Further consideration of Bill, as amended in the Committee and in the Public Bill Committee.
New Clause 11
High cost credit lending
‘The Government shall lay before Parliament a review of all taxation measures contained in this Act that are applicable to those judged by the Financial Services Authority (or its successor body) to engage in high cost credit lending. This review shall consider the following matters—
(a) the nature of the high cost credit market and the proliferation of lending practices which are detrimental to consumers and or competition in the provision of credit to consumers;
(b) the impact that taxation could have on the provision of high cost credit in the UK which is detrimental to consumers and or competition in the provision of credit to consumers;
(c) whether changes to taxation could discourage lending in a manner which is detrimental to consumers and undermines competition in the provision of credit to consumers; and
(d) other measures relevant to the high cost credit lending sector that may prevent consumer detriment.’.—(Chris Leslie.)
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
We do not often find the issue of high-cost credit lending in the headlines, but it is critical for many people up and down the country. Many of our constituents would expect to see it addressed in the Finance Bill, because there is growing concern that a large number of some of the poorest people in society are becoming prone to high-charging payday lending, doorstep lending, new variants of hire purchase and illegal loan-sharking, especially as the mainstream banks restrict credit availability.
I gather that since 2007 we have seen a fourfold rise in payday lending. The high-cost credit sector is now estimated to be in the order of £8.5 billion in value. The situation is familiar to many hon. Members across the House and particularly so to my hon. Friends, who represent some of the poorest and most challenged constituencies in the country. In my constituency, Nottingham East, the citizens advice bureaux and other advice organisations, such as Advice Nottingham and the St Ann’s advice centre, have recently published an anthology of modern poverty as they encounter so many stark stories of personal indebtedness daily. There are too many instances of companies—legal ones—preying on the vulnerability and desperation of stressed consumers who need to bridge their spending with short-term but, unfortunately, ultra-high-interest credit. A quarter of consumers who use high-cost credit cannot access any other form of borrowing. Apparently, 7 million people in the UK are denied credit and bank accounts that many of us would take for granted.
May I lend my support to my hon. Friend’s endeavours on this critical issue? Is it not a fact that the pressure on debt advice in our constituencies has increased dramatically because of the economic circumstances and the tightening of the criteria for social fund and care grants, and that this situation will get worse as people get caught up in a spiral of borrowing to pay existing debt?
My right hon. Friend, who has an excellent track record in raising many of these issues, is completely correct. The vice in which many of our poorest constituents find themselves being squeezed is very much apparent. The changes to the social fund that he mentions are part of the context in which we would want to review the circumstances in which high-cost lending takes place. That is the objective of our new clause 11: we want to examine the possibility of regulatory and/or tax measures to address this problem.
The hon. Gentleman mentioned the fourfold increase in payday loans. Would he acknowledge that a substantial amount of that increase occurred in the period 2007 to 2009, at the start of the recession, and that although the rate has subsequently increased, its growth has tapered off somewhat? Does he also agree that payday loans are but a sub-segment of the sub-prime, high-cost credit sector?
Yes, payday lending is indeed a facet of the broader problem. I am not sure about the trends and how things have been moving—the hon. Gentleman may have other statistics that it would be worth sharing if he makes a contribution to this debate—but there is no doubt about the trajectory of that growth, which has been quite marked, which I know is a concern for all Members, in all parts of the House.
Government Members share Opposition Members’ concerns about this issue, and we want to do the best that we can. However, new clause 11 asks for a report on the impact of all tax and non-tax measures on the cost of high-cost lending when we have not yet heard the response to the Government’s call for evidence. I am hopeful, as are many Members, that this will address the issue and provide further help, so does the hon. Gentleman not feel that his new clause might be a little premature?
The hon. Lady makes an interesting point, because it is important that we engage with the Government properly on this agenda. We are still waiting for that report, although I hope that new clause 11 has been framed in such a way as to be pretty harmless and to command widespread support. Ultimately, all that we are looking for is a review of the circumstances; and indeed, some of the tax measures that may need to be included—although they may not—would not currently be part of the arrangements that I understand her hon. Friends are reviewing. New clause 11 is simply about ensuring the widest possible capability for those policy levers that the Government would be able to consider. There are so many measures necessary to help protect the consumer. They include not just action on payday lending or interest rates, for example, but the support needed for financial literacy education—something to which the Government have regrettably taken the axe, by terminating the £26 million financial inclusion fund. That decision is a particular regret, given that it will hit citizens advice bureaux up and down the country, along with other face-to-face advice agencies. Indeed, the financial inclusion fund was an essential bit of seedcorn funding, so I would be grateful for the Minister’s clarification about its future.
There is no need for clarification: if the hon. Gentleman had done his research properly, he would know that the Government have extended the funding for debt advice for a further year, and it is the intention that the Money Advice Service—which is funded by the financial services industry—will take on that work.
I did indeed know of the hon. Gentleman’s announcement of some time ago—not quite a full year yet. We are now into July, and the funding is due to run out next April, expiring at the beginning of the financial year 2012-13. Many advice agencies are quite anxious about what will fill the gap. It is clear that he has kicked the issue to the Money Advice Service, although we do not yet know what its approach will be. One crucial point is whether it will be interested in face-to-face advocacy and supporting such activity.
My hon. Friend makes an important point. In addition, it does not necessarily address the face-to-face advice that is given by many citizens advice bureaux and other agencies that have been reliant on the financial inclusion fund. The Minister says sotto voce that it will do face-to-face advice as well; I will be interested to see whether the £26 million of investment is maintained. No doubt he will want to clarify that when he addresses the new clause.
I pay tribute to my hon. Friend the Member for Walthamstow (Stella Creasy), whose tenacity is to be commended for the fact that this issue remains front and centre on the political agenda. The Back-Bench motion that was passed last February called on the Government to introduce measures to increase access to affordable credit and to take regulatory action to control non-competitive examples of excessive charging, but we still have not seen any action since then. That is another reason why it is important to move forward and get a sense of priority and urgency into this issue, and this Bill is a good opportunity to consider these matters.
My right hon. Friend the Member for Sheffield, Brightside and Hillsborough (Mr Blunkett) spoke earlier about why some of this action is needed now. The changes to the social fund and crisis loans that were announced in March—after the Back-Bench motion was passed in February—mean that social fund crisis loans will no longer be available to pay for basics such as cookers and beds, and the living expenses rate is being cut from 75% to 60% of the benefit rate, thereby limiting the number of loans that can be applied for. In addition, there is a backlog of unprocessed claims and the Government are planning to cut the discretionary social fund from £872 million last year to just £183 million this financial year—all under the axe of a Liberal Democrat Work and Pensions Minister of State, the hon. Member for Thornbury and Yate (Steve Webb).
At the same time, thousands, if not hundreds of thousands, are being disfranchised from access to credit. After the credit crunch, as the banks recapitalise, we see withdrawal from anything vaguely “sub-prime”, as it may be categorised. However, it is also known that there is money to be made from vulnerable customers. Many hon. Members will have experienced pushy sales calls, which are randomly generated, and text messages, which many people are receiving. It is about the desperate customers that I worry most and their responses to some of those apparent offers of help and assistance. It is all part of the allure of high-cost credit, which we need to regulate far more effectively.
It had been hoped that the promises of mutuality and support for the credit union movement in the coalition agreement would by now have tried to make some inroads into this problem, but despite the promise in the coalition agreement that
“detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry”
would be brought forward, all we have seen from the Government so far is the Northern Rock trade sale, local authority discretionary help for credit union squeeze because of the cuts to their budgetary position and, of course, the Treasury’s pre-emption of the Lloyds Banking Group disposal. The Vickers commission was looking at how to handle that particular issue, but Ministers have pressed on with the disposal of 620 branches rather than pausing and waiting for that report.
At the same time, funding for advice and financial education is falling away, as we have been discussing, as local authorities cannot pick up the tab. The basic problem is that not all customers are informed and logical when it comes to financial issues. The Money Advice Service, as my hon. Friend the Member for Makerfield (Yvonne Fovargue) mentioned, may well be there as a guide for people who have the time and space to make those decisions, but many of our constituents are not only busy but often confused about financial services. They can be distracted and stressed and in many cases they have an aversion to small print. Coupled with that, there is massive inertia in credit services.
There are some fantastic charities, such as Citizens Advice, which I have mentioned, and the Consumer Credit Counselling Service, of which I was a board trustee for five years. They pursue a number of ways to help those in most distress. Creditor-funded consolidation is a very good approach, but we need other reforms in the sector; facets include, for example, the fee-charging, customer-charging debt management plan providers. Charging customers rather than looking to the creditor to cover the administrative costs is an unacceptable business model in this day and age. The practice should be phased out and I hope the Minister agrees.
Unfortunately, the consumer credit regulation changes the Government propose still involve too much confusion. There is still no clarity—[Interruption.]—as I understand it. The Minister may know because he may be able to look into what will happen in the future, but we still have no clarity about consumer credit regulation and the powers that may transfer to the financial conduct authority. It will not be a champion of the consumer in its objectives but will have regard only to the
“appropriate degree of consumer protection”,
which in my view is too open to interpretation.
On the prudential regulatory changes, the Bank of England Financial Policy Committee and the Prudential Regulatory Authority have insufficient consumer focus. There will be no PRA consumer panel. There is no voice for the consumer on the Financial Policy Committee. Indeed, it was interesting that the first of the FPC’s reports talked about the risks of forbearance, which may indeed be something the committee needs to deal with, but the fact that it did not even address the point that sometimes forbearance and flexibility are in the consumer’s interest gave me the sense that there was not yet an adequate balance in the composition of that board. The PRA’s duty to consult the financial conduct authority is too weak and, as the Minister knows, I have criticisms of the lack of parliamentary accountability of the new apparatus he is proposing. That too is an area where the consumer voice is being fettered.
I acknowledge that there is no single easy answer to the high-cost credit regulation issue and that there are different approaches to regulation. Caps on usurious interest rates—to use the biblical term—have often been suggested, but there could be consequences. Should we control things geographically, for example where there is inadequate competition? Sometimes deserts emerge, even among doorstep lenders, who have scaled back their activity in recent years, and the illegal loan shark has filled the gap voraciously.
There are cases when taxation of demerit activities might be appropriate, to discourage punitive charges and rates. We need detailed regulation to protect not just the percentage interest rate charged, but the admin fees and product fees that put such a squeeze on the unsuspecting consumer. One of the best ways to look at the regulation of high-cost consumer lending is to consider time limitations on the use of payday lending. Should we say that such lending is absolutely for emergency circumstances and it should have only short-term availability? Unfortunately, we see people go back to payday lenders month after month, and even year after year. Excessive long-term dependency on payday lending needs to be addressed.
I entirely agree. I had a meeting with Wonga the other week. The company advocates a maximum of three rollovers. It is in nobody’s interest, not even the lender’s, to have people in a cycle of debt, because they are less and less able to pay it off. Perhaps something like that could be included in the regulations.
The sector itself ought rapidly to produce suggestions for self-regulation. I hope the new clause will make the sector aware of the seriousness with which the House takes the issue. We have had enough of people in desperate circumstances being exploited. The House of Commons passed a motion in February. We should pass the new clause, simply to ask for a review and a report on the range of regulatory and financial powers that the Government ought to take to stamp out some of the worst practices.
Customers need a fair deal from financial services generally, but our duty is to start with the people who are most at risk—the vulnerable and the exploited. If Parliament cannot stand up today to protect those most in need, who will?
I rise not to support the new clause but to say to Ministers that I would like to hear exactly what they intend to do about doorstep lending. The hon. Member for Solihull (Lorely Burt) mentioned Wonga, which can charge up to 4,500% interest on its loans. Uncle Buck can charge 2,500% and PaydayUK can charge 1,200%. With a base rate of 0.5%, how can charging such inordinate interest be justified? These companies—I call them all loan sharks, to be blunt—travel around our poorest areas. I would be the first to admit that my constituency is not the most deprived in the country, but I have many poor and vulnerable constituents, and I think that Members on both sides of the House are concerned about what action we should take.
I know that Ministers are not keen on dealing with this problem through regulation, but perhaps we should consider our approach to smoking: we do not stop people smoking—although we have banned it in public places—but we put large health warnings on cigarette packets. The Financial Services Authority, or whichever body will be responsible, should at the very least take action so that there are serious health warnings for those considering taking out these loans.
The hon. Gentleman is right that the advertising and promotion of these products is a great concern. These products can seriously damage someone’s financial health, because they not only get them into huge debt, with huge interest to pay, but can often prevent them from securing mainstream credit, which can affect them enormously.
I am not greatly in favour of regulation, but I do not think that we can stand idly by and let some of the most vulnerable people in the country be exploited. They are desperate for money, and people knock on the door and offer them it. In fairness, many of them do not look at all the details or consider the fact that they will have to pay such high interest if they do not repay the loans. They do not realise that they will probably be charged even more interest if the loan is renegotiated, and that if they do not pay on time the loans company is likely to impose huge fines. That is unacceptable in this day and age and we must do something about it.
About 50% of the population in Ireland are involved in credit unions. In the US and Canada, the figure is about 40%, in Australia and New Zealand it is about 25%, but in the UK it is only 2%. I know that the Government are looking into increasing the availability of credit unions across the country, but we need to act much faster. In the meantime, we have to act against these companies, the loan sharks, because people who take out the loans sometimes have to pay back 10, 20, 30 or 100 times as much as they originally borrowed.
If the loan sharks’ argument is that they lend on those terms because the people to whom they lend are a security risk, we must question whether they should lend the money in the first place, and certainly at such massive amounts of interest. They must take the view that if 25 of the 100 people to whom they lend are forced into bankruptcy they will make enough money from the other 75 to make a profit. Is that moral and right? The answer is certainly not. Regardless of one’s political persuasion, that cannot be right in this day and age.
I have mixed views on the new clause, but I do not want Ministers to wring their hands and say that there is nothing they can do. In fairness to the Government, I should point out that the Opposition cannot hold their heads high, because they had 13 years in which to do something about this issue. It is right for the coalition Government to take the issue on. Instead of wringing our hands and saying we can do nothing, let us do something.
My hon. Friend is talking, almost interchangeably, about loan sharks and high-cost credit lenders regulated by the FSA. The Government have put even more money into the loan shark operation to clear them from the streets. It is important that we do not mix the two, because whatever one thinks about high-cost credit loan companies they are at least regulated and we are doing things to improve them. Loan sharks are totally unacceptable in this country.
I agree with the hon. Lady to some degree, but I say to her bluntly that charging 4,500% interest, whether it is done legally or not, is theft. As a farmer, perhaps I have slightly jaundiced views about bankers, who offer an umbrella when the sun is shining and want to take it away when it starts to rain. We cannot go on letting vulnerable people be exploited—it does not matter whether it is being done legally.
My hon. Friend makes a powerful point. The challenge is that people always say that we have to do something about this issue, but it is never clear what that thing is. For me, the vital thing is awareness. The issue is not just loan sharks but extends to organisations such as BrightHouse. Does my hon. Friend agree that people need to understand the true cost of what they are borrowing?
I share that view entirely. At the start of my speech, I spoke about a financial health warning on a loan, including what the rate of interest will be. There should also be an example, perhaps showing what the principal amount would be to repay if one started with £100.
I support the hon. Gentleman. Does he agree even when people know the rates, they have little choice because they cannot borrow from any other type of organisation? Research shows that a quarter of these companies’ customers cannot get credit elsewhere, so even when they know the rates they have no option.
The hon. Lady is right that parts of the population cannot borrow elsewhere, which is a problem. That is another reason for clear warnings, if not restrictions, on the rates of interest charged.
The problem is not just that there is a population who cannot borrow from anywhere else but that many companies and loan sharks knock on people’s doors. Credit is often dished out in cash, which is very tempting. Some people could, if they went to a great deal more trouble, secure money from proper lending companies at a competitive rate.
The hon. Gentleman refers to payday loans, which also incur huge amounts of interest.
I am not against people being able to borrow. In a capitalist system, people need to be able to do that, but we must stop companies exploiting people’s vulnerability and lending at such vast rates of interest. That can be achieved either by legislation or by companies having to provide a clear statement of what a loan will cost when their representatives arrive on somebody’s doorstep and try to lend them money. If someone who borrows £100 will end up paying £2,000 back, that should be absolutely clear. That is the very least I should like the Government to do.
I have made, I hope, many good points, and I hope too that the Government will not just wring their hands but do something to help vulnerable people and stop legal loan sharking companies taking money from people in a way that I believe is theft.
I have come here today to speak in favour of the new clause, and to vote for it, too, which I believe will be a powerful expression of the need to act to tackle the problems caused across our country by high-cost credit companies, or so-called legal loan sharking.
I promised when the House debated the issue previously that I would congratulate those who took action to protect vulnerable consumers, and I want to do so. I welcomed the announcement of the consumer credit review and the coalition agreement promise to tackle the cost of borrowing on store cards and credits, but it worries many of us that it is already overdue. To meet the timetable, that work will have to be done within the next two weeks.
Even more worrying for the Opposition is the fact that we have had to drag the Government kicking and screaming to the table to discuss high-cost credit, because the coalition agreement made no commitment to tackle it. There is still uncertainty about whether it will be tackled in the consumer credit review.
I am a huge supporter of what the hon. Lady is trying to do. I agree that there is concern about how quickly we are moving, but we had 13 years of her party’s Government. Can we try to keep this a cross-party matter? Members of all parties are concerned about it, so let her not bash the Government, and when I speak I will not bash the Labour Government for their inaction. Let us all try to keep it positive.
I very much hope that there will be cross-party agreement, but, as I will explain, I fear that that consensus is being broken for the purpose of choreographing coalition conferences. That worries me greatly. I hope the hon. Gentleman will agree that when so many people are suffering by having to pay the high costs of credit that companies charge, any delay is unacceptable, and I hope he will vote accordingly.
I know that we are not alone in wanting action as soon as possible. The campaign has the widespread backing not just of MPs or policy makers but of debt experts, campaigners and members of the public. They are deeply concerned that doing nothing to regulate these firms is feeding a growing crisis of personal debt for families across the country, and they want action.
I fear that I am going to end up condemning the Government today, because we are debating not whether to act, or whether regulating for a cap on the cost of credit would be effective, but when to do so: debating when, not if, is unforgivable.
The evidence on which that presumption —that myth—is based is very uncertain. I would argue that there is a strong parallel with the debates on the minimum wage and the fear that its introduction would drive companies out of business. We now know that that is simply not the case. Evidence shows that a cap on the cost of credit would lead to a fairer deal for consumers, for which we are arguing today. It is important that we get it right, given the number of people involved in the market. I ask Members to support the new clause because it proposes regulatory action now, given the consensus that there is a problem. It states that it covers
“other measures relevant to the high cost credit lending sector that may prevent consumer detriment.”
By consumer detriment, we mean lending that drags people into debt.
We might all agree that there is a problem in the market, and that something needs to be done, but the coalition’s choreography is getting in the way, and I fear that our constituents will lose out. In making the case for Government Members to change their mind about the political fancy footwork and instead dance with us to action now, I want to set out what the problem is, what is causing it, what could be done about it and why doing nothing, or even delaying doing anything, should not be an option.
This question is important when we are debating a Finance Bill, because we can use taxation and regulation to deal with social and economic problems. For example, we could tackle problem drinking by raising taxes on high-strength alcoholic drinks. Indeed, in Committee, the Economic Secretary to the Treasury said:
“We can see that such a measure will have a disproportionate impact on tackling problem drinking, because the change in taxation will make it less attractive for producers to make such strong products.”––[Official Report, Finance (No. 3) Public Bill Committee, 17 May 2011; c. 166.]
By the same principle, the Treasury could tackle problem lending by penalising companies that fail to meet certain standards in their provision of consumer credit.
The problems in the lending market make the issues clear. The UK has one of the highest levels of personal debt in the world. As of April last year, Britain owed more than £1.4 billion in private debt. As the hon. Member for Tiverton and Honiton (Neil Parish) pointed out, borrowing money is sometimes essential, whether to enable someone to pay for training or a house, or to start a business. Indeed, borrowing is critical for our future economic recovery. I am therefore saying not that we want to stop people borrowing, but that we want to stop problem borrowing. However, the current signs are that personal debt is on the rise, and that is a problem.
Does my hon. Friend agree that the evidence suggests that this country is now becoming a haven for such companies, which are targeting this country because of the lack of regulation? Does she also agree that that is making things far worse for our constituents?
My hon. Friend is exactly right. It is not just evidence; the companies have specifically said that the lack of regulation in the UK compared with other countries makes it a target market for them.
