[Relevant documents: Seventh Report from the Business, Innovation and Skills Committee, on Payday Loans, HC 789.]
I beg to move,
That this House has considered payday loan companies.
I thank the Backbench Business Committee for providing time for a debate on an issue which has been gathering importance and significance, and which was the subject of a second Select Committee report fairly recently. The report was published just before Christmas.
Before I deal with the substance of the report’s recommendations, let me thank my colleagues on the Business, Innovation and Skills Committee for their assiduous work and their commitment to promoting the recommendations, which went far beyond just supporting them in the Committee. While I recognise that there has been a huge body of support for the recommendations on both sides of the House, and that people have campaigned for them for a long time, I feel that I should mention in particular my hon. Friend the Member for Sheffield Central (Paul Blomfield), who has fought a long, sustained and robust battle to secure the recommendations, and will continue to do so until he sees them enshrined in appropriate regulation.
We wanted the issue to be debated today because this is a particularly strategic time for such a debate to take place. Historically, the regulation of payday lenders has been the responsibility of the Office of Fair Trading, but in April that responsibility will be taken over by the Financial Conduct Authority. The FCA has conducted a consultation on the rules that it is proposing, and we felt that it was timely for the Select Committee’s recommendations to be given an even more public airing before the authority published its conclusions.
The impact of the payday lending industry has been a subject of growing concern for a long time. I could probably spend 20 minutes giving the House statistics about the impact that it has had on particular sections of the public, but I shall try to confine myself to one or two particularly relevant ones.
A personal debt survey that was conducted in December last year found that 5% of adults admitted to having taken out payday loans. An even more significant finding was that 6% said they would consider taking out such a loan in the next six months. The turnover of the market increased from £900 million in 2008-09 to £2.26 billion in 2011-12, and all the indications are that the more recent figures will show an even greater increase. According to StepChange, an organisation that provides advice on debt, 36,000 people approached it for advice in 2012, and 30,000 people did so during the first six months of 2013. That means that what was a very large number of people in the first place has almost doubled over the past year.
The payday lending industry gives rise to many reasons for concern, but given the time that is available to me this evening, I shall not try to deal with all of them.
The hon. Gentleman is right to focus on the need for us to review the existing regulations. He is also right to draw attention to the problems involved in payday lending. As he will know, the Archbishop of Canterbury is keen for us to try to compete payday lenders out of existence. I hope that he and the House will be pleased to learn that the Archbishop has appointed Sir Hector Sants to lead a taskforce that will try to establish what more can be done to improve competition and the alternative market. Of course, that will not happen overnight.
I broadly support that course of action. I think that there is a sector of the market to which payday lenders can be relevant, but that sector must be closely regulated and transparent, and there must be a process that prevents lenders from adding to the problems of those who apply to them for loans. I shall say more about that, and about the important issue of competition.
I intend to talk about just one significant part of the industry, but let me first point out that much of the publicity about the industry has focused on the interest rate charged by payday lenders and the associated costs. That is obviously crucial in terms of the impact that it has on the people who take out the loans, but I think that we should view the issue much more broadly. We should think about the way in which payday lenders promote themselves, and the way in which they lure people into taking out loans. We should think about the processes in which they engage, which do not ensure that the loans given to people are appropriate to their personal needs, as well as how much they charge and how much they make from those charges. The Select Committee’s recommendations cover all those issues.
I think that the main problem—which was reflected in the 2013 OFT review of payday websites—is that payday lenders who are in competition with each other do not operate on a competitive price-offering basis; they operate on the basis of speed of access to such loans and lack of accountability. Anybody who goes on a payday loan site will see that the key aspects of every company advert are speed of access and lack of accountability. The OFT review made a substantial impact. As a result of the investigation, 19 of the 50 operators left the market, three had their licences revoked and three surrendered them. That alone shows the appalling misrepresentation that was going on at that point, but should anybody believe that that problem is over as a result of that action, even a cursory glance at their advertising will show that it is not. There are still many areas of enormous concern, and I know other Members will want to comment on them.
I want to concentrate on the advertising element. I have mentioned that the emphasis is on speed, ease of reading and ease of application. I took one advert at random. It says, “Great news!” and
“We have 7 lenders who can offer you £1,000—paid online today!..Complete our 1-minute verification form.”
For an industry that claims to be cleaning up its act and not to be lending to those who cannot afford to pay back, to offer to verify the appropriateness of a loan to somebody in a one-minute online process defies all credibility.
I looked at another advert that had a beautifully seductive cheery pink pig. I could not help but marvel at how the piggy-bank, a symbol over the decades of thrift and financial responsibility, should be misused in such a way to promote what is perhaps some of the most irresponsible lending, but that is how these companies advertise on their websites.
We found the television advertising to be the most concerning of all, however. Ofcom carried out research on this. In 2008 there were 12 million impacts, and in 2012 there were 7.56 billion impacts, with 152 loan adverts per viewer per year. Most seriously of all, children aged between four and 15 saw 3 million adverts, an average of 70 per child per year.
The Committee recommends that all advertising targeted at children should be banned. I acknowledge that there are problems around this, because the amount of advertising aired directly in children’s programmes is relatively small. However, there is an enormous amount shown during programmes that children are likely to watch. These adverts are largely focused on daytime and early-evening television, which is far more likely to be seen by children.
I shall now quote an e-mail I received from a teacher. She said:
“I asked the children what they could do if there was something they wanted to buy and didn’t have the money for yet. Almost all the hands went up (Only one child said they should save up) and I was given the names of several payday loan companies…They said that it was on TV and then most of them sang the song in the advert.”
Certainly the cartoon style of some of the adverts can only be interpreted as being geared for children.
The teacher went on to say:
“The advertising seems to have ‘normalised’ payday loans for the children as a way to buy things instead of saving and I feel that by the time these children are adults they won’t think twice about taking out a payday loan to pay for it. I spoke to them about interest charges and none of them had realised that these companies were anything other than a benign service helping people to pay for things.”
This ties in with the research done by Martin Lewis. He stated in his evidence to the Committee that he thought that in effect these companies were grooming children. Those are strong words, but the evidence so far is that the number of children seeing these adverts and the impact they are having on them is such that we cannot stand aside and disregard that. I understand the broader issues about regulating advertisements, but I feel there is now a huge body of evidence to demonstrate that the Advertising Standards Authority should be working with the financial services industry and others to ensure that there is a code of practice so that children are not subjected to such a level of pressure.
I cannot believe all this is coincidental. Parents respond to pester-power from their children, and if those children believe it is so easy to obtain money, the pressures that adults may feel are multiplied many times. That is reinforced by constant demands from their children to spend money they cannot afford.
I have spoken about just one element of this issue. There are many others that are equally important and significant and equally damaging to people’s personal financial situations. I know many colleagues will want to highlight those and I will not try to pre-empt them. I will instead conclude my remarks at this point, having highlighted that particular recommendation.
It is a real pleasure to follow the hon. Member for West Bromwich West (Mr Bailey) who made an interesting and well-informed speech.
My general philosophical approach is very much that we want to build a land of opportunity and aspiration where anyone can do well and where they have the tools to succeed and achieve and even reach for the moon. There is a flipside to that form of opportunity politics—that Conservatism—and that is that we also need to protect people from being taken advantage of. In too many cases, there is a history in this country of lax regulation, which has enabled people to be taken advantage of: water and power companies not properly regulated with rising bills; the banking system was not properly regulated and spawned payday lending; a tax system that was lax and weak and allowed industrial-scale tax avoidance, which was unacceptable; and employment law that is not properly regulated, even though it was previously reviewed and zero-hours contracts were allowed to carry on. In too many cases, this Government need to protect people and make sure they are not taken advantage of. In many instances action has been taken, however, and I welcome the action on payday lending announced by the Chancellor.
The problem is not a new one; it has been around for a while. I remember a client phoning me up back in 2006 and saying “I’m thinking of buying a payday lender.” I said, “What is that? I haven’t heard of it.” He explained what it was and I said, “This is a car crash in the making.” He said, “It’s great: it’s a rising a market and I can make lots of money out of it.” I said, “Don’t do it. People will not understand. It will not be acceptable, and sooner or later it will cause a massive scandal in this country and an enormous row,” and that has turned out to be the case. I am glad to say he did not take on that business, but many others did: they saw an opportunity and took it, and what has happened is wholly unacceptable in too many cases.
Many people say we should not take any action on payday lending because that will drive people into the hands of loan sharks, but the evidence from the Bristol university department for business was that when customers could not access short-term loans, most would either go without or approach a friend or relative for help. It showed that a small number would try to borrow from other short-term lenders, but that the use of an illegal lender was not an option that the vast majority would consider. It does not seem right, therefore, to say that most people would end up going to loan sharks.
I want briefly to look at the international comparators. This is not simply a UK problem. It is a problem worldwide, and many other countries have taken action to try to deal with it. The hon. Member for West Bromwich West spoke movingly about advertising and related issues. I want to talk about interest rate caps and what we can do to control the excessive amount of money that is often demanded by payday lenders.
The USA has introduced caps, and the overall result has been substantially to restrict the market. Payday lending has been dramatically reduced as a result. Other countries have gone down different routes. Canada, for example, has introduced substantial regulation for short-term loans and established a payday lending education fund. It has also introduced a two-day cooling-off period during which customers can cancel their payday loan, and banned the inclusion of fees in the value of the loaned amount. The payday loan industry has set up its own industry body. There are also rules banning the rolling over of payday loans; the issuing of multiple payday loans to the same customer; the taking of collateral as security; and the charging of an interest rate greater than 90 cents a week for the first 13 weeks. Canada has thus produced a system of regulation that involves capping amounts of money, rather than capping interest rates.
Japan has introduced an interest rate capping system, set at around 20%, which was implemented in 2010. Australia has introduced an interesting system of payday loan regulations, as many hon. Members will be aware. It has looked at a form of regulation similar to the one we are considering. Those international comparators suggest that we should consider not only an interest rate cap but perhaps a cap involving a particular amount per £100 over a set length of time, and I hope that hon. Members will consider that.
A bit closer to home, in Oldham—and elsewhere in this country—there are good examples of credit unions. They charge very low interest rates and work in the collective interest, which I am sure we all agree is a good thing. Does the hon. Gentleman agree?
I am in complete agreement with the hon. Lady. Credit unions are a good idea, and mutual finance is a good thing. I am a fan of mutuals, having made the case for my own port of Dover to become a people’s port—a community mutual. We have mutuals in the financial sector in this country, but they are rarely mentioned. What happened to the building society movement? Why is no one fighting for that these days? Building societies are mutual organisations. We should look again at what we can do with them and at the kind of organisations they could become. They are substantial organisations, and this is something we should look at. In Australia, the credit unions have been more successful than they are here. Here, we have a building society movement, and we should look at developing it.
I want to touch on a further concern. Why is the payday lending industry there at all? Why has it arisen? I believe that bank overdrafts have a lot to do with it. Anyone who has an unauthorised overdraft will be charged 20 quid for a letter and 50 quid for the unauthorised overdraft fee, plus an extra amount per cheque or payment. That is wrong; it is egregious. When people have run out of money and cannot get an authorised overdraft, it is the behaviour of the banks that can help to drive them to the alternative credit providers. A practical step would be to look into the banks’ behaviour. We need to strike a balance between protecting customers from being stung by the banks when they have short-term cash-flow problems and making access to irresponsible credit too easy for them.
I propose that the banks should operate a grace period, so that people who ended up with an unauthorised overdraft would not get hit with fees immediately. They should be able to overdraw for a short time without being charged. That would reduce the numbers being forced to seek alternative forms of credit. There should also be a wide-ranging review of the way in which the banks handle overdrafts, and of their ability to help people who find themselves short of funds in the short term. Most of us in the House want to defeat the payday lending industry, and the best way to do that is to provide an alternative for people who do not have much money and who are in real need of assistance. I am also concerned about the EU consumer credit directive. The ability of lenders to operate across EU borders makes it possible for payday lenders to bypass anything that we decide here. That needs to be carefully considered and addressed.
