Stella Creasy
Main Page: Stella Creasy (Labour (Co-op) - Walthamstow)Department Debates - View all Stella Creasy's debates with the HM Treasury
(12 years, 10 months ago)
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Neil Parish
I share that view entirely. At the start of my speech, I spoke about a financial health warning on a loan, including what the rate of interest will be. There should also be an example, perhaps showing what the principal amount would be to repay if one started with £100.
Stella Creasy (Walthamstow) (Lab/Co-op)
I support the hon. Gentleman. Does he agree even when people know the rates, they have little choice because they cannot borrow from any other type of organisation? Research shows that a quarter of these companies’ customers cannot get credit elsewhere, so even when they know the rates they have no option.
Neil Parish
The hon. Lady is right that parts of the population cannot borrow elsewhere, which is a problem. That is another reason for clear warnings, if not restrictions, on the rates of interest charged.
The problem is not just that there is a population who cannot borrow from anywhere else but that many companies and loan sharks knock on people’s doors. Credit is often dished out in cash, which is very tempting. Some people could, if they went to a great deal more trouble, secure money from proper lending companies at a competitive rate.
Stella Creasy
I have come here today to speak in favour of the new clause, and to vote for it, too, which I believe will be a powerful expression of the need to act to tackle the problems caused across our country by high-cost credit companies, or so-called legal loan sharking.
I promised when the House debated the issue previously that I would congratulate those who took action to protect vulnerable consumers, and I want to do so. I welcomed the announcement of the consumer credit review and the coalition agreement promise to tackle the cost of borrowing on store cards and credits, but it worries many of us that it is already overdue. To meet the timetable, that work will have to be done within the next two weeks.
Even more worrying for the Opposition is the fact that we have had to drag the Government kicking and screaming to the table to discuss high-cost credit, because the coalition agreement made no commitment to tackle it