To ask Her Majesty’s Government what plans they have to cap charges made in the home credit market.

My Lords, I acknowledge the right reverend Prelate’s concern regarding home credit and his desire to protect vulnerable people. Evidence suggests that caps on charges could be detrimental to those on low incomes by risking a contraction in the supply of licensed credit, leading to an increase in the use of loan sharks. The OFT is reviewing the high-cost credit market, including caps on interest rates, and the Government will respond quickly when the results are published.

My Lords, I am grateful for that Answer and for the promise of thought and action in the future, because a large number of people are driven into deep debt by the home credit market. What action will the Government take to make it easier for credit unions to make loans, as they are a far better way of helping those in debt than home credit can ever be?

My Lords, I wholeheartedly agree with the right reverend Prelate about credit unions. We strongly support credit unions and we have taken steps to make them more accessible to vulnerable consumers, helping them to move away from high-cost credit. The growth fund has enabled credit unions and CDFIs to make over 230,000 loans worth £100 million to financially excluded people. We have also laid a legislative reform order which will put credit unions in a better position to grow and provide a wider range of services.

My Lords, I was surprised to hear the Minister dismiss the idea of capping charges, which can be astronomic. Can he tell us what is the highest rate that a person in the clutches of these lenders can be charged? Also, can he give us the Government’s definition of “usury”?

I cannot say what the highest rate is, but it could be something like 500 per cent—they are huge figures. We have looked carefully at introducing interest-rate caps, and we recognise that vulnerable consumers sometimes have little option other than to use high-cost credit products. However, the case for a rate cap is not clear-cut, and is not supported by consumer bodies—even though I have some personal sympathy with the idea. Introducing a cap could lead to lenders withdrawing from the market, denying vulnerable consumers legitimate sources of credit and leaving them no option but to resort to illegal, unlicensed lenders, exposing them to much higher borrowing costs and potentially violent methods for obtaining repayment.

My Lords, how can a loan at a rate of 500 per cent be described as legitimate?

My Lords, I do not think that I was describing it as legitimate. I was asked to give an estimate of the highest possible figures and I went on to say why we have not yet acted to introduce a rate cap. Research tells us that that would not particularly solve the problem. In countries such as France and Germany, where they have introduced rate caps, more borrowers than in the UK admitted that they or someone in their household had used an illegal lender.

The Minister referred to violence being used by loan sharks at the bottom end of the market. Is he satisfied that trading standards officers and the police have the resources that they need to crack down on loan sharks where they are known to operate?

My Lords, since 2004, the Government have committed £16.5 million to tackling illegal money lending. Initially, that covered two pilot areas—Glasgow and Birmingham—but was rolled out in 2007 to cover every region of England as well as Wales and Scotland. The Government will continue to fund an anti-loan-shark team in every region until March 2011.

My Lords, is it not the case that district and circuit judges have a wide discretion to brand as unconscionable high rates of interest and indeed any other oppressive condition in such a contract? Is it not time that every opportunity should be made to exercise that discretion, which enables courts to clamp down considerably if they are so minded?

I would not demur from the point made by the noble Lord.

Will my noble friend encourage our ministerial colleagues in the Department for Work and Pensions substantially to increase the loan facility of the social fund, which makes credit available to people on lowest incomes, including benefit incomes, at virtually nil rate and reasonable terms of repayment? That would surely be an appropriate way to drive out some of the completely hazardous and disgraceful rates—not just 500 per cent but 1,000 per cent at the lower end of the market.

I agree with my noble friend. There has already been some increase in the social fund and we will continue to try to ensure that that provides an opportunity for people to ensure that they get loans at a reasonable rate, especially at the vulnerable end of the market.

My Lords, in the continuance of support for credit unions, do the Government have any initiatives to assist in their start-up in localities and communities? One of the most difficult periods is in the earliest months of a credit union. It would be a great help to the public-spirited people starting them up if the Government could show some initiative in helping them, perhaps with preferential council tax on the premises that they often have to take at expensive rates in high streets.

I agree with my noble friend. We have taken some steps, as I said in Answer to the right reverend Prelate, to support credit unions. We have taken steps to make them more accessible to vulnerable consumers. As I said, the growth fund has enabled credit unions and CDFIs to make more than 230,000 loans worth £100 million to financially excluded people. We will do everything we can to assist the establishment of credit unions.

My Lords, what is the most extortionate example of a home credit agreement in the Minister’s brief?

I have already answered that, as best as I can. The figures available tell us that rates of interest are extortionate. I have suggested 500 per cent, some have suggested that they are even higher than that and they may be right. These are illegal activities and, with a range of measures, we are doing our best to stamp them out.

Is it not the point that even credit card companies, which are supposed to be respectable banks, are still charging extortionate rates in double digits—up to 20 per cent APR—when we have a base rate of only half a per cent? Is that not even more outrageous in the terms of financial services?

It might be a high rate of interest, but if we could reduce it from 500 per cent to the rates the noble Lord suggested, the people concerned might find that a considerable improvement.