Finally, what more can we do, above and beyond what the Financial Conduct Authority is proposing to look at when it takes over in a few months’ time? We could consider the following measures: setting a ceiling on the total cost of borrowing, rather than setting an interest rate cap; seeking reform of the European consumer credit directive; introducing tougher sentences for illegal lending, including mandatory prison sentences; enabling victims of illegal lending to recover all payments made to the lender, plus extra, rather like what the Labour Government did with tenant deposit schemes; requiring payday lenders to form an accredited industrial body; and requiring banks to give a grace period of three working days before customers are charged for unauthorised overdrafts.
The fact that this is the second time in two years that the Business, Innovation and Skills Committee has reported on this issue reflects the enormous public interest in the matter and the concern about the impact of the sector on our communities as well as on individual borrowers. To date, the regulatory authorities have being running behind the curve, and it is important that the Financial Conduct Authority should start ahead of the game. The regulators initially gave little priority to protecting the poorest borrowers on the basis that the total lending represented just a small percentage of the total in the financial services sector. They failed to take proper account of the problems that had already beset other international jurisdictions, to which the hon. Member for Dover (Charlie Elphicke) has referred. The Government’s response to our first report was simply to try to shift the problem further down the time line, with an instruction for further reviews and reports. The transition to regulation by the FCA was used as the main reason for not taking immediate action.
In my own city of Glasgow, the council reported last year that its citizens borrowed £57 million annually through high-cost credit, including payday lending. Given that 49% of our residents are within the bottom 20% of the income quartile, it is not surprising that the council estimates that a staggering 100,000 residents are using non-standard credit and that a high percentage of that number are finding it difficult, if not impossible, to repay their loans.
In 2013, the regulatory authorities and the Government realised that a policy of laissez-faire was not going to work. The findings of the Office of Fair Trading’s damning report showed the scale of contraventions in the sector, and the growing amount of strong evidence from agencies like Citizens Advice, StepChange and Which? could not be ignored. The sector itself had rapidly increased from £900 million in 2008-09 to £2.2 billion in 2011-12. Wonga had become a household name and, even more worryingly, the level of personal debt in this country was beginning to rise again, potentially threatening any increase in growth.
The sector now has a shop in every high street, it dominates the advertising schedules and it has been allowed the freedom of a wild west market to achieve rapid growth and massive profits. Many of its victims now populate the ever-growing food banks and our debt courts. It should be abundantly clear that this issue cannot exist in a vacuum, devoid of political direction. The statutory independence of a regulatory authority to act should not be a barrier to setting a framework and priorities that it needs to address; nor should it be a way to sidestep the will of Parliament, which on numerous occasions over the past three years has expressed exactly the concerns that are being raised today. The level of cross-party agreement and civic support for tougher regulation is overwhelming.
Wider issues have intensified the interest in this sector. The hon. Member for Dover referred to the lack of provision in the mainstream credit sector, but other issues include the squeeze on real incomes, and the above-inflation rises in essential costs—energy, transport, housing and food. The demand for unsecured lending continues to expand, but we also have a rapidly changing financial services sector that often lacks adequate transparency not just in short-term lending, which adds to consumers’ confusion in making the best decisions to suit their needs.
I believe the major players in this sector well know that the current era of weak regulation ripe for exploitation will one day come to an end, but if they can extend that period or find a new avenue for profit, they will happily go for the bottom line. They have achieved their aim of being a ubiquitous presence. The Chair of the Select Committee on Business, Innovation and Skills, my hon. Friend the Member for West Bromwich West (Mr Bailey), has referred to the evidence from the money expert Martin Lewis, who brutally exposed the scale of this insidious influence. He said:
“14% of parents of under-10s, when they have said, ‘No, you cannot have your toy,’…have had a payday loan company quoted to borrow the money from.”
We have also heard about scale and the Ofcom research on advertising, which found that there were 17,000 payday lending adverts in 2008 whereas there were 397,000 in 2012. That equates to each adult in the UK seeing an average of 152 payday loan adverts a year. Given that level of market penetration, some of the biggest firms barely need ever to advertise again. That is why our Committee believes that our modest recommendation on curbing TV advertising is important, but we should not believe that it will cure the cultural influence.
Does the hon. Lady agree that it is not just the volume of TV advertising, but the nature of it that is concerning? These companies are often advertised via cuddly, humorous characters, such as knitted grannies and granddads. That is worrying it lulls people into a false sense of security about the nature of the product in which they are investing.
I absolutely concur with what the hon. Lady, a Committee colleague, says. The advertising is very clear and insidious, and it is targeted at younger people and children in particular. There is no debate about that; it has happened and continues to occur.
I want to deal now with the real-time recording of credit information. If credit information is to work, it needs to be both accurate and comprehensive; otherwise, there is little point to it. Unsurprisingly, the industry was quick to downplay the significance of this potential regulatory step, and again it is regrettable that the authorities have not been faster to respond, preferring instead an approach of wait and see. I commend the sustained pressure from agencies like as Citizens Advice and StepChange, but the cloud lifted when BBC’s “Newsnight” programme and others reported at the end of last year on the potential impact on mortgage lending. If there is no real-time recording in the payday lending sector, the existing credit recording systems become increasingly unreliable and inaccurate, particularly in respect of younger borrowers, who form the bulk of this sector’s customers. Lenders in the mainstream sector have now decided, in their world of lower risk, to dismiss payday borrowers entirely from their eligibility test—and hey presto, this month we have the announcement from Wonga and some others that a real-time recording system is going to be put in place later this year. Call me a cynic, but I suspect that the potential hit on their client base, who were increasingly worried about future access to mainstream lending and to mortgages, acted as a greater incentive than the dialogue with the FCA.
My hon. Friend will be aware that only four payday lenders have entered into this real-time conglomerate. The FCA has indicated that it will take action if the sector does not get its act under way. Do we not need to get action from the FCA to make sure this happens?
My hon. Friend has taken the next sentence from my speech, because that is what the FCA absolutely needs to do and it is what we have recommended. Unless we have a recording system that is properly comprehensive, we will not have a solution and we will not stop lenders making non-compliant loans. The current proposal contains no requirement to report to the FCA; it still relies on voluntary reporting, and we know that many of the same lenders were found wanting in last year’s OFT investigation. As colleagues have done, I urge the FCA not to rely on the industry to provide the solutions, but to ensure that the public’s protection is paramount. Given that no one trade organisation represents the sector and that new entrants are likely, albeit in smaller numbers than before, we need a regulated and transparent system of recording which will have the trust of borrowers and lenders alike, and which will do the work it needs to do to allow our constituents to obtain legitimate credit. The FCA should quickly impose such a system, rather than allowing a not very satisfactory alternative to emerge in fits and starts.
Our Committee has further requested that in the light of the disturbing evidence we received of continued abuses of the present regulatory system, all companies should resubmit their affordability tests to the FCA for approval. Like some other hon. Members here today, I received whistleblowing evidence this weekend from a former senior employee of a major payday lender. It portrays an endemic culture of avoidance, from the senior managers down to shop-floor staff, and I trust it will receive the urgent and serious attention it deserves from the regulators. This is not just about a company bending the rules to suit its own profit line; it is about full-scale lending to people the company knows will be unable to repay in full or part, with the misery that goes along with it. I do not believe this is an isolated example, and as the Chair of our Committee has stated, the evidence before us challenges regulators to make sure that their enforcement systems are going to work. As this evidence suggests, there may be a move by some lenders to have long-term lending simply to bypass regulatory attempts. To be fair to the FCA, I know it appreciates that the challenge on effectiveness will be in trying to cope with changes in the market and how it shifts over months and years. I believe it is important for the Government to have a strong response to our Committee’s report, to accept our recommendations and to make sure that public protection is always paramount in our considerations.
I am sure that we would all much rather that people did not have to resort to payday loans to make ends meet. My hon. Friend the Member for Dover (Charlie Elphicke) cited the behaviour of the banks in respect of overdrafts as a possible reason for the rise of the industry, but I cannot help but think it correlates with the last Government’s economic policy, whereby we saw an explosion in household debt, the decoupling of median pay from GDP and a recession that wiped out 7.2% of our national income. We have to deal with the world as we find it, not as we would like it to be. If desperate people do need credit at short notice, I would much prefer they got it from legitimate companies which can be monitored and regulated, than through illegal means. My hon. Friend cited pieces of research that say that people will not go to loan sharks, but a significant minority do end up going to loan sharks, who would do anything to get their money back.
One concern in my constituency is that paramilitary organisations are often the loan sharks and, although the consequences that flow from a payday lender are of concern, the consequences of defaulting on such a loan are serious in the extreme.
The hon. Lady makes a very powerful point. I have seen evidence of conversations between a young lady and a loan shark in a coffee shop where she was having to agree to lie to her husband to try to get some more money, otherwise her limbs would be damaged.
The question is how we regulate the sector. As with any financial market, we need a system of clear rules backed up by tough enforcement. A good regulator needs to have blood on its sword, and I hope that the FCA will use its enforcement powers to drive the most egregious players out of the market. I am on record as calling the behaviour of some of these companies rapacious.
Unlike the Office of Fair Trading, the FCA will have the power to cap the total cost of credit, which is welcome news, but I want to see the FCA go further than the terms of its consultation in two areas. First, it should mandate the use of real-time data sharing as a condition of being able to trade in this market. The hon. Member for Glasgow North (Ann McKechin) made that point eloquently. It is vital that we make it harder for consumers to take out multiple loans from different companies. Such borrowing can quickly spiral out of control, trapping people in huge debt. As we know from macro-economic policy, we cannot borrow our way out of a debt crisis.
Does my hon. Friend agree that, although real-time information is essential, it would be good if the companies checked any information at all? When I conducted some research, I made an application for a loan under the name Boris Peep, using my constituency address as the address for the individual. The loan was approved by WageDayAdvance. I then received—
My hon. Friend raises an important point. It just shows how farcical the system is when Bo Beep can lose her sheep, but get a loan from a payday lender.
Secondly, I want to see the FCA introduce a roll-over limit of one. Failure to meet a loan repayment should be a clear signal that the borrower is in financial trouble. The answer is not then for the lender to refinance the debt. The purpose of payday loans is to tide the borrower over until payday; they should not be allowed to become long-term financing instruments. Two roll-overs equate to three months, which is far too long. Getting the regulation right is important, but if we do more to support the incomes of the lowest paid, this market will lose much of its raison d'être.
I warmly welcome my right hon. Friend the Chancellor’s support for an inflation-busting rise in the minimum wage. Such a rise would put more money in the pockets of millions of hard-working people, reducing reliance on high cost credit. Of course, the most direct impact Government can have on our income is to take less of it in tax. That is why the increase in the personal allowance, which has a disproportionate impact on the low paid, is so important. Someone working a 40-hour week on the minimum wage is now paying half the income tax they paid under the previous Government.
In the longer term, we need to get more people into work and improve workplace productivity, so that higher wages can be paid for out of higher profits. The Government’s reforms to schools and welfare will help us get there. I believe in markets, but all markets need strong frameworks to ensure that the consumer can make free and informed choices—free from coercion and informed about the risks. Nowhere is that need more clear than in the market for high-cost consumer debt.
I welcome the report from the Business, Innovation and Skills Committee. It is right to focus on payday lending, but there are other practices that we need to look at. The logbook loans, the rent-to-own model of BrightHouse and brokers such as Cash Lady all bear closer inspection, but at the moment we are looking at the payday loan industry. The industry has said that it recognises the need to clean up its business, and it introduced the good practice customer charter a year ago. However, were those just fine words, or has it cleaned up its business? Over the past year, Citizens Advice surveyed more than 4,000 people who had taken out a loan with payday lenders, and I am afraid that the results do not make encouraging reading. Like my hon. Friends, I do not trust the payday industry when it says that it is going for the database.
The real-time database must be mandatory to have any effect. If it is not, lenders can pop up all over the place without putting in the data. It is no good for lenders to say that they will give the FCA information on their products and services on a six-monthly basis, as has been said by the lenders who have promised to join the real-time database. That promise is simply not worth having. This is a fast-moving and—shall we say—innovative market, and the FCA must have the tools to work with the companies, examine their products and see how they are lending to people in as quick a time as they are changing their practices.