We know that borrowing is becoming a problem for people. More than four in 10 people are worried about their current debt, and in recent months 4 million have taken on more debt than they ever have before. One third of families say that they have no emergency savings whatever. However, this debate is not about a lack of rainy-day money. The number of people who say that they are likely to exceed their overdraft limit has more than doubled in the past year, and the number of people who say that they are likely to use an unauthorised overdraft this month has nearly doubled since July last year, from 900,000 to 1.6 million.
That means that more people are getting into financial difficulties. In recent years, personal insolvency in the UK has reached a record high. On average, there are more than 160 personal insolvencies every year in each constituency, which is a dramatic increase since the start of the last decade.
New clause 11 covers not only those who are formally in financial difficulties but those who are affected by debt and who have not sought help. The proposal reflects the growing inequality in our society between those who can borrow affordably and those who cannot. Research by the Department for Business, Innovation and Skills shows that most households have a debt-to-income ratio of 10% or less, but that one in five households have debts worth more than 100% of their annual household income. There is growing evidence that such households are using multiple forms of unsecured credit—a mixture of high-cost credit and credit cards. Thirteen per cent. have four or more types of debt.
The question for many of us is this: who is borrowing? Eleven per cent. of lone parents use non-mainstream loans compared with just 3% of households overall. The Consumer Credit Counselling Service tells us that one in eight people who contacted it during the first half of 2010 were claiming jobseeker’s allowance. However, one thing that might concern many hon. Members is the growing evidence that the people who are suffering in this market are not just those whose incomes have always been fragile, but many middle-class families. Experian data show that the biggest increase in insolvency is among those with suburban mindsets—people who are in work, married and have kids, and who are trying to make ends meet.
Is it a matter of regret to the hon. Lady that the previous Labour Government presided over the greatest expansion of consumer credit in the history of this country? In their 13 years, the previous Government tried to do a number of things, but rejected the proposal in new clause 11. Does she agree that this Government, one year in, should be given the opportunity to finish their consultation and make proposals of which she might approve?
I am interested in the hon. Lady’s impression that consumer credit is a bad thing, because I do not agree. I would also be interested in her views on research by the Office for Budget Responsibility, which shows that as a direct consequence of the Government’s Budgets an extra £10,000 of debt is being put on to households. Perhaps she would like to comment on the implications of that for family finances. No? Then I will continue.
The problem is not just the high-cost credit industry but the nature of the industry and the way in which it operates, which is causing so many problems. What most worries many Opposition Members is that so many families are struggling. Indeed, we know that 46% of families say that they do not earn enough in a month to pay all their bills. Crucially, of that 46%, 10% say that the reason they are struggling is the repayments on high-cost credit. It is those very products that are pushing them into financial difficulty.
For the avoidance of doubt, I say clearly that I am not trying to put Wonga and the other companies out of business. I do not hold with the constituent of mine who argued that we should learn a lesson from Dante and put them in the seventh circle of hell, but we can make the credit market fairer for all concerned. It is important to set out, therefore, the kind of companies we are talking about and just how quickly this industry is growing in the light of recent economic circumstances.
Many people know about payday lending—the form of credit whereby a borrower gives a creditor a cheque or an authorisation to make an automatic withdrawal from their bank account. That is used as security for a short-term loan to be repaid, supposedly on the next payday. It is a long-established form of credit in other countries, but it is relatively new to the UK—and it is growing rapidly. By 2009, the payday lending industry was worth more than £1.2 billion, and the figures I have gathered from the Department for Business, Innovation and Skills, which were released under a freedom of information request rather than being put in the public domain, show that it is now worth £1.9 billion. Indeed, in its “Keeping the Plates Spinning” report, Consumer Focus estimates that payday lenders are expected to quadruple the scale of their operations in the UK in the next few years alone.
The hon. Lady says that the payday lending market was £1.2 billion in 2009. According to the Office of Fair Trading review of the payday loan market, it was £600 million. To clarify the situation, and for my education, will she explain the difference between the two numbers?
I will happily explain the difference between the two numbers. The hon. Gentleman might have heard me say that I made a freedom of information request to obtain the most up-to-date data from the Department, and it is a source of concern that Ministers did not share the information with MPs. Research shows clearly that the market has grown to £1.9 billion. If I tell the hon. Gentleman that 5% of the population have taken out a payday loan in the last year, representing 2 million, perhaps he will understand the discrepancy. Perhaps he might like to account for why the Government did not want to put that information in the public domain.
I just wish to point out to the hon. Lady that I think there is a lot of consensus, which I hope she does not destroy in her passion for this issue.
As a point of clarification, the 5% figure in the OFT’s analysis came not from the payday loan market but from participation in the high-cost credit market, which includes credit unions and credit cards. Given that my source is the OFT, perhaps she will clarify that point too.
I am happy to share the figures with the hon. Gentleman, although I am afraid to say that his interpretation is incorrect. One of the things that I have done—perhaps I am getting a reputation for it in the House—is my homework on this market, and I have sought as much accurate information as possible. That was why I made the freedom of information request, and I would be happy to share the data with him. One of the challenges is that the Government have information about how quickly this market is growing, but they are timid about confirming it.
My hon. Friend is setting out carefully and deliberately the challenges that people face. Does she agree that the exponential growth in this high-cost credit lending is the very reason the Government need to act to address this issue sooner rather than later, in line with the consensus across the House?
I absolutely agree. I am quoting research by the consultancy practice, R3. It is conducting surveys because it is worried about the mix and range of credit that people are taking out and the high-cost credit itself, which is causing people to get into debt. That is why I am passionate about tackling the problem sooner rather than later. Contrary perhaps to some of the briefings that hon. Members might have had from the payday industry, the majority of people borrowing from these companies are on comparatively low incomes. In particular, one in 10 UK payday customers has an income of less then £11,000, and 46% have incomes of less than £15,000 a year. It is evident how quickly high repayment charges eat into an already meagre wage.
This debate is not just about payday lending; it is also about some of the other forms of high-cost credit equally untouched by regulation in this country, including home credit. I know that some Government Members are concerned about home credit, particularly the provision of small cash loans to be repaid by instalment to collectors who call at home. A company named Provident, with which many people in the House will be familiar, has noted that its customer base has increased by 20% since 2007. It is now lending money to nearly 1.8 million people in this country.
This debate is not just about home credit either; it is also about hire purchase agreements and other methods of buying goods by instalment but under contracts that have heavy penalties written into them. BrightHouse, which has been mentioned, is also growing at a tremendous rate. In its annual report for 2009-10, it reported having had its busiest year ever, posting 13.7% growth in what it termed “contract receivables”, standing at nearly £298 million. It has opened 21 new stores in the past year, increased its customer services by 20%, and grown fourfold since 2006-07.
We know that a number of factors are driving demand for these products. I agree with those who ask what more the mainstream banks could do to service this group within our community. We need to ensure that people are lent money at affordable rates, and mainstream banks must play their part. PricewaterhouseCoopers’ research notes that a growing proportion of consumers are now facing the shock of being denied credit from mainstream lenders. We know that about 5 million to 7 million people in Britain are denied credit either because they do not have a bank account or because they have no credit history. That leaves many people with only the option of unsecured lending, including from payday or doorstep lenders.
We also know that the cost of living is pushing people to borrow to make ends meet. The Institute for Fiscal Studies recently warned that households are looking at the largest fall in their disposable income since 1981. Prices are rising twice as fast as income. What does that mean on an everyday basis? It means that the cost of living is rising. Asda’s income tracker shows that the average UK household is £13 a week worse off than it was a year ago, as inflation eats into what is left of wage packets. We know that price-sensitive commodities are part of that mix. Petrol accounts for 12% of the average household’s budget, although that is likely to change, and I suspect that energy prices might vie with petrol prices in the costs they add to households.
We also know how vulnerable many in our community are to a change in interest rates. Some 30% of those buying a property in 2007-08 relied on 100% mortgages, so they are especially vulnerable to signs of change. A 2% rise in interest rates would lead to a £307 increase in monthly mortgage payments across the country, and already people are struggling to pay their mortgages and using high-cost credit to meet their costs.
The hon. Lady just made the hypothetical point that a 2% increase in interest rates would cause those costs to rise. Undoubtedly that might be true were rates to rise, but they have not risen, and one reason market interest rates have not risen is that the Government are dealing with the deficit at a time when the Labour party has not come forward with any policies to tackle the emergency.
I hope that the hon. Gentleman is not being complacent about the cost of living, its impact on people in his constituency and the fears of many about what an interest rate rise would mean for their monthly mortgage payments. One thing that worries me is that a lot of people are borrowing just to make ends meet; they are borrowing not for investments, holidays or fancy televisions, but to pay their rent and mortgages and to put food on their families’ tables. His complacency about interest rates not rising any time soon is misplaced.
I have heard the hon. Lady speak with passion in this debate and others, and I respect the point being made. However, some of the points being made by Government Members are important, particularly those concerning fiscal constraint and household spending constraint. The gap in her argument is that it is vital that households bear down on their spending. It is not just about the cost of financing a television or whatever else; it is about not going for it in the first place. There is a wider scope for this argument. This debate is not just about the cost of the debt, but about people avoiding it in the first place by lowering their expectations of what they need.
I would be interested to hear the hon. Gentleman’s advice to the nearly 500,000 Londoners who are having to use their credit cards to pay their mortgage or their rent. Right now, people are borrowing to pay for everyday essentials, and I fear that he sounds a bit like Marie Antoinette saying that people should just eat cake. That is very misplaced, given the dire financial situation that many people are finding themselves in, certainly in my constituency and, I will wager, in his as well.
Indeed, Shelter’s research shows that it is not only people in London who are using their credit cards to pay their mortgages. There are 2 million people in this country who are doing it. It is horrifying to think of the situation that those people are getting themselves into, given the interest rates that they are paying on their mortgages, let alone the rates that they are paying on their credit cards.
We also know that changes in the cost of living affect some more than others. The Resolution Foundation points out in its low earners audit that those on low to middle incomes spend a higher proportion of their incomes on the goods and services that are hard to cut back, such as their housing, their fuel, their transport to work or the food that they put on their children’s plates. That is what the hon. Gentleman is talking about. Those low to middle income earners spend 40% of their spending on those everyday essentials, compared with the 26% spent by higher earners. One in five pensioners have had to cut back on essentials such as food because of the rising cost of living.
This is not just a demand-side issue; it is also about the way in which the high-cost credit market is stacked against the consumer. That is why I believe that the market merits regulation. In order to make its profits, the high-cost credit market makes use of a number of the attributes of the people who have to borrow from it and of the way in which the market is structured. As has been mentioned, a quarter of the customers of high-cost credit companies cannot access any other form of credit. Indeed, Consumer Focus’s research shows that many users of payday loans are unable to access mainstream credit such as overdrafts because they have already maxed them out. That means that they have no choice; they have no power to shop around for a cheaper loan. Also, they cannot build up a credit history that would show a mainstream lender, who might lend at a lower rate, that they could be trusted to pay a loan back.
Because high-cost credit companies have fixed costs, they make their money by repeatedly lending to people. That means that their business strategy is geared towards encouraging repeat borrowing and the rolling over of loans. Friends Provident has found that 29% of payday loans are refinanced, with the refinancing rolling over on an average of two occasions. Some 15% of home credit loans are refinanced and rolled over into a new loan before the end of their term. It is worth explaining what that means for the cost of borrowing from these high-cost credit companies.
One person who got in touch with me took out a loan of £650 with Wonga, in two instalments, to be paid back within a month. When the repayment date arrived, he found that he could afford to pay only the interest that had accrued on the £650, which was £163. The original £650 loan was then rolled over for another month. At the end of that month, he paid off the loan, which cost him another £858. That was the original £650, plus interest of £208 accrued in the second month. The clock starts ticking in the first month of these interest payments, which is how 4,500% interest rates are reached. The longer a loan is rolled over, the closer it can get to the 4,500% APR that Wonga charges. The process of rolling over meant that he had paid £1,021 for borrowing £650 over two months. It is difficult to see what level of cap on the number of roll-overs would make a difference in this market, because the industry consistently refuses to release information about its business model. We can therefore only guess at the impact that the number of roll-overs has on people’s debts.
Furthermore, we know that the rates charged by high-cost credit companies often do not reflect an economic rate, due to a lack of competition in the market, a lack of regulation to drive down costs, and the absence of any ceiling being set. I recognise that using APR is problematic in understanding the cost of borrowing, especially in the payday loans industry, but as a yardstick it can help us to illustrate the issue. We know that payday loans can cost 4,500% from Wonga. They can cost 2,100% from Uncle Buck, 1,200% from Payday UK, and 1,700% from KwikCash.
I apologise for coming in late to the debate. My hon. Friend uses the same tube line as I do. Did she notice on the way in that one company was advertising on the tube, offering a decision by text within a minute for a loan at an APR of 1,734%. That cannot be right; we have to do something to crack down on it.
I agree absolutely with my hon. Friend. There is no ceiling on this market, which means that company rates are going up, not down. We also know about the lack of competition with other sections of the market. Provident owns 6% of the market. In 2004, the Office of Fair Trading referred the doorstep lending industry to the Competition Commission and, in 2006, its report confirmed the lack of competition. As Citizens Advice argues, however, the fact that these problems are getting worse, not better shows that the measures suggested in 2006 have not worked and that it is time to strengthen the intervention we make in this market.
Although I am an avid supporter of the credit union movement, it cannot at this moment present any kind of alternative to this market within any relevant timetable. Credit union membership is growing by 8% a year, but the payday lending industry alone is three times as big as it was two years ago. Credit union lending therefore remains relatively small scale, equivalent to just 5.9% in value terms of the high-cost commercial sector. As a consequence, it is unlikely to exercise any real competitive restraints on the prices in the high-cost credit sector.
With all the signs that this market is growing exponentially, this new clause and the review it recommends would allow us to look at a number of issues on how to tackle it effectively. First, it could consider excess profits—
I thank the hon. Lady for giving way. I think that credit unions are really important. I have promoted them in my own constituency and I will continue to do so. I have joined one myself to demonstrate that it is something that we should all think about. Surely it would be a good idea to put out a more positive message about the role credit unions can play and encourage people to start thinking about being responsible in the management of their finances through the use of credit unions.
The hon. Gentleman is being a little unfair to accuse me of not putting out a positive message about credit unions, given that I worked long and hard to set up the Waltham Forest community credit union and to secure it more than 4,000 members from my borough. My point is that when only 2% of the British public are part of a credit union, it cannot be the answer to the problems caused by these companies. The question is how to get the right mix, and I believe that regulation needs to be part of that mix. Of course extending access to affordable credit is part of the solution, but it will take decades for credit unions to provide a serious alternative to these companies from which people are borrowing and getting into debt with now.
In response to the intervention by the hon. Member for Stroud (Neil Carmichael), is it not a further problem that because of the cuts to citizens advice bureaux, welfare rights units and law centres, good advice, which might help people to steer clear of loan sharks, is less and less available? As the years go by and the cuts continue, the problem will get even worse and the inequalities will grow.
There is a real concern about the lack of advocacy services and about people’s inability to get help in negotiating with their creditors. I believe that we have to make credit affordable for all; payday lenders could be part of the mix if they were properly regulated. That is all that the new clause calls for.
Let me present some figures that might tempt Treasury Ministers when they see what could be achieved in the way of tax through this review. The Competition Commission inquiry into the lack of effective price competition in doorstep or door-to-door lending estimated that companies were making an excess profit of at least £150 million a year. The commission considered that 90% of that excess profit was made by Provident Financial alone. On that basis, Provident has made £675 million in excess profit out of low-income communities since 2005—a sum greater than the total amount of credit union lending that took place in 2010.
The Competition Commission’s findings showed that excess profits amounted to additional costs to the consumer of approximately £9 for every £100 lent. A cap on that basis would have allowed Provident to charge no more than £53 for every £100 lent in 2006—still a lot of money. Even allowing for inflation at about 4.5%, taxing credit lent at a rate of £63 per £100 lent in this market would save consumers some £18.80 on every £100 borrowed or about £94 on the cost of a typical £500 loan. Even if Ministers rejected looking at tax measures, they could look at how to introduce an effective cap on the cost of credit.
Let me be very clear: I do not want to see a cap on interest rates. I know that Members have been lobbied extensively on this and been given information about capping the costs of credit based on caps on interest rates. I do not believe that caps on interest rates work effectively. The European research shows that low caps in America have been problematic, but it points out that the more flexible caps in Europe have been effective in controlling the market.
There are many myths about capping the costs of credit, as there were about regulation and the minimum wage. To those who argue that capping the costs of credit would cut lending and put firms out of business, I say that they should look at Poland, France and Germany, which all have such caps. To those who fear that caps would encourage all banks to start charging 4,000% interest, I say that that clearly would not happen. The EU research shows that interest rate caps have in some cases led to less illegal lending, as consumers are better able to manage their borrowing requirements without turning to informal sources of credit.
The review could also consider what happens in other countries and how they cap the costs of borrowing. It is not just America, France, Poland, Germany, Italy, Greece or Spain that have caps on the costs of credit. Fourteen European countries have some form of capping system or ceiling on charges, whether it is France with one third over the market average, or Slovenia, which has a spread of caps. Some countries, such as Ireland, cap only parts of the market. Others, such as Germany, have limits on all forms of lending.
We could also consider capping roll-overs: I agree with the hon. Member for Solihull (Lorely Burt) that that is critical. In Alabama, for example, if someone cannot repay a loan the first time they take one out, they can have it rolled over only once. In Arizona, one can have it rolled over only three times. In 2010, Consumer Focus called for limiting the number of roll-overs to five per household per year.
We could also consider capping the amount that can be lent as a percentage of income. In Montana, one cannot be lent more than 25% of one’s take-home income. The number of such loans that a person can have at any one time could also be capped. In Montana, a person cannot have more than two at any one time, and a lender cannot lend the person more than $300. Nebraska allows only one loan at a time. As my hon. Friend the Member for Nottingham East (Chris Leslie) said, we could also consider whether financial conduct authority powers are relevant to such practices. I note that there is talk about it dealing with toxic products, and I hope that Ministers will consider seriously whether it should regulate the consumer credit market. The review could consider that.
Above all, the review would be a kick start for action in a matter that is pressing on many of our constituents. We know the consequences of doing nothing: rates of borrowing from such companies are going up and up. At the time of the Competition Commission report, Provident Financial was charging £65 per £100 lent; now it is charging £82 per £100 lent. That is an increase of 26% in the cost of credit. With a 4.5% rate of inflation, and a 2% increase in earnings, it does not take a mathematical genius to work out that problems for families trying to make ends meet will only get worse. Between April and May this year, there was a 58% rise in people applying for a payday loan via MoneySupermarket.com. One in 10 people in this country now spends more than 30% of income on repayments on unsecured debt.
What are the human costs of not dealing with such levels of debt? We all know people in our communities whose lives have been torn apart by getting into debt, whose families are struggling, and who experience mental health problems as a result. Were it passed, the new clause could cover a wide range of things. The question remains: do we need it? I believe that we do, because the Opposition need to be certain that there will be action. Whether the Government will act in the best interests of the consumer, and not the coalition, is now in question.
Back in February, the Minister responsible for consumer credit asked for more time to gather evidence. Five months on, we have nothing, and no update. He will not meet us to discuss the matter. I warned then that we could see any impetus for action diluted, lost in ministerial red boxes and the cosiness of the mantra that complexity justifies the status quo. I did not realise that it would be those on the Government Benches who prevaricated rather than officials. In the words of a prominent Lib Dem activist, to reject the new clause
“merely because it is an opposition amendment risks us being portrayed as mealy mouthed opportunists—caring more about party politics than the people I know we all got into politics to speak up for, those people whose lives are constantly blighted by these ruthless money lenders”.
I came to the House to improve the fortunes not of the Lib Dems, but of the public. Today, I have set out the problem in the hope that Government Members will do the decent thing and let the cat out of the bag about what they will do to give respite to those who are suffering. If not, the Government should understand that we will not let the matter rest, and we will keep holding them to account. They may want this debate to go away, but let it stand on the record that those who vote yes to the new clause today are those who see the value to our economy of ensuring affordable credit for all, who see the benefit of our communities of ensuring that they are not trapped in debt for years trying to make ends meet, who put the interests of the British people first, not second, and who know that the capping of the cost of credit should be announced now and not on the conference podium.
I ask Members not to make the public wait but to vote yes today, tell their constituents how they plan to cap the cost of credit, and then get on with doing it. The people who depend on us to fight for their interests and those of their families need and deserve nothing less.
Having listened to the lengthy speech made by the hon. Member for Walthamstow (Stella Creasy) in the Public Bill Committee, and having checked Hansard to find that it was almost identical to the speech that she just made, I congratulate her on raising, yet again, both her profile and the issue of unscrupulous and high-cost lending. As she knows, she has a great deal of cross-party support on the underlying problem, but I fear that her new clause has little to do with identifying a workable solution, and I found her speech today disappointingly partisan.
