with the Post Office offers amazing synergistic opportunities for both sides. It marries the financial expertise and product base of the credit unions with the presence and trusted brand of the Post Office. We talked earlier about trusted brands.
The point was made a few moments ago that it is important that middle-income people also join credit unions. I am pleased to have joined my local credit union, as I am sure everyone in the room has joined their local credit union, as a place for savings. The point about a high-street presence is extremely important. My local credit union in Crawley operates out of a community centre, which as we have heard is the norm. I very much support the idea of making credit unions mainstream, and it therefore becoming much more the norm for people to save and transact with them.
My hon. Friend makes a fine point, which I do not disagree with at all. I should say, for the avoidance of doubt, that my own savings account is with the United Savings & Loans credit union in Bordon. That fantastic institution has a high-street presence, but because of the rents in my part of the world, it is not the most prominent high-street presence. The established network of the Post Office could make a big difference to that. Of course, this is not just a matter of saying, “We’ll work with the Post Office.” It is also about the infrastructure that goes behind that—the electronics and the systems. That is why it is necessary to build a robust back-office system and interface. That takes money, but it does not necessarily have to come entirely from the Government, and it would be a mistake to think so. Such activities do of course carry with them a future income stream, and as everyone knows one can borrow against a future income stream. There is certainly a role for the Government in financing such a thing, but not just grant funding is needed.
Overall, the provision of alternatives is the surest and most important initiative that can be taken in this area. Whatever the regulation, people will always find ways to get around it, and we must strive to make things better.
I take the hon. Gentleman’s point, and I understand and recognise his experience in the credit union movement. Does he agree that these are the very issues on which the credit review should be formally consulting? It should be looking not just at store and credit cards but at access to credit, and also the home credit market, pay-day lending and the many other products that may well be expanded, to try to tackle once and for all the needs of the poorest consumers.
I am supremely relaxed about the names that are given to reviews, discussions and discussion documents. The important thing is that members of the coalition Government take a keen interest in this area and are interested in making progress, and I know that they are. The name or title is of secondary concern.
The surest thing we can do is to provide a good, robust alternative, and thereby revolutionise affordable credit. We can also improve the savings culture in this country and provide a real alternative to the doorstep lenders about which we are all so concerned.
I thank my right hon. Friend the Member for Walthamstow (Stella Creasy)—sorry, my hon. Friend the Member for Walthamstow, but soon to be promoted—for securing this debate. As a new Member, I am struck whenever I speak in Westminster Hall by the quality of the debates that take place here. It is such a shame that we do not have the same quality of debate on the Floor of the House, and I believe that that is recognised by all Members here.
Members on both sides of the Chamber have made good points. I know that many people wish to speak, so I intend to keep my remarks brief and largely to restrict them to the north-east and my constituency.
This problem arises in constituencies such as mine and many others because of a lack of affordable credit. People who work part-time and live on low incomes or minimum wage often find themselves with few options, which has resulted in an outbreak of high-cost credit. My constituency is large and made up of many small towns. I cannot walk down the high street of any of the small towns in my constituency without seeing an array of pawn shops that buy gold, cash cheques at exorbitant prices and generally prey on the poor in our communities who, like many hon. Members, I see in my surgery.
In the past seven years, the number of pay-day loan users has increased fourfold and the number of pawnbrokers has trebled. That is happening in constituencies such as mine and that of my hon. Friend. This is probably one of the best attended Westminster Hall debates that I have seen, so the problem clearly exists in other constituencies—not just in the north-east or poorer areas, but right across the country.
Irresponsible lending serves only to make things worse. Companies such as Oakam, which has been mentioned, and the Money Shop charge annual interest rates of more than 444%, despite a Bank of England base rate of just 0.5%. Borrowing at such rates can tip vulnerable people into a cycle of debt and poverty. High debt repayments are linked to rent, council tax and utility arrears, as well as other poverty indicators such as constraints on job-seeking behaviour, poor diet, cold homes, and mental and physical health problems.
The hon. Member for East Hampshire (Damian Hinds) said, rightly, that loan sharking has not resulted from the comprehensive spending review, but the review will simply make things worse. The Government’s plans to reduce housing benefit by 10% after a year will make things worse in constituencies such as mine. So far, the arguments in that debate have centred around what will happen in London, but the effects of the cuts will not be restricted to central London. In my constituency, they will mean people who are already struggling and in debt being forced to find another £15 a week that they simply do not have, and being forced to go to loan sharks and disreputable loan companies.
