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Credit Cards: Cost Regulation

Volume 635: debated on Wednesday 7 February 2018

[Steve McCabe in the Chair]

I beg to move,

That this House has considered regulation of the cost of credit cards.

It is a pleasure to serve under your chairmanship, Mr McCabe. I hope that by the end of the debate we will actually have done more than consider the cost of credit cards. This is a familiar place for me to come to raise concerns with Ministers about personal debt in this country. However, I hope that I get a better hearing today than I did several years ago, when I came here repeatedly to warn the Government about the dangers of payday lending, because I believe that we are again on the cusp of another massive personal debt crisis in this country. There are proactive things that we can do to tackle that, one of which is dealing with credit cards.

We have to be honest: this is a nation in debt up to its eyeballs. Individuals actually owe more than the Government, with total household debt standing at £1.23 trillion. Most of that total is mortgage debt, but £117 billion of it is from credit cards and loans—a 15% increase in the last couple of years alone. The average UK household now has £14,000-worth of debt, and that is expected to rise to £19,000 of unsecured personal debt by the end of this Parliament. It is little wonder that the number of people going bankrupt in this country is soaring. Indeed, the number of people taking out individual voluntary arrangements is also soaring.

I thank the hon. Lady for securing this pertinent and important debate. Does she agree that credit card companies must play their part in ensuring that small retailers are still able to use card machines as a payment option? It must be the credit card companies, not the small businesses, that pay the bill.

I appreciate that the hon. Gentleman has a particular concern. I hope I can convince him that the regulation of credit cards that I am interested in is about their cost to the consumer in the first instance.

I do not think the reason we have such a personal debt crisis in this country is rocket science. There is simply too much month at the end of the money for too many people. We now know that economic insecurity is the new normal, with at least 70% of Britain’s working population defined as “chronically broke”. Some 32% of UK workers have less than £500 in savings, and 41% less than £1,000. Almost 30% are desperately concerned about their debt, because it is not just about everyday living costs; it is about the financial shock that might come because someone loses their job or their relationship breaks down. Too many people live on that edge now.

It is worrying that, unlike in previous years when insolvency rates have increased so much, unemployment rates are still dropping. That tells us that people are in full-time work, but are still unable to pay the basic costs of living, such as utility bills and rent. Combine that with inflation increasing at about 3% a year and stagnating wages, and it is not hard to see why personal debt is booming in this country.

On credit card debt, a lot of people are suckered in with introductory interest-free periods and their credit limit being increased, to a degree where they end up putting a noose around their neck. Ultimately they are unable to repay because of their lack of savings, as the hon. Lady has already identified, and as a consequence they end up paying at exorbitant interest rates once the interest-free period runs out.

The hon. Gentleman prefigures much of what I will say about who I believe are the new Wongas in our society.

It is not possible to make the argument that the millions of people on zero-hours contracts and in temporary work can manage their repayments and can be confident about the amount of money coming into their households. With millions of people now self-employed, and more people in England likely to be employed in the gig economy than working for the NHS in a few short years, it is clear that insecure, precarious work and precarious finances are the new norm for millions of people in our country.

I thank my hon. Friend for securing this important debate. Many of my constituents rely on organisations such as Citizens Advice to support them when they are in dire credit card debt. At the West Hampstead Women’s Centre in my constituency, bespoke Citizens Advice surgeries often lead to referrals to specialist services, such as the face-to-face disability and debt service. However, since 2010, Citizens Advice has seen its funding slashed from £178 million a year to £99 million a year. Does my hon. Friend agree that, in addition to taking on credit card companies, we need to ensure that debt management services are protected as well?

I completely agree with my hon. Friend. The idea is that this is just a problem for a few hundred thousand people, but debt, worrying about debt and the causes of debt are mainstream concerns in this country. Debt management, debt advice and the work of Citizens Advice is very important, but I also believe that, when we see these problems growing again, there is a role for us to step in before they get any worse. I made a call to action several years ago about payday lenders. We did not listen then until it was too late. I hope the Government will listen now.