Let me give an example from Florida of how a real-time database can help. Loans are capped at $500. The regulator thought that a company had given two loans that breached the cap. It went in and the manager of the shop said, “Hands up, yes. It was a rogue employee. I am terribly sorry.” The regulator had the real-time data in enough detail to be able to say, “Actually, it was you, the manager of the shop, who approved this loan on two occasions.” That is the sort of data we need.
I am still uncomfortable with the idea of two roll-overs. The survey says that for 18% of such borrowers, the risks were never explained at all. In only 18% of cases were the risks of extending the loan explained to people. In 37% of cases were the costs clearly explained. Only 17% of people were treated sympathetically when they got into difficulties. In only 16% of cases were the charges and interest frozen. I have even more concerns now after receiving the same e-mail as my hon. Friend the Member for West Bromwich West (Mr Bailey) in which the company talked about repaying the loan in full, and then making another loan, which means they would get out of any cap. They would not be capped because it would be a new loan. The market is extremely fast-moving and slippery, and we must ensure that the regulations are worded in such a way that we can regulate on the basis of intention.
Default fees are a major problem for many people. Someone who borrowed £200 was charged £50 for a letter telling them that they had not paid. That is a completely ridiculous amount to charge for a letter. I have always said that payday loans are a perfectly sensible way to borrow in certain situations, but if someone cannot pay the loan, they can expect to be treated with some sympathy. I am more concerned that the cap on the total cost of credit will not include default fees. I have heard some companies say that it is the cost not of credit but of not paying, and that is how they will get around the cap, which is why there should be a cap on the default fee, and it should be an amount that the regulator says is reasonable. I am sure that a company can justify £50 for a letter, with time, office costs and so on, but it is not justifiable on a £200 loan. It means that vulnerable people who take out a loan, like 48% of the population, and are slightly over-optimistic about whether they can pay it back will continue to be exploited.
I am pleased that limiting continuous payment authority is under consideration. People need to have a letter before money goes out of their account, because I am not convinced that they understand that they are giving a supply of blank cheques to such lenders.
I totally agree with my hon. Friend. As my hon. Friend the Member for West Bromwich West said, the affordability check should be sanctioned by the FCA. It should be approved, but, as we know, at the moment speed trumps affordability in most cases.
Let me return to the report by a group of northern housing associations and social landlords, which regularly surveys 100 tenants—this is the second time that it has surveyed the same people. It found that 55% of those surveyed said that they had “never” felt optimistic about their future in the past six months, and 21% said that they were “rarely” optimistic about the future. Those are horrifying statistics, and when we consider that 89% of those surveyed said that they were concerned about the level of debt they were in, it is not surprising. According to a survey by Citizens Advice, only 9% of those who are in hock to payday lenders have been referred to free debt advice. That means that 91% of those who should have been referred have not been.
This is probably a once-in-a-generation opportunity to influence and control these lenders and we need to make the most of it. We must also ensure that we cannot sit back after taking some action and say, “That’ll be the end of it.” As I have said, these people are extremely innovative. They will look at the rules and how they can get around them, so we need a regulator with the tools to act and the will to move with lenders to ensure that vulnerable people do not continue to be exploited.
It is a great pleasure to follow the hon. Member for Makerfield (Yvonne Fovargue), who, as always, speaks not only with great passion but expertise and first-hand experience. This is an important debate, and not just because of the widespread detriment that is acknowledged to result from the payday loan market and the huge growth in it, which is not new but continues to happen and is set in the context of a much wider high-cost sub-prime market in this country. We cannot consider one without thinking about the interaction with the others.
The debate is also timely. This is debt awareness week and this Friday, the 24th, has been dubbed payday loan danger day as apparently it is the day of the year on which, as a result of Christmas and so on, people are most likely to take out a payday loan. To look at the more positive side, we are also in a period of regulatory change and an evolving FCA regime. This is Parliament’s opportunity to have some input into that and, I hope, to shape it.
We should also acknowledge what has already been done and welcome it: the enhanced enforcement from the OFT; the referral of the entire sector to the Competition Commission; and the FCA’s announcements on its regime, including the affordability checks, measures on roll-overs, advertising restrictions and what is being done on the continuous payment authorities, which the hon. Member for Makerfield mentioned. It is also worth acknowledging some of the wider things the Government have done, such as putting financial education on the national curriculum and providing great support for credit unions, putting £38 million behind the credit union expansion project and liberalising that sector.
On credit unions, does the hon. Gentleman agree that we need to put a lot more effort in if the system is going to work? The credit union in my constituency is run by volunteers and operates from an upstairs office, without a shop front. The payday lenders and the like are in glossy high street operations. Perhaps local councils could help credit unions to get out on the high street.
The hon. Lady is right. Of course, many local councils do that, providing premises and soft support in all sorts of ways. What the Government are doing, which is key, is trying to help the sector get to a point where it stands on its own two feet. Although subsidy and direct support have a role, we eventually want the sector to thrive, to be self-sustaining and to be able to take on the other lenders. That will include brand awareness and a product range that is right and that attracts people, but essentially we want the sector to be a bigger, professional operation that provides a real alternative. I think that we are moving in that direction, both through the Government’s support and through the liberalisation of the sector, with the legislative reform order and the move from a 2% cap to a 3% cap on interest a month. That puts credit unions a little closer to being able to compete with payday lenders, although it is still very hard to break even at 3% per calendar month on a payday loan.
The biggest change by far that the Government are putting in place is the duty to have a cap on the cost of credit. That is an enormous change—not just for a Conservative or coalition Government, but even for a Labour Government. I was reluctant about such an idea, but a couple of years ago I finally concluded that we needed to cap total costs in this market.
Why was I reluctant and why did I change my mind? I was reluctant because, in this country, with the exception of natural monopolies and a few other very specific examples, we do not do price control. It goes against the philosophy of our economy and of our politics. We—by which I mean most people in this House, not just those on the Government Benches—tend to believe in the efficacy of markets, in consumer sovereignty and in the beneficial impact of price competition. Why did I change my mind? I was trying to reconcile all those beliefs about what markets do with what we see in this market, and in many ways the normal laws of economics do not seem to apply to high-cost sub-prime credit.
The hon. Member for Makerfield talked about how pessimistic some people can be, but in some ways people are incredibly over-optimistic, even about their ability to pay back a loan. They feel that they are not the type of person who will get into difficulties. The hon. Member for West Bromwich West (Mr Bailey) set out very clearly how consumers in this market tend not to buy on the basis of price, so, unlike in other markets, bringing in more competitors does not tend to bear down on price.
If the normal rules do not apply, in many ways the normal remedies that one might apply to a market that was not working well do not apply either. Of course we want clarity about what a product offers, disclosure, health warnings and so on, but there is a limit to their effectiveness. Warnings quickly become part of the wallpaper of life, just like that thing that goes, “Your home is at risk if you do not…blah, blah, blah.” People stop paying attention and, as I say, borrowers do not anticipate that they are the ones who will end up with a problem.
As for sound financial education, of course we want educated, empowered consumers but there are limits here too. There is a big time lag. If we educate the next generation, we will have to wait quite a long time before they are in a position to need to use that education—and I can guarantee that by the time they do need it, everything will have changed. If we had had financial education when we are at school, we would have learned about clearing houses and endowment mortgages. They would have said, “Don’t worry—at least a final salary pension will see you safe,” and we probably would have been told that payment protection insurance was a damn good idea and we should get as much of it as we could.
Of course competition is a good thing, but if it does not affect prices there is a danger that more competition can mean more ubiquity, more advertising about speed and convenience and more proposals of instant solutions that do not really exist—and, I am afraid, more people believing in those things.
Micro-interventions are another suggested solution. We think that if we find an abuse in a market we should stamp it out, but there are limitations in that regard. If we restrict roll-overs, I can guarantee that the industry will find a different way to make money. That even applies to the real-time database that people are setting such store by—we should always beware when people think that one solution will solve a lot of problems. Quite apart from the other problems caused by the creation of mega-databases, there is also the issue of scope. In Florida, for example, there is no home credit market on the same scale as ours. If a real-time database is to be really effective, it must include the other parts of the market too.
If we believe that the current levels of payday lending are a social ill, that it will not go away as the economy improves, as there is growth and real wages increase, and that to some extent the market creates its own demand through advertising and supply, we should ultimately conclude that we must make the market less attractive. We must reduce its ubiquity so that we reduce both supply and demand. Not only do we want to make the market work better, we want less of a market. A cap on the cost of credit is a fundamental part of that, not only in ensuring that consumers are not ripped off but in making it less attractive to players coming into the market. We do not want to make it unattractive, because, as the hon. Member for Makerfield said, there are of course times when the short-term borrowing of relatively small sums of money makes perfect financial sense, but we want to make it less attractive.
A cap is, of course, not a panacea either. First, stimulation, whether big or small, at the margin of the illegal market will definitely be a problem. Of course, firms will find other ways to make money. When people hear that, they say, “Oh, but I’m not talking just about a cap on interest. I mean a cap on the total cost of credit,” but what do they mean by that? I suggest that people mean different things and think that everyone else is using the same definition. Sometimes, people mean restricting behavioural charges or penalties. That is a perfectly legitimate goal, but it is not the same as reducing the overall cost of credit. Such a cap would have to be really rather high to tackle the real abuses.
Some people say, “Ah, but we’re talking not about penalties, but the overall cost and the hidden fees.” Well, that is what annual percentage rates cover. If a fee is paid by everyone, it is already included in the APR. Because people do not understand percentages very well, they could be presented with a cash number for the total cost of credit, but I suggest that there is a big difference between using a cash number for disclosure where it makes perfect sense—“You will pay x per £100”—and using it for a limit where it can be generalised. That probably explains why most usury caps use APRs, and I suggest that the twin caps approach now used in Australia is probably the most effective.
This is a timely debate. The issue has captured the public’s imagination because people cannot understand why apparently high and exploitative interest rates are charged on short-term loans, and the Government have faced mounting pressure. It is important to pay tribute to Members on both sides of the House, but particularly my hon. Friends the Members for Sheffield Central (Paul Blomfield) and for Walthamstow (Stella Creasy). Their work, in combination with the public’s feeling that this is somehow unfair and wrong, has brought the issue to the Government’s attention. The Government have recently crossed the Rubicon in announcing that an intervention in this market would be justified. They said not only that the FCA now has the power to impose a cap on the total cost of credit, but that they feel that that will happen.
In a moment, I will draw an analogy with the pensions market, which I know something about. I was struck by the fact that the hon. Member for East Hampshire (Damian Hinds) said that Conservatives were against caps in general, but that this was an exceptional case. I am sure that he is aware that the Government are consulting on a pension price cap for somewhat similar reasons, particularly the fact that consumers in the marketplace are not sovereign because they do not know what they are being charged.
A few reasons have been given for why we find this to be such an issue in 21st century Britain. My hon. Friend the Member for Glasgow North (Ann McKechin) noted the extraordinary growth in short-term loans being taken out. Members on both sides of the House have suggested that that is something to do with either bank overdraft charges or, perhaps more fundamentally, the growth of a low-wage economy. The latter is absolutely true. We cannot understand this problem without reference to the growth of low-wage employment. However, it is important to refer not only to low wages but to irregular and insecure employment.
What we see in the 21st century phenomenon of payday loans is something that we commonly found 100 years ago in the form of the pawnbroker: the debt-credit cycle, which appears in economies and contexts where low pay and insecure and irregular employment are a reality. One hundred years ago, the pawnbroker was ubiquitous for a simple and straightforward reason: weekly wages did not cover outgoings. Therefore, in a world where weekly wages could not meet the cost of living, what was the rational response of people in that position, of whom there were many millions? The rational response was to pawn their good claithes at the point in the week when their wages were exhausted and then to redeem their good claithes—that is, clothes, for non-Scottish Members of Parliament—when their wages were paid. That continued week after week. They pawned when their weekly wages were exhausted but their outgoings had not been met, and they redeemed when they were paid—over and again, week after week.