The north-east is a hot spot for illegal loan sharking. The North East Illegal Money Lending Team, which was set up by the previous Government in December 2007, has identified 1,083 illegal lenders—92 in the first quarter of this year; convicted 40 loan sharks; and saved borrowers more than £2 million. When loan sharks are convicted, the cases are publicised widely in the local press and on television.
Some people have argued that a cap on total lending will simply increase illegal loan sharking, but, coming from an area where it is prolific and is blighting the lives of the poor, I would argue that a cap on total lending, as well as investigating and jailing loan sharks, and publicising the cases widely, would improve the position for the poor in my constituency.
This is very much a gender issue. Fair Finance, a social enterprise bank that offers loans and debt advice, has seen clear trends in those seeking its help: 75% are women, 70% are single mothers and 80% are on benefits. The issue disproportionately affects women. In the north-east, there are recorded cases of women being forced into prostitution because of loan sharks.
All families—all of us—experience financial emergencies from time to time, but when a financial emergency hits a poorer household, it is often the catalyst that sets it into a downward spiral of debt. Many people in such situations are vulnerable at all kinds of levels. Many live on the margins and are preyed upon routinely. One of my constituents was forced to borrow £200—a relatively small sum—from a loan shark to fund a trip to Wales. His sister had been murdered by her partner, and he needed to make a trip from the north-east to Wales to organise the funeral and to settle her debts and affairs. His neighbours rallied round and paid off the loan, but many of them are also poor and vulnerable. If those people can see that there is an issue, surely we can, too, and the Government should act on it.
The hon. Lady speaks with great passion about individuals in her constituency, and I really feel for them. I hate the phrase, “This is not a partisan point,” because we all know what comes next, so I shall not say it. Does she think that the previous Government’s claims to have ended boom and bust encouraged or discouraged vulnerable people to gear up with more debt?
I understand what the hon. Gentleman is saying, but I do not think that it is relevant to the debate, or helpful.
The current situation of allowing very high interest rates to be charged to the lowest-income households leads to greater wealth inequality and greater child poverty, and it constrains efforts to regenerate deprived communities. We have heard about Provident Personal Credit, a legal loan company that operates widely in the north-east. It controls 60% of the home credit and legal doorstep lending there. It mainly offers small, short-term and unsecured cash loans. The typical annual percentage rate on a Provident loan is 272.2%, and 70% of its customers are women. The Government can address those issues and make the lives of those living in the poorest households easier.
On the three recommendations made by the hon. Member for Walthamstow (Stella Creasy), does the hon. Lady agree that the second, which was about the role played by credit unions in the post office network, is the most exciting opportunity for combating loan sharks that we have seen in this country for a long time? The Minister with responsibility for the Post Office has already made it clear that he welcomes a future role for credit unions in the structure and distribution network of Post Office Ltd. In my constituency, the new Gloucestershire Credit Union, which is partly funded by the Department for Work and Pensions, represents an important step forward for us all in our different constituencies.
I thank the hon. Gentleman for making that point, which I was going to come on to. What I will say now is that this is not either/or, and we can do both.
The Government could provide a cap now on the total lending rate that may be charged for providing credit, and on additional interest on late payments and default charges, and that could be targeted on companies that charge excessive interest—and then interest again on that charge—to customers who borrow from them. That would be a popular move. A recent YouGov poll, carried out in April 2010 and highlighted on the “End Legal Loan Sharking” campaign’s website, found that 89% of the people polled would support such a move.
The Government could also provide alternative sources of affordable credit. Many organisations have called for such action on high-street loan sharking, including Compass, Citizens UK and the “End Legal Loan Sharking” campaign. The Government need to provide local authorities with powers to enable them to restrict the provision of premises for licensed consumer credit agencies within a local area, and to give locals a say over what happens in their high street. When people are asked, they say that they do not want these pawnbrokers and “gold for cash” or high-interest-rate companies on their high streets.
I am disappointed by this morning’s announcement that the people’s bank will not be part of the post office network, as it could provide affordable short-term credit. Using the post office network to provide back-office functions that integrated the network’s services with credit unions would help the poorest people to access credit unions, current accounts and savings accounts through post office branches. However, I welcome the announcement about bringing together the synergy of post offices and credit unions.