We know that not everybody is struggling, and that Britain is a nation of contrasts, where some people have seen their wealth balloon because of property and pension rights. However, we also know that there are too many for whom debt is just everyday life. It is debt on basic payments—on food, rent and travelling to work costs. We know that 25% of the UK population now struggles with debt. Not everybody is in trouble, but enough are, and the reason is the nature of the products they use to deal with their debt, particularly credit cards.

I hope the Minister will understand why we need to act, because credit cards are the acceptable face of modern debt for people. All of us have one; I am sure if Members were to open up their wallets and purses, they would have, if not one, then maybe two or three with them. There are 30 million cardholders in the United Kingdom. Indeed, the Financial Conduct Authority has been investigating the credit card market.

The hon. Lady has been very gracious in giving way. I appreciate that very much. Does she appreciate, as I and many others in the House do, the good work of Christians Against Poverty, church groups, Citizens Advice and those who step into the gap to give advice and help people to manage their affairs when they get into debt?

I happily join the hon. Gentleman in supporting Christians Against Poverty, which very kindly came and ran a workshop for activists in my local community not a few weeks ago, to help residents to understand what they should say to somebody who is struggling with debt.

People often do not see credit cards as debt because they are just a fact of life. We know that the Financial Conduct Authority will tell the Minister that the market is working well for most, and that people shop around when getting a credit card, are able to compare rates and understand what they are buying. However, the problem comes when we look deeper and see the connection between those who struggle with debt and the nature of the credit cards they have.

Credit card debt is £263 billion—about 15% of total household debt—but it accounts for half of all interest payments made each year. That is the first signal that we need to look more closely at the interest rates on these cards. A whopping £28 billion is repaid each year, which accounts for 41% of all consumer debt, up from 33% in 2008. The average balance of those making just minimum repayments—the zombie debtors, who are paying off the interest but not the capital—is about £5,000; that is what they owe. However, 15% of zombie debtors owe more than £10,000. Crucially, when the FCA looked into this, it found that 20% of the people who ended up paying interest on their credit card did not expect to do so when they took it out. The reason is that life does not always go the way we expect it to. Jobs disappear. Relationships break up. The cost of living gets higher and higher.

Little wonder that there are 5 million accounts that, with people making just minimum repayments, it is estimated it will take 10 years to pay off the balance. It is no wonder that four in 10 British adults are worried about their credit card debt. They understand that what seemed like the best way to manage their finances has quickly got them into a situation that they cannot get out of. Forty per cent of adults in this country say that they struggle to make it to payday and, of those, 30% say that credit card repayments are causing them the problem. The FCA has identified that; it has identified those people whom it would say are in difficulty because of their credit card debt. It considers more than half those people to be “potentially vulnerable” because they have few resources to fall back on, even if they are managing to make some repayments.

The FCA has also identified that one third of people do not really understand the interest rates that they are paying on their credit cards. Again, it is the point about interest rates and what it will actually cost people to use these cards, even if they are flipping between zero-rate-interest cards. It identified that people who switch are switching because they think that they are getting a better balance offer—crucially, they are not getting out of debt.

The point of today’s debate and raising this issue with the Minister is to ask him not to wait until the situation gets worse, because we know the consequences of waiting until it gets worse. Let us learn the lesson from those legal loan sharks, the payday lenders—the people who were lending £100 to people who were ending up paying an average of £260 back. They were using payday loans when they were unregulated to pay for their basic living; 53% of them were using them just as people are using credit cards—to pay for groceries and utility bills. They were paying for things that they could not go without. Three in five borrowers on a payday loan said that they could not go without the item for which they had taken out the loan.

Let me tell the Minister that when we do act—when we recognise the consequences of leaving a situation to fester, as we did with payday loans—it makes a massive difference. Bringing in a cap on the cost of credit saw a 45% reduction in the numbers of people going to the citizens advice bureau in difficulties with payday loans; indeed, there has been an 86% reduction since 2016.