Of course, the world has changed enormously in the past 100 years. Everyone’s standard of living has increased significantly. I would argue that it is not coincidental that that happened at the same time as the Labour party was formed to advance the interests of people in those situations. [Interruption.] Government Members are laughing. I did not even think that that would be a point of controversy. Surely, the past 100 years have seen a significant—[Interruption.] The hon. Member for Brigg and Goole (Andrew Percy) shouts something. The point is that, 100 years ago, the pawnbroker was a reality; in the 21st century, the payday lender is a reality. The standard of living is much higher of course, but we find this problem emerging once again. It used to be a weekly problem; it now might be a monthly, six-weekly or bi-monthly problem.
There is one advantage of the pawnbroker: at least, the debt could only go so far—the amount of credit that someone put up. The problem with payday lending is that interest rates keep increasing and people are caught in a vicious cycle of debt, which is why it is becoming even more difficult for ordinary people to cope with it.
My hon. Friend takes the words right out of my mouth. That, indeed, is the big difference. This is a much more exploitative form of lending than pawnbroking.
The hon. Member for East Hampshire, in a thoughtful speech, got on quickly to what sort of cap one should look to the Government to construct. I mentioned that the Government are consulting on a pension cap, and my involvement in that from the Labour side leads me to make a couple of observations that might seem obvious. The most obvious is that one must be absolutely clear about what one is encompassing in the cap—a point that he made very well—while being clear about when the cap will be introduced. As things stand, we have an undertaking from the Government to move towards a cap on the total cost of credit, but until we are clear what the total cost of credit includes, the dangers of leakage are significant.
Alongside that, we must be clear about what the objective of regulation is in that context. It must be to end the exploitation that is widely thought to be taking place—Members on both sides of the House feel that, and the public certainly do—but at the same time to ensure that legitimate access can be maintained to short-term loans that are not exploitative. That is the principle from which the Government must proceed.
However, to pick up on a point made by more than one Government Member today, when all that is done and exploitation through payday loans has been reduced, or hopefully ended, we will still not solve the problem unless we can build securer and more regular forms of employment with a higher wage. My hon. Friend the Member for Glasgow North is absolutely right that that form of lending can be much more exploitative than pawnbroking has been over the past 150 years, but the lesson from the era when pawnbroking was ubiquitous in working class communities is straightforward: as long as there is low pay and irregular and insecure employment, it is rational for people to have to find a way to make ends meet.
We welcome the view that the Government have taken on regulation. It is fair to say that they are moving on to the territory that the Opposition have staked out, but I think that we can agree—we might disagree about the method of achieving it—that unless we can a securer and more regular employment economy with a higher wage, the problem will not disappear.
I pay tribute to those Members who have already spoken for what has been a balanced and well-informed debate so far. I also pay tribute to the hon. Member for Sheffield Central (Paul Blomfield), who has been leading a cross-party push to influence and shape policy in this extremely important area. I have been proud to work with and support him. I am delighted that my borough council has achieved cross-party support, so we are leading nationally and locally, and with cross-party support—perhaps it is the future.
I have talked about this subject on a number of occasions, particularly the need to empower consumers to make informed and savvy decisions. I recently read an interesting report on consumer markets by my hon. Friend the Member for South Thanet (Laura Sandys). It states:
“Good markets put consumers in the driving seat to make, shape or break products. Bad markets disguise, mislead or control consumer choice”.
How true that is of this market. It is absolutely key, because there is a fundamental information asymmetry in the payday lending market, and that is at the root of why it does not work in the consumer’s interest. The market distorts decision making so that, rather than making an informed decision based on price, the consumer is led into favouring other factors above all others in making their decision—a point that has been made by a few Members today.
The Office of Fair Trading investigated 50 payday lenders, and 60% of the consumers who responded emphasised speed and quick access. For the industry itself, the FCA produced an informative and useful video and talked with some of the consumers. They said that traditional mainstream banking was often too formal. There was a perception that they would have to turn up in a suit and justify their demands, wishes and financial actions.
Does the hon. Gentleman accept that many who have tried with the normal banks, regardless of whether they were wearing a suit, were turned away or found it very difficult, and that is why they have ended up with payday loan companies?
I thank the hon. Gentleman for that intervention. I will be moving on to the failings of mainstream banking shortly.
It is also a recognition of how consumer habits have changed. With 24/7 internet shopping becoming increasingly popular, if consumers see something online at 3 o’clock in the morning and want to purchase it, they would like to be able to access the funding right away. Society is geared up for consumers wanting something, and wanting it right away. That market adapted to consumer demand and stepped in where the mainstream banks were not looking. Clearly, value for money for the consumer is not paramount, and that needs to be addressed.
I welcome the positive steps that the Government have started to take, working with the FCA. I will comment briefly on the various things that I would like to see. The first one, and it is often the simplest, but the one on which I am not sure we are there yet, is that the total cost of a loan should always be displayed in cash terms. I suspect that not even Treasury Ministers can calculate an APR rate, which involves a hugely complex formula. Therefore, a customer should be able to say, “I want to borrow £100, and it will cost me £20.” Even those without a particularly good grasp of mathematics would then be able to make a reasonably informed decision on whether that represents good value for money.
To encourage competition, we need a standardised unit for comparison. In the energy market and in mobile phone contracts there are standard units, so consumers can visit price comparison websites to find the best product. That is very difficult with payday loan companies.
My hon. Friend is making an excellent speech. I know that he has worked hard to bring financial education into the school curriculum. Does he agree that to be able to fathom even the cost of these loans in numerical terms people need a certain level of literacy, so we really need to tackle the poor levels of adult numeracy and literacy, which are a big barrier in this case?
I thank my hon. Friend for that contribution. If she can just be patient, I will be heaping huge amounts of praise on her shortly.
The second thing I would like to see is real-time credit checking. The industry wants that because, despite a lot of the rumours, it relies on people being able to pay back the money they have borrowed. It would help to avoid somebody going into one shop and 15 minutes later going into another one. The credit checking agencies follow the traditional monthly banking system, so in theory somebody can wreak damage on themselves in the course of a month before the banks catch up. The industry says that it wants real-time credit checking; the credit agencies say they would like to offer it but that it is very complicated. One of the smaller operators, Call Credit, has got 10 operators signed up, but it will not be 100% participation. The Government will therefore have to empower the FCA to demand this. We are getting close to it, and it exists in some forms in America. It will make a huge difference because it will protect people from taking out multi-loans and allow the FCA to enforce affordability checks so that lenders who are lending to people who cannot afford it can be dealt with.
I would like to go one step further in ensuring that people can rebuild their credit rating. When someone has been turned down for a loan by one of the mainstream banks, the payday lending industry is often the only one that is prepared to take the risk with them. If they pay back the loan properly and on time, they should then have their credit rating repaired, allowing them to re-enter mainstream traditional lending.
There is a perception that the products, prices and requirements placed on people pushed them away from mainstream banking into a more modern, innovative industry that was responding to the situation. Mainstream banking has to take a long look at itself to see how it can adapt to a changing world. I fully support the fantastic work that my hon. Friend the Member for East Hampshire (Damian Hinds) has done on credit unions as an alternative for people. It might not be the total solution but it is certainly a very important part of the process.
On debt advice, which will be debated tomorrow in Westminster Hall, I fully support the levy, and I think the industry does as well. The Nationwide building society carried out a survey showing that 91% of people who get into financial difficulty say, “If only I had known better.” We see this in our casework. People who have got into difficulty come to see us with their carrier bags of unopened envelopes, and they need face-to-face, patient help. At the point where they go to get one of these loans, it would be helpful to have well-advertised information about how they can access free, independent debt advice, with a freephone telephone number.
Under the licence to operate, it costs lenders about £2,000 to get set up. A particularly bad, unscrupulous lender can wreak all sorts of damage before the FCA, or formerly the OFT, will have had time to do something about them. Unfortunately, some of these operators on the very fringes of the market will take advantage of the potential two-year window to do whatever they want before being taken down, and will then spend more money to get themselves back up the Google search engine listings.
The FCA needs to be extremely proactive in terms of mystery shoppers. Often the consumers who get themselves into the most difficulty are vulnerable people who are least equipped to raise it with us so that we can chase things up. This particularly applies to doorstep lending, as I have said in previous debates. With that lending model, the lender befriends someone, gains their trust, goes into their house every month, and could encourage them to borrow more. They might say over a cup of tea, “Have you sorted out your Christmas presents? If not, don’t worry, because we could provide the money for that, and why don’t you get your carpet sorted out if you’ve got your family coming round—that’s only another £3 a week.” We need to have mystery shoppers to check that the operators are sticking to the rules.
I championed the desire to get financial education on to the statute book, and I am delighted that the Government are implementing that in 2014. As my hon. Friend the Member for East Hampshire said, things will now change. This is about equipping the next generation of consumers with the skills to be able to make informed decisions—not moralising on those decisions but enabling them to make the mathematical calculations.
My hon. Friend is absolutely right to mention financial education. It is good that we have got that on to the curriculum, and it was a good campaign, but we also need to make sure that it is covered in teacher training. I used to be a teacher, and I would be the last person to give advice on financial literacy, as people will know from my previous speeches. We have to make sure that teachers are trained properly in how to deliver this.
My hon. Friend is absolutely spot on. From his experience as, I am sure, a wonderful teacher, additional training would make a real difference. It is important that the Government tie that in with the national curriculum to be introduced in September.
My hon. Friend the Member for Gosport (Caroline Dinenage) was also spot on about adult literacy. We cannot just wait for future generations to filter through; people are making bad decisions now because they simply do not have the capabilities to do anything else.
As a country, we need to encourage a savings culture. I sometimes worry that we all—we are all as bad as each other—want everything tomorrow, but it is sometimes not such a bad thing to wait.
The cost of credit is being looked at, and we are absolutely right to consider the total cost. We should look not just at the crude APR measurement, but at the fees, the cost of roll-overs and things such as bank overdrafts. Some of the charges I have seen equate to about 80,000% APR. The hon. Member for Makerfield (Yvonne Fovargue) made some good points about fees and roll-overs, and we should continue to push on those matters.
Finally, we just have to recognise the need to be flexible. The industry will continue to change: when we started to look at limiting roll-overs of loans, it began to extend loans. The market will keep changing, so we have to be quick on our feet.
Debt is a growing issue faced by many people in my constituency, just as it is in those of other hon. Members. As a result of both the recession through which we have laboured during recent years and changes in employment practices, people find themselves increasingly unable to make their income stretch to the end of the week or the month to cover necessities such as rent, heat, food and clothes, and desperately seek a source of credit to tie them over from one pay cheque to the next. Particularly for those who are financially vulnerable and find access to mainstream credit difficult or impossible, due to the risk of defaulting, payday lenders offer the illusion of quick and easy credit, but in many cases at significant cost in the long term.
Unmanageable debt has a corrosive effect on people’s lives. Servicing high levels of debt repayment has been linked to rent and mortgage arrears, rates and utility arrears, constraints on jobseeking behaviour, poor diets, cold homes, and mental and physical health problems that are not limited to distress and depression.
Several things that can be done to tackle the problem have been mentioned by right hon. and hon. Members, and I want to touch on a few of them. First, we need to acknowledge and address the growing poverty in our country. It affects not only those who rely entirely on benefits, but—and, in some cases, more so—the working poor who struggle to make ends meet on low and irregular pay. The rise in the uptake of payday loans has been accompanied by a growth in the number of food banks, which is evidence of the financial stress with which many families have to contend in trying to afford the basics.
Raising the level of the minimum wage and lifting the poorest out of taxation are two very positive measures that the Government are considering and have committed themselves to doing. However, the impact of welfare reform is likely to hit hard precisely those same families who are struggling now, which will increase the risk of their getting into unmanageable debt. One alternative source of help that has been available for those in difficult financial circumstances is the social fund. Although it has certain eligibility limitations, I am concerned that it will go under welfare reform, and that there is little information about what will replace it.
We need to provide good alternatives to payday lenders for those in need of credit. The role of credit unions and community banks, which has already been referenced, could be significant. There are some excellent credit unions in my constituency, and they have a greater presence in Northern Ireland than in the UK generally, due to the Irish League of Credit Unions and the Ulster Federation of Credit Unions, but more work could be done to promote what credit unions have to offer. That service extends beyond access to credit, because it covers work with adults and children to support good financial habits and to encourage saving and good literacy and planning, which are hugely important.
