Payday Loan Companies

Mike Crockart Excerpts

Monday 20th January 2014 Commons Chamber

[Nadhim Zahawi]

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.

[Mike Crockart (Edinburgh West) (LD)]

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—

[Madam Deputy Speaker (Dawn Primarolo)]

Order. This is not a 40-minute speech.

[Mike Crockart]

I then received numerous texts saying, “Hi Boris, your loan application has been approved.” That surely shows that no real-time information was used at all.

[Nadhim Zahawi]

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.

--- Later in debate ---

[Paul Blomfield (Sheffield Central) (Lab)]

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.

[Mike Crockart]

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?

[Paul Blomfield]

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.