The credit review and a cap on interest on store and credit cards are both welcome, but in themselves will not help the poorest people in my constituency and in many others. A credit review would seem to be the right way to go, but I ask the Minister to look again at the terms of reference and to include some of the very strong arguments that have been made from both sides of the Chamber today.
The Government need to do something to stop what is happening. It seems that the only growth on high streets in my constituency and in many others is in charity shops and pawnbrokers. The Government have made a commitment to reducing child poverty and this would be a very good place to start.
[Mr Christopher Chope in the Chair]
I shall be very brief. I congratulate the hon. Member for Walthamstow (Stella Creasy) on introducing the debate on those very important issues. She has certainly done her research. The previous Government did some very good work on the regulation of consumer credit, with the Consumer Credit Act 2006. Coming down the line in February 2011 we have the EU directive, and the main thing that that will introduce is the provision that in any credit agreement the customer has to be given standard information. I hope that that, too, will be helpful.
The quality of the contributions to the debate illustrates how complex this issue is—there are other sides to the story. I was speaking to the Finance and Leasing Association this morning, and it is concerned that excessive regulation will shrink the market. The market is contracting at the moment, and that might polarise it.
We could be in danger of using a blunt instrument here, and as has been said, if we knock an apple down, it will bob up somewhere else as an alternative product that cannot be legislated against, so we will continually be revisiting legislation. As was mentioned, the answer is more in education, so that people get the difference between the costs of credit.
I totally agree with the hon. Gentleman. As the hon. Member for Walthamstow said, it is very important to look at the whole cost of a loan rather than necessarily relying on an interest rate. The Finance and Leasing Association is concerned that if we cap the interest rate the market will migrate towards the maximum, with high-risk consumers being cross-subsidised by lower-risk ones because somewhere or other the risk has to be funded.
Does the hon. Lady share my concern that listening to the Finance and Leasing Association on how to protect the poorest consumers is a bit like listening to burglars telling us that muggers are not very nice because they take people’s property to their face?
A burglar might have a lot of expertise in telling us how to keep our homes safe, so it is important to keep an open mind and listen to everybody in the argument. The point is that the association is concerned that if we over-regulate, illegal loan sharks will fill the void left behind when other, more reputable lenders leave the market.
The Office of Fair Trading did a review this year of high-cost credit products, pawnbroking, pay-day loans and home collection credit. It concluded that capping price controls was not necessarily the answer:
“This is because controls such as interest rate caps can contribute to reducing competition in the sector and lead lenders to recover lost income through increasing charges for late payment and default.”
Were a cap introduced, there would be a risk of all lenders raising their interest rates to match their competitors, thus making access to loans more difficult for borrowers. The cost of loans is twofold—it is a combination of interest rate and length of term of borrowing—so although some interest rates are very high, that can be offset by the length of the loan. The variety of lending options ensures that the specific requirements of all consumers can be met.
I shall not go into the pay-day and home credit loans, or indeed store credit cards. The point is that they all have a role to play, provided that they are properly regulated. We have heard reference today to the review by the Department for Business, Innovation and Skills and the Treasury. I know that they are covering slightly more than credit and store cards; indeed, they are covering an issue that I have raised in my private Member’s Bill—unauthorised overdraft charges. I am very hopeful that we will now get a good resolution on that. I would, however, appreciate clarification from the Minister as to what we will be covering, because my understanding is that we could take the opportunity to consider that important and complex issue.
Finally, is not the answer to give deprived communities better access to mainstream debt? We have talked about the Post Office and basic bank accounts. Everyone has a right to a basic bank account, and that should be much better promoted. We have talked about credit unions, and some companies, such as My Home Finance, have reduced their APR to 29.9%. That might sound like a lot of money, but in the context of illegal loan sharks it is quite something. I look forward to the Minister’s problems—sorry, the Minister’s comments [Laughter.] He certainly has enough problems, that’s for sure. In all this, it is important that we take into account the fact that, somewhere, we have to price for risk.
I will be exceptionally brief. My huge notes have been cut back dramatically, and I will focus on one point. First, I quickly pay tribute to the hon. Member for Walthamstow (Stella Creasy) for both this crucial debate and the ten-minute rule Bill, the thrust of the arguments of which I support. So, there is cross-party support.