That leads to another thing that we can do, which is to invest in financial literacy, as other hon. Members recognised in their speeches. We need to give better financial advice, guidance and education to everyone, young and old. Many people simply do not understand the implications of taking out a payday loan, the potential impact on their credit rating or the rapidity with which their debt can escalate if they fail to meet all the conditions.
A levy on payday loan companies’ profits to fund advice services would be one way to expand the advice available to people with financial problems. I have raised that with the FCA. Given that companies have made such massive profits due to charging extortionate interest rates, they could well afford it. Such advice is particularly important because people are also facing changes in their benefits and in their workplace arrangements, and yet much of the advice that is available has also been hit by austerity measures. It is hugely important that people get financial education, but it is also important that clear, transparent information is available from the loan companies themselves on how the payments will be collected and on what charges will be incurred.
There needs to be much more regulation of the operation and marketing of payday loans. Other Members have spoken about advertisements during programmes that are aimed at children—even the tone of the advertising is aimed specifically at children.
Is the hon. Lady concerned not only about payday loan companies, but about companies such as BrightHouse that offer access to high-value products? The costs are extraordinary by the time people finish paying for those products. To all intents and purposes, it is the same sort of arrangement. People are being charged a high amount of interest to have access to those products.
I agree that it is not only payday lenders who are at fault. People are offered a range of credit facilities. Part of the difficulty is that people do not understand what the APR means in real terms when they take out a loan. We really need to work on that. People must also have transparent information when they make such decisions.
On advertising, I want to bring to the attention of the House an experience that I had of late. I received an unsolicited letter from Wonga. I will name the company because I have already done so on Twitter. That was the only way that I could get a reply to my original letter of more than a month ago, in which I asked why I had received the letter. I wrote to it because I was concerned to receive what appeared to be a marketing mailshot, claiming that I had applied for credit with the company, which I had not. It offered me terms on which I could apply for a loan.
Wonga claims that the information of mine that it possessed had been used fraudulently to try to obtain credit in my name. It had retained my details on file for the purpose of excluding that, but had mistakenly sent me the mailshot as part of a marketing test. I asked whether the matter had been reported to the police and why Wonga did not contact me directly to say that my details had been used, given that it had my address. I also asked whether it could tell me when the incident had taken place and whether it was only people in the same category as me who had received the marketing shot or whether it was more general.
I intend to pass on my experiences to the FCA and the Information Commissioner’s Office, because although some people will realise that they had not sought the unsolicited mailshots, such abuse could fool others into thinking that they have previously applied for a loan and that it is something that they may want to take up. It is hugely important that aggressive marketing tactics are stamped out and dealt with through proper regulation.
There needs to be a cap on the total cost of payday loans. That has been referred to by a number of Members. I welcome the FCA’s ongoing consultation on such a cap. It is worth noting that other EU states have imposed a cap, as have many states in America. Given the mobility of payday loan companies, if the UK does not have a cap on a par with those of other EU states, we might find that companies move to the UK to capitalise on that.
Other Members have said that competition does not really work in this marketplace. I think that that is true. Six lenders account for about 90% of the market share. There is no incentive for them to offer competitive interest rates because convenience seems to drive demand, rather than interest rates.
The regulation of charges is required, in tandem with an overall price cap, so that the costs are not passed on in that way. I welcome the work that Which? has been doing to expose the excessive default fees that are charged by many companies. It has described that as exploiting borrowers and potentially illegal. Such fees are often well above the costs of administration for the default and are one of the biggest factors that tip people into a debt spiral. The Which? research shows that one in five payday loan users has been hit with unexpected charges and that more than 50% of payday loan users have incurred late payment charges over 12 months, compared with 16% among all credit users.
For the information to be effective and meaningful, we need a real-time lending database. Some payday loan companies have worked together to implement that, but it needs to be mandatory if it is to be meaningful. It would hopefully stop multiple loans and prevent people from taking out one loan to pay off another, thus compounding their problems.
I hope that in raising these issues tonight and in keeping the public focus on payday loans, we will be able to do something worth while to protect those in our society who are financially very vulnerable.
Order. Before I call the hon. Member for Worcester (Mr Walker), it will be obvious to Members present that everyone who has spoken has gone to the wire and taken every second, or more, of the eight-minute time limit. It is not really meant to work like that, and it would have been helpful if hon. Members had sometimes limited their remarks, rather than going absolutely to the cliff edge. After the hon. Gentleman has spoken, I will reduce the time limit for speeches to seven minutes.
It is a pleasure to follow what I thought was an excellent speech by the hon. Member for Belfast East (Naomi Long). I am pleased that the Backbench Business Committee has requested this debate about an important report and a subject in which I have taken an interest for a long time. I first spoke about this issue in a Backbench Business Committee debate, and it is particularly appropriate that this subject should have received time for debate, given the essential role played by Back Benchers of all parties in driving forward the debate on high-cost credit and the regulation of the payday loan industry—a role that has been acknowledged by the Government in the past.
I congratulate the Chair of the Business, Innovation and Skills Committee, the hon. Member for West Bromwich West (Mr Bailey) on the report we are discussing and on his powerful speech in opening the debate. He made the point about television advertising extremely well, and one of the most memorable moments in evidence to the Committee was when Martin Lewis made his passionate case about grooming by payday lenders.
Over the past year a number of steps have been taken, which will be welcomed across the House, to tighten and improve the regulatory regime for high-cost lenders, to mandate a cap on the cost they can charge their customers, and to protect consumers. The FCA provided a helpful briefing for today’s debate that enumerates many of the improvements it intends to introduce, and given the rapid growth of the industry since 2008, such action is not only welcome but necessary. Nevertheless, there remains a high degree of concern about the prevalence and ease of access to very high-cost loans, and a good deal of evidence that they are causing real problems to many of our constituents.
When the Select Committee took evidence from payday lenders, they were at pains to point out that the number of people driven to default was only a small proportion of the total number who use such loans. That may be the case, but given the enormous scale of the industry, that small proportion represents a significant number of people whose lives have been profoundly affected for the worse, whose credit ratings may have been destroyed, and who will have been left permanently worse off and—as the hon. Member for Glasgow North (Ann McKechin) pointed out—sometimes unable to get a mortgage as a result of short-term credit. I therefore speak for all members of the Committee when I say that we feel that we need to go further in regulating the sector.
The report sets out some important points, and I wanted to focus on two: real-time data sharing and the importance of the FCA levy to fund free debt advice. For real-time data sharing, and taking on board the point made by my hon. Friend the Member for East Hampshire (Damian Hinds) that it is not a total solution, affordability is key, and it can play an important role in ensuring that payday lenders better assess affordability in the future. Representatives of the industry who gave evidence to the Committee went to great lengths to argue that they apply strenuous and rigorous affordability tests, but we also heard a great deal of evidence to the contrary. Perhaps one of the most illustrative points was the example cited by my hon. Friend the Member for Edinburgh West (Mike Crockart) about Bo Peep applying for a payday loan—an extraordinary story.
Charities such as Citizens Advice and StepChange were able to demonstrate too many cases where the same person was able to take out irrational numbers of loans from different providers, and the evidence both on defaults and roll-overs suggests that affordability is still not properly assessed. Although the spokesman for Wonga argued that the proportion of its debts written off had been overstated in some media coverage, he admitted that there was £77 million of bad loans, which represented almost 10% of lending by that company, or 300,000 customers. In another answer he suggested that only 3% of customers got into financial difficulties and could not afford to repay, but even if we take that 3% as a fair assessment, we would be talking about tens of thousands of people.
I think that real-time data sharing—unglamorous and perhaps wonkish as it is—is one of the keys to making the short-term credit industry work better and more fairly. Not only would it mean that existing lenders could avoid giving loans to those who might already be overcommitted elsewhere, but it would allow new entrants to the market to lend at a better rate, increasing competition and providing a real alternative to some of the sky-high costs out there in the market. That is because they would be able to avoid lending to people with large numbers of outstanding short-term loans, and thereby reduce their default rates. I have met potential market entrants who believe that if a proper system of real-time data sharing were available they could offer short-term loans at not much more than the roughly 39% APR allowed to credit unions.
The industry has suggested that it is in favour of such a system. Callcredit, one of the main players in the credit reference agency sector, has recently announced that it is piloting a data sharing scheme. That is to be welcomed, but there are a number of concerns with that voluntary approach. One credit reference working on its own with its clients will be unable to provide an accurate picture of the whole market. Its suggestion is an improvement, in that it reduces the interval between filings on lending, but it is not a real-time system. There is still a chance that customers could apply for one loan after another in a short time interval, and that lenders will be unaware of the loans outstanding at the time of their lending decisions.
More seriously, as long as credit reference agencies continue to provide lending data to their paying customers only, and as long as they compete on which agency has the best client list, there will be gaps in the picture of the market they can present. There is no guarantee that that voluntary approach will make lenders or the FCA aware of all the loans an individual has outstanding at any moment in time. Unless there is a firm agreement for all the credit reference agencies to work together and share their data, which is inimical to their reason for being and their way of doing business, some form of Government or regulatory intervention will be necessary.
I was pleased that both the regulator and the Minister, in their evidence to the Committee’s inquiry, expressed a willingness to intervene should it become necessary to do so, and I welcome the recognition they gave to the importance of real-time data sharing, but I reiterate the question I asked then: what time line will they set before taking action to mandate real-time data sharing? The Committee’s report suggests a deadline of July 2014 for the FCA to step in if the industry has not delivered. Notwithstanding the decision of Callcredit, I believe that that is likely to be necessary.
I do not want to give an exhaustive list of the Committee’s recommendations, which I support, but hon. Members who have followed debates on payday lending will know that the funding of the free debt advice service through the FCA levy is dear to my heart. There is a great deal of evidence that the high-cost credit sector is driving demand for free debt advice services. I have previously advocated a levy on their charges to help to finance the sector. The current mechanism is the FCA levy. I want to put in a quick advertisement to hon. Members in the Chamber. Tomorrow morning, we will have a debate in Westminster Hall. I do not want to put all my arguments on the levy tonight, but I hope many in the Chamber will join me in advocating the case, as the Committee has recommended, for the additional levy for payday lenders to be passported to the free debt advice sector. That will be crucial in making the sector work better.
I pay tribute to hon. Members on both sides of the House who have worked on this issue. My hon. Friend the Member for North Swindon (Justin Tomlinson) has worked on improving financial education; the hon. Member for Sheffield Central (Paul Blomfield) has run a cross-party campaign; my hon. Friend the Member for East Hampshire (Damian Hinds) has done important work on credit unions; and the hon. Member for Makerfield (Yvonne Fovargue) has worked with Citizens Advice and the debt advice sector. By working together, hon. Members have achieved good things, and we can go much further.
I thank my hon. Friend the Member for West Bromwich West (Mr Bailey) and the Business, Innovation and Skills Committee for their excellent report on payday lending and for doing so much to raise the profile of the issue, including by stimulating debate. There is a strong degree of cross-party consensus on what needs to be done. I thank my hon. Friend the Member for Sheffield Central (Paul Blomfield) for doing so much to bring the problems of payday loans to our attention.
Most MPs will know from their constituency casework, and from the growing number of payday loan companies on our high streets, that payday loans are becoming more of a problem for our constituents. I hope to be able to run through my four main concerns, the first of which is the exorbitant interest rates charged by those companies, which should not be tolerated in our society. Pay-back rates of 5,800% are not unheard of, and APRs of 2,600% are not at all unusual. That creates huge problems for people paying back the loans. Despite this, more and more people have to turn to payday loan companies just to make ends meet. That indicates that there is a huge cost of living problem in our society, and that many jobs simply do not pay people enough money to live on.
In 2010, just 1% of people getting advice from citizens advice bureaux had debt from at least one payday loan. That rose to 4% in 2012 and 10% this year. Evidence from Citizens Advice also reveals irresponsible lending, and says that it is intrinsic to the industry. New 12-month figures from the national charity’s payday loan tracker reveal that 61% of loans still come without proper checks to assess whether borrowers can afford to repay. It also found not only that three out of four borrowers found it difficult to repay their loan, but that in 84% of cases lenders were breaking their promises to freeze interest and charges for those who were struggling.