I have been rather bemused by the hon. Lady’s recent Twitter stream, which refers to the campaign to persuade Members to vote for her Consumer Credit (Regulation and Advice) Bill. Perhaps she does not realise that we are voting today not on her Bill—although many of us may agree with its principles—but on amendments to the Finance Bill. For reasons that I shall give later, her new clause is fundamentally flawed.
The problem of vulnerable consumers being preyed on by high-cost credit lenders is not new. It did not suddenly appear following last year’s general election. It is a problem about which Members in all parts of the House have felt strongly for some time. My constituency contains areas of severe deprivation, and I deal regularly with case work relating to debt. I am active locally in trying to ensure that those with debt understand that there are good people to turn to, such as local credit unions and citizens advice bureaux, and that they need not rely on high-cost credit lenders.
Through the local media I have highlighted my own earlier debt problems, incurred when I worked as a researcher here in the House of Commons in the mid-1990s. I have received messages from local people saying that it was brave and courageous of me to be so honest, but I do not think that it was anything of the sort. I saw it merely as a way of removing some of the stigma from debt, and demonstrating not only that anyone from any background can get into debt, but that there are good people out there who can help to put those in debt back on the right track.
Increasing debt is an issue that should concern Members in all parts of the House. It, too, is not a new issue. I remember talking about the nation’s personal debt topping £1 trillion before I entered the House. For some time my local citizens advice bureau has been advising clients with debts totalling £1 million per week, including priority and non-priority debts, but the figure is now nearing £3 million per week. Unfortunately, Medway has a high repossession rate: on average, about 70 repossession hearings take place each week. In these worrying times, what we do not need are unscrupulous credit lending and, indeed, debt management companies taking advantage of those who are in financial trouble and at their most vulnerable.
The new clause proposes taxation measures as a means of clamping down on, or even stamping out, the industry. I fear, however, that the Opposition have not thought it through in any great detail. For a start, they have not addressed its unintended consequences. It is likely that any additional tax on the companies in the industry, just six of which control about 90% of the market, would simply be passed on to the consumer in the form of even higher rates. What is being proposed as a solution to the problem could exacerbate it by increasing the cost to the consumer and creating an even larger debt.
The hon. Lady obviously did not listen to the Minister’s response to a point made earlier. As he said, a review is currently taking place. The new clause proposes
“a review of all taxation measures contained in this Act”.
I think that, on this occasion, the hon. Lady is wrong.
Surely any tax review is likely to come up with a suggestion for raising taxes. It is unlikely to propose that taxes should be cut. If that is on offer, however, I certainly do not intend to vote for a measure that would cut the taxes of the people whom we are discussing.
My hon. Friend makes a good point. Whether or not the tax goes up following a review—and the hon. Member for Walthamstow will probably say that it will go up—the result will be passed on to the consumer.
Organisations such as Citizens Advice recognise that the problem of debt is not confined to the high-cost credit industry. It is also caused by other practices, such as irresponsible lending, the imposition of high contingent charges, and the mis-selling of debt management services. I am not a supporter of the high-cost credit industry, but a tax on one part of the sector would not only be anti-competitive, but would not address problems in other parts of the consumer credit market.
The simple truth is that the industry needs better, if not more, regulation. Although the House may not often hear Conservatives say that we need more regulation, a number of Government Members believe that in this context, and particularly in the context of debt management, it is the appropriate solution. We have met the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey), and have told him that.
The hon. Lady is right to refer to the need for regulation. What troubles her more, the profitability of high-cost lenders or the techniques that they use to entrap their customers? Does that not provide a clue to where we should focus any Government interventions?
That is a good point. In fact, what troubles me most is the impact on consumers. As we have been told by Members in all parts of the House, these companies prey on people who are incredibly vulnerable, and we need to ensure that the industry behaves much more responsibly.
A response to the Government’s call for evidence on consumer credit is due shortly, and I look forward to the findings of the review. I have always had some sympathy for the proposal of a rate cap. However, it is interesting to note that Citizens Advice does not share the hon. Lady’s view, and nor does the money-saving expert Martin Lewis.
It is true that Citizens Advice opposes a cap on interest rates, but I think the hon. Lady will find that both it and Martin Lewis have been very positive about the proposal for a cap on the total cost of credit, which the new clause would allow to be investigated. I hope that the hon. Lady will correct the record accordingly.
The total cost of credit involves more than just the high-cost lending industry, but the hon. Lady spent most of her speech talking about individual high-cost credit lending companies such as Wonga. We must find a focus, and the fact is that wider issues of consumer credit are involved. I hope that the review will come up with a solution on which we can all agree.
The Government are considering specific product regulation as part of their draft Financial Services Reform Bill. Under the proposals to establish the financial conduct authority, a new model of conduct regulation will be established that will use early and proactive intervention to ensure that consumers are protected. That is a far more pragmatic solution than the blunt instrument of taxation, which, as I noted earlier, could have the adverse and opposite effect of creating a greater problem.
Does my hon. Friend share my concern about the fact that it is often very convenient, and made very easy, for a person to take out a loan? A door-to-door salesman may appear and try to build a relationship with someone. Part of the battle is to provide responsible institutions such as credit unions, and to ensure that people know how to contact them. I think that there should be far more advertising and signposting so that people know how to get in touch with their local credit unions.
I met the members of Kent savers credit union on Saturday, and look forward to meeting members of the Medway credit union in the autumn. I am a keen supporter of credit unions, and I think that all of us here are responsible for ensuring that our constituents are aware of alternatives such as lending and debt management advice. Citizens advice bureaux also offer a fantastic service. We should take it on ourselves to ensure that the message reaches our constituents.
The House should know that there is a cross-party consensus on this issue, and that the consumer credit market—particularly the high-cost credit industry—is an area of concern. In Committee, new clause 11 was billed by the hon. Member for Walthamstow as a measure in line with nudge economics. While there are some taxes that have arguably altered behaviour, such as those on cigarettes, it is highly unlikely that a tax that could be passed directly to the consumer will halt the growth or the unscrupulous practices of the industry. It would be far better to concentrate on regulation rather than taxation, and it is for that reason that I urge Members to vote against the new clause.
I congratulate my hon. Friend the Member for Walthamstow (Stella Creasy) on initiating and devising this new clause. The UK is a long way behind other countries in its regulation of this sector. Action is being taken in the United States and elsewhere in Europe, and therefore increasing numbers of companies are seeing the UK as the ideal place to operate because they know we are behind in respect of regulation. Indeed, as they do not anticipate regulation any time soon, they also do not anticipate leaving the UK in the near future, and they consider now to be a good time to invest in the UK market. Therefore, BrightHouse says it will triple its number of high street shops here in the UK. That is not only a worry for consumers, who are, by and large, exploited by these companies; it is also a threat to our high streets, because I for one do not want my high street to have signs saying “Cash for gold” and shops such as BrightHouse; I do not want what I would call unscrupulous companies populating our high streets.
The high-cost lender lobby is lobbying within an inch of its life. It is inundating those of us who are speaking out on these issues with documents, offers to meet, conversations and phone calls about why it is right and we are wrong. However, Members who represent places such as Darlington see the effects week in, week out in our surgeries, so we know the impact that these companies are having. They are not doing what they do for the benefit of the consumer, as they would lead us to believe; they are doing it because it is a pretty good business for them. I do not have an issue with their having a good business and making money, but I do have an issue with people who are least able to make such financial decisions being exploited in this way, and that is what is happening.
I am not a big fan of Jeremy Kyle, but in the interests of research I have sat through a bit of morning television, and I was disgusted at what I saw on our screens. Such companies are deliberately targeting people who are at home during the day and who they know are on low incomes. They are making their products look affordable, easy and cheap, which they are certainly not, and, most disturbingly, they are making them look the norm. They are making these products appear to be an everyday solution of which people from all walks of life throughout the country are taking advantage. That is the single most concerning aspect of this market.
I must confess, somewhat ashamedly, that I have also seen Jeremy Kyle’s show and the advertisements that accompany it. I want to pick up on the fact that Labour Members do not feel it appropriate to meet short-term loan companies. I do not tweet, but it is my understanding that the hon. Member for Walthamstow (Stella Creasy) says that Wonga has refused to meet her. That is not the case, however. [Interruption.] This is my understanding; I am just going on a letter from Wonga, and I do not want to get involved in the dispute. My point is that we must fully understand the situation. The hon. Lady knows it intimately; I do not deny that.
I am unclear as to the point that was being made, but I recommend that the hon. Lady follows my hon. Friend the Member for Walthamstow on Twitter, as she might therefore become more familiar with my hon. Friend’s efforts to secure meetings with senior officials at Wonga and might also understand the frustration felt by Labour Members. It is frustration not only with the high-cost lenders, but with the Government too. Five months ago, the Backbench Business Committee initiated a positive debate on this issue, but there has been no movement since then—no announcements and no indication that something is in the pipeline. That fosters a great deal of frustration and a lack of trust among Opposition Members.
The hon. Lady is expressing her case very well, and I sympathise with everything she is saying. However, is she not impressed by the work of, for example, the Office of Fair Trading in issuing its guidelines, and does she not recognise that it has the power to withdraw licences if the guidelines are not respected? I could also draw her attention to a number of other possible actions that have been put in place to enable movement in the direction in which she rightly wishes to proceed.
All those steps are very welcome, but they do not go very far at all in addressing the fundamental issue. The Competition Commission says that what the OFT wants to do is nothing like enough. I understand the hon. Gentleman’s intention: it is to give the Government a background against which they can decide not to support this new clause, but we are trying to force this issue to the fore and get something done about it. We are all for cross-party consensus—that is wonderful when it can be achieved—but what we actually want is something to be done. I hope the hon. Gentleman will therefore forgive Opposition Members if we are sometimes slightly intemperate in the way we express our views on this issue.
As I said when talking about my ten-minute rule Bill, for me the key issue is the advertising of these products, which is irresponsible. It might be argued that people are being given a choice, but people are not making that choice on value-for-money grounds. They are not shopping around. They are not thinking, “What’s the best product for me?” They are instead thinking, “What will get me an answer to my problem as quickly as possible, and who will say yes to me? I don’t want to go to the bank and be told ‘No’ or ‘You can’t have this but you can have something else and do you want to make an appointment to come back next week?’” These people have very immediate financial difficulties, and these products are deliberately targeted at them.
First, may I apologise for missing some of the earlier speeches?
I have a great deal of sympathy with much of what the hon. Lady has said, but the fact that these companies have high costs and in particular high marketing costs, and the fact that there is no evidence that consumers are making rational choices based on which is more or less expensive, suggests that taxation is not the answer to the problem. There may well be an answer to the problem, but hiking up taxes is almost certainly not it.
The new clause does not only address taxation. The hon. Gentleman should read it thoroughly, as it talks about other measures too. I do not think there is any one measure alone that will address this problem; there will have to be a package of measures.
There is no real competition in this market, as there are only a few companies in it. On Friday my attention was drawn to a company operating in the north-east called Provident. I was very disturbed to hear that last Christmas Provident representatives were going door to door deliberately targeting single mothers—as members of political parties, we all know that can be done. Its representatives were knocking on doors just before Christmas, saying, “We can offer you £500 and you don’t have to pay it back until after Christmas.” They were saying it could be paid back in a number of easy payments, thus making it seem attractive and ordinary. That is completely exploitative, and it will happen again this year unless the Government do something about it; indeed, it will happen Christmas after Christmas after Christmas. This House should neither accept nor tolerate that.
All Opposition Members are big supporters of credit unions.
Yes, Members on both sides of the House are, of course. The people behind the credit union movement are hard-working and honourable. I work somewhere where everybody is honourable, but these people really are hard-working and dedicated—many of them are volunteers—and they work in our communities to promote low-cost credit to people who are left out of mainstream credit. However, even with the best will in the world credit unions are not going to be able to compete with Wonga and Uncle Buck and so forth, because they lack the high street and web presence.
The low membership of credit unions in Great Britain has been mentioned. Credit unions in Northern Ireland have a high membership; well over a quarter of the population—in some constituencies the figure is more than 50%—are members of the very well-developed and well-funded credit unions. The credit union movement in Northern Ireland has made it very clear that it expects Parliament to take action against the predatory credit sector. The movement does not expect Parliament just to wave to credit unions; it says, “Tackle the sharks, don’t wave to the dolphins.”
I am very grateful to my hon. Friend for that intervention, as he put it extremely well. I was aware that credit unions in Northern Ireland were incredibly advanced. I have found that although the fledgling credit unions in my constituency are doing a marvellous job, they are unable to do the very thing that he says is unable to be done in Northern Ireland. That strengthens the argument for accepting this new clause.
I welcome the opportunity to debate this new clause. I have worked with the hon. Member for Walthamstow (Stella Creasy) on a number of occasions to highlight the need to protect the most vulnerable people in society, and we have been supported by hon. Members from both sides of the House. Let us be clear that a consensus is essential, as has been said by the hon. Member for Scunthorpe (Nic Dakin) and my hon. Friend the Member for Macclesfield (David Rutley). This is an extremely complex and challenging issue, and although we all agree that action must be taken, we need to be careful not to make the situation worse. I will set out a number of reasons why that could happen.
The new clause would require the Government to review how taxation could be used to penalise high-cost credit that is detrimental to consumers and competition. However, the current consumer credit review is examining all the options through which we can hope to secure a measured and effective response. I first wish to highlight the need to use credit reference companies, because it is unacceptable that so many of these loan companies do not even simply check whether the person borrowing the money can actually service the debt. We would all agree that we are not against people borrowing money if that is what they wish to do, but they should have the opportunity to be able to service that debt. Secondly, we need to limit the number of customer extensions and roll-overs, as a number of hon. Members have said. It is unacceptable that people can be trapped into a cycle of increasingly expensive debt. Thirdly, there needs to be a cut-off point, when fees and the interest stop being accumulated. Too often we have seen people borrow a relatively small sum that has built up over many years. Many horror stories have been related in previous debates.
Does my hon. Friend agree that there has been far too much of a rush to litigation by credit companies and that a far better approach would be to seek mediation before pressing the button to go to court? Such an approach would relieve a lot of the burden and pressure on the hard-pressed consumers.
My hon. Friend makes a very important point, with which I absolutely agree. Help should be provided at the point where we freeze that debt, and there should be an examination of the reasons why a consumer was unable to service the debt before that debt gets even further out of control.
Another crucial element is to make sure that those who can pay early are not penalised for doing so. That would mean that if circumstances change to benefit them, they would be able to break away from high-cost lending. A number of hon. Members have mentioned the need for there to be greater access to credit unions, and I know that my hon. Friend the Member for East Hampshire (Damian Hinds) has highlighted the issue on a number of occasions. Interestingly, and aptly, the hon. Member for Darlington (Mrs Chapman) made the point that we should be encouraging those organisations that will lend with the consumer’s interest at heart.
The particular issue I wish to discuss, which was mentioned by my hon. Friend the Member for Chippenham (Duncan Hames), is the need to examine the techniques that are being used. In previous debates, I have directed the majority of my anger at doorstep lenders and their nudge-nudge sales techniques. They build up personal relationships, face to face, in the homes of vulnerable consumers, suggesting ways in which people can borrow money. For example, in the run-up to Christmas the lender will ask people whether they have organised the Christmas presents for their children, the consumer will say that they are not sure whether they can afford them, and the lender then says, “It’s lucky I’m here. Just add another £3 a week and you can get the presents that your children want.” These lenders continuously build up people’s dependency on high-cost lending, so we really have to look at these techniques.
A number of hon. Members have picked on particular organisations—Wonga has been mentioned because it is always advertising on the television and the tube, as hon. Members will have seen—but we need to be wary of attacking what may not necessarily be so and we have to be careful not to chase cheap headlines. For example, although we often consider just the annual percentage rate, very few people can actually make calculations using the APR. When I tested this on a treasury manager the other day, they got it spectacularly wrong, as did everybody else. Let us suppose that someone needed to borrow £100 to tide them over until pay day. They have a choice between paying an APR of 4,400% plus a £5.50 product fee or, as happens at a typical high-street bank they go overdrawn, paying a flat, easy-to-understand fee of £10 a day plus £2.50 for having used their debit card without the authority to do so. Most people would snatch the hands off the person offering them the flat fee—the £22.50 to borrow that £100 for two days—but the APR of 4,400%, which many hon. Members have mentioned, works out at £1 a day and so that loan would cost £7.50, which is £15 cheaper than opting for the unauthorised overdraft at the bank. I am not defending that 4,400% rate, but we have to compare the like-for-like cost of loans and consider the crucial element, which is that most people cannot understand APR.
That brings me on to my next point, which is that we need transparency so that consumers can examine the clear costs of a loan. Let us have none of these different product fees or annual percentage rates, which people do not understand; when people want to borrow X, they need to be told that it will cost Y. That would allow them to shop around and completely understand things. If someone borrows £200 for 20 days at one of the high-street banks, they will be paying an APR of 46,500,000 million. Again, that sounds staggering, and I would not advocate anybody doing that, but we have to compare things on a like-for-like basis. We have to make everything clear.
Is the hon. Gentleman saying that it is not acceptable for banks to do what he just described? What does he make of the evidence suggesting that one of the challenges in this market is the fact that a quarter of their customers cannot borrow from banks, so even if they wished to use unauthorised overdrafts, they could not actually do so and the only source of credit available to them are predatory lenders such as Wonga?
Absolutely, and that highlights my first point about using credit reference checks. These people should not be getting money from high-cost lenders. Many of the more reputable high-cost lenders will not lend to them, but many of them do and prey on these people—that is particularly true of the doorstep lenders. We have to try to ensure that more people have access to the affordable banking arrangements—the credit union arrangements—but we must not fall into the trap of thinking that the banks always get things right because, as in the example I just gave, they can prove a lot more expensive—
The hon. Lady may shake her head, but my interest lies in ensuring that people get the clearest information and the cheapest possible price. I will not defend any organisation that is going to exploit the most vulnerable people.
Unsurprisingly, the final item on my tick-list is the need for financial education. I chair the all-party group on financial education for young people, and I thank the 224 Members who are now signed up to the group. People do not understand APR and, as I have argued, it needs to be removed and replaced by a transparent approach. In addition, we need consumers to be able to understand the implications of what they are signing up for, its true cost, how to source alternatives and the best way to address the situation if they get into difficulties.
I am conscious of the time so I will conclude. We are all agreed that action is needed—nobody, from either side of the House, disputes that. I welcome the consumer credit review, but we must not fall into the trap of a quick fix to chase political headlines which simply makes matters worse. We need a measured and wide-ranging response that puts the vulnerable consumer first. Let us not chase a fix that makes things a hell of a lot worse for the most vulnerable people.
May I commend my hon. Friend the Member for Walthamstow (Stella Creasy) for her tenacity in pursing this issue and say that her speech was a tour de force? Equally, I commend her for getting this issue discussed on Twitter, as this must be the first new clause on a Finance Bill to have generated this much interest on that site.
I wish to make only a few brief remarks, because a lot of what I wanted to say has been covered by my hon. Friend the Member for Darlington (Mrs Chapman), in particular, and by some Members on the Government Benches. Early on, I want to pick up on one point made by my hon. Friend the Member for Walthamstow in her speech and at business questions last week, which is the suggestion that some funny business is going on and that the Government are deliberately delaying making a decision to help the Deputy Prime Minister at the party conference—[Hon. Members: “Rubbish!] Some hon. Members are shouting from a sedentary position, so I would be grateful if the Financial Secretary, who will, I presume, respond to the debate, could guarantee that the Deputy Prime Minister will not make an announcement on this matter in his conference speech. That would help Opposition Members—[Interruption.] I invite the Financial Secretary to make a few remarks on that point in his closing speech.
There is some consensus on this issue on both sides of the House. I was not a Member of Parliament when it was debated in February, although I have read many of the speeches. Many Members, on both sides of the House, take the issue very seriously—and rightly so. Before the general election campaign, the then Leader of the Opposition took it very seriously. When he was rebranding the Conservative party, he did not only hug hoodies and huskies. The party launched a campaign about resisting—I hope this is not unparliamentary language—your “inner tosser”, which encouraged people not to fall into the trap of personal debt that we have discussed. At the time, the current Prime Minister said that—and I paraphrase—although the campaign was provocative, we needed to do something about personal debt. The Opposition agree.
Today I visited a money advice centre in my constituency to talk about some of the issues faced by many of my constituents who are getting themselves into trouble. I was told stories about how Wonga and quickquid.com target many vulnerable people in my constituency. Members might not be aware that my constituency contains some of the most deprived estates in the country and we have had many examples of such companies targeting people such as single mothers, as in the cases mentioned by my hon. Friend the Member for Darlington, when they have no choice but to sign up to such deals. Such people end up in great difficulty.