I want to concentrate on the important element of financial education. It is essential to provide financial education to equip people to make informed decisions. Working with the national financial education charity, the Personal Finance Education Group, and Martin Lewis of www.moneysavingexpert.com, I am launching an all-party group on financial education, with a focus on securing compulsory financial education in schools. It will launch on 31 January. This is a very brief plea to all Members who are still in this important debate to come and join the group, so that we can help future generations to make informed decisions.
It is really important to get financial education into our schools because one of the big problems with things such as credit unions is that people do not understand what they are. Banks come into schools, but we do not know about the whole range of the market.
My hon. Friend makes a really important point. According to a survey carried out by the Nationwide Building Society, 91% of people who got into financial difficulty said that if they had had better financial education, they might not have made the decisions they did. The number of people who think that a higher APR is better than a lower one is worrying, and reinforces the point that financial education is absolutely essential.
I join others who have spoken in commending my hon. Friend the Member for Walthamstow (Stella Creasy) on securing the debate and how she introduced it, and for her ten-minute rule Bill of a week or so ago, which others also referenced. She has done a huge amount of research and has made a powerful case for smarter regulation. She and others focused on the impact on some of the most vulnerable in the various communities we represent of access to finance going wrong, and the associated issues.
My hon. Friend highlighted three specific issues that she wanted the Minister to include in his Department’s review. The first was to consider regulation of the total cost of borrowing and how much interest different financial products can carry. She pointed to experience across the European Union and north America, where similar measures have been introduced. She referenced the need for a levy on those who sell credit to pay for debt counselling and advice services, and she pushed for increased accessibility of credit union services and their integration with the Post Office.
I have just watched the “Jeremy Kyle Show”—I do not want to recommend that to anybody and I cannot believe that I have admitted it in a Westminster Hall debate. During the adverts, a company called Wonga was advertising same-day loans with an interest rate of 2,400%. Is it responsible for advertising companies to allow such adverts to run?
I will not comment on my hon. Friend’s television viewing habits, other than to say that I know he has raised concerns about the activities of Wonga, and I will come on to that. It is an interesting company in the consumer credit field for a slightly different reason, which I shall come to later.
I join my hon. Friend the Member for Walthamstow in asking the Government to consider including the issues that she raised within the review of the consumer credit sector, and I do so in a spirit of welcoming their review of consumer credit.
There seems to have been a tiny bit of confusion earlier about the nature of the review to which the hon. Gentleman refers. I think I heard suggestions that it was restricted to credit and store cards only, but the call for evidence was much broader, as he knows.
As the hon. Gentleman says, there has been a broader call for evidence. I hope the Minister will use the debate to call for further evidence about, and embrace, the areas that my hon. Friend the Member for Walthamstow championed in the debate and in her ten-minute rule Bill.
I am sure my hon. Friend will agree that it is one thing to ask the question, but the challenge is to set out that the answers will be listened to. The Government have, so far, only formally committed to looking at the cost of borrowing on credit and store cards in the remit of the credit review. They might be asking for evidence on the broader credit market, but there has been no equivalent firm commitment. The hon. Member for East Hampshire (Damian Hinds) is shaking his head, but I can show him the details on the BIS website; it is outlined clearly. The Government are looking at the interest rate cap on credit and store cards only, and I am specifically asking for the review to be expanded to cover all forms of lending, so that it looks at the market for the poorest consumers.
I trust that the Minister will clarify his intentions on that. The review should look at the three specific issues that my hon. Friend the Member for Walthamstow raised.
The hon. Member for East Hampshire (Damian Hinds) made an interesting speech extolling the importance of credit unions—as did my hon. Friend the Member for Walthamstow—as a crucial alternative to some of the most costly parts of the consumer credit industry. He said, rightly, that the issue is not new, but the market is continuing to change. He also raised the issue of the importance of education, as did the hon. Member for North Swindon (Justin Tomlinson), whose initiative in setting up the all-party group I commend.
The hon. Member for East Hampshire alluded, I think sympathetically, to considering how to regulate the worst excesses of the market. He made the important point that the consumer credit industry, as part of the financial services industry, plays a crucial role in helping our economy to function effectively; nevertheless, there is genuine concern about some activities of the most controversial part of the consumer credit industry, that which provides pay-day loans.
As others have touched on, it is crucial that we consider access to affordable credit beyond the consumer credit industry, such as through credit unions and community finance organisations. The issue is about not only financial education in schools but access to financial education and assistance outside the school environment through debt advice services, and about how we bear down on illegal activity such as loan sharking.