National Debtline says that calls for help with payday loan issues soared from 776 in 2008 to more than 20,000 in 2012. A ComRes survey found that 98% of MPs and 93% of the public believe there is a problem with payday lending, and that 66% of MPs and 65% of the public support a cap on the total cost of credit. It is hardly surprising, therefore, that the Government were forced to take action earlier this year, but I am not sure that requiring the FCA regulator to clamp down on excessive interest rates is really good enough, especially when it will be some months before any such scheme can be implemented. Labour put forward an amendment to the Financial Services Bill, which would have given the new FCA clear powers to tackle the overall cost and duration of high-cost loans, especially where it could demonstrate consumer detriment. It is a real pity that the Government did not accept the amendment.
My second concern is the methods used to trap people in cycles of debt. I have a constituent who, when desperate and applying for a loan, was told that she had to give her mobile phone number. Thereafter, she was sent texts that offered her more loans and offered to give her more money to pay outstanding loans. She was contacted at the end of the month, when she was particularly short of money, and urged to take out more loans. When she came to my surgery she was literally at her wits’ end and did not know what to do. That case is not unique and we really should not continue to allow companies to behave in this way. If this sort of bullying was taking place anywhere else, it would be tackled. My hon. Friend the Member for West Bromwich West mentioned how advertising is increasingly being targeted at children. Again, that is a disgrace and something that should be brought to an end immediately. Research shows that of those sampled who had taken out a payday loan, 60% regret the decision and 48% believe that their loan has made their financial situation worse. Only a tiny number think it has had a positive impact on their finances.
My third concern relates to the proliferation of these companies on our high streets. Action the Government have taken to deregulate use classes and permitted development rights means that it is much easier for payday loan companies to set up on our high streets without having to gain planning permission. This is a step in completely the wrong direction. We are urging the Government to take action on this immediately by returning powers to local councils and local communities, so that they are able to reduce the numbers of payday loan companies on their high streets. We know, from a number of different surveys undertaken with communities, that local people want those powers and they want their councils to be able to reduce the number of payday loan companies in their area.
My fourth point concerns the way in which payday loan companies target disadvantaged areas and prey on poor people. Research recently carried out by Professor Sarah Banks at Durham university described payday loan companies as preying on the poor. She said that many people have multiple loans with payday and doorstep lenders at annual interest rates of up to 4,000% even though their incomes are very small, and that the companies did not even look at the other debts people had or whether they could afford to repay them. They lent to people, even though some of them had only a very small amount of savings or no savings at all. She gave lots of examples of the unscrupulous way in which loans were being targeted, particularly at those with very low incomes.
As several hon. Members have said, we need to find ways out of this situation, and one of them is to support and promote credit unions better. I am pleased that our new Bishop of Durham has signed up to the Durham County credit union. It is important we see this as a way of fighting poverty, particularly in areas like the north-east that still have very high rates of unemployment and where people are losing lots of money through welfare reforms and increasingly being driven to loan sharks just to make ends meet. We must ensure that people see credit unions as a viable way forward and give them the support they need to join them.
This has been an interesting and largely consensual debate. The only comment I bristled at was that by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) linking the rise in living standards to the emergence of the Labour party. As a former history teacher, I thought it had something to do with the industrial revolution as well—next he will be claiming credit for the power shift to the workers after the black death. Apart from that, it has been a generally consensual debate. Regarding solutions, I think we all agree on the general direction of travel and have all been receptive to the Government’s proposals, although some of us would perhaps like them to go a bit further.
I shall focus on some of the reasons for the rise in payday loans and then look at one solution that others have touched on, which is education. Members on both sides of the House have tried to explain the reasons for the explosion in payday lending, but in reality it happened at the same time as a reasonable explosion in living standards, so it is not simply about the economic downturn or people finding themselves in a more difficult position economically; culturally, something deeper is going on.
Members have talked about the “we want things today” culture. My grandparents never had any debt in their entire lives; they saved for everything and they tried to embed that idea in their grandchildren. It failed spectacularly in my case—I listened to them on many things, but clearly not on debt. Something deep has changed in society. As my hon. Friend the Member for North Swindon (Justin Tomlinson) said, we want things immediately—at three o’clock in the morning, if the money is not quite there but someone can click on a payday lending website, that is unfortunately what too many people do.
The high streets in my constituency, particularly in Goole, have seen an explosion in the number of these shops and services. I have to say I bristle when I walk down the high street. The high street should be a place for visiting the butcher, the baker and the candlestick maker—there is still one of those not too far from my constituency. That is how we think of our high streets, but regrettably they are today overpopulated with betting shops and payday loan companies. I probably have more complaints in my constituency office about the behaviour of the banks than about individual payday lenders, but that does not mean there is not a problem—we should not mention banks in anybody’s defence.
Obviously there has been an explosion in personal debt, and that is a deeply engrained cultural thing. The solutions spoken about this evening are to be welcomed, but they deal with the symptoms, not the causes. As my hon. Friend the Member for North Swindon and others have alluded to, education is key—and not just in schools. I was happy and proud to chair the inquiry by the all-party group on financial education for young people into financial education. We welcome the fact that the Government have taken that report on board—it is a good start—but much more still needs to be done, because far too many people simply do not understand how to handle debt, what it is, how to work out how much they will have to pay or the impact on their life.
I have spoken before about the debt troubles I got into when I was a teenager and in my early 20s, funding my way through university. I bristle when I am told on Twitter, “You’re a millionaire Tory MP who doesn’t understand real life.” That happens too often, but it was not the case with me; I struggled with high levels of debt that I am still dealing with. I am lucky: I am a Member of Parliament with a reasonable salary, and I can get to grips with it. I did not realise at the time, however, that I would be one of those who might struggle—the hon. Member for Makerfield (Yvonne Fovargue) talked about this. I did not realise that it had to be paid back and that the interest would be huge. The minimum payments are often less than the interest accrual every month. Until we crack that, we will not get anywhere, whatever caps on lending, roll-over caps or whatever else we introduce. Until we get to the bottom not just of how to work this into the curriculum, but of how to demonstrate the impact of this problem on people’s lives in the longer term, we will not make real progress.
I am still dealing with the debt issues I encountered in getting myself through university. I am lucky, as I said, but others will be condemned by their debt for very many years. This is largely because of the failure to understand that while some debt is good—the Select Committee talks about mortgages, home ownership and so forth, perhaps as necessary evils—much debt is truly evil and life changing for so many people. Until we crack that problem through education, I do not think that any of the other solutions will do a great deal, welcome though they are. Financial education in schools is a good start, but we need to address the adult population if we want to make a real change. We face a great problem with financial illiteracy in our adult population. I know that my hon. Friend the Member for Worcester (Mr Walker) is passionate about that issue and he spoke about it.
I welcome the interesting debate we have had and some of the solutions put forward, but as I have said, without cracking the financial illiteracy that is so evident in this country, I think that everything else will be but a drop in the ocean.
I was rather hoping that you would not be in your seat when I rose to speak, Mr Speaker—not because it is not always a pleasure to speak under your chairmanship, but because you will realise that I am being rather greedy this evening, having secured an Adjournment debate on pre-payment meters and fuel poverty. I think there is a link between the two topics of debate, and it is a pleasure to follow the hon. Member for Brigg and Goole (Andrew Percy), who I thought seemed to be arguing rather dangerously in respect of financial education: those who can’t should teach.
I congratulate my hon. Friend the Member for West Bromwich West (Mr Bailey) on the work he, his staff and members of the Select Committee did in bringing this report before us. At last, we are seeing some serious progress on regulation of the payday lending sector. I also congratulate, and express the gratitude of my constituents to, my hon. Friends the Members for Sheffield Central (Paul Blomfield) and for Walthamstow (Stella Creasy) on the work they have done, because it takes real courage to take on payday lenders, especially when a Member does not have the support of the whole Committee. To go out there alone to take on these payday loan companies can be a terrifying experience.
My first encounter with Wonga was very similar to that of the hon. Member for Belfast East (Naomi Long), so we must catch up later. I received an e-mail, saying that I had previously secured a loan from them and they wanted to be back in touch. I tried to contact the customer care service and then phoned. They told me it was a fraud, so I asked why I was being put through to customer care service when I replied to their e-mail, but I really got nowhere. My next encounter with Wonga was when a constituent had two loans fraudulently taken from her account. I put out a press release on my website, mentioning legal loan sharks. Within a few moments, Wonga was on the phone in my constituency office. It was presumably whoever it is who tries to promote the good name of Wonga. He said, “If you have a problem with Wonga, I really wish you had lifted the phone to us.” I explained that I had not found phoning to be the most fruitful way of dealing with Wonga in the past. He then said that my description of them as “legal loan sharks” was not helpful to Wonga. I responded that I had not waited 50 years to come to Parliament to be helpful to Wonga. The conversation pretty much ended at that stage!
We have definitely reached the stage where we need regulation and reform of this sector. The hon. Member for East Hampshire (Damian Hinds), who is unfortunately not in his place—I am sure he has something very pressing to attend elsewhere—spoke in praise of markets. I do not want to bury them, but I believe different markets work in different ways. In the food retail sector, for example, competition drives down prices. Generally, people in areas of larger population concentrations have access to other companies offering the same service. Other markets, however, do not operate in that way, and it almost seems that the different players are colluding to drive up the price rather than drive it down. I certainly think that that applies to payday lenders.
The hon. Member for Brigg and Goole spoke about walking down his local high street. I urge him not just to walk down it, but to stand in it and campaign against payday lenders. I did that in Musselburgh high street, in partnership with my Labour colleague in the Scottish Parliament, Kezia Dugdale, whom I must praise for her work on the Debtbusters campaign. I was goaded by the hon. Member for Edinburgh West (Mike Crockart) to put on a shark costume in the high street, which I duly did. I must add that, after I had positioned myself outside the premises of each of the four providers of expensive unregulated credit in Musselburgh, each one came out and challenged me about my right to be on the pavement.
I think that it is time for action, and that it cannot come soon enough. I had the strong impression that people in Musselburgh did not like the fact that those shops were in their high street. I agree with my hon. Friend the Member for Makerfield (Yvonne Fovargue) that we should look at other sectors as well, including pawnbrokers. One of them kept saying, “We do not lend money”, but there were signs all over his shop saying “cash loans”, which seemed to contradict that. The whole sector needs a thorough examination.
We need to look at the total cost of credit. I realise that that will be difficult, but we must find a way of doing it. We also need to deal with advertising as rigorously as we have dealt with it in the alcohol industry. Advertising should not just make the facts clear, but should not be able to glamorise credit.
I think that we are now seeing a cross-party attack on payday loans, along with a wish to attract people to credit unions and create more of them. We should put pressure on payday loan companies not to charge huge interest rates and huge fees for late repayment, and try to give people access to credit at an affordable rate through credit unions.
I want to finish what I was saying about advertising, but I shall then say something about possible alternatives.
I was very disturbed and disappointed to learn that Kerry Katona was advertising Cash Lady. I saw no reason for her to be involved in a project that was aimed specifically at women. Car insurance is a different matter, because, as we all know, we are better drivers than men, and a separate service may be appropriate in that context. I was pleased when many people complained and the advertisement was removed, but Kerry Katona then appeared in another one. Advertising in this sector must be rigorously controlled.
The hon. Member for Tiverton and Honiton (Neil Parish) mentioned alternatives, and I agree that we should think about them. My hon. Friend the Member for Edinburgh East (Sheila Gilmore) said that credit unions needed to have the same sort of presence as payday lenders. Unfortunately, the credit union shop in East Lothian closed, and credit unions have no high street presence in the area. That makes it far more difficult to reach out to people, and makes competition much more difficult. One Member said that the sector did not need support, but I think that that is unlikely. We do not want the cost of credit from credit unions to rise, because that would defeat the purpose.
The hon. Member for Dover (Charlie Elphicke) spoke of watching “It’s a Wonderful Life” at Christmas, with its talk of mutuals and building societies, and the Building and Loan company. This evening’s debate has been cordial, apart from, as ever, the contribution of the hon. Member for Stratford-on-Avon (Nadhim Zahawi), who also reminded me of “It’s a Wonderful Life”, because in his account of where we are today he seemed to be saying, “Imagine what it would have been like if the Conservatives had never been in government.” I think that the hon. Gentleman was the only Member who—as he often does—struck the wrong chord. There are links between increased poverty and welfare changes, and the fact that more and more people are having to turn to payday lenders.