Another issue mentioned at the centre, although it does not fall within the narrow confines of the new clause, was illegal loan sharking. The problem is that many people who find themselves in deep trouble through legal loan sharking feel that they have no alternative but to turn to illegal loan sharks. I hope we will be able to debate that in future. I was told many tragic stories about people who have fallen foul of illegal loan sharking. Such people might be in work—it is not always a matter of gangs preying on vulnerable out-of-work people on estates. One example involved somebody who took out a loan from an illegal loan shark for £7,000, which soon became £70,000.
I agree with the hon. Gentleman about illegal loan sharking, which is a scourge of this country. Does he welcome the fact that despite the cuts the Government have made in other areas, we have increased the amount of money we are using to fight illegal loan sharks?
My hon. Friend the Member for Nottingham East (Chris Leslie) tells me that the Government have cut the financial inclusion grant. I always welcome action to tackle illegal loan sharking, so I would be very disappointed if the money going into those funds was cut.
This is an important issue, which particularly affects my constituents. As my hon. Friend the Member for Walthamstow said, it is not just the constituents we would traditionally think of as the most vulnerable in society who are being hurt. Increasingly, the money advice centre I visited today is finding examples of people from lower and more middle income-backgrounds getting themselves into trouble and falling prey to such organisations.
Does my hon. Friend accept that that income group—some of whom claim housing benefit and will be hit by the housing benefit changes and will have to find a lot of additional money to pay their rent out of their own pockets—could well fall victim to both official and unofficial loan sharks simply to meet their rent?
I know that my hon. Friend has a good track record in raising such issues, particularly those to do with homelessness, and she is right to bring that matter to the attention of the House.
I want to focus on the point made by my hon. Friend the Member for Walthamstow about lower and more middle-income people being hit. Increasingly, such people are turning up at the money advice centres in my constituency in a way that they had not in recent years. That might reflect our economic climate, with inflation running at twice the rate of earnings and with the cost of living, food and utilities putting a great strain on the budgets of many people in my constituency. Those issues came up time and again in my by-election campaign and the Asda income tracker, which my hon. Friend mentioned, shows that families are some £165 a month worse off than they were a few years ago.
The final point raised with me today concerned credit unions. Labour Members have always been huge supporters of credit unions—the co-operative values on which they are based are values that we share—and I concede that Government Members support them, too. If we simply say, however, that credit unions can step up and fill the gap, we are somewhat mistaken. They do not have the capacity to compete with organisations such as wonga.com and quickquid.com. I would welcome it if more resources went into credit unions so that they could compete, but realistically they cannot carry out the door-to-door activity that wonga.com and so on can. Although we are great supporters of credit unions, I do not think they are the answer, although they are part of it.
In conclusion, I would welcome it if the Government could give us some indication of what is happening with the review, if they will not support the new clause. We need some regulatory reform of the sector. People in my constituency, in particular, are being hit. The situation is getting worse and unless the Government take action, I am worried about the future.
I was not sure when I came into the debate whether I was going to speak—[Interruption.] Well, I can never resist the temptation to hear the sound of my own voice. I have found this an interesting and fascinating debate with some very good speeches from Members on both sides. Some speeches have been a little political at times and it is best that we brush over that, because the issue should not be political. The hon. Member for Walthamstow (Stella Creasy) is, I know, passionate about this matter and I agreed entirely with a great deal of her speech. She has been in a Twitter conversation with a constituent of mine in Snaith. Very sound people live in Snaith—very sound people, because they re-elected their Conservative councillor with a massively increased majority in May, but we will gloss over that.
The issue has sparked an interest across the whole country. The letters and tweets we are getting from our constituents reflect the fact that a lot of people are interested in this matter. This has been a good debate and the hon. Member for Darlington (Mrs Chapman) made a particularly good speech, I thought, which was very consensual. I look forward to hearing the hon. Member for Makerfield (Yvonne Fovargue). I always listen to her on such matters because of her vast experience. I know that my hon. Friend the Member for North Swindon (Justin Tomlinson) has a huge interest in the subject, as does my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch), who used to work with me at McDonald’s in Hull when I first started to get into debt. Although I have never personally had to borrow from a high-cost credit company, I certainly understand having debts to the tune of tens of thousands of pounds.
In my case, it was credit card debt, and I am not alone in that. It started at university and I went down the line of paying off one credit card by transferring it to another on 0% for a year or a number of months before conveniently forgetting that and maxing out the one that I had just cleared. I now pay about £600 a month to clear all my credit cards, which I have had to roll into a loan since my election. I understand what debt is like and I know how once someone is on the conveyer belt, it is difficult to get off, and that is just with credit card debt. That conveyer belt moves faster for those on the high-cost credit side of things—I guess that is the only difference.
A lot of my constituents come to me with debt issues, which is why, following the lead of my hon. Friend the Member for North Swindon, I am getting the staff in my constituency office trained in the debt management side of things—not so that we can issue particular advice, but so that we can point people towards the most appropriate advice.
We cannot look at just one side of this debate, such as regulation, education or the behaviour of people in the market; we have to look at them all together. That is why I am genuinely interested in the Government’s response to the consumer credit review. I look forward to hearing what the Minister has to say. Access to advice is one side of the issue, which is why I was delighted to hear about the financial inclusion funding. As the hon. Member for Makerfield will attest, I took part in the debates on that at the time, because it is something on which my constituents rely heavily. I am pleased that the financial inclusion funding has been preserved for the year and that we seem to be moving towards an alternative that will maintain face-to-face advice—that has certainly been hinted at, and I hope that that happens—although I look forward to hearing more. Indeed, I am talking to one of my councils in north Lincolnshire about how we can better support citizens advice bureaux, which my neighbour, the hon. Member for Scunthorpe (Nic Dakin), is a huge supporter of.
We have to look at all the issues in this debate together, although I have to say to the hon. Member for Walthamstow that some of her speech got into the politics of the issue. I understand that she feels passionately about it, and she is quite right to criticise the Government if she feels that they have not responded quickly enough. Also, if she feels that anything has been set up for party political reasons, she is right quite to highlight that too, because I would not want to be a part of that—I hope that that is not the agenda in this debate. However, as Government Members have said, we are not talking about a section of the high-cost credit market that suddenly appeared on 7 May last year; we are talking about something that has exploded over the past couple of decades, and which no Government have dealt with properly. Indeed, her Government could be held just as responsible for the current position, so let us move on from the party politics of this debate.
The hon. Lady put her points across passionately, but she is asking Government Members to vote in support of a new clause and against their own party. That is not something that bothers me—I have no desire ever to be a Minister, and I will vote whichever way I think is best —but I would question whether some of those promoting the new clause have the same record on voting against their own side when they feel strongly about an issue. Therefore, please let us not criticise Government Members who perhaps do not support the new clause this evening; what is important is the message that goes out from all parts of the House. As the hon. Member for Scunthorpe said in an intervention, we must ensure that we retain cross-party consensus on the issue.
Education is key to this debate. The all-party group on financial education for young people, which the hon. Member for Walthamstow and my hon. Friend the Member for North Swindon have a part in, is driving this agenda forward. It is my privilege to be chairing the cross-party inquiry—on which the hon. Member for Darlington serves with distinction—into how we can get proper financial education on to the primary and secondary school curricula.
We also need to look at regulation. Let me say to Ministers that, as other Government Members have said, regulation is not something that generally comes naturally to me as a Conservative. I prefer to have as little regulation as possible; however, we are dealing with some of our most vulnerable constituents. Any Member who has had somebody come to their surgery with such problems will know that it is not school teachers or local doctors who turn up; generally, it is vulnerable people from a particular socio-economic group who are not very financially literate—although plenty of educated people are not financially literate either. Indeed, I can almost predict from where in my constituency people with such problems will come, because they will have been targeted, because they have not had access to proper advice or, as has been said, because they have not had access to alternative sources of credit.
It is therefore time that we looked at some form of regulation in this area. Indeed, the international experience that the hon. Member for Walthamstow spoke of sounded very interesting. We looked at some examples in a previous debate, and I note the example of Alabama in particular. It has come to something when we are looking to Alabama for examples of regulation, given that the southern US states are not exactly known for their love of regulation. I look forward to the Minister’s response to this debate. I said that I would approach it with an open mind, and I take on board the excellent speech that my hon. Friend the Member for Chatham and Aylesford made about taxation measures. Personally, I cannot see how taxation measures would have a great impact, although I note that sub-paragraph (d) in new clause 11 talks about looking at basically everything, so it will be interesting to see how the Minister responds to that.
I am feeling the love in the Chamber today, which is a good thing—there must have been something in the water in Goole this morning. However, the serious point is that that hopefully proves that although there are concerns, and although lots of Members who will vote differently from each other this evening have made incredibly passionate speeches, they clearly all want to see the same thing. We might disagree on how to get to there, but the fact that I am agreeing with so many people is perhaps a sign that there is consensus on this issue, which is a good thing.
At the risk of increasing the love in the Chamber, does the hon. Gentleman agree that the new clause would put beyond doubt—along with other measures that could be taken to tackle the problems that we all agree exist—tackling the question of regulation and acting on it by the Government? At the moment, we have no guarantee that that will happen in the consumer credit review; rather, we have only vague assertions that they are thinking about it. The review proposed by new clause 11 would guarantee that that would happen, which is why we want action now.
Of course that is what we all want to see, but we await the response of the Minister. At one point, some Opposition Members seemed to be saying that the Government were going to announce something at the Liberal Democrat conference, suggesting that it would no doubt be a well attended—I will not be going —and joyous occasion. Indeed, the hon. Member for Walthamstow seemed to suggest that the Government already had a solution that they were about to announce in October, so we all look forward to hearing what they have to say.
To end where I began, this is a hugely important issue for a lot of my constituents, as it is for constituents up and down the country, and it is time that we did something about it. It is appalling that people end up on a conveyor belt and seem unable to get off it. I therefore look forward to the Minister’s response, and I genuinely hope that we have some action soon, in the interests of all our constituents.
At any one time there are 5 million to 7 million people in this country who are unbanked or who do not have a credit history. In the main, they are the people who turn to high-cost lenders, because they do not have a credit history and they have nowhere else to go. Personal debt is rising, with 46% struggling until pay day, up 8% this year. Again, they are the people turning to the payday lenders.
I take issue with the claim that the rate has grown in the last decade. When I started in the advice field 20 years ago, there was one high-cost lender, Provident, which targeted a specific market. Provident went round the estates, using neighbours and talking to people. The company would go in—here I also take issue with the claim that people use the money on luxuries—and find people who needed to replace their broken cooker. The neighbour would come in, look at the cooker and say, “Oh yes, I can lend you that money.” When the loan was nearly repaid, Provident would come back and say, “Tell you what, your sofa’s looking a bit shabby. It won’t cost you much more to get a sofa,” and people would get trapped in a cycle of debt. However, in one respect, Provident was reasonably easy to deal with, because there was one company with a specific target group. It was possible to go round and talk to individuals, target schools and visit the residents groups that the people concerned attended. It is much more difficult now. The explosion of advertising and the normalisation of the process have made it so much more difficult to control the market and tell people what the dangers are.
I had a constituent come to me in February, as soon as he realised my interest in the subject. He could not quite manage to the end of the month—I think his car tax was due—and he had taken out a payday loan. The company immediately took the payment and the interest out of his bank account the next month. He realised that he could not get to the end of that month either, so he took out another payday loan. That carried on and in the end he had 10 payday loans and all his salary was being taken from his bank account. That was a man who was working. Such companies are supposed to check that people can afford to pay the money back and that they do not have other credit, but that did not happen in this case. For such companies, self-regulation absolutely is not working. That company was not an illegal loan shark: it was a legal company and it did not threaten to break the man’s legs, but it left him in a cycle of stress and depression that he found very hard to get out of.
I am also concerned about the double whammy that these companies are operating, as many of the companies that put people into debt are opening debt-management arms to get people out of debt as well. When the financial inclusion fund was finishing last year, those companies were circling like sharks. I cannot tell hon. Members how many companies contacted me basically gloating and saying, “There will be no, or very limited, free debt advice, so people will have to turn to us and you will have to deal with us now.”
I welcome the Money Advice Service because any advice on budgeting is welcome, but that service does not replace face-to-face debt advice. There is a need for that kind of service to be available—and more freely available than it is now. People have what I call behind-the-clock syndrome. They get into debt and cannot face opening the letter about their debt so they put it behind the clock. When they get the next letter, that also goes behind the clock. I cannot tell hon. Members the number of people who used to come into the bureau with a carrier bag whom I would look at and think, “They are in debt”. They would have a carrier bag full of letters that they could not face opening. People are not going to deal with a telephone or online service if they cannot even open a letter. There is a need for free, impartial, face-to-face debt advice and for regulation of debt management companies. Self-regulation is not working. It did not work in America, and when America regulated, those companies started coming over here because they like what they see.
Does the hon. Lady agree that while the availability and accessibility of free debt advice are important, visibility is also important? When people do get around to opening letters and starting to seek help, if they search on internet search engines for debt advice, Citizens Advice and the Consumer Credit Counselling Service ought to come at the top of the list even though they cannot afford to compete with debt management companies on pay-per-click rates. Should we not exhort Google and others to make sure that those services are duly highlighted?
I think that is an excellent suggestion, but there also have to be appointments available when people need them. It is no use searching for citizens advice bureaux if appointments are not available for six to eight weeks because funding to provide the very specialist advice that is needed has dried up. We have to make sure, first, that people get information about where they can go, and, secondly, that appointments are available.
Regulation of debt management companies is needed. They come at the top of Google and other search engines on the basis that they will be going out of business in two years’ time anyway, so they might as well make as much money as possible by charging up-front fees and charging as much as they can. If they do go bust, as two have recently, it does not really matter to them. I had a client come to me who had been paying £40 a month to a debt management agency for 18 months, at the end of which he owed his creditors more than when he had started. Those companies need to be regulated.
The new clause is one of the range of measures we need. We have to keep this issue high on the agenda because the longer we leave it, the more people will go to high-cost lenders and debt management companies and the more people will get themselves into a spiral of unaffordable debt. We have to act now. It is no use leaving this for another five or six months—how many thousands more will have got themselves into debt in that time?
In the circumstances, I shall not trespass on the House’s good will for too long.
I want to start where the hon. Member for Makerfield (Yvonne Fovargue) did by making the point that if a child of people on low incomes or on benefits needs a pair of trainers or some piece of equipment is broken, it is often a disaster and the money is needed right away. That is the background to this issue. The social fund does a good deal. [Interruption.] I think the hon. Member for Makerfield would acknowledge that 400,000 people a year make more than three claims on the social fund, so they are obviously finding it useful. It is important that a credit facility is available, and it is excellent that in Northern Ireland mutuals and credit unions are so well established. We need to do more in this country to develop that idea; otherwise, we will be in the hands of the high-cost operators we have been hearing about.
Does the hon. Gentleman agree that many people do not realise that some credit unions offer loans to people who have not saved with them? The growth fund has been very useful in that regard, but many credit unions do not have access to the growth fund with which people have to save before they can get a loan. That makes the situation impossible for many people.
I am a member of one, and membership is a good way of trying to convey knowledge about credit unions. I pay tribute to the all-party group on credit unions, chaired by my hon. Friend the Member for East Hampshire (Damian Hinds). We need to do more to increase the amount of credit that is available on reasonable terms.
I am a member of the all-party group on financial education for young people, chaired by my hon. Friend the Member for North Swindon (Justin Tomlinson). The move to teach children the basics of budgeting from quite an early age is long overdue. In households that are chaotic and at the bottom of the economic pile there is very little understanding of basic budgeting, which we must resolve.
Finally, I want to support the point about advice. In the past, I have given free legal advice and dealt with welfare rights. I have experience of the people the hon. Member for Makerfield described, who come to see us carrying bags of documents from companies and unpaid invoices. The people who sit down with them, go through everything carefully and present their case to creditors do a marvellous job. The other day, I went to the Shelter facility in Hatfield, which offers debt advice in that part of Hertfordshire. Someone there had been working on debt advice for 29 years and she had lots of letters on the wall from people saying how grateful they were to her for trying to sort things out for them. We must certainly support debt advice, but we need to do other things in relation to education and credit unions. I would like more regulation in this field and, possibly, a cap.
Unfortunately, it seems that debates on this subject are beginning to follow a pattern: we all agree that high-cost lending is terrible and a scourge of many of our communities and that we would like something to be done about it, but the problem arises in agreeing to act. In February’s Back-Bench debate, the teeth were drawn from the motion proposed by my hon. Friend the Member for Walthamstow (Stella Creasy). The amendment agreed by the majority of Members of the two Government parties removed any impetus for immediate action or any agreement that the regulator should consider doing something. I see exactly the same pattern beginning to emerge. We are told that we all agree that high-cost lending is bad, but when Opposition Members want something to be done about it we are accused of breaching the consensus. In the words of the hon. Member for Brigg and Goole (Andrew Percy), we are the ones who are being political.
That is not quite what I said. I said that if we were to be political, we could bandy about the suggestion that all Governments had done nothing. I argued that we should await the Government’s response to the consumer credit review. We can condemn them if they do not do what we want, but until then we should at least try to pretend to be on the same side.
I am afraid I do not share the hon. Gentleman’s confidence that the review will indeed cover the issues, although something might be pending. The hon. Member for Solihull (Lorely Burt) is no longer in the Chamber, but I was interested to hear her say that “we” would all be happy to see the regulations “we” would be bringing forward. I do not know who “we” were, but it suggests that the Government’s plans are quite well advanced and that the hon. Lady is privy to their thinking, as we are not. At the end of the debate, I hope we shall hear what the regulations are and what will happen.
Warm words are not enough. Some of the organisations involved have tremendous resources behind them, yet there is so little control of their operations. Their services can seem attractive because they “solve” people’s immediate problems. Regrettably, at this stage credit unions cannot compete. Castle credit union in my constituency had to give up its shop-front premises in the main street because it did not have the resources to continue to pay the rent. It has moved into an office in a community building and is still functioning, but it has much less presence than it would have if it were still on the high street, where people would be able see it from the bus and pop in when they were doing their shopping. Now that it is tucked away in the community office, people might not know where it is. The situation is not helped by the fact that the local community newspaper, which used to advertise such facilities, has had to shut up shop owing to cuts in its funding. That will make it even harder for people to find the credit union.
I agree that sometimes it might be hard to find a credit union, although the one in my constituency is based on Cheltenham road, a main road. Perhaps credit unions need to go out and find customers; for instance, Bristol credit union had a stall at St Paul’s carnival this weekend.
Indeed. On Saturday, I was at just such a festival in my constituency. It was a beautiful day—the first sunny Saturday for some time. Volunteers from Castle credit union, who help to keep it going, were there for exactly the reasons the hon. Gentleman suggests. However, if, unlike credit unions, high-cost lenders have a high street presence—extremely attractive, brightly lit and hardly missable—it is much easier for people to find them.
Regrettably, only 2 % of people in the UK are members of a credit union. We can all work harder to increase that number, but one thing that would clearly help would be real resources to build the movement. Experience in my city is that real resources, far from being put in, are declining, and there are even fewer members. Despite the efforts of the volunteers who man stalls at local fairs and festivals, credit unions are not providing the competition we want with high-cost lenders. I should dearly like people to use credit unions instead of those institutions.
I understand that this is politics, but when Opposition Members make proposals we meet the accusation that Labour should have done things over the past 13 years, and it is suggested that the fact we did not debars our making proposals and expecting them to be listened to. I am sure that if my hon. Friend the Member for Walthamstow had been a Member during our period in government, she would have been harrying Ministers in exactly the same way as she has harried the Government over the past year. She would not have been afraid to speak.
We should not accept too lightly the suggestion that the previous Government did not look seriously at financial inclusion. The present Government say that they are interested in it too, but they do not put in the means to make it happen. It is not good enough to say they are interested. In my Westminster Hall debate, I referred to our manifesto proposal to oblige banks to provide basic bank accounts. The Minister’s response was, “Oh, we don’t really want that sort of regulation. We want it to be voluntary and we want to work with banks.” That is all too often the Government’s response. They say they want the ends, but they are not prepared to put in the means.
The previous Government did a lot of work on financial inclusion, but no one thing is enough: credit unions will not do it; basic bank accounts will not do it; and taking action against high-cost lenders alone will not do it. We need a range of measures.
Some of the steps that would help have been positively stopped by the Government. The growth fund, which helped to boost credit unions and other community-based financial institutions, has not been renewed or extended.