On giving access to debt advice, my constituency office is working with debt agencies to train our staff, and me, in how to give the right advice. We are also working with local media to communicate constructive advice ahead of the festive period, which is a particularly risky time for people making financial commitments.
I commend the hon. Gentleman’s work on that, and I hope he will bring his experiences to his all-party group so he can share that good practice with others.
There were important contributions from the hon. Members for North West Leicestershire (Andrew Bridgen) and for Crawley (Henry Smith), from my hon. Friends the Members for East Lothian (Fiona O’Donnell), for Clwyd South (Susan Elan Jones), for Halton (Derek Twigg), for Leeds West (Rachel Reeves) and for Darlington (Mrs Chapman), and from my right hon. Friend the Member for Tottenham (Mr Lammy). My hon. Friend the Member for North West Durham (Pat Glass) made an important speech focusing our attention, rightly, on concerns about illegal loan sharking, which I want to come back to in a second. The hon. Members for Gloucester (Richard Graham), for Solihull (Lorely Burt) and for North Swindon also contributed.
My hon. Friend the Member for Walthamstow and the hon. Member for East Hampshire drew attention to the work of the previous Government in reforming the Consumer Credit Act 1974 and introducing the Consumer Credit Act 2006. It is time to look again at the definition of “unfairness” that sits as the heart of the 2006 Act to see whether it addresses the concerns of those championing reform of the 1974 Act. We need further action to tackle loan sharks, who continue to operate despite the activity of teams across the UK dealing with illegal moneylending. We also need to look at how to expand access to credit unions.
Forgive me but, given the time, I will not.
The hon. Member for East Hampshire raised the question of access to social fund loans, which are another important source of short-term lending for those in difficulty. The previous Government decided to increase the amount of social fund loans available, and it will be interesting to hear what steps the Minister’s Government plan to take on that. The previous Government also acted to increase pressure on businesses regarding how debts were collected and interest rates levied, due to considerable concern about how they were operating.
I shall end with questions to the Minister. Consumer Focus, which I understand is to be abolished, has called for reform of the pay-day lending market. It has specifically called for the number of loans taken out or rolled over to be limited to five per household, and called for the development of an industry code of practice. My hon. Friend the Member for Islwyn (Chris Evans) raised the activities of Wonga. He may be interested to know that it has developed a code of practice, and I will be interested to know what the Minister thinks about it, and whether he thinks there is merit in the industry doing more in that area.
I hope the Minister will explain the Government’s intentions for the consumer advocate, and whether it will have a role in regulating unfairness. Will he explain how the Consumer Protection and Markets Authority will take over responsibilities for consumer credit from the Office of Fair Trading? Lastly, will he explain what the future holds for the growth fund and the financial inclusion fund? Both have done much to fund the expansion of access to credit unions and debt advice and, as a result, have provided substantial help to many extremely vulnerable people.
We all wish to thank the hon. Member for Walthamstow (Stella Creasy) for securing this important debate. She made clear her views about loan sharks—even more so when she tweeted a message to me which, if clicked on, plays the “Jaws” signature tune. We know where she stands, and during the few minutes available, I hope to respond to the specific points that she raised. I also want to comment on the excellent speeches made by my hon. Friends the Members for East Hampshire (Damian Hinds) and for North Swindon (Justin Tomlinson), and the hon. Members for North West Durham (Pat Glass), for Solihull (Lorely Burt) and for Harrow West (Mr Thomas).
Sadly, time is tight, so I will go straight on to some of the points that were raised. I am sorry that the Under-Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Kingston and Surbiton (Mr Davey), cannot be present, but he is involved in the Committee stage of the Postal Services Bill. As part of the development of our policy on postal services, we have published a document to secure the post office network in the digital age. The hon. Member for Walthamstow will have the opportunity to pick up a copy from the Vote Office, but let me draw her attention to paragraph 53 on page 24, which states:
“We are firmly supportive of a stronger link up between Post Office and credit unions and are actively looking into ways the two can work more closely together. Credit union current accounts holders can already access their accounts at post offices through arrangements with the Co-operative Bank, and it is estimated that…almost 80,000 Credit Union transactions have been carried out in post office branches.”
We understand the importance of the links between credit unions and the Post Office, and we have made a commitment on that.