The Select Committee report and the debate are welcome, and I hope that they will result in more protection for many of my constituents, such as those who came out of Loretto primary school to find people from the cash store in Musselburgh giving balloons to the children and providing fliers that did not contain any information about the cost of borrowing money. I hope that we shall see an end to practices of that kind, and an end to some of the poverty that is driving people to these lenders.
I congratulate my hon. Friend the Member for West Bromwich West (Mr Bailey) on securing this important debate and on his continued chairmanship of the Business, Innovation and Skills Committee. I thank my hon. Friend the Member for Sheffield Central (Paul Blomfield) for promoting the charter on payday lending, whose terms I strongly endorse, and I hope that the Government will respond positively and speedily to the important recommendations in our Select Committee’s report on advertising and marketing as well as on access to real-time data on a person’s suitability to a specific loan. The Committee has also called upon the Financial Conduct Authority to extend this practice of access to real-time data, concluding that if it is not properly established by this July, the FCA should make it obligatory for all regulated lenders seeking to provide payday loans or similar financial services products. I hope that the Minister in replying to this debate will say that is precisely what the Government’s approach will be. On roll-over loans, which can see an individual’s effective interest rate on debt escalate rapidly, a limit of one roll-over for each payday loan would prevent much unnecessary hardship for our constituents across the country.
In this debate we have heard a great deal from Members, representing the views of their constituents, on the purpose of markets. The views of my constituents are that where markets do not serve the public interest and serve only the purpose of maximising profits for a very few, we in this House are right to call for them to be reset and rebalanced in order to provide greater fairness for consumers, and in this case greater justice for those on the lowest incomes. Sadly, however, the Government’s recent proposals may be too late for many people in Scotland who are facing escalating charges from using payday lenders. It is clear that the cost of living crisis is biting hard in areas like mine, where 16.5% of all people in work earn less than the living wage, including nearly 3 in 10 of all part-time workers. The mean wage, at just £342 a week, fell in cash terms by nearly 2% in the year to last April, while at the same time prices were rising at a rate of 2.7%, meaning ordinary workers in my constituency were nearly 5% worse off in the year to last April.
As prices have outpaced wages for such an extended period it is no wonder that people have had no choice but to run down their savings or seek recourse to credit to try to maintain what they can of their previous living standards. This means that they are increasingly likely to seek payday lending from a proliferating range of shop-front lenders in Springburn, Dennistoun and other areas in my constituency, but they also seek lending online or increasingly by following up adverts that they have watched on television. My hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) was on to the very important point that the under-employment in our economy, with nearly 1.5 million people trapped in part-time work but seeking further hours, is driving the sense of weak productivity, and the response to the growing crisis people are facing with rising personal debt is a very poor one.
Scotland has the highest volume of payday lending in the UK according to research published by StepChange last November. Last June, some 10.3% of total client debt in Scotland was the result of payday lending, compared with 9.4% in England, 8.4% in Wales and 7% in Northern Ireland. The research also shows huge increases in arrears in priority debt areas such as rent, mortgage, gas and electricity, particularly in the preceding six months. Moreover, payday borrowers in Scotland had the highest value of council tax arrears in 2012—nearly double the UK average at £1,312.
StepChange presented its data in terms of the Scottish Parliament constituency boundaries rather than UK Parliament boundaries, but the picture it painted of the payday lending problem in the two constituencies which make up Glasgow North East is equally depressing. In areas with some of the highest material deprivation in Scotland, we see people falling into severe payday debt interest rate problems, with 37% of people in Maryhill and Springburn having council tax arrears averaging £1,504, and half—50%—of all StepChange clients in Maryhill and Springburn with rent arrears averaging £620. That is the scale of the crisis that is being faced in some of the poorest parts of this land.
To deal with the crisis, the Government should be encouraging the FCA to use the powers it has at its disposal now to implement a total cap on the costs of lending, to ensure that the consumer credit market serves the consumer, rather than the other way round. We also know that our credit unions are experiencing the sharp end of this cost of living crisis. People are using them to save for the things they need—such as a washing machine, when theirs breaks down—when their pay and savings can no longer stretch to them.
Nearly a fifth of the payday lending industry’s profits come from just 5% of loans, which are rolled over four or even more times. Most people would think it fair if those companies faced a higher levy on their profits, so that a much-needed doubling of Government support for our credit union sector could be provided. I urge the Government to do all they can to implement the Select Committee’s findings, but that would simply be a first step to ensuring that, together, across the House, we could lift millions of vulnerable people from the life of misery that deeper levels of personal debt caused by unscrupulous and irresponsible payday lending are putting them into.
I thank my hon. Friend the Member for West Bromwich West (Mr Bailey) for introducing this important debate and for chairing the Business, Innovation and Skills Committee. I want to make four points, and I shall do so as quickly as possible, not least so that I can listen to my hon. Friend the Member for Sheffield Central (Paul Blomfield), who has done some excellent work on this matter. I am keen to hear what he has to say.
First, I endorse the Committee report’s recommendation for limits on payday loan companies’ advertising. That should apply particularly to advertising on children’s television channels. There should also be health warnings in relation to advertising, as the report suggests. Secondly, I endorse the report’s recommendation about ring-fencing the levy that is to be placed on payday lenders, in order to fund debt charities. Those charities do excellent work, and I welcome any measure that would ensure that the payday lenders funded them.
My third point relates to payday lenders on the high street. There is no doubt in my mind that there are far too many of them, and better regulation will be critical in that regard. There are 10 payday lenders on Rochdale’s main shopping street alone. Their presence creates difficulties for the regeneration of our high streets, and I endorse Labour’s proposals to change the use classes available to local authorities in order to limit the number of payday lenders on high streets. It has already been mentioned that local authorities could do more to help credit unions to gain a greater presence on the high street. I supported the Manchester credit union in setting up a pop-up shop in Rochdale for three months, which was extremely popular. Local authorities could do more, not least by implementing a 100% business rate waiver for credit unions to enable them to have a greater presence.
While I am on that point, various alternatives to payday lenders have been discussed today. The directly elected mayor of Salford is proposing to establish the bank of Salford, which would see the local authority getting directly involved in providing an alternative to payday lenders. I thoroughly endorse that proposal, and I will be interested to see how it develops.
I am conscious that there has been a lot of cross-party consensus in this debate, and I do not want to make anybody’s chips soggy by moving on to something more contentious, but I want to make an important point about the Government’s effect on the discretionary social fund. It used to be administered by the Department for Work and Pensions, but from last April the Government passed it down to local authorities to manage. There has been variable performance by local authorities in how effective they have been in getting that money to people in desperate straits. So the Government, first, reduced the social fund budget and then passed the responsibility to local authorities, and we heard just before Christmas that they intend to scrap it completely from 2015. It appears that they would rather the private sector, through payday loan companies, met this need. We should remember that this crisis fund has been a safety net for people at a critical time, and the Government are now proposing, in effect, to privatise it, because they want payday lenders to step into the breach to meet that need. That is wholly unacceptable, and people will reach their own conclusion as to why the Government are so enthusiastic about payday loan companies providing this safety net instead of the Government. The Government should remain the lender of last resort and provide a safety net when people are really in crisis. At that point, I will leave the Floor open to my hon. Friend the Member for Sheffield Central.
On this occasion, it is a pleasure to be called at the end of the debate, Mr Speaker, because it provides me with an opportunity to reflect on the contributions, where two things have stood out. The first is the deep concern on the issue and the positive points that have been made about the Financial Conduct Authority and its proposals. The second is the unanimity across the House that the FCA is moving in the right direction, but not going far enough. After it launched its proposals in October, Members from every party represented in this House came together to launch the “Charter to Stop the Payday Loan Rip-off”, not only outlining a holistic intervention on how we could regulate the sector, but critiquing the FCA proposals. That has subsequently been backed by civil organisations ranging from Unite to the Women’s Institute, and by councils of all political persuasions, as the hon. Member for North Swindon (Justin Tomlinson) pointed out. It is also supported by every major debt advice and consumer organisation.
Many Members have cited shocking statistics and research to back the case for further action, but I thought I would share the case of one Sheffield woman and ask how she would be helped by the FCA proposals. She has asked to be kept anonymous so let us call her Susan, and her case is all too typical. She was struggling to keep up with bills and to make ends meet, she took out a payday loan to help tide her over but still found that she was short at the end of the month. By rolling over the initial loan and taking out new ones to pay off that debt, she found herself in a spiral of increasing debt, with three payday loans, costly default fees and mounting interest.
My first question is: would the FCA proposals on advertising have protected Susan? She took out that payday loan because of the advertising she had seen. Too often, such advertising makes borrowing look easy and stress free. The hon. Member for Gosport (Caroline Dinenage) made the point that the FCA is focusing on tackling misleading advertising, but we should be focusing on tackling irresponsible advertising. We have all seen “Wonga: the movie”, which illustrates the problem of advertising that makes loans seem aspirational and life-improving, whereas payday loans are in fact the worst form of credit anybody could take out. So Susan would have been failed by the proposals on advertising.
My second question is: what about roll-overs? Once Susan had taken out her first payday loan, why was she encouraged to keep rolling it over? How could she have taken out two further payday loans when she was clearly having difficulty repaying the first one? The FCA’s proposal to limit the number of roll-overs to two is a step in the right direction, but the Select Committee is right to say that there should be a limit of one. Is the need to roll over more than once not a sign that the borrower is in trouble?
Similarly, we must look at repackaging loans and the problem of multiple loans. On the issue of multiple loans that pushed Susan into the spiral of debt, I recall that in a debate on 11 December on the Financial Services (Banking Reform) Act 2013, there was great agreement across the House on the need for real-time data to prevent irresponsible lending. As my hon. Friend the Member for Makerfield (Yvonne Fovargue) pointed out, Callcredit, with great support from Wonga and the Consumer Finance Association, announced the establishment of some data sharing. However, that scheme will not stop irresponsible multiple lending.
Let us consider these questions. Are all lenders signed up to this data sharing? If not, and Susan went to one that was not, they would not know that she was struggling to pay back her initial loan. Will the scheme identify lenders who are breaching FCA rules by, for example, rolling over loans too many times, and report them to the FCA? If not, Susan’s loans could be rolled over, just as now, with the FCA left to play catch-up once it has received its six-monthly data report from lenders. Will it establish a benchmark of affordability and assess whether that is being met by lenders? If it is not, will it report those lenders to the FCA? If it does not do that, Susan will still be trapped by unaffordable loans. The answer to each of those questions is no, so we still need the FCA to establish a database, require all lenders to use it, and use the data to enforce its rules. The case for that database is as strong now as it ever was, and I hope that the Minister and the FCA will pay heed to it.
There is also the issue of the continuous payment authorities. I welcome the fact that the FCA is suggesting that CPA administration be limited to two unsuccessful attempts, but it does not go far enough. It still provides lenders with the opportunity for a strategic intervention into somebody’s account to drain them of all their resources at a critical point in the month when they need that money for rent and other vital payments.
The code of practice that the sector has established, to which my hon. Friend the Member for Makerfield referred, suggests that lenders should provide three days’ notice of using a CPA, and yet, assessment of the sector by Citizens Advice suggested that 60% were not complying with their own good practice. The three days’ notice should be accompanied by a reminder of the right to cancel, which has been deliberately obscured in the case of many people who have got into difficulties with CPAs. I agree with the hon. Member for Worcester (Mr Walker)—I will be supporting him tomorrow morning—that we should use the opportunity of the new levy on payday lenders to increase the overall resource that is available to support free and independent debt advice, which has grown in response to the growth of the payday lending sector.
The hon. Gentleman has talked about being able to cancel the CPAs. He said that only 23% of lenders were explaining the situation, but the figure for those lenders explaining the ability to cancel is even worse, standing at only 5%. Does he agree that that is absolutely abysmal?