These credit card companies are truly loan sharks pretending to be the good guys. We know that what matters is in the small print. Many of us may have looked at our own credit card interest rates and seen that they vary from between 0.8% and 2% a month, but we also know that those basic interest rates on credit cards have been rising over the past 11 years, from an average of 15% to 23% now. As the hon. Member for South Antrim (Paul Girvan) pointed out, the zero balance transfer deals have been lengthening, but what is happening is that the credit card companies are making up for competing to get people to switch, by increasing the interest rates. And that is before we get on to the credit cards for people who are in bad credit—the new Wongas: the Vanquises, the aquas and the Capital Ones, which offer interest rates of 30% to 60%.

The Minister will point me to the research by the Financial Conduct Authority that shows that about 45% of people borrowing on cards for those with bad credit have found them useful for building up a credit history, but let us think about the other 55%—those who, as the FCA has identified, are in severe or serious arrears as a result of getting these cards. I see Vanquis in my town centre in Walthamstow, preying on people.

The hon. Lady mentions the FCA. In December 2017, it published revised proposals that would see lenders reduce or even cancel credit card interest and charges for customers who are in persistent debt, so positive work is going on.

I thank the hon. Lady for pointing out the research that I am quoting and the paper that I have read. This is my concern. Having read exactly what the Financial Conduct Authority is doing, I think that it is missing a trick, and I am appealing to Ministers to intervene. Let me explain why.

We can look at companies such as Vanquis, which offers people £1,000 straight off—no credit checks, no questions asked. It is owned by Provident, which is a high-cost-credit legal loan shark. It targets people with the blithe claim that as long as they can afford the minimum repayment every week, they can rebuild their credit. Alternatively, we can look at the aqua credit card, with an interest rate, superficially, of 3.9%. If someone borrows £1,000 from that company and makes the minimum payments, they will have paid £480 within one year, £680 within 18 months, £800 within two years and £1,000 in interest by 28 months. Those figures reflect exactly the sort of lending and patterns of repayment and costs of interest that we recognised were wrong for payday lenders, yet now that is happening in the credit card industry.

There is a simple principle at issue here. We recognised that it was wrong to ask people to pay back more than they had borrowed; up to 100% was a fair amount of interest to be charging. Why have we intervened and said that that was wrong in the payday lending industry, but are letting it happen with credit cards? That is exactly what is happening: people are paying back in interest double what they have borrowed.

Yes, the FCA conducted a market study, and yes, parts of the market are working well for some consumers. Therefore, if we act where the market is not working well for the other consumers, we can stop these problems before they get worse. I do not understand how the FCA can justify not bringing the same lessons that we have learned from payday lending, about not asking people to pay back in interest double what they have borrowed, to the credit card companies, even though we recognise that that is wrong in the payday loan industry—but that is what has happened.

All the FCA’s remedies at the moment require people to have the cash to be able to act—to be able to make quicker repayments and to be able to pay back earlier—when actually what we are seeing is a nation that does not have spare cash in its pocket, let alone when facing economic shocks. These companies are entering into voluntary agreements with the Financial Conduct Authority. We are not learning the lessons of asking legal loan sharks, like turkeys, not to speak in favour of Christmas. These companies are making millions of pounds from pushing people into debt in exactly the same way as the Wongas of this world did, yet still the FCA is standing by.

There are things that we can count on in the coming months. We can count on the fact that the economic situation will still be uncertain for people, that there will still be precarious work as the new norm, that people will not be able to plan. We can count on the fact that the cost of living is still going to go up—that if we want to put food on the table, keep a roof over our head and put petrol in our cars to get to work, it is going to get more expensive. We can count on divorce, house moving and redundancy still being facts of life. And yes, we can count on the fact that some parts of these markets work well, but not enough of them do, so I am asking the Minister to learn from history. Do not wait until millions more British people are stuck in spirals of debt with credit cards. Do not think that credit cards are acceptable and high-cost credit and payday lending are things of the past. This market is mutating, but it is still firmly focused on exploiting communities such as mine, exploiting people in financial difficulty, exploiting people who have few options. If the FCA feels too timid to be able to act, then just as we did before, let us give it muscle. Let us bring in a cap on the cost of credit cards, just as we did with payday lending, and recognise legal loan sharking in this country for what it is. I look forward to what the Minister has to say.