The hon. Lady also asked about a levy to fund credit advice, but that is not a straightforward matter because one would have to consider on whom the levy should fall. Should it fall on credit unions? The Consumer Financial Education Body is part funded by credit card providers and other credit providers, and before we go down the route of a levy, we should await the results of our wider debt review, which I shall say more about in a moment.
The hon. Member for Harrow West asked about the consumer advocate and the consumer landscape review. Following the changes to the consumer landscape announced by the Secretary of State on 14 October, we are still considering the options. The previous Government launched a consultation on that issue, so we are not able to provide a response to that point at present.
Given the level of concern among all parties, I would like to report on changes that are already under way, which go back to the previous Government. Those changes, which will offer significant new protections for borrowers, include a new cooling-off period that will allow the consumer 14 days to withdraw from any credit agreement, a need for adequate explanations to be provided to any consumer when taking out credit, and a requirement for someone to undertake a creditworthiness assessment before any loan is made. Those changes will benefit consumers.
Let me turn to the focus of the debate: the consumer credit and personal insolvency review. A call for evidence was launched on 15 October. My hon. Friend the Under-Secretary is leading on that review and working closely with the Financial Secretary to the Treasury.
The review focuses on three key issues, the first of which concerns helping consumers and lenders to make better borrowing and lending decisions because we think that more can be done in that area. Secondly, consumers and lenders should increasingly manage existing borrowing in the long-term interest of the consumer, so we want a regulatory regime that encourages consumers to manage their level of borrowing over time and limits the scope for people to be unfairly penalised for events beyond their control. Thirdly, people in difficulties should be able to access the most appropriate debt remedy.
When I visited a branch of Lloyds TSB recently, I was told that a major problem was that if good customers get into a dispute, for example with a mobile phone company, and a county court judgment is imposed on them before the dispute is resolved, their credit rating can be messed up. Do the Government intend to review that situation?
Such abuse needs to be included in the review.
In the remaining few minutes available, I shall try to reassure hon. Members about the way in which the review is being conducted. First, we know that we must engage with specific issues, such as advertising. The existing rules on advertising do not address some of the softer issues concerning the way credit is advertised, so we wish to examine that. Impulse buying on store cards is another key issue that will form part of the review. In addition, the coalition Government are concerned that some charges levied by banks, particularly for unauthorised overdrafts, may make it difficult for consumers to keep control over their finances. The review will also cover interest rate caps, which we recognise as perhaps the most controversial issue touched on in today’s debate. We are concerned that the APR on some store cards can average 26%. Despite the fall in the base rate of interest since 2008, there seems to have been no comparable fall in rates on store cards.
The hon. Member for Walthamstow asked about other terms for the review. We have asked for evidence on a specific number of issues, so if people, including hon. Members, believe that we have not flagged up a problem that needs to be addressed, they should provide evidence of that problem to the review and state how it should be identified. The coalition agreement specifically mentions the issue of an interest rate cap on credit and store cards and that of a cooling-off period. Those are specific coalition pledges, which is why they are top of the list in the review, but there was no intention to exclude other subjects from the consultation should hon. Members, or other concerned people, wish to provide evidence of problems to be included.
Is that a yes? If we provide evidence that there needs to be action on interest rates charged across the board, including for pay-day loans, home credit markets and hire-purchase agreements, will the Government look at that evidence, act and include the matters in the credit review?
It is certainly an undertaking that if people, including the hon. Lady, come to us with evidence of a problem, we will consider that as part of the review. Obviously, we cannot commit the Government to act because that raises a host of further issues. If there were time, I might have repeated for the benefit of Opposition Members the details of at least three separate studies on interest rate caps that were commissioned by the previous Government. They all concluded that there were strong arguments against such caps, including the danger that people would become more dependent on loan sharks. We are aware of the evidence from the 2004 study, the 2006 inquiry into competition and, most recently, the OFT review. We are not committed to such measures because of our concern about people becoming dependent on loan sharks, but we will certainly consider the evidence. If the hon. Lady, the hon. Member for Solihull—who has a track record of being concerned about this issue—or any hon. Member would like their evidence to be considered, they should submit it to our review.
I assure the hon. Member for Walthamstow that I and the rest of the Government appreciate the many concerns about the availability and consequences of consumer credit. When used sensibly and responsibly, credit is a tool for coping with life’s uncertainties, but this is an area in which we must gather evidence before we introduce new rules, because we otherwise risk unintended consequences. That is why we have launched our call for evidence, and it is why I welcome today’s debate.