I agree with the hon. Gentleman. The level at which the good practice surrounding the administration of CPAs has been obscured by lenders has caused enormous difficulties for many people. It underlines why we need a clear regulatory framework for the use of CPAs, in which any lender participating in the sector must comply.
My hon. Friend the Member for Glasgow North (Ann McKechin) was right when she said that, although the FCA is moving in the right direction, it is currently behind the curve. I hope that it listens to the debate tonight, gets itself ahead of the curve and listens to the voice of Parliament.
We have had a very thoughtful and interesting debate this evening, with 17 speakers in total as well as interventions. Most of the speakers seemed to reach a consensus on a way forward, although, as my hon. Friend the Member for East Lothian (Fiona O'Donnell) pointed out, the slight exception might be the hon. Member for Stratford-on-Avon (Nadhim Zahawi), who has just returned to his place. He tried his best to be consensual, but every now and again he was straining at the seams—[Interruption.] I hear someone say that he cannot help himself.
We heard an excellent speech introducing the report from my hon. Friend the Member for West Bromwich West (Mr Bailey), the Chair of the Select Committee on Business, Innovation and Skills. I know that we have had a number of debates on the issue and I wondered whether we would be able to reach consensus on the report this afternoon. That has happened and, as a number of hon. Members have said, this is an important time for such a debate, not least because the FCA is considering the responses to the consultation and will be publishing the rules shortly. It is also debt awareness week. I always feel that we should be concerned by debt awareness week—it is good for us and for the organisations that support people as it focuses our attention, but for many people the harsh reality of debt is something of which they are aware not just for one week of the year but every single day.
We have heard once again this evening examples of the cases with which we are all only too familiar that involve people in our constituencies. The Chair of the Select Committee highlighted a number of issues with advertising. He put it very powerfully when he talked about the suggestion that there could be a one-minute verification to decide whether someone could access such a loan. That highlighted why we need action on advertising.
My hon. Friend the Member for West Bromwich West also highlighted the impact of television advertising on children and young people aged 12 to 15. I have raised concerns about the issue in a previous debate, and about how advertising normalises payday loans and such borrowing. Someone might not normally consider such an option, but it can be instant and they can do it without thinking. I was also concerned to hear the story from a teacher about children’s awareness of the payday loan sector as one way of getting the things that one wants quickly. A strong case has been made this evening about advertising on television during daytime, early evening and children’s programmes.
My hon. Friend also made an important point in his opening speech about the need for the Advertising Standards Authority to work with the industry on a code of practice. If everyone were to come together to work on the matter and agree on how to take things forward, that would be excellent. If that does not happen, however, and if there is any delay, we should be prepared to ensure that action is taken.
My hon. Friends the Members for Glasgow North (Ann McKechin) and for Glasgow North East (Mr Bain) raised some of the particular concerns of the city of Glasgow. Let me take this opportunity to pay tribute to the new scheme introduced by Glasgow city council whereby pupils going to secondary school for the first time will be given the opportunity to have a credit union account, with £10 put into each account. That is one way of providing financial education while working creatively with the credit union movement in the city.
A number of Members stressed that it is now time for the FCA to act and various evidence was given from the CAB and StepChange about the level of debt. My hon. Friend the Member for Makerfield (Yvonne Fovargue) raised concerns that she has pursued for a long time now about the database and access to real-time information. A number of hon. Members talked about the Callcredit announcement and questioned whether it went far enough, as it does not necessarily provide real-time information on how decisions are made. That must be considered in more detail because, essentially, it is no good having information if it is not up to date.
As we have heard, indebtedness is not a new issue. As a former social worker, I well remember spending a lot of time trying to work with families who had to borrow money to pay for the basic necessities of life, without understanding the ongoing costs and how they would pay the money back. Of course, access to online systems and the “press the button, do it now” approach of the payday loan companies make it even easier to borrow now than in the days when the payday lenders of the time went around the doors and persuaded people to take out loans.
We heard some interesting comparisons with work that has been done in the US, Canada and Australia, particularly on roll-overs, and some good questions have been asked. For example, if someone cannot deal with one roll-over debt, why on earth would we want to let them have a second roll-over debt without that being challenged? We have heard concerns about the fact that payday originally meant payday. Of course, now it does not always relate only to people who are in work; many people on benefits and very low fixed incomes are also encouraged to take out these loans.
We have heard concerns about the continuous payment authority and people not understanding what they were getting into. We have heard a call for mainstream banking services to look more at how they support people on low incomes and the important point about financial education being about not only what happens in school but what happens particularly at key points in people’s adult lives, when there is an opportunity to intervene and to work with people to ensure that they understand what they are getting involved in.
A couple of hon. Members, including the hon. Member for Belfast East (Naomi Long), mentioned fraud. We heard from my hon. Friends the Members for City of Durham (Roberta Blackman-Woods) and for Rochdale (Simon Danczuk) about the implications of the planning system and the problems of payday loan companies opening shops in the high streets.
My hon. Friend makes an important point, but I do not have time to develop it now because I must now come to a conclusion.
I hope that the payday lending industry will understand the strength of feeling in this debate. To be fair, some Government Members said that they had come round to our way of thinking and are now prepared to back some of the actions that we have been calling for. The industry should look at that. The FCA should take note of the issues that have been raised this evening, and it should listen to the calls for action and the suggestion that it has perhaps not gone far enough.
I will finish by congratulating again the Business, Innovation and Skills Committee on the thorough work it has done on the issue and, indeed, all the campaigners who have brought it into the mainstream of opinion and concern, rather allowing it to be seen as something on the margins.
I congratulate hon. Members on securing this debate, and balanced and thoughtful contributions have been made by hon. Members on both sides of the House. In particular, I thank the hon. Member for West Bromwich West (Mr Bailey) for his contribution and his work on the issue in chairing the Business, Innovation and Skills Committee.
I recognise that the issue has caused concern not just in the Chamber but across the country. I should like to reassure all the hon. Members who have spoken today that the Government are taking decisive action to protect borrowers from the harm caused by payday lenders and that we are fundamentally reforming the regulatory system that governs them. I will do my best to answer hon. Members’ questions, but first I should like to take a little time to set out the main course of action that is being undertaken.
As many hon. Members will be aware, thanks to the changes made by the Government, the Financial Conduct Authority will take on new consumer credit responsibilities from the Office of Fair Trading in April. The OFT has done a good job with its powers and resources. However, the FCA will have far stronger powers than the OFT. It will be a regulator with teeth. It will have the power to set its own rules, rather than having to wait for the Government to pass legislation each time a new problem arises. That will put it in a stronger position to keep pace with a fast-moving market.
Furthermore, for the first time those rules will be binding on lenders. The FCA will have far stronger powers to enforce breaches of its rules and standards. For example, currently the OFT can fine up to a maximum of only £50,000, whereas there is no ceiling on FCA fines. For the first time the regulator will have powers to award redress to wronged borrowers. The FCA will thoroughly assess every single lender over the next two years. Those that are not fit to trade will be ejected from the market. It will approve key executives to ensure that they are personally accountable for the way their firms operate. In short, we are moving from PC Plod to Sherlock Holmes.
It is encouraging to see that the FCA is already flexing its regulatory muscle. It set out proposed new rules in October, as we have heard today, including: a cap on roll-overs; curbs on the use of continuous payment authorities; and mandatory risk warnings on adverts. The Government, as many Members will know, have welcomed the FCA’s proposals, and we look forward to its confirmation of the final rules next month.
Our absolute priority in this area is to ensure that the FCA can clamp down quickly on the causes of harm in the payday lending market, particularly the unfair and extortionate cost of borrowing from certain payday lenders and the spiralling costs faced by those struggling to repay. We took the opportunity in the Financial Services (Banking Reform) Act 2013 to give the FCA a clear mandate, and indeed a duty, to put a cap on the cost of payday loans by the beginning of next year, which means that it will not have to spend precious time making the case for a cap and can instead focus on the best way of implementing a cap and protecting consumers from those unfair and damaging costs.
The FCA is already on the case on that front, and we should see rules to implement a cap in place this year. It will be not just an interest rate cap, but a cap on all fees and charges associated with a payday loan, including default charges and roll-overs, which many hon. Members made the case for today. The total cost cap will work alongside the regulatory interventions already proposed by the FCA to tackle decisively the causes of consumer harm in the payday lending sector.
I will endeavour now to cover some of the important points raised in the debate. A number of hon. Members mentioned real-time data sharing. The Government believe that lenders must make proper assessments of an individual’s ability to repay before they lend and that that should be based on accurate, timely and comprehensive information. The FCA is looking at real-time data sharing as an absolute priority and has committed to bringing about a real improvement in the way data are shared, including looking at the role of credit reference agencies and at international examples of data-sharing systems.
The FCA has warned the industry that it must improve the way data sharing works, including how quickly lending data are made available. A number of Members referred to last week’s announcement by Callcredit that it will introduce real-time data sharing from this April, which I think is a welcome step. However, if the industry fails to improve properly, the FCA has been absolutely clear that it will not hesitate to act. The Government wholeheartedly endorse both that message to the industry and the regulator’s commitment to action.
The hon. Member for West Bromwich West and several others rightly mentioned advertising, particularly advertising aimed at children. The idea that children might see payday loan adverts and then put pressure on parents to take out loans is very concerning. The Broadcast Committee of Advertising Practice, the body that writes the broadcast advertising code, is considering the extent to which payday loan advertising features on children’s TV and whether there are any implications for the regulation of the sector. However, it is important to note that recent Ofcom research found that payday loan adverts make up just over 0.5% of TV ads seen by children aged between 4 and 15. Many payday loan firms, including Wonga and those that are members of the Consumer Finance Association, have stated that they do not advertise on children’s TV. It is essential that all payday loan advertising is responsible and is not designed to target children. That is why payday loan adverts are subject to the Advertising Standards Authority’s strict content rules. I hope that I will reassure hon. Members when I say that the ASA will not hesitate to ban irresponsible adverts. In fact, it has a strong track record of doing so, including, recently, Wonga and Cash On Go adverts. I hope that I will provide further reassurance by saying that the FCA is consulting on new rules for consumer credit adverts, and it will have the power to ban those that breach its rules.
Several hon. Members mentioned affordability tests. The Government believe that it is crucial that loans are made only to those who can afford to repay them, so we welcome the FCA’s tough action to make sure that that is the case. This will include ensuring that firms have suitable and sustainable business models, including appropriate affordability assessments. The FCA has announced in its rule book consultation that it will transpose much of the OFT’s affordability guidance requiring lenders to check borrowers’ ability to repay loans sustainably into binding rules that will, for the first time, be enforceable with the full range of FCA enforcement powers. This package of measures should help to address the problem of lenders giving loans to those who will struggle to repay them.
A number of hon. Members rightly raised credit unions as an alternative for people looking for short-term credit. The Government believe that credit unions provide an invaluable service to people on lower incomes, offering sound financial advice and responsible lending. That is why we have already taken action to try to help the sector by, for example, increasing the interest rate that credit unions can charge, as we found that many—indeed, almost all—were making losses, and this was clearly not sustainable. The interest rate was therefore increased from 2% to 3% per month. We also have the credit union expansion project, with £38 million of Government money designed to modernise the sector. I want to do more for it, and the Government are considering what further action they can take.
I congratulate the hon. Member for West Bromwich West on securing this debate and thank all hon. Members for their thoughtful and balanced contributions.
I thank all Members who participated in this debate, particularly members of my Committee. An enormous number of contributions from across the House have brought to this Chamber the detail of Members’ experience and expertise, and in some cases some imaginative solutions.
There is clearly a serious problem, and the proposed measures on capping credit and interest rates are very welcome but will not in themselves be sufficient to deal with the scale of it. The issues raised included roll-overs, continuous payment authorities, affordability tests, real-time data sharing, free debt advice services, financial education, and advertising. Dealing with those is all part and parcel of a comprehensive solution to the problem. I recognise that the FCA does not have all the powers it needs to do so, and that requires Government to look at other means of addressing the issues. My hon. Friend the Member for Glasgow North (Ann McKechin) made a pertinent comment when she said that regulation is behind the curve. That is true. We must now ensure that the Government and Parliament are ahead of the curve in order that the appropriate measures are put in place.
Question put and agreed to.
That this House has considered payday loan companies.