I might be wrong, but I understand that the fund is not a substitute for the money that was available through the growth fund. When it was introduced, it was hoped that banks would lend to community-based lending organisations; they have not done so, yet high-cost lenders can get finance to expand their businesses to make them attractive.
Does my hon. Friend agree that it is a cause of concern that the Wellcome Trust, which is supposed to advance charitable endeavours, has lent £73 million to Wonga so that it can expand its operations in the UK? Such companies can easily access credit; indeed, that sum is the entire amount left from the growth fund for credit unions across the UK.
I thank my hon. Friend for that helpful intervention. If we are to put the money where our mouth is, it is extremely important that we do not just sit in the House constantly agreeing about how bad something is; we need to take action. On that basis, I urge Members, and perhaps even the Government, to accept the new clause.
I thank the House for its indulgence. I was at a meeting of the Select Committee on Communities and Local Government so I missed the beginning of the debate. I shall try to be as brief as possible, because I am sure that Government Members will have heard the compelling case made by my hon. Friend the Member for Walthamstow (Stella Creasy) and my colleagues and will have been won over by the powerful arguments they articulated.
Those outside the Westminster bubble sometimes question what we as Members of Parliament do in this place. I am sure that there are moments when even we wonder what it is all about and why we parliamentarians put ourselves through the rigorous demands of elected office. I realise just how privileged I am to be here and to represent not only the people of my community, for whom I have the highest regard, but a great city such as Liverpool, and then I have the opportunity, such as the one put forward tonight, to change the lives of ordinary people and realise that my time here is anything but wasted.
High-cost credit is exactly the sort of issue that I got involved in politics for in the first place. The issue is totemic, as it represents the sort of fight that I hear politicians talk about all the time in this House. The word “fairness” is bandied around the Chamber like confetti. Even the Prime Minister claims that coalition policies are about fairness. Although I point to the juxtaposition between the reality and the rhetoric, today is an opportunity for Government Members to put their money where their mouth is, because this really is about fairness.
There is of course wide acceptance across the House that some regulation is needed in this area, but why should it be about taxation? A Finance Bill obviously provides an opportunity to raise the issue, but does the hon. Gentleman not agree that there is a risk—[Interruption.] He should at least let me ask the question before learning the answer from the hon. Member for Walthamstow (Stella Creasy). Does he not agree that there is a risk, through the law of unintended consequences, of high-cost companies simply passing on the costs of higher taxation to the poor people in Liverpool he is worried about?
I always listen to my hon. Friend the Member for Walthamstow, as she is much more of an expert on these matters than I am. I hope that the hon. Gentleman’s intervention is not indicative of the thinking of all Government Members.
I have a particular reason for wanting to see a cap on the cost of credit. I come from a family of eight kids, and unfortunately my beloved mum was often a victim of door-to-door credit. She took it not to pay for luxury goods, but so that she could afford to buy us things like school blazers and winter coats. She would get a Provident or Sterlers cheque and pay it back on the “never-never”, as it was known colloquially. This meant paying back hundreds of per cent. of the original loan in interest charges, but like millions of others she did not really understand the rudimentary economics and looked only at how much she could afford to pay back each and every week, rather than the interest rate or the cumulative payment total. Unfortunately, she was not unique in this respect and, even four decades on, far too many people are still caught in this poverty trap.
The high cost of credit has not improved much for families at the wrong end of the socio-economic ladder. Home credit lenders often charge astronomical annual percentage rates of up to 3,000% or 4,000%. I had to check those figures, because the current bank base rate is only 0.5%, but I found that interest charges of thousands of per cent. are not uncommon. In fact, the UK’s poorest pay the highest price for credit in Europe. This is an obscene state of affairs and the Government must act. Before we hear the same old mantra from Government Members, I admit that we in the Opposition did not do enough to tackle the issue head-on when we were in power. However, as my hon. Friend the Member for Makerfield (Yvonne Fovargue) rightly pointed out, this is an escalating problem that needs to be tackled immediately.
I urge Members on both sides of the House to support what my hon. Friend the Member for Walthamstow is trying to do to stop this most socially iniquitous of practices. Even Boris supposedly supports measures to protect the financially vulnerable, and if he can do it, there should be nothing stopping Government Members doing the same.
Members on both sides of the House have highlighted the problem and provided examples of the unfairness, but it is worth reiterating that credit lenders can charge, in real terms, £82 in interest and collection charges for every £100 lent. A gentleman came to my constituency advice surgery only last Friday and told me that his wife was suicidal because of the level of debt that they had got themselves into. I highlighted last week in a Westminster Hall debate the fact that the banks are failing to meet the Project Merlin targets for lending and the adverse effect that this is having on the construction sector. The banks are also failing ordinary families as they are refused credit from high street lenders, which often results in them taking the only option left: high-cost lending through payday and doorstep loans and hire purchase.
The rising cost of credit traps those least able to cope with the pressures of economic stagnation as they struggle to make ends meet, and believe me, the VAT increase has not helped those families. Some payday lenders are rubbing their hands at the expansion in their “target audience”, as one put it, 70% of whom have a household income below £25,000. I know that we will never completely stop this most lucrative of immoral trades, but we can certainly put a cap on lending to regulate the total amount that can be charged for supplying credit.
This is one of the occasions on which I do not understand how a proposal could not receive unequivocal support from both sides of the House. I have listened to some of arguments against taking action, such as the suggestion that it might make things worse or restrict credit to those who need it, but that is an absolute cop-out with no basis in evidence. Therefore, I ask Government Members to support the new clause to ensure that consumers are protected and simply pay a fair price for credit.
I think that the debate has demonstrated the potential for cross-party support for the analysis underpinning the discussion we have had this afternoon, but I gently point out to Opposition Members who seek to turn this into a partisan political issue that their Government had the opportunity over 13 years to tackle this. In fact, we had a debate on it while the Financial Services Act 2010 was going through Parliament, not long before the general election, during which my opposite number at the time ruled out acting on interest rate caps because of the impact of depriving the most vulnerable of credit services. It is not a new issue, or one that is fresh to this Parliament. Ministers in the previous Government were opposed to the idea of caps because, as the hon. Member for Liverpool, Walton (Steve Rotheram) indicated, it could restrict the supply of credit, forcing those who need it into the hands of illegal moneylenders, an outcome that Members on both sides would not want to see.
Let us be clear that credit can be a good and positive force that enables people to meet needs when there is a sudden shock, such as an unexpected expense or a cut in income, but it must be used sensibly and sustainably. When people decide to borrow, they must be mindful of what that means for them and realistic about their ability to repay the loan. That is true whether the loan is over 10 years, five years or a matter of days, as is the case with some instant or payday loans. However, all lenders have a responsibility in this regard. Lending more than borrowers can afford to repay does not benefit anyone. Under the recently introduced consumer credit directive, all lenders, including high-cost credit lenders, must ensure that when they decide to advance a loan they do so after making a thorough assessment of the lender’s ability to repay.
We know that consumer debt grew significantly under the previous Government, more than doubling from £620 billion in 2000 to more than £1.4 trillion by May 2010. Some of this debt is now being repaid as consumers begin to come to terms with their borrowing, with the amount of unsecured debt reducing in the past two years. Although much of this debt will be repaid without any problems, some borrowers get into difficulty. Lenders have a responsibility to help customers and treat them fairly when they get into difficulties with loans, not push them further into debt. Continuing to add excessive arrears and default charges is a lose-lose situation; the debt increases out of all proportion to the amount borrowed, the lender is less likely to be repaid and the borrower may have difficulty borrowing again. Lenders should work with borrowers, not against them.
We should all be concerned about people borrowing at high rates of interest. However, the high-cost credit market, whatever its faults, provides a service for those who cannot get credit from any other source. We should be careful about describing high-cost credit providers as legal loan sharks. We all recognise from our own communities that real loan sharks are far worse, resorting to violence and intimidation to recover their debts. High-cost lenders are licensed and operate within a regulatory framework, which provides some recourse when things go wrong.
We should be clear that action has been taken over the past year to improve consumer protection in this area. First, under the consumer credit directive, which came into force earlier this year, consumers now have a right to withdraw from any credit agreement within 14 days. If they do so, they have to pay back only the money lent and the interest accrued over that time. Secondly, consumers have a right to repay a loan early at any time, in part or in full. Thirdly, lenders now have to provide information in a standard format so that borrowers can easily compare the costs of different loans. Improving the transparency of information will help consumers. Fourthly, lenders must conduct a full credit assessment before advancing any loan. Lenders will also have to explain the key features of the credit agreement.
In addition, the Office of Fair Trading has recently published its guidance on irresponsible lending, which clearly sets out that deceitful, oppressive or otherwise unfair lending practices are not acceptable. The OFT, which is responsible for the regulation of credit—something that whoever tabled the new clause seemed to forget—has the power to remove the licence of those who breach the irresponsible lending guidance.
Much good work is going on, including the excellent work of credit unions, which many of my hon. Friends have mentioned. It is a shame that the hon. Member for Edinburgh East (Sheila Gilmore) is not in her place. My hon. Friend the Member for East Hampshire (Damian Hinds) is right that there is £73 million to help to expand and modernise credit unions. The money that the previous Government put into credit unions is diminishing, because the money that credit unions were able to earn on the debt was lower than the default rate on the loans given. I therefore welcome the money that the Department for Work and Pensions has found to strengthen credit unions.
As a number of hon. Members have said, we are reviewing the wider consumer credit landscape. At the end of last year, the Treasury and the Department for Business, Innovation and Skills published a joint call for evidence on the consumer credit and personal insolvency review, which covers all aspects of the consumer credit life cycle, including what happens when things go wrong. This is an opportunity to ensure that the regulatory framework is fair to consumers and the industry. Part of that review focuses on the high-cost credit market. Following an OFT review that took place under the previous Government, we have asked for evidence on five of its recommendations.
Let me just finish the recommendations, and then I will give way.
The first recommendation was to provide information on high-cost credit loans to consumers through price comparison websites. The second was to introduce a “wealth warning” on high-cost credit products. The third was to collect essential information on the high-cost credit sector so that the OFT can track developments. The fourth was for the Government and industry to develop a code of practice. The final recommendation was to work with credit reference agencies to explore ways in which payday lenders could provide suitable information about the payment performance of their customers. That would help those who use high-cost credit to build up a credit history that they can use to access more mainstream lenders.
I wonder whether the Minister can deal with an anomaly that has driven the new clause. I received a letter on 25 May, which set out that the high-cost credit market was not specifically included in the consumer credit review. Is the Treasury taking the lead on this and does BIS need to follow? Will the Minister clarify this matter, because the letter from the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey) said that BIS was not looking at this area per se?
Her Majesty’s Treasury and BIS have joint responsibility for this matter, which is why we issued a joint call for evidence. As I said, the consultation includes gathering further thoughts on the five areas from the OFT review.
The Government will respond to the review in the coming weeks and we are still assessing the evidence that has been provided. I can tell the House that a number of responses have been received on introducing a cap on interest rates, including from Members of this House. This is clearly an area that we will consider properly and carefully. We have been clear that we are not afraid to take action where there is evidence of consumer detriment.
I turn to the new clause that was tabled by the shadow Chancellor and a number of hon. Members. It asks the Government to review the impact of all taxation measures on lenders who are seen to engage in high-cost lending. I appreciate that this may be a probing new clause. I pointed out in Committee that the new clause as then drafted would lead to the perverse outcome of forcing up the cost of credit. The new clause before us has similar defects and unintended consequences.
I will point out the defects first. It is the Office of Fair Trading that regulates consumer credit, not the FSA. I would have thought that a Member who is so proud of her reputation for doing the homework would have got that right. It is well known that the OFT regulates high-cost credit.
Secondly, unlike the new clause tabled in Committee, which focused on the bank levy, this new clause looks at tax measures that are applicable to high-cost credit lenders. It would require each tax measure in the Budget to be assessed to see whether it is applicable. I listened carefully to the speeches of the hon. Members for Nottingham East and for Walthamstow—she is probably tweeting about this as we speak—to find out what tax measures they had in mind. I did not hear a single tax proposal being put forward by Opposition Members. [Interruption.] The hon. Gentleman says that we should propose the measures. I have been listening carefully for any sensible tax proposals from Opposition Members, but I am yet to hear one.
My concern is that there is a degree of price elasticity for those who use high-cost credit. Such people pay for high rates on their borrowing. If we increased taxes on high-cost credit, the costs would be borne by the borrowers through higher charges and the benefit would be gained by the Exchequer. That would run counter to the interests of those who use high-cost credit.
If taxes and levies are invariably passed on to the consumer, will the Minister elaborate on the banking levy? Presumably he feels that that, too, will be passed straight through to the consumer. Are there not other tax measures that disincentivise or demerit activities?
There are a number of taxes that disincentivise certain activities. We could be here all day identifying them. The challenge is to what extent an increase in tax is passed on to the consumer and to what extent it is borne by the shareholders. There is a lot of evidence that in areas where borrowers are relatively insensitive to price, such as payday lending, the additional costs of tax measures would be passed on to the consumer. I am yet to be persuaded that that would not be the case. It might help if the Opposition had some concrete proposals on tax that could be assessed, but so far they have not. Perhaps the hon. Member for Walthamstow has a proposal.
I am saddened that the Minister did not feel that any proposals were made in the debate. I thought I had caught his eye when I talked about whetting his appetite with the excess profits that companies make. I made a specific proposal on that, which I will repeat for his benefit. Provident has taken £675 million in excess profit out of low-income communities since 2005-06, according to the Competition Commission’s investigations. Perhaps he could look at taxing the excess profits that these companies are making. Does he agree with that proposal?
I listened carefully to that point, and the hon. Lady again demonstrated the problem that she is long on analysis, but short on solutions. She talked about excess profits, but of course there is a range of solutions for that, one of which is to increase competition in the market to force prices down. I am not sure that a windfall tax, which I think is what she is proposing, would have the impact that she expects.
The Financial Secretary suggests that taxation would inevitably be passed on to consumers, but Ministers insisted not so long ago that the North sea tax would not be passed on to consumers. The Chancellor himself was very clear that it would not, and that he had means and measures to ensure that it could not be. Many Government Members said that they were happy that consumers would not pay the VAT increase, because hard-pressed businesses would just have to absorb it. Why are the Government protecting the predatory credit sector?
The hon. Gentleman needs to look carefully at the impact of tax in different sectors. Just because one rule applies to one sector does not mean that it applies to others. We know that there is real concern, for example, that if we forced excise duty up too high, people would resort to smuggling to evade it. The impact varies from tax to tax and from area to area, and we need to consider which measures will be effective.
There are broader concerns about how the Opposition want to use tax. As I said, tax is used to change behaviour from time to time, but it is a blunt instrument, and if it is not properly thought through it can lead to perverse outcomes. An increased rate of tax on lenders would not have any obviously positive impact on how consumers are treated. Studies from other areas show that lenders will find ways to circumnavigate regulations and pass costs on to borrowers. A different tax rate for those businesses would be detrimental to consumers and would raise the cost of providing credit to those who may be unable to access mainstream credit.
Members have a responsibility to take seriously the potential for such measures to drive lending underground. I am sure that no one in the House would like to see a rise in illegal loan sharking, which can so devastate lives. The risks to individuals’ financial and personal well-being would be increased by loan sharks, who do not follow regulations or take legal action when debts remain unpaid. They use whatever means they can to recover their money, often forcing borrowers into more debt, or much worse. The provision of short-term credit can prevent financial exclusion, and it has allowed more consumers to access credit in a regulated market.
A number of comments have been made about an interest rate cap. There were three separate reviews under the previous Administration that considered, among other things, price controls in the high-cost credit market in the UK. They all came to a similar conclusion—that introducing price controls may lead to unintended consequences that would not be beneficial to consumers. The OFT review found that
“introducing price controls would not be an appropriate solution to the particular concerns we have identified in this market”,
“developing a system to enforce and monitor price controls or interest rate caps in the UK would be complex, expensive and difficult to administer”.
In Committee, the hon. Member for Walthamstow mentioned a recent European Commission study published at the start of this year, but it found that restrictions on interest rates could deny people access to small amounts of credit, do not reduce overall average interest rates and lead to increased fees and charges being imposed by lenders. The idea of a cap on the total cost of credit sounds appealing at first, but it would have its consequences.
Does my hon. Friend agree that two initiatives that were described earlier are valuable? One is credit unions—my hon. Friend the Member for East Hampshire (Damian Hinds) chairs the all-party group that is promoting their work—and the other is financial education for young people, which my hon. Friend the Member for North Swindon (Justin Tomlinson) and his all-party group are pursuing vigorously. Are those not two positive things that the House can get behind?
Yes, my hon. Friend is absolutely right. The provision of better education, information and guidance to help people manage their money is extremely valuable. That is why we have been very supportive of the Money Advice Service in its work to help improve financial capability and capacity.
Sustainable solutions to the issues raised by the Opposition are not simple or obvious. As my hon. Friend the Member for North Swindon (Justin Tomlinson) said, an individual making the minimum repayment on their credit card could be subject to a higher total cost of credit than someone using payday lenders. The vast majority of people who borrow from payday lenders and then re-borrow pay off the amount that they borrowed by the third time. That shows that careful and considered thought needs to be given to the impact on consumers of a cap on the total cost of credit, and how it would be implemented in practice. The majority of available research focuses on interest rate restrictions rather than such a cap, but some of the same challenges apply.
We need to gather evidence before we introduce new rules, or else risk unintended consequences. That was why we launched the consumer credit and personal insolvency review, and we are considering carefully the evidence that has been provided. The Government will announce the next stage shortly, and are committed to taking action when we can be sure that it will be effective. The Under-Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Kingston and Surbiton (Mr Davey), and I will continue to engage in the matter, along with the hon. Member for Walthamstow. However, I am afraid the new clause is not the right way to take things forward. It is flawed in both detail and effect. We need sensible, well-thought-through interventions to improve the functioning of high-cost credit markets and get better outcomes for consumers. The new clause would not achieve that, and I ask the Opposition to withdraw it.
I know that it cannot be easy for the Opposition to work with the Government on this issue and appear to concede on the new clause. It could seem like a climbdown for them to accept that more work is needed before action is taken, but that is the sensible, responsible approach.
I am sorry that the Financial Secretary has taken that attitude to the new clause, which is pretty innocuous in calling for a review. We have not put specific proposals in it, because we thought that in the spirit of cross-party working it would be useful to set up provisions to allow the Treasury and the OFT, working together in harmony, to work through the options and possible policy devices. Asking for a review on an extremely serious issue such as this is a bit like motherhood and apple pie; it really should not be objected to.
I must correct the hon. Lady. I know that there is a review of sorts going on, but it relates to credit card lending and high bank charges on lending. The letter that my hon. Friend the Member for Walthamstow (Stella Creasy) received in May from the Under-Secretary said that the high-cost credit market
“was not specifically included in the call for evidence”
for the current review. That was what the letter of 25 May said—from the same Minister, incidentally, who refused to meet my hon. Friend.
The Financial Secretary is far too relaxed about this issue, and the Government are not exercised enough about it.
Members of all parties, including the hon. Gentleman, to whom I may give way in a moment, have made the point that there is great concern among our constituents in our surgeries about the real suffering and punitive charges that they sometimes face. The organisations in question admittedly engage in legal lending, but their activity feels immoral to many of us.
My hon. Friend the Member for Makerfield (Yvonne Fovargue) said that help from the financial inclusion fund ought to be there for our constituents. The Minister tried to explain that that fund will remain for another nine months, but as my hon. Friend said, it will end, and for those who struggle even to open the envelopes containing the bills as they stack up, there is no substitute for such face-to-face advice. The Government need to do better to ensure that face-to-face advice services remain and do not fall away when the cuts to them are compounded by local authority cuts.
The Minister said, “Oh well, the previous Administration ruled out interest rate caps,” and castigated them for that. The point is that we are talking not about one route or policy solution today. We need a thorough review that deals specifically with high-cost credit markets. The current joint OFT and Treasury review does not do that. His reasons for resisting the new clause are the typical civil service ones—pointing out that the proposal refers to the Financial Services Authority rather than to the OFT is pretty pedantic. He also said that the proposal does not list specific policy elements. He rules out tax as a lever, but I do not say that a tax measure is absolutely necessary in this case; I am saying that it could be. We want him to lead a review to find out.
The Minister’s complacency is not good enough. Vulnerable people in this society are suffering because of the high punitive charges that they unfairly face. Some of the very poorest in our society are suffering. We need action now, and we have tried our best to offer the Minister a device that would allow him to get on with reviewing the levers that could make a difference. He refuses to do that and throws the proposal back in our face. For that reason, surely, we ought to press the new clause to a Division.
Question put, That the clause be read a Second time.
