Debt: Interest Rates

Question

11:21:00

Asked By

Lord Higgins
To ask Her Majesty’s Government what steps they are taking to prevent lenders charging interest at annual percentage rates of over 100 per cent.

Lord Brett
My Lords, the Government share concerns over excessive interest rates charged by some lenders, and we have strengthened the regulation of credit  markets to address them. We continue to monitor the issues closely, including latest research. However, we are not currently persuaded of the case for an interest rate cap, which risks forcing low-income consumers into the hands of illegal lenders. Experts, including Citizens Advice, supported this position during the passage of the Consumer Credit Act 2006.

Lord Higgins
My Lords, I am grateful to the noble Lord for that Answer, but it appears that in the existing situation people are being exploited. Before Christmas, leaflets were put through people’s letter boxes offering loans of between £50 and £500 at an interest rate not of 100 per cent, but at a typical APR of 189 per cent. Does he agree that this is extortionate and likely to lead to serious problems for vulnerable people? Is this being done by people who are not licensed and, if so, are they being prosecuted? Or is it being done by people who are licensed, but the licensing authorities impose no restriction whatever on lending of this kind?

Lord Brett
My Lords, the form of credit that we are talking about is home credit or doorstep credit; shorter-term credit is also offered through Money Shop and the like. It is not always clear which type we are referring to. Basically, if lenders are unlicensed, they can be prosecuted. We strengthened through the 2006 Act the ability to do this. We created the ability to make complaints through the ombudsman for finance and of course we are trying to do all that we can to support laws in such situations.

One has to be careful about the APR. It looks extremely high, but companies that lend for very short terms argue that the cost is quite high. The APR can be deceptive. For example, if the noble Lord, Lord Higgins, were to loan me £25—that is not a request—and in two weeks I were to repay him and offer to buy him a pint costing £2.50 in the bar, on the grounds that that would be a reward, that would look quite reasonable, but it would be an interest rate—an APR—of 4,000 per cent. We have to be careful about this, but we have strengthened regulations and we will continue to monitor the situation.

Lord Howarth of Newport
My Lords, will my noble friend tell the House what the Government are doing to support the spread and development of credit unions, which, where they have been established, are very valuable for people who are poorly served by conventional sources of finance and which in present circumstances could have a particularly useful part to play?

Lord Brett
My Lords, my noble friend is absolutely right. The Government strongly support the use of credit unions. In 2004, we set up a growth fund, which is spending some £80 million up to 2011. It has made 120,000 loans, amounting to more than £52 million. Credit unions are a major source of low-interest loans, relative to those that we have been talking about, and we hope that that area of activity will expand considerably.

Lord Forsyth of Drumlean
My Lords, if the Government’s declared policy is to try to make available more credit at as low a rate of interest as possible, why are they persisting in charging penal rates of interest for their own provision of credit to the banks?

Lord Brett
My Lords, the noble Lord uses the pejorative term “penal”, but it has been explained in the other place and here why those rates of interest are being charged—they are part of the Government’s response to the credit crunch. In that sense, I doubt whether many people who are borrowing money from lenders in this area are too worried about the situation in the major finance industries. With all due respect, I think that the noble Lord’s question goes a little off the area of the Question on the Order Paper.

Lord Newby
My Lords, I declare an interest as a member of the MoneySense advisory board. Are the Government satisfied that enough action is being taken on financial literacy among children and adults so that they understand interest rates and so that, when they are given the opportunity to purchase various sorts of financial services products, they can take an informed view of what they are buying?

Lord Brett
My Lords, the noble Lord makes an important point: we need greater financial literacy among the whole population. In the past, people received an offer of finance, in a leaflet or other form, but had no way of finding out whether it was the best offer on the market. That situation changed in October last year with the launch of lenderscompared.org, a new website that allows individuals to make a comparison. Although children may not be as financially literate as we would wish, they are all, so far as I can see, IT literate and they will therefore be able to make use of that site.

Lord Elystan-Morgan
My Lords, does the Minister agree that, with more and more families falling into debt through no fault of their own, there is the strongest possible case for a thorough review of how the position of the vulnerable debtor can be further protected? Will the Government give particular attention to the possibility of extending the powers already vested in judges to strike out or amend unconscionably unfair and unjust provisions in loan agreements? I support the point about credit unions; at this moment, the most important contribution may well be to take more and more people out of the clutches of pawnbrokers and loan sharks by way of credit unions.

Lord Brett
My Lords, the last part of the noble Lord’s question concerns an area in which the Government are actively proceeding—that is, tackling the whole area of illegal money lending. Independent research suggests that 165,000 consumers and households in Britain are using illegal lenders and that some £40 million is loaned but £120 million is having to be repaid. In 2007, the money lending project was rolled out and the Government have committed £11 million to it. Since then, 410 illegal money lenders have been identified. Formal investigations have been commenced into 319 of those, 48 proceedings have been instituted, 28 prosecutions and enforcement actions are in the pipeline and a further 90 will be investigated shortly. The estimated value of the loan book total is £6 billion. Two hundred and forty-three victims have been referred to alternate legal sources of financial support and more than 10 victims have required other support, such as rehousing and protection. Therefore, the Government are taking action on this and, of course, the Consumer Credit Act 2006 considerably strengthened the OFT’s action in this area.

Lord De Mauley
My Lords, for all his protestations of sympathy, the Minister is surely aware that just before Christmas it was slipped out on the DWP website that the Government were planning to scrap interest-free emergency loans for the unemployed, replacing them with loans with a store-card level of interest of up to 27 per cent. Does he accept that he cannot blame this on the market?

Lord Brett
My Lords, I think that there has been some mischief, not so much in that question but in the questions posed before Christmas. People’s memories may be selective but I recall that, immediately after that announcement was made, Ministers in the other place went on record saying that that was not the case and that Social Fund loans via credit unions would not be subject to interest.