It is a pleasure to serve under your chairmanship, Mr McCabe. I thank the hon. Member for Walthamstow (Stella Creasy) for raising this significant issue with characteristic passion. I will seek to answer the specific questions she has raised about the role of the FCA and how fluid the situation is.

Consumer credit, including credit cards, plays an important role in our economy, helping consumers to smooth their income, spread costs over time and cope with unexpected financial shocks. However, risk is inherent in any credit product, so it is vital that consumers are treated fairly and protected from unscrupulous or predatory practice. The Government recognise that and are working with the regulator to ensure that such activity is curtailed.

I think it will be helpful if I set out first what the Government have already done on consumer credit. Our vision is of a well functioning and sustainable consumer credit market that responsibly meets the needs of all consumers. That is why we fundamentally reformed regulation of the consumer credit market, transferring regulatory responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014. The Government have given the FCA a robust set of powers, designed to protect consumers, in three key areas. The FCA assesses every firm’s fitness to lend and it has put in place a binding standard on firms. The FCA requires all firms to assess each customer’s ability to repay. The hon. Lady gave the example of Vanquis being able to lend £1,000 without any checks. I repeat: all lenders must make that assessment of their customers’ ability to repay. Firms must also treat customers who fall into arrears fairly. Thirdly, the FCA monitors the market. The characterisation of the FCA as passively waiting for a crisis does not do justice to the actions it has taken. I will go on to set those out and describe how they are still under review.

Focusing on the areas that are most likely to cause consumer harm, the FCA has a broad enforcement toolkit to punish breaches of its rules. The FCA’s enforcement arm supports its objectives by making it clear that there are real and meaningful consequences for firms and individuals who do not follow the rules. There is no limit to the fines it can levy. Crucially, it can force firms to provide redress to consumers. For example, in October 2017 the FCA announced that BrightHouse, a rent-to-own firm, will pay over £14.8 million in redress to customers in respect of agreements that may not have been affordable and payments that should have been refunded. That is just one example of the effectiveness of the FCA enforcement action. In total, the FCA issued fines of nearly £230 million last year, and as of December 2017 it had secured £734 million in redress for more than 1.47 million customers in the consumer credit market.

I turn now specifically to credit cards. When the Government gave the FCA responsibility for consumer credit regulation in 2014, it sought to build a sound understanding of the credit card market and to assess whether it was working well in the interests of consumers. To that end, as the hon. Lady mentioned, the FCA conducted an extensive study of the credit card market between 2014 and 2016. It found that competition within the industry was working well for the majority of consumers, but identified concerns about the scale and extent of problematic credit card debt. Last year the FCA consulted on remedies to tackle persistent credit card debt and proposed a robust package of remedies to tackle the issues—

Order. There is a Division in the main Chamber, so we will have to suspend the sitting and you will all have to come back to conclude. We will suspend for 15 minutes.

Sitting suspended for a Division in the House.

On resuming

As I was saying, last year the FCA consulted on remedies to tackle persistent credit card debt. It proposed a robust package of remedies to tackle the issues that it identified in the market.

The Minister mentions that the FCA consulted on persistent debt. The FCA defines persistent debt as paying 100% in interest and charges on top of the principal repaid over an 18-month period. Given the evidence that that is exactly what people are doing on these credit cards, and the fact that we intervened and capped the cost of credit through payday loans when we saw that, will the Minister explain why it is acceptable not to do that for credit cards when it is okay to do it for payday loans?

I will come on to that. As ever, the hon. Lady is eager to intervene. Let me finish what I want to say, and I will give her the answer that she wishes to hear.

The remedies include requiring firms to take steps to encourage customers to repay debt quicker and to avoid getting into persistent debt in the first place. Where customers are not able to repay their debt in a reasonable period, firms will be required to offer forbearance. Firms will also be required to use the data available to them to identify customers at risk of financial difficulty earlier and to take appropriate steps.