New Clause 12
Report on capital allowances
‘The Chancellor shall direct the Office of Tax Simplification to report by 31 March 2012 on the options for simplifying or replacing the capital allowances regime with a view to ensuring businesses obtain tax relief for capital assets over a period more closely matched to the useful life of those assets.’.—(Nigel Mills.)
Brought up, and read the First time.
With this it will be convenient to discuss the following:
New clause 14—Group filing for corporation tax—
‘The Chancellor shall direct the Office of Tax Simplification to report by 31 March 2012 on the potential for the introduction of a consolidated corporation tax filing for UK-resident companies meeting the current definition of a group for corporation tax purposes, to include an assessment of the potential cost savings for companies and HMRC, and the potential for reducing tax avoidance.’.
Amendment 15, in clause 4, page 2, line 16, leave out ‘is treated as having come into force on 1 April 2011’ and insert
‘shall come into effect when legislation shall have been enacted requiring that all public limited companies registered in the United Kingdom shall be required to submit the arrangements for the payment of salaries and bonuses of their directors to a binding vote of approval by their shareholders at an Annual General Meeting.’.
Amendment 20, page 2, line 16, leave out ‘is treated as having come into force on 1 April 2011’ and insert
‘shall come into effect when legislation shall have been enacted requiring all public limited companies registered in the United Kingdom to publish the current salaries and bonuses of their directors.’.
Amendment 51, in clause 7, page 4, line 6, at end insert—
‘(10A) The Chancellor shall produce, before 30 August 2011, a report on the Government’s discussions with the industry on the implementation of the increased charge’.
Amendment 17, in clause 42, page 27, line 4, after ‘appoint’, insert
‘after a Report has been submitted to the House of Commons detailing the number of EIS schemes previously approved, their total cost in terms of tax relief, the number of jobs created by the companies enjoying such relief and the number of companies that failed subsequent to relief being granted allowing for an estimate to be made of the cost of each job created under the terms of this scheme when compared to the cost of tax relief given.’.
Amendment 9, in clause 43, page 27, line 35, at end insert—
‘(11A) In section 1052 in subsection (2) after paragraph (a) insert—
“(e) incurred on premises costs
(f) incurred on design costs
(g) incurred on patent, trade mark, registered design, copyright, design right or plant breeder’s right (see section 1139)”.
(11B) After section 1142 add—
“1142A Premises costs
(1) In this part “premises costs” means rents and business rates costs of the studio where R&D is undertaken.
1142B Design costs
‘(1) In this Part “design costs” means—
(a) user interface costs,
(b) user testing costs,
(c) aesthetic costs,
(d) new business model costs.
(2) In subsection (1)(a) “user interface costs” means—
(a) costs occurred from designing the visual and functional appearance of the application,
(b) costs occurred from designing the code that reacts to user inputs.
(3) In subsection (1)(b) “user testing costs” means—
(a) costs occurred during product testing.
(4) In subsection (1)(c) “aesthetic costs” means—
(a) costs occurred from the artistic design of the product.
(5) In subsection (1)(d) “new business model costs” means—
(a) marketing of building a new business monetisation model,
(b) marketing of testing a new business monetisation model.”’.
The aim of new clauses 12 and 14 is to encourage the Government to move a little faster in simplifying our corporation tax system, which is far too complex to meet modern needs.
On a day on which we have celebrated the 100th birthday of Ronald Reagan, it is appropriate to start with a quote from that great tax reformer. He said in 1985:
“Later in this session of Congress, we’ll be presenting our proposals for tax reform that will lower tax rates, broaden the tax base and make the tax code simpler and fairer. We’re looking at a top rate on personal income taxes of 35 percent, very possibly less. And we’ll be sure that incentives for capital formation are maintained. And I just want to reemphasise one thing: Tax reform will not be a tax increase in disguise.”
Those words are as relevant today as they were 26 years ago. To be fair, the Government have received that message. The Exchequer Secretary recently said:
“Taxation in Britain is far too complex. A clearer and more straightforward tax system will bring benefits for tax payers, tax professionals and the Government alike.”
I hope that the whole House would entirely agree with those sentiments.
The Government have taken welcome steps in the right direction. We have established the Office of Tax Simplification, and I commend the work it has done. In fact I am keen to ensure that we get maximum value out of it by giving it a bit more work to do under these two new clauses. At a time when we are assessing the value of all our quangos and outside bodies, the more work we get out of them the better.
We need to hasten the work of the OTS along. We are already a year into this Parliament and we rightly have a process now whereby we consult in detail on major changes to the tax system. If we do not bring forward our proposals in the next year or so, we will struggle to get any benefit from them in this Parliament, and that is the direction in which I am encouraging the Government to go tonight.
The Exchequer Secretary has made such a great start in tax simplification that he has had the honour of being named the tax personality of the year. We could start making various jokes about accountants’ personalities, but we would probably cause grave offence to all my former colleagues, so perhaps we should leave that subject. We have had a consultation on removing a few simple tax allowances, such as the reliefs for angostura bitters and black beer—if going that far gets the Minister that award, just think what garlands could be thrown at his feet if he tackled some of the real complexities of our tax system!
It was just last week that the Government announced the next areas that they want the OTS to consider, rightly including the taxation of pensioners and employment taxes. However, at a time when we need business to drive the growth that will sort out the deficit and our economy, we need to look at the taxes that encourage—or perhaps discourage—business from making the investment that we need. That is why new clause 12 would require the OTS to consider ways to simplify the capital allowance system, or to replace it if simplification is not possible. If the Minister questions why we need that provision, I draw his attention to the Bill, in which we have had to introduce various measures that tinker with the capital allowance system, because we know it is out of date and not working. It is hard to imagine that anyone would design from scratch a system in which we have to introduce a modification to ensure a different system for short-life assets and then we have to change the definition of short-life assets to eight years. I wonder how often businesses invest in assets that they expect to have a useful life of eight years, never mind any longer. That is a clear sign that the system is not working, out of date and far too complex. It needs to change.
I am sure that Members have taken a fascinating look through this country’s tax code and seen how many types of capital allowances we now have. We have a basic regime—the general pool—which from next year will produce an allowance on a reducing balance basis of 18%, meaning that it will take a long time for a business to get the full economic relief for its investment. It would take well in excess of six years to get the majority of that relief. We then have the short-life asset pool for assets that a business thinks might have a life of less than eight years. That effectively means that it has to track those assets and work out when to scrap or dispose of them to get the final balance. We also have a long-life asset regime for assets that have a particularly long life, but which are not suitable for the general pool. Furthermore, we have different rules for cars and environmentally friendly assets, and completely different rules for assets on a finance lease, where effectively we allow account depreciation.
This range of reliefs for simple investments in plant and machinery beggars belief. Frankly, if I was an overseas business or someone with some cash wanting to start a business in the UK, and if I wanted to invest in a heavy manufacturing business, was investing in large numbers of plant and equipment and went to my adviser and said, “I want to invest in the UK. Can you tell me how I get relief for all this investment?” and I got the answer, “Well, it depends on whether it’s a long-life asset, a short-life asset, an ordinary asset, an environmentally friendly asset, and it depends whether you lease it, hire purchase or buy it outright”, I would start to wonder whether it was really worth the effort. Surely there must be a simpler and better way of doing this than having to go down all these different routes.
We know what happens. The system creates complexity for businesses having to track and make all these returns. Then the Revenue has to audit and scrutinise those returns and ensure that everything is done properly. It therefore takes work on both sides to support a system that I suspect is achieving the opposite of what we want, which is to encourage existing and new businesses to invest in new, modern and environmentally friendly equipment, and to create more jobs in the manufacturing sector that we so value in this country.
My hon. Friend is making a powerful speech, and I share his interest in this subject because, like him, I have large amounts of manufacturing industries in my constituency. Have any businesses in his constituency made representations to him about how much such a measure could save them or help them to invest?
I can think of many things on which businesses lobby their MP, but the details of the tax system are a little way down that list. We would find that businesses take a different view of whether they benefit from the current regime. However, as we continually reduce the rate, this will become of greater interest to more and more businesses. Yes, businesses come to me and say, “The general tax system is just far too complex. The corporation tax system as a whole is far too complex.” The issue I have raised is just one particularly good example of where the system is now out of date.
If the Minister needs more encouragement to simplify the system, I would add that the more complex we make a system, the more attractive we make tax avoidance and the more loopholes we create for tax avoidance. Through the Finance Bill we have had to introduce anti-avoidance measures to try to stop people exploiting the system’s complexities. How much more attractive would it be if we simplified the regime either by retaining capital allowances that provide the attraction of a simple fixed rate of relief, or by allowing a business to relieve the depreciation charge it makes in its accounts? In previous debates, we have heard of the risk that businesses could massage their tax results to accelerate the deduction in advance of the economic life of those assets ending. These things can be tackled, however. In effect we are allowing a business with an intangible asset to take relief for its accounts depreciation. It is strange that we allow that for intangible assets that we cannot, by definition, touch and for which there is no scientific data proving the lifespan, yet for tangible assets—the core things we want businesses to invest in—people have to go down this hugely complex route.
In reducing the allowance rate from 20% to 18%, the Government think that they will more closely align rates with the economic life of assets these days. I am not sure that businesses in my constituency are saying that that is their experience. These days, things move on so fast that the life of an asset is quite hard to predict. If someone is looking for a return on an asset over six years-plus, it is hard to be confident in the current market. There are many issues with the capital allowance system, and I suspect that each year a different aspect will become the hot topic. The Minister will be lobbied by different interest groups, as I suspect he was this year in his attempt to move—quite rightly—from four years to eight years, but when he is next lobbied and gets proposals in his Red Box to add another layer of complexity to the system, I hope he will say, “Actually, there must be a better way we can do this.” This is fundamental to our corporate tax system, it is fundamental to how we encourage investment in our country, and there must be a better, simpler, fairer way that removes some of the potential for abuse. New clause 12 would get the Office of Tax Simplification to consider whether a better system could be introduced. I would strongly encourage the Government to consider carefully going down that line.
Let us step back in history to the time of President Reagan. One example of how not to simplify a tax system was his Tax Reform Act of 1986, which introduced what was called the “double-declining balance method”, switching to the straight line method at a time to maximise the depreciation allowance. I raise that issue only to show that this is not as simple as saying that we need either the current system or accounts depreciation—different things could be done that might encourage investment, although I am not sure that the double-declining balance would meet my aim of simplifying, even if it might give businesses the joy of accelerated relief. I shall not ask the Minister to respond in detail on that particular method, however, as I suspect that it will not have featured in his recent studies.
New clause 14 addresses a slightly less hot topic—groups of companies. These can range from groups with two companies through to multinationals with dozens or even hundreds of UK companies. For corporation tax purposes, we currently ask groups to file a tax return for each entity. Then we ask them to file separate claims and elections for all the various inter-group transfers and allocations. They are allowed to transfer a loss from one company against the profit of another, and they are allowed various elections on the transference of assets around the group. All these things create a huge compliance headache for taxpayers and the Revenue.
It is worth considering whether there is a simpler way of getting groups to deal with their corporation tax compliance by filing a tax return covering the whole group. There are precedents: many other tax regimes under our competitors allow groups to file a single tax return for their whole group, and in fact we allow groups to make group VAT elections and effectively file single VAT calculations. I wonder how much easier it would be for a group if it had the same basis for VAT as for corporation tax. Let us consider all the potential savings for businesses and the Revenue in not having to go through dozens of individual tax returns. We should bear in mind the fact that many entities in a group will have few entries and will add very little. Under my proposal, we would no longer require all these group relief returns when businesses allocate losses from one company to another, then make a change following submission and have to change all those returns, after which one company makes a loss the next year that changes the previous year’s return, meaning that they have to re-file them all. All these things add huge complexity and costs but very little value to the tax system.
I accept that they add some value to the Treasury, however, through the hope that, somewhere in a group, some losses or something else will not get relieved but will get trapped, whereas under a simplified system they would get used. I am not sure that our predecessors, when they passed these reliefs to support and encourage business, were aiming to put in place systems so complex and out of date that some relief would get denied when it ought to be given.
There are further reasons behind my proposals. We impose on UK group companies various requirements to review the pricing of transactions that take place between them. There is no tax at stake if company A sells something to company B for £100, then has to work out whether the price ought to have been £95 or £105. The only result is that one entity ends up with a slightly reduced profit, and the other with a slightly higher one. Both pay the same rate of tax, so the present arrangements simply result in a paper chase that creates compliance headaches for business and the Revenue alike. All such transactional requirements between group companies would disappear if they were allowed to file one tax return.
If I were working in the Revenue, I would be keen to get a consolidation from large groups of what their affairs in the UK actually looked like. In that way, I would be able to see what return they were making and whether it looked a little low or whether there were any strange entries that seemed to be reducing profits. At the moment, a group filing 65 tax returns could have all manner of strange things going on, and it could be hard to see both sides of the matter. Something could be shown in one entity, and it would be necessary to hunt for the opposite entry somewhere else.
Those arrangements create scope for tax avoidance. The Minister will be aware of the reforms that he has to introduce to tackle these complex, one-sided instances in which a tax deduction appears for a payment in one group company and the income elsewhere in the group is somehow characterised as something different that is not taxable. If we got this reform right, we could make this kind of tax abuse a lot harder to carry out. That would also remove the need to introduce more and more complexity into the tax system, year on year, to tackle all these abuses. Simplifying the tax system will reduce costs, encourage the investment that we want and tackle tax avoidance by taking away the present complexities and loopholes. I suspect that simpler taxes are more likely to be complied with.
If I have not convinced the Minister so far, let me return to the question of capital allowances. At the moment, we give pretty much no relief when a business invests in a new factory. We no longer give any relief for the building, but if we want people to invest in large-scale manufacturing plants, that is not a wise position to take. I understand why we give no relief for land or for office blocks, but the situation for factories is a strange one. It forces a business to separate out anything that it has put into the factory that could be regarded as plant and equipment. For example, it could separate out air conditioning or mezzanine floors, or anything else remotely specialist, in order to claim tax relief on it. This creates a huge amount of work for businesses and tax advisers.
In fact, a consultation is taking place at the moment on reforming the rules for businesses that are trying to track assets such as those. We get annoyed with businesses for entering into expensive and complex leases in order to get a tax deduction for their property costs when their income perhaps appears offshore and is not taxed in the UK. Might there not be a better way? My proposal would remove some of the incentive to do that, and allow businesses to get proper relief on their capital investment instead of forcing them down ever more complex, artificial and expensive routes whereby those with well-paid tax advisers can get themselves into the best tax situation. My proposal would help the innocent companies that just want to get on with running their business but instead get mired down in the complexities. I commend both my new clauses to the Government.
I congratulate the hon. Member for Amber Valley (Nigel Mills) on moving his new clause and on the deployment of his expertise for the benefit of the whole House. He could well be a candidate for tax personality of next year, but I would advise him that it might help his prospects if he were to lay off the Reagan quotes.
I wish to speak to the amendments tabled in my name. Amendment 15 deals with directors’ salaries and payments, and proposes a binding vote by shareholders on such payments. Amendment 16 deals with the publication of information on the salaries and bonuses of directors in all public limited companies. Amendment 17 deals with a number of issues relating to enterprise investment schemes, and it would be helpful to receive certain information from the Government in order to assess those schemes in future.
I want to deal with salaries and bonuses first, as they have been a matter of contention in the House for a number of years now. Statements have been made by leading members of all political parties expressing concern, if not outrage, at the levels of increase in the pay of company directors. The Leader of the Opposition said in a recent speech that the
“danger today is that pay and performance have become detached…Over the last 12 years, chief executive pay in Britain’s top companies has quadrupled, while share prices have remained flat.”
The Secretary of State for Business, Innovation and Skills has called for greater disclosure on pay and bonuses and their link to company performance. He was reported as hitting out at the
“ethics of the wild east”
in the City. He described some directors’ pay and bonus settlements as “ridiculous”, “outrageous” and “rewards for failures”. I agree wholeheartedly with the Leader of the Opposition and the Secretary of State on this matter. I believe that the Secretary of State’s sentiments have been echoed by the Prime Minister himself.
My amendments seek to address the fact that the present system for the control of directors’ pay and bonuses by shareholders is not working. The current system for judging and rewarding remuneration in major companies is clearly not linked to performance, and evidence for that now abounds. The Business Secretary was referring to the dramatic increase in the remuneration of directors and executives of the top 100 companies. In 1998, that remuneration was 45 times the pay of the average employee in the company. By 2010, it was 145 times the average pay, and if it continues at that rate, it is predicted to reach 214 times the average salary in the company that the director or chief executive controls.
At the moment, the chief executives of the FTSE 100 companies have total remuneration packages averaging £4.2 million a year. Last August, it was reported that the financial crisis had resulted in ordinary employees’ salaries being frozen in at least one third of Britain’s biggest companies, yet the average pay of the top directors increased by £500,000. Hewitt New Bridge Street has reported that the typical bonus has now increased from 90% to 120% of salary, and the total remuneration survey conducted by pay and reward consultants MM&K showed evidence of a total disconnect between rewards, actual performance and shareholder value. Performance-related pay has just gone through the roof, however, with extremely complex packages being devised. The average top award under share allocation schemes and incentive schemes in the FTSE 100 has risen from 174% to 328% of salary.
In some instances, outrageously large awards have been agreed even before the director has demonstrated any value to the company. An example is Lloyds, which gave its new chief exec, António Horta-Osório, a welcome package worth close to £13.4 million simply for joining the bank. This is a bank that we, as taxpayers, now own. Lord Oakeshott, the Liberal Democrat peer, said that taxpayers would be “appalled” at paying someone
“£5,000 a day, just for turning up at the office for the next three years”.
I wholeheartedly agree with him on that. Ironically, Sir Victor Blank, the former chair of the Lloyds group, described top bankers’ pay in The Sunday Telegraph—not a newspaper I regularly read—as “unconscionable” and warned that the widening pay gap could lead to dangerous divisions in society and more strikes. I shall quote him directly. He said:
“You can’t have an ongoing widening gap between the top pay and the average pay…I think we are at a time now where you have a certain amount of unrest over pensions and other issues where if we don’t start early to have a degree of moderation in the levels of pay we risk more industrial unrest than we have had.”
I could not agree more.
Some shareholders have echoed those concerns. It was perhaps best expressed by a woman shareholder who was disgruntled at the Cable and Wireless annual general meeting. She complained—and it was a heartfelt plea from the floor:
“All the money and all the profit seem to be going towards the salaries of the Board, and I did not necessarily think that they were worth that amount of money.”
I believe this is undermining confidence and engendering cynicism—and, of course, division and disenchantment—in the whole process.
Clearly, the billowing packages of directors’ pay, bonuses and overall remuneration has to be addressed. The Government have acknowledged that, as have all parties in the House. My amendments are designed to prompt action and to make action more speedy and decisive.
If we are to tackle this issue, we need to understand why it is occurring. The Joseph Rowntree charitable trust funded an independent inquiry, the High Pay Commission, to which I believe a number of Members have submitted their views over the last year. It has looked at the drivers behind the trend of increases in directors’ and executives’ pay and remuneration. It provides some understanding of how the system operates to determine directors’ remuneration and puts forward the reason for the excesses.
Governments have addressed the issue over the last two decades. Legislation has been there to establish the current system of corporate governance. For publicly listed companies, it is based first on the establishment of a remuneration committee on every board to advise on appropriate remuneration; secondly, on disclosure; and, thirdly, on the shareholder having a vote on the pay and remuneration of directors. All the companies with a premium listing of shares are required on the Financial Services Authority listing rules to report on how they have applied the UK corporate governance code in their annual reports and accounts. This includes explaining how the pay was arrived at and determined.
The remuneration committees that have developed since the 1990s grew up as a result of pressure from successive Governments. They aim to overcome the conflict of interest in directors setting their own salaries. The Greenbury report on corporate governance called for them to be fully independent and to comprise wholly non-executive directors. The committees agree the pay packages for top execs and produce the report that will eventually go before shareholders.
The problem identified by the High Pay Commission and others is that the non-execs that sit on the remuneration committees are often executive directors in other companies, so setting benchmarks of remuneration is important for them. There have been charges of cronyism as executives and directors appoint each other to each other’s remuneration committees—a relationship of incestuous self-interest—while the non-execs sit alongside executive directors supporting them and unwilling to challenge them on pay. In recent years, we have seen the emergence of remuneration consultants who advise the remuneration committees on the setting of pay, but these are unregulated and they are often working for or are commissioned by the company directors on whose salaries they are giving advice.
On disclosure, quoted companies must publish directors’ remuneration reports. These appear in the annual report and are put to shareholders for a vote. This information is required to be put to companies as an ordinary resolution for approval at the AGM. The problem, however, is the UK corporate governance code guidance, according to which:
“A significant proportion of executive directors’ remuneration should be structured so as to link the rewards to corporate and individual performance. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing remuneration packages of individual directors.”
The Hampel report back in 1988 argued that the remuneration reports were excessively detailed and that features of the packages were
“rendered obscure to all but the expert reader.”
The situation has got worse in recent years—worse than ever before. The data produced for the reports to the shareholders are often impenetrable and the remuneration packages are extremely complicated and sophisticated. There is a real fear of shareholders gaining any understanding of the package of remuneration, including the levels, and it has been argued that the reports are less about enlightening the shareholders than camouflaging pay and bonus levels within the complex schemes proposed. Publication does not cover all companies, so it is extremely difficult for shareholders to hold the directors and executives to account, simply because the information published is too complex and impenetrable.
As for the shareholder vote, international and national regulations and guidance on corporate governance place great emphasis on shareholders having the ability to express their opinions on the remuneration of directors. It is enshrined in OECD principles of corporate governance. In the European Union, the publication of remuneration levels and performance criteria is recommended, as is investors having a vote on remuneration.
Within the UK, the UK corporate governance code sets out the standard of good practice on reporting to shareholders on remuneration and regulations also require shareholder votes on the total remuneration packages of company executives and directors. The vote itself, however, is purely advisory and the failure to pass the remuneration report does not invalidate the payments made. In fact, the FSA reforms of the banking sector have gone further on the basis of EU principles and those of the Basel Committee on Banking Supervision. Further help is provided on disclosure, but there is still no authoritative binding vote that will determine the acceptability of pay packages.
When shareholder advisory votes were initially introduced, they had some effect. The best example is GlaxoSmithKline, as the remuneration report was defeated—but that is very rare. The average vote against the remuneration report nowadays is 5.6% on the all share index. Shareholders are limited by the amount of information available, particularly in view of diversifying portfolios that have a range of investments, making it hard to find time to study and intervene in each case.
My amendments are designed to address some of these issues, particularly the weaknesses within the current governance structure. I am trying to make the existing structure work more effectively so that shareholders can begin to control the excesses of directors’ pay and remuneration that have developed in recent years.
Amendment 20 says simply that prior to the corporation tax changes taking effect, the Government should enact legislation to ensure that all public companies
“publish the…salaries and bonuses of their directors.”
We have the opportunity this evening to hear the Government’s future plans on publication in order to tackle the complexity of the current arrangements.
Amendment 15 goes further in an attempt to strengthen the hands of shareholders by making the advisory vote on remuneration packages binding. In this way, it will enable shareholders to take control of their own companies once again and ensure accountability. It will enable shareholders to hold not only directors but remuneration committees to account.
My amendments would go some way to ensuring that the information is published, enabling the Government to look in more detail at such information, while also enabling shareholders to have at least some opportunity to hold the directors to account. As I said, the advisory vote system worked initially, but it certainly has not worked in recent years, as the HBOS example demonstrates. Having a binding vote will give the shareholders some authority. The amendments are an attempt to redress the current imbalance of power between the shareholder and the board. It will not solve all the problems of directors being unaccountable on pay or bonus awards, but it would put another weapon in shareholders’ hands to tackle the issue.
Amendment 17 relates to enterprise investment schemes and accountability. Just as shareholders need information to hold company boards to account, the House should ensure that taxpayer’s money and tax concessions are allocated wisely to groups in society and that value for money is achieved. The amendment would invite the Government to justify in more detail future enterprise investment schemes on the basis of past performance of previously approved schemes. The amendment would seek information from the Minister on the total cost of tax relief with regard to the tax income forgone, the number of jobs created by the companies that have gained tax relief under the schemes, and the number of companies that have failed after the tax relief has been given—calculating the cost of each job created compared with the cost of the tax relief given. The information provided in the paperwork in relation to the Budget and the Finance Bill is not clear. The Treasury briefing on enterprise investment schemes and venture capital trusts sets out the proposals but provides no analysis of past measures and their performance. The Treasury Committee, in its comments on tax relief for EIS under the Finance Bill , suggested:
“The measure also needs to be viewed alongside the other proposals for EIS and whether the existing EIS conditions encourage investment in growth businesses.”
The Treasury Committee, therefore, points us in the direction of undertaking a proper value for money exercise on the proposals.
The amendment would enable the Minister to respond to that. Before we venture into such schemes, particularly EIS, we must ensure that their objectives are achieved with value for money, and the information is not currently available for us to make that judgment.
I shall speak briefly to amendment 51. Since the Government announced the additional corporation tax on oil companies in the Budget, I have been urging and, I hope, taking a constructive part in getting the companies and the Government to talk through how field allowances can be used to ensure that projects reviewed as a result of the tax changes can still go ahead. The purpose of the amendment is to get feedback from the Government on the progress of such negotiations, which I hope will have a positive outcome. Immediately after the Budget, Statoil made the most controversial, and certainly the most high-profile, announcement: that it was putting on hold the Mariner and Bressay fields. I imagine that those fields involve up to £6 billion of investment, with 600,000 barrels of oil recoverable and the possibility of a headquarters building being located in Aberdeen. I hope that the Government will find a way to ensure that the project goes ahead.
Next week, my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and I are taking a number of oil companies that are members of Oil & Gas UK to meet the Secretary of State for Energy and Climate Change to discuss in detail the implications of the tax. The difficulty is that the tax changes impact differently on every field and on every company and its planned investments. I hope that active negotiations will lead to a recognition that allowances can be adjusted for particular types of field or circumstances, and that as a net result we will not lose too many of the investments that were originally at risk. I also hope that engagement over time will lead to both parties agreeing that a simplification of the tax system might be desirable. When prices are high, the industry might reasonably be expected to make a contribution; equally, we should recognise its need to know with some certainly the return that it is likely to get on significant investments.
The hon. Member for Hayes and Harlington (John McDonnell) made a powerful and persuasive case regarding rewards for work not done or risk not taken, but it is easy to look at the oil companies as rich fat cats, which is how the public and the House often view them. However, developing oil from under the North sea involves huge risks in relation to technology, geology, exchange rates, markets and weather. Many people engaged in the industry use their technical knowledge and expertise to make a substantial return for their companies and for the UK economy, and although they have good, well-paid jobs, the payments and returns they receive are not in the same league as those received by people in financial services.
The Government have acknowledged that they do not want to lose the production from marginal and mature fields, and they are prepared to use field allowances. According to conversations I have had, negotiating in detail over a project for a field is incredibly complicated, requiring an enormous amount of civil service time, expertise and engagement, as well as executive management time, so I hope that the system will be simplified. Perhaps everybody is prepared to devote such time to significant projects, but the Department has a limited capacity to engage in too many of those negotiations, and companies sometimes have a limited capacity and willingness to engage, to the extent they might say that investigating or investing in other projects is more worth while.
I want to be encouraged by the knowledge that constructive engagement is taking place. I get good feedback from the industry about talks that it hopes and believes will lead to agreements that ensure that investments go ahead. In the long run, I hope that we will have a system in which there is trust and understanding and the Government get the revenue from high oil prices to which they are entitled, but the country gets the investment in the expertise, people and resources that will maximise production of oil and gas in the North sea, maximise jobs in the UK, and maximise and sustain the export industry, which is growing substantially. I hope that the Government will give a positive response in due course.
I support amendment 51, tabled by the right hon. Member for Gordon (Malcolm Bruce). As neighbours, we share the same interest in the oil and gas industry and know full well its importance not just to the north-east of Scotland but to the whole United Kingdom. One of our disappointments about the imposition of the tax is that the Government seemed not fully to understand the industry and its importance, which I hope they understand now.
Like the right hon. Gentleman, I am pleased to hear from my contact with the industry that discussions are under way, with the possibility of improvements to field allowances. If the Government had thought the tax through properly, they would have already prepared the ground for field allowances to mitigate the damage done to the industry. It is not possible to overstate that damage. A huge blow was dealt to confidence, not just because the industry had been involved in regular discussions with the previous Labour Government and the current Government about a review of the tax system to deal with a host of areas that had been remained untouched over the years, but because of how that was done. It seems from all the available information that the politicians had no contact or discussions even with tax experts in the Treasury. This was a purely political decision that did not arise from the review, from consultation, or from any wider consideration than the need to raise money.
It is clear that the industry will prosper for the next couple of years, certainly in the North sea, because the investment for the two years has already been committed. We are concerned about what will happen from 2013 onwards, when owners and shareholders and those at the companies’ headquarters will be looking for investment. As I am sure the Minister knows, investment decisions are made not locally but in places such as Dallas, Houston, San Diego, Paris and Madrid, and the people who run our industry have to pitch for that investment.
There is huge uncertainty because of the damage caused by the initial tax imposition and the tax system proposed in the Bill, but discussions about what is to happen in 2013-14 are taking place now. The sooner the Government can give us an indication of what they intend to offer in field allowances the better it will be, not just for the individual companies involved but for the country, because investment from abroad is desperately needed.
As I listened to the hon. Member for Hayes and Harlington (John McDonnell) speak to amendment 15, I thought that my ears were deceiving me because I felt so much sympathy for what he was saying. Indeed, he put me in mind of a book by a reformed Trotskyite, James Burnham, who predicted in “The Managerial Revolution” the system of capitalism—the set of structures—that we now recognise in publicly listed companies. My discomfort evaporated, however, when I realised that the hon. Gentleman was defending the interests of the owners of capital.
In that case, I am delighted that we are on opposite sides of the Chamber.
It is strange that capitalism has come to this: that, nowadays, the owners of capital need to be defended by the House from their own directors. If I have understood the amendment correctly, it would mean that the change in the main rate for 2011 would not come into force until legislation had provided arrangements for shareholders to approve their directors’ remuneration. It is almost incredible that such an arrangement does not already exist.
We must reunite ownership control and the risk taken with capital, and I believe that the amendment goes to the heart of one of the problems of our capitalist system. I am not sure that it would achieve the aim that the hon. Gentleman has set out because it might not affect the rate for 2011, and I therefore cannot support it. Nevertheless, I think it is an extremely good idea, and I urge the Government to consider it.
I support amendment 51, tabled by my right hon. Friend the Member for Gordon (Malcolm Bruce). I remind the House of my entry in the Register of Members’ Financial Interests as a shareholder in Shell and a vice-chair of the British offshore oil and gas industry all-party parliamentary group.
The key aim of the amendment is to introduce damage limitation and to rebuild the confidence and trust among investors that the country needs if we are to maximise the benefits of our own oil and gas. The oil and gas under the ground does not provide us with any jobs, tax or security of supply. Those are produced only when it comes out of the ground, and, although it belongs to the nation, we can get it out of the ground only through the expertise and skill of people from my constituency and throughout the country. They apply their knowledge by way of the investment provided by risk capital, and the investors must know, as far as possible, in what climate they are operating and what returns they will obtain. The kind of risk that we rely on their taking is illustrated by a field in the North sea where the geology suggested that three platforms would be enough to sustain production and provide all the necessary equipment. Only when they started extracting the oil did they discover that there was much more sulphur in some parts of the field than in others and that they needed to build a fourth platform at a cost of £1 billion. Such extra risk taken by investors—not by the Government or the taxpayer—must be recognised as being of great importance to our country’s success in this regard.
Last week, we held a reception in Parliament for Subsea UK to highlight an industry that has developed into a jewel in the crown of this country, yielding £6 billion in production from under the sea through engineering skill, half of which is exported from this country. The United Kingdom is responsible for one third of the world’s subsea engineering; we therefore have something very important to nurture and build on.
The field allowance discussions are an important means of trying to unlock some of the fields that will be negatively affected by what has been proposed. The hon. Member for Aberdeen North (Mr Doran) and my right hon. Friend the Member for Gordon emphasised a longer term risk that needs to be addressed: the risk not to the projects that are unwinding now and in the next two years, which already had the momentum of contracts signed and delivered before the tax was changed, but to those that will be decided in the culture and investment climate prevailing in the aftermath of the tax. That is why these talks are so important in rebuilding trust and a constructive engagement.
I welcome the fact that industry and Government appear to be addressing the need for constructive engagement, and any updates from Ministers as to how we are progressing in rebuilding trust will be very important. We must remember that the reputations of the country managers—the people in this country who work for the multinational companies and the investors abroad—has been damaged by what happened. They have been encouraging their investors to invest in this country in one set of circumstances, only for the goalposts to be shifted. They need trust and confidence in them to be restored if they are going to persuade their investors abroad—in Calgary and elsewhere—to invest again in our country so we can build on the potential that exists.
I agree with everything that has been said by the hon. Gentleman, his party colleague, the right hon. Member for Gordon (Malcolm Bruce) and the hon. Member for Aberdeen North (Mr Doran). We have heard about contracts and work that is in place already unwinding, with the likelihood of a gap after 2013 when one set of investment decisions has already been made but others have not yet been taken. I ask the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) to carry on the good work he is doing with his own Government on speeding up this review, so we can avoid that investment gap and the real dangers we will face in a couple of years’ time.
The purpose of the amendment is to keep the spotlight on this issue by ensuring we get updates from the Government, and that the Government can give a signal on the investment climate showing that they understand the concerns and are willing to take them on board so we can build a long-term future.
There is another gap apart from the time gap as these contracts unravel. We are a mature province so we must ensure that the infrastructure to get the next investments off the ground is still in place in years to come. That infrastructure must not be decommissioned prematurely, and so the investment must not be withdrawn. The owners of the infrastructure need to know that there is a long-term future for investment as more production will be brought in through those platforms. That is another reason why these constructive talks are so important.
I encourage the Government to do all they can to restore confidence and the positive investor climate that will unlock the full potential that exists in this country, build on the skills we already have, and maximise the benefit to the taxpayer in the long run and to our security of supply.
I am grateful to the hon. Member for Amber Valley (Nigel Mills) for kicking off this wide-ranging discussion on a number of important tax issues. He certainly enlightened me when he revealed that the Minister is tax personality of the year. I missed that; despite all my “Gauke” Google alerts, I missed the fact that he was tax personality of the year. May I offer the official Opposition’s wholehearted congratulations to him on that?
The hon. Member for Amber Valley gave a number of Ronald Reagan quotes and he said today was the 100th anniversary of Ronald Reagan’s birth. That was on 6 February, in fact, but this is the 100th year since Ronald Reagan’s birth. As you will know, Mr Deputy Speaker, today is the day on which we shrank the UK tax base by giving away America 200-odd years ago, and I hope that, as part of his plans for simplification, the hon. Gentleman will recall that.
New clauses 12 and 14 were proposed by the hon. Gentleman and he may be surprised to learn that I am not averse to his suggestion in new clause 14, because there are grounds for discussing the simplification of UK corporation tax returns for multinationals. It is worth while considering the review that he suggests, provided that it examines whether such a simplification will decrease, rather than increase, tax evasion—an increase is always the worry with such a simplification. New clause 14 potentially has merit and although I do not expect the hon. Gentleman to push it to a vote, I hope that the Minister will consider the issue.
New clause 12 proposes to review, or possibly even remove, capital allowances and asks the Office of Tax Simplification to report on replacing them with a different form of relief. The hon. Member for Amber Valley will know that Labour Members had substantial concerns about reducing capital allowances for firms, which explains why I cannot support the new clause. My hon. Friends and I tabled a number of amendments in Committee to oppose the reduction in the capital allowances. I realise that the reduction was tied up strongly with the decision to cut corporation tax to 24% by 2014-15—shortly thereafter it was decided to cut it to 23%— which was one of the flagship growth measures in the June Budget. However, that was paid for by slashing investment and capital allowances, which encourage businesses to take a long-term view by providing tax relief on the purchase of equipment and machinery. The view that I expressed in Committee has not changed, although I know that it will cause disagreement: companies that invest, particularly in manufacturing—car industries in my own area of north Wales, advanced manufacturing, wind turbine manufacturing, plane makers and so on—will benefit from capital allowances, whereas the tax cuts are, unfortunately, aimed at financial services.
At the time of the June 2010 Budget, manufacturers expressed concern at what this approach will mean for industry. More recently, the engineering manufacturers association warned that the Government risk moving to a tax system that contains “a bias” against big manufacturers. Members on both sides of the House are trying to encourage manufacturing growth, and I believe that the review that the hon. Gentleman seeks in the new clause could be damaging to the growth of capital investment and, therefore, to the growth of manufacturing industry.
I wish to clarify something. My aim in new clause 12 was not to do what the right hon. Gentleman fears will happen, but to do the opposite. I was aiming to ask the OTS to consider simplifying or replacing the capital allowances regime with one that would match the tax relief more closely to the life of the assets being invested in. My concern was that an 18% reducing balance was giving tax relief over a far longer period than the actual useful life of those assets. I felt that having a simpler system, where a shorter “life” meant that the tax relief would be obtained much faster, would incentivise investment, not discourage it.
That is an interesting argument, and I bow to the hon. Gentleman’s detailed knowledge of these matters, which goes back to his professional experience before entering the House. My worry has been placed on the record on Second Reading, in Committee and on several other occasions. For the moment, it is best that we keep our arguments to the effectiveness of capital allowances, and I will, thus, still be unable to support the new clause.
My hon. Friend the Member for Hayes and Harlington (John McDonnell) tabled amendments 15, 20 and 17. I suspect that he was even more surprised than me to hear the hon. Member for Wycombe (Steve Baker) offer his unflinching support for my hon. Friend’s suggestions on this matter. I thank him for tabling his amendments because they make an extremely important contribution to the debate. We face a real issue in how we collectively address what is now a cross-party concern and shed light on the remuneration of executives, who are ultimately paid by the companies for which they work and by us as consumers of those goods in our society at large.
Far be it from me to engage with my hon. Friend on the benefits or otherwise of Trotsky’s theory, because I am sure that he would win that discussion hands down.
The key point is that we all seek transparency in remuneration. My hon. Friend the Member for Hayes and Harlington will be aware that there is already legislation on the statute book that means that banks must have transparency in their remuneration. The Government should enact that legislation and should also push for a wider European agreement on transparency, an act of faith that they have so far failed to push for.
The previous Government, in our Financial Services Act 2010, allowed the Treasury to issue regulations that forced banks to disclose in bands the number of staff earning more than £1 million a year. That legislation has so far not been pursued with any vigour by the Government. The Act, which gained Royal Assent in April 2010—just before the general election—gave the Treasury the power to regulate on this issue. It is an issue that my hon. Friend the Member for Hayes and Harlington has raised and for which the Government must account today. The Opposition will continue to consider it in the future. Indeed, my right hon. Friend the Leader of the Opposition made a clear speech to the Coin street neighbourhood centre on Monday 13 June in which he committed the Opposition to ensuring that we had such transparency and that chief executives were accountable not just to their shareholders but to the wider community.
Does my right hon. Friend agree that an important feature of exposing those very high bonuses to public scrutiny was to make it clear that other lower paid workers in the banking sector receive some bonus payments? It is very important that we distinguish between the excessive bonuses at the top and the bonuses that top up relatively modest wages for the bank clerks, who are feeling quite attacked personally when the banking crisis was none of their making.
My hon. Friend makes a valuable point. She will know that the legislation passed by my right hon. Friend the Member for Edinburgh South West (Mr Darling) in the last Parliament allowed salaries of more than £1 million to be open to scrutiny, which would address the issue she mentions.
There is some merit in bringing this issue to the attention of the House, and I am grateful to my hon. Friend the Member for Hayes and Harlington for doing so. He will know that there are some issues to do with his amendment delaying corporation tax cuts, but I am grateful that he has addressed the issue and I hope the Minister will respond in due course.
Amendment 17 is about the enterprise investment scheme, which we support. In Committee, we asked the Minister whether he had state aid approval for the EIS and I would welcome an update on whether he has since made progress on that.
I have some sympathy with amendment 51, tabled by the right hon. Member for Gordon (Malcolm Bruce). On Second Reading and in the Committee of the whole House, we tabled amendments that mirrored his amendment in many ways, asking the Chancellor to produce before the end of September an assessment of the impact of taxation on ring-fenced profits, business investment and growth, including an assessment of the long-term sustainability of oil and gas exploration in the North sea. For the reasons mentioned by my hon. Friend the Member for Aberdeen North (Mr Doran), the way that the proposal was brought forward contained elements of surprise for the industry. There was a lack of consultation and there have been consequences. The right hon. Member for Gordon and the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) both mentioned Statoil and the great impact that the decision has had on that company’s potential $10 billion—or £6.1 billion—investment in the North sea.
It is important that the Economic Secretary has had discussions—some potentially very exciting and energetic—with oil companies on these matters as part of her initiation into her role in government. I hope that she will ensure that she reports back. I also hope that the Minister will accept amendment 51, or at least accept an amendment in principle for the future.