The FCA’s rules apply to all credit card companies, including those that lend at the higher interest rates, some of which the hon. Lady mentioned, to customers with poor credit ratings. All lenders have a duty to treat customers fairly and to lend only to those who can afford to repay. We expect the FCA to publish a final policy statement soon, and I will look carefully at what it says to see how we can take this forward. It seems a bit unreasonable not to wait for the final policy statement before we conclude where the FCA has got to with it.

As an additional weapon in its armoury, the FCA has worked with the industry’s leading body, UK Finance, to secure a voluntary agreement with its members to restrict unsolicited credit limit increases, giving customers more control over their accounts. All customers will be made aware that they can choose not to receive offers, and customers in persistent debt will not receive any unsolicited credit limit increases at all. New customers will be given the choice of how credit limits will be applied to their account, and firms will make it easier for existing customers to decline offers of a credit limit increase by reminding them of their options.

The combination of existing FCA powers and the proposed package of remedies is a very robust arsenal.

No, I will continue.

The measures are a demonstrable commitment by this Government, the regulators and the industry to tackle structural issues within the credit card market. [Interruption.] If the hon. Lady did me the courtesy of listening, as I did to her, it would be quite helpful.

Thinking about the limits that should be put on the cost of credit card borrowing, which I think the hon. Lady referred to, it is important to note that the Government have already given the FCA the power to cap all forms of credit, and the FCA can do that if it thinks it is necessary to protect consumers. However, it is neither this Government’s mandate nor our role to intervene in a functioning and competitive market. In addition, a credit card cap would be inherently more complex than the price cap introduced on payday loans in 2015. Payday loans are fixed-term, discrete loans, whereas credit cards provide a revolving credit facility—they are quite different.

What the Government can do, and already have done, is ensure that there are regulatory checks and balances in place to ensure fairness. The FCA has said that it will keep the issue of a mandatory cap on the cost of credit, including credit cards, under review. The FCA will monitor the effectiveness of its credit card remedies, and can take further action if necessary.

The Minister has not answered my question. With the greatest respect to the Minister, I asked him a very specific question about the disparity between it being unacceptable for people with payday loans to pay double in interest what they had taken out, and those 5 million people who are stuck in 10 years-worth or more of credit card debt continuing to pay those rates. I would like his specific answer on that unacceptability.

I did directly explain that there is a distinct difference between the nature of a payday loan and a credit card facility. I explained that very clearly and I am sorry the hon. Lady did not hear it.

It will be helpful to set out some of the things that the Government have done with respect to dealing with people in financial difficulty. The Government are delivering on their manifesto commitment to implement a breathing space and debt management plan. The call for evidence on the breathing space scheme recently closed, and the Government have committed to consult on a policy design proposal in the summer.

We set up the Money Advice Service, which spent close to £49 million on providing 440,000 debt advice sessions last year. We are now going further to ensure that consumers can gain easier access to financial guidance and debt advice by creating a new single financial guidance body, which will bring together the Pensions Advisory Service, Pension Wise and the Money Advice Service. The new body will make it easier for consumers to get help with all aspects of their financial lives, as well as having a statutory duty to improve financial capability and to commission free-to-use debt advice. The Bill to create the new body is currently before the House of Commons.

I thank the hon. Lady for raising this issue—I acknowledge that it is very important—and for speaking with such fervour. I share some of the concerns that she has expressed. Millions of people in this country use credit cards regularly, and the Government are committed to ensuring that they are treated fairly and not encouraged to fall into persistent debt. I hope the hon. Lady understands that a cap on the cost of credit card borrowing is not an effective solution. It is a blunt, interventionist approach to a complex issue. The Government have given the FCA strong powers to take action, and the FCA is putting in place measures to tackle persistent debt in the credit card market. This is not a static issue, however, or one that I and the Government are not interested in examining on an ongoing basis. The Government and the FCA are committed to ensuring that it remains under constant review.

Question put and agreed to.


That this House has considered regulation of the cost of credit cards.