Finally, although my hon. Friend the Member for West Bromwich East (Mr Watson) is not present today because of other matters, I very much welcome his amendment 9, which is part of this group. We raised the issue of video games tax relief in debates on the Finance (No. 2) Bill. However, we need to look at the issue again in detail, if only because the hon. Member for Wantage (Mr Vaizey) said when in opposition:
“We are committed to a tax break along the lines of the video games tax credit. We have been calling for tax breaks for the video game industry for the last three years.”
He said that during the general election, on 13 April 2010. He is now the Under-Secretary of State for Culture, Olympics, Media and Sport, yet he has been sat on by the Chancellor of the Exchequer, who said in his Budget statement last June:
“In the current climate, with the deficit the size…all those reductions in tax must be more than paid for by other changes to business taxation, so we will not go ahead with the poorly targeted tax relief for the video games industry.”—[Official Report, 22 June 2010; Vol. 512, c. 175.]
My hon. Friend’s amendment 9 asks the Government to look again at the issue. I simply put on record the fact that, yet again, those in government said one thing during the election and something else afterwards. We need to encourage the video games industry so that we can compete on a global scale.
In summary, there are some useful amendments in this group. I cannot accept everything that the hon. Member for Amber Valley said, but the other amendments before us have some merit. I look forward to hearing what the Minister has to say.
We have had an interesting and wide-ranging debate on this group of amendments, which propose a number of changes to the taxation of business. Let me start by reiterating our position on business tax. The first step in the Government’s plan for growth is a competitive UK tax system. In fact, the Government’s aim is to create the most competitive corporate tax regime in the G20, and we have been clear about how we intend to achieve that. Last November we published our corporate tax road map, setting out our plans for reform over the next five years and the principles underpinning those reforms. I am quite clear that if we are to provide business with the certainty that it needs to invest in the UK, tax reforms need to maintain stability, avoid complexity and ensure a level playing field for taxpayers.
Let me deal first with the amendments tabled by the hon. Member for Hayes and Harlington (John McDonnell), and in particular amendment 15, which deals with directors’ pay, and on which we saw an unlikely alliance between him and my hon. Friend the Member for Wycombe (Steve Baker) in defence of the interests of capital versus workers—if I can phrase it in a way that will please my hon. Friend but not the hon. Gentleman—albeit the highest paid workers. It is worth noting that both hon. Members have made many declarations of independence, and today was no exception. As I have said, a competitive tax regime is the foundation of our plan for growth, and the consequence of amendment 15 would be to delay the reduction in corporation tax.
The Government take the essence of the hon. Gentleman’s concern—directors’ remuneration—seriously; indeed, my right hon. Friend the Secretary of State for Business, Innovation and Skills raised it on 22 June in a speech to the Association of British Insurers, asking how we can ensure that directors’ remuneration is effectively linked to company performance. To help answer that question, the Government already have plans to consult in two relevant areas. In July, the Department for Business, Innovation and Skills will look at the narrative aspects of reporting directors’ remuneration, examining the provisions dealing with the disclosure of directors’ remuneration and making the link to company performance much clearer. In the autumn, the Department will explore other policy options related to the role of remuneration committees and company accountability to shareholders.
Turning directly to the proposals made by the hon. Member for Hayes and Harlington, let me first remind him that UK-quoted companies are already required to publish a directors’ remuneration report. That includes full individual details of each director’s pay, including salary and bonuses, share schemes and all other forms of remuneration. His proposal to make the remuneration vote binding in nature would raise difficulties, as such a vote would inevitably cut across contractual arrangements already entered into between the company and the director. That is why the vote is currently advisory in nature.
As I have said, the consultations I have announced will focus on the narrative provisions, the role of remuneration committees and company accountability to shareholders. I am sure that representations could be made to the latter consultation. However, there remains a difficulty with cutting across contractual arrangements and I dare say that there might be issues with the Human Rights Act 1998 were that to happen.
First, I think it would be greatly reassuring to the House overall if the issue of the binding vote was within the scope of those consultations. Secondly, the issue of contractual commitments has always been the red herring brought up on any future reform. The way around it is simply to make future contracts subject to that binding vote of shareholders.
I know that my ministerial colleagues in the Department for Business, Innovation and Skills are watching this debate very closely and will have listened to the hon. Gentleman’s representations. I noticed that when he referred to the House as a whole, he gestured to my hon. Friend the Member for Wycombe. Whether the hon. Gentleman and my hon. Friend necessarily represent the views of the House as a whole on all issues I am not sure, but the hon. Gentleman raises a fair point.
May I say that I think the reason for this unlikely alliance is that the workers now are the capitalists through their pension funds and other investments? I remember a trade unionist explaining to me with some care the new movement for workers’ capital and I think we will be missing a trick as a free-market Government, if indeed we are a free-market Government, if we do not recognise that the workers now are the owners and that we need to help them take control of what they own.
I do not know whether my hon. Friend is trying to lose the support of the hon. Member for Hayes and Harlington on this, but I fully take his point on board and I shall ensure that BIS is aware of this debate. My right hon. Friend the Business Secretary has said that shareholder accountability is an area that his Department will be looking into in the autumn.
This is a serious point, and I say to the Minister that this will come back time and again, because every Government structure put in place by successive Governments on this issue has been unsuccessful in controlling remuneration. There is outrage among the general public about what has been happening, not just in recent years but today with £6 billion bonuses in the City and elsewhere. I say to him in all seriousness that any Government need to address this issue, which concerns the democratic control of what are now public companies in terms of ownership.
The hon. Gentleman makes his point forcefully. It is worth pointing out that the UK leads the way internationally on the reporting of executive pay and accountability to shareholders. I hope that he will acknowledge that, just as I acknowledge the legitimate concerns he raises. It is our intention to make sure that the framework remains fit for purpose and in line with our approach to delivering long-term returns as our economy grows out of the recession.
The hon. Gentleman’s second amendment, amendment 17, would delay the introduction of clause 42 until a report on the impacts of the enterprise investment scheme had been published. In contrast with corporation tax as a whole, EIS is a focused relief with a particular purpose and is a vital component of the Government’s plan for growth. The scheme encourages investment into smaller, riskier companies by offering a tax incentive to investors. For example, it benefits new start-ups in high-tech sectors such as IT bioscience. Since 1994, about £7 billion from private investors has been contributed to qualifying companies. The Government are building on the success of the scheme with changes in this Finance Bill and in the Bill next year that will increase the incentive for people to invest in smaller companies, helping them to establish and grow.
The hon. Member for Hayes and Harlington wants a report on the impact of the scheme and the number of jobs created. Information on the cost of EIS and the number of investors claiming relief is available on the HMRC website. About 10,000 individuals invested through the scheme in 2008-09. HMRC does not collect data on the number of jobs created or the outcome for companies. Doing so would create an additional burden on the taxpayer and invested companies at a time when the Government are seeking to minimise the compliance and administrative burdens resulting from the tax system, particularly on small businesses.
There have been assessments of the enterprise investment scheme, which has been in place since 1994. We want to encourage greater investment, particularly in smaller companies. We recognise that sometimes there is market failure in that area, which is why tax incentives are justifiable. We have set out as much information as we can, but it is not something on which we can provide precise numbers. That is not the nature of the economy, but the scheme will encourage greater investment and that should be welcomed.
I thank my hon. Friend the Member for Amber Valley (Nigel Mills) for his remarks on my award as tax personality of the year. Some may think it a somewhat oxymoronic award, but I can tell the House that it has changed my life considerably.
My hon. Friend brings much greater expertise to these matters than I do. I welcome the fact that he seeks simplicity, which is not always the case with new clauses and amendments to Finance Bills. I want to make a couple of points that relate to both his new clauses.
First, we do not see it as our role to direct the Office of Tax Simplification. The office has done a lot of good work, but it is important that its independence is respected. Secondly, in its broad work the OTS has looked at the various allowances and reliefs in the tax system and has concluded that they are not areas where it wants to devote its efforts. None the less, I know that the OTS will closely read my hon. Friend’s speech. We are always keen to look at areas where we can improve the administration of the tax system, including his proposals in new clause 14 on consolidated filing.
On new clause 12, the OTS has given initial consideration to capital allowances as part of its review of tax reliefs and its ongoing review of small business taxation. The Government have set out their approach to capital allowances in the corporate tax road map. Allowing each business asset to be written off for tax purposes in line with its own depreciation rates would not necessarily bring the benefits to businesses that the new clause anticipates. Some business assets would depreciate more slowly than they currently do under the capital allowances regime, and it should be noted that the annual investment allowance gives immediate write-off for the plant and machinery expenditure of 95% of UK businesses. There is thus a danger that the new clause could increase business tax complexity.
I know that my hon. Friend tabled his new clauses as probing provisions. I may not have entirely satisfied him, but he has put his case on record and the OTS will of course look carefully at what he says.
I turn finally to amendment 51, tabled by my right hon. Friend the Member for Gordon (Malcolm Bruce), who has played a constructive role on the issue in the three months since the Budget announcement on oil and gas. He made an important contribution when the House debated clause 7 in the Committee of the whole House. He has stressed the importance of working closely with the industry in the months ahead, which the Government committed to do at the time of the Budget. We announced then that we would work with the industry in three key areas: setting the right trigger price for the fair fuel stabiliser; looking at whether we can find a way to provide long-term certainty on decommissioning relief; and looking at the case for new categories of field qualifying for the field allowance. I am pleased to tell the House that we are making good progress in these discussions. My hon. Friend the Economic Secretary, who is here this evening, will update the House on progress on those discussions as soon as is appropriate. I hope and expect that she will be able to do so in the very near future. I thank my right hon. Friend for tabling his amendment. Although I have been unable to respond in full detail, I hope that the Government will be in a position to do so shortly.
In conclusion, I remind the House that it is the Government’s aim to create the most competitive corporate tax regime in the G20. We have set out our plans for reform over the next five years in the corporate tax road map, which was published last November. In order to provide businesses with the certainty they need to invest in the UK, tax reforms need to maintain stability, avoid complexity and ensure a level playing field for taxpayers. Therefore, although we have had a good debate, I invite my hon. Friend the Member for Amber Valley to withdraw the motion.
My purpose in moving the new clause was to encourage the Government down the route of tax simplification, which I hope I have achieved tonight. Therefore, I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
Charge and main rates for 2011-12
I beg to move amendment 10, page 1, line 9, at end insert—
‘(3) By 31 March 2012 the Office of Budget Responsibility, in consultation with HMRC, will report to Parliament on the revenue of the 50 per cent. rate of income tax and its impact on the UK economy.’.
With this it will be convenient to discuss the following:
Amendment 14, page 1, line 9, at end insert—
‘(3) A report on the impact of the current rates of income tax on inequality in the United Kingdom, also taking into consideration all other direct and indirect taxes including duties and excises, council taxes and mandatory charges for the use of cars and televisions and making specific reference to the overall tax rate of taxpayers grouped by decile in the United Kingdom and by each individual constituent country shall be prepared by HM Treasury and laid before the House of Commons not later than 1 December 2011.’.
Amendment 30, page 1, line 9, at end insert—
‘(3) All public sector employees whose earned income does not exceed £21,000 shall be entitled to a £250 reduction in tax liability for the tax year 2011-12.’.
I do not intend to detain the House for long on these amendments, although they are important. I particularly welcome amendment 30, which stands in the name of my hon. Friend the Member for Hayes and Harlington (John McDonnell) and my right hon. Friend the Member for Birkenhead (Mr Field), and which I will touch on briefly. Clause 1 deals with rates of taxation and, if approved, will set the rates for the next financial year at 20%, 40% and a special rate of 50%. Amendment 10, which is simple and straightforward, has been tabled by the shadow Treasury team because we want to shed a little light on how the Government will report on their future plans for the 50% rate of tax.
We already know certain key facts. We know that the Chancellor has asked HMRC to collect tax receipts for this financial year and that he has assessed the revenue levels of the 50% rate for this year. In Committee, the Exchequer Secretary said:
“The Chancellor’s Budget statement to the House on 23 March simply highlighted the fact that he has asked Her Majesty’s Revenue and Customs, as part of that ongoing work, to see how much the additional rate actually raises. HMRC will look at all the available evidence about the impact of the 50% rate, including data from the 2010-11 self-assessment returns, which will become available next year.”––[Official Report, Finance (No. 3) Public Bill Committee, 10 May 2011; c. 22.]
My concern, which I will put directly on the table, is that the Government have already prejudiced any decision on the 50p rate of tax by stating clearly that they believe it will do lasting damage to the economy. We want further explanation of the methodology that they will use to consider the 50p tax rate for future Budgets, and I think that the best organisation to do that is the Office for Budget Responsibility. The Government set up the OBR and gave it a number of key roles, one of which I have helpfully drawn from its own website. Under the heading “What we do”, it states:
“We scrutinise the Treasury’s costing of Budget measures: During the run-up to Budgets and other policy statements, we subject the Government’s draft costings of tax and spending measures to detailed challenge and scrutiny.”
All the amendment would do is formally recognise that role in relation to the Government’s forthcoming review of the 50p additional rate.
The Chancellor has said to the House of Commons, the public and anyone who will listen that he sees this as a “temporary measure” and that it will do “lasting damage” to the economy. He has signalled that he will abolish the 50p rate as soon as he can, in line with Conservative thinking before the election. However, the timing remains uncertain. I believe that the Chancellor has pre-empted the review. When HMRC undertakes the review, it will do so on the assumption that at some time around 2013 the Chancellor of the Exchequer will abolish the rate on incomes above £150,000.
May I congratulate the Opposition on submitting the amendment on time and on its being selected? In relation to this report, I ask the right hon. Gentleman whether it is fair, right and proper that in 1978 the top 1% of earners paid 11% of all tax and that they now pay 25%.
I am grateful to the hon. Gentleman. I presume that he does not support the 50p tax rate, whether it raises revenue for the Treasury or not. We do not want HMRC to do a private report for Ministers, and for Ministers then to make political judgments about the 50p additional rate. Through the OBR’s involvement, we want there to be a public report on the impact of the rate which is open to scrutiny.
The hon. Member for Dover (Charlie Elphicke) will know that about 308,000 people are affected by the 50p rate. I am not surprised that he supports its abolition and a lower rate, because he knows that it is paid less in my region in Wales, in the north-west region of my right hon. Friend the Member for Birkenhead and my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) and in the north-east region of my other hon. Friends. The benefit of this tax cut, if it happens, will predominantly affect south-east and east England and the wealthier parts of London, although it will not particularly affect the constituency of my hon. Friend the Member for Vauxhall (Kate Hoey). I understand why the hon. Member for Dover wants to get rid of the rate. If he does, there will be a tax benefit for the richest people in our society and for certain parts of the United Kingdom.
All I am saying to the Minister is that we want to see the evidence on whether the additional rate raises money. If it does not raise money, we want to see it openly scrutinised. If it does raise money, we want to expose that, so that if the Minister and his hon. Friends cut the rate, it will be clear that they are doing so for political reasons and not because it is ineffective.
The right hon. Gentleman should know that in Dover there is a lot of deprivation. My case is not that we should get rid of the 50p tax rate tomorrow, but that we should do so at the right time. My question was simply whether it is safe and sensible for so much of the tax base to depend on so few people in this country?
I just say to the hon. Gentleman that in south-east England, which I recollect covers Dover, some 67,000 people pay the additional rate, whereas in north-east England, which is represented by some of my hon. Friends who are present, only 5,000 people pay it. Clearly, there will be a regional imbalance if this tax cut goes ahead. We will consider those issues in due course. I know that there are areas of great poverty and deprivation in Dover, where people do not pay the additional rate, but the hon. Gentleman has imposed value added tax on those people through votes in the House of Commons, and that is an unfair tax.
The simple point I make to the Minister is that we want open scrutiny of the decisions he takes on the ending or otherwise of the 50p additional rate. The leader of the Labour party has said that we would maintain that rate for the duration of this Parliament. The Minister and his colleagues have indicated that they want to do away with it. They are now trying to produce the information to show why that should be done. I believe that the Office for Budget Responsibility would provide greater scrutiny of that decision than—dare I say it?—the Minister in an in-house decision. We will test the matter tonight, and I hope that the Exchequer Secretary will accept the amendment. It relates to a core role and duty of the OBR, which is on its website, and I cannot see why he would not wish it to review the Government’s decision formally.
Is it not important that the matter is subject to scrutiny, because the Government continue to tell us that they are looking after everyone in the community, including the less well-off? A review would show whether they have plans to reduce the burden on the highest paid.
That is true. My hon. Friend will know that “We’re all in this together” is one of the Government’s refrains, and a review would show whether that is true. I want to know that preferably from the OBR, as suggested in the amendment, but otherwise from the Exchequer Secretary. The Government need to set out why they have decided to reduce the 50p rate in 2013, if that is their decision; what it will cost; what the forgone income will be; and who will benefit. There should not just be internal discussions—the decision should be open to public scrutiny through the OBR.
I am grateful to my right hon. Friend the Member for Birkenhead for tabling amendment 30, which highlights an extremely important issue. Again, I wish to hear the Exchequer Secretary’s response today. I do not wish to steal my right hon. Friend’s thunder, but he will know that the Conservatives pledged in their manifesto to freeze public sector pay, but to exclude from that 1 million of the lowest-paid workers. It stated that they would
“freeze public sector pay for one year in 2011, excluding the one million lowest paid workers.”
Through great effort, he has used parliamentary questions to uncover the fact that that is not the case, and that the Conservative Government have yet again broken a promise in their election manifesto. I believe that he will make a strong case that we need some explanation from the Government of what they are doing about the impact on low pay of the public sector pay freeze that has been put in place.
My right hon. Friend will know that there are issues to consider about the applicability of his amendment to clause 1 and its workability, and indeed its fairness. However, he has highlighted an extremely important issue, and I want the Exchequer Secretary to explain why the Conservatives’ words about ensuring that low-paid workers were not disadvantaged have proved to be weasel words.
I have not yet heard what my right hon. Friend the Member for Birkenhead has to say about it, but the hon. Gentleman might be interested to know that we have discussions not just in the Chamber but outside it as party colleagues. My right hon. Friend will make his case in a moment, and I will listen to it and respond in due course. There are some issues that we need to consider, but it is not for me to respond to amendment 30; it is for the Exchequer Secretary to say why he has let down low-paid workers across the United Kingdom through his promises before the elections and his actions in the Budget. I look forward to hearing my right hon. Friend in short order.
My hon. Friend the Member for Hayes and Harlington has yet again tabled an amendment that has a great deal of merit. Although I do not expect it to be pushed to a vote, I want to hear what he says about it, because he has important points to make. The key point on all the amendments is that the Government need to provide clarity. We need clarity about what they are doing on the 50p tax rate and on low-paid workers, and on the points raised by my hon. Friend’s amendment. I look forward to hearing my hon. Friend, my right hon. Friend the Member for Birkenhead and the Exchequer Secretary in due course.
I shall not press amendment 30 to a Division tonight, because we will return to the subject in greater detail later in the Parliament. However, I want to address some questions to those on the Treasury Bench. I accept that there are problems with the amendment, but it was the only way that I could find to debate the matter in the House.
I wish to remind the Minister that in the Budget debate of 2010, the Chancellor said that
“the Government are asking the public sector to accept a two-year pay freeze, but we will protect the lowest paid…They will each receive a flat pay rise worth £250”—[Official Report, 22 June 2006; Vol. 512, c. 171.]
He said that the cut-off point would be not £18,000 but £21,000 a year, and he, not the Opposition, estimated that 1.7 million people would receive that pay increase.
A number of Opposition Members, including those who put their names to amendment 30, and many hon. Members, have constituents who believed what the Government said. They believed that they would be protected. The Chancellor’s announcement was a crucial part of protecting those workers, but it was also a crucial part of selling to the wider public the pay freeze that the Government announced. However, those people have so far received no £250 pay increase.
I should therefore like to ask the Minister two questions. First, of the 1.7 million whom not I, but the Chancellor, said would be eligible, how many have received the £250 across-the-board pay increase? Next year’s earnings figures show that the numbers eligible will rise to 2.2 million. Therefore, my second question for those on the Treasury Bench is this: how many of that 2.2 million will receive their £250 pay increase?
I conclude by merely trying to express, perhaps inadequately, a sense of how low-paid workers in my constituency feel. They feel that they have again been let down. The previous Labour Government did not do too well by that group, with the 10p tax rate abolition, and this Government have done not too well by them. Many are women coming up to retirement age who now learn that they must work two years more. They thought they would get £250 as a lump sum to protect them against rising prices and a general wage freeze, but many now find that no such increase is forthcoming. I would therefore be grateful if the Minister could give us answers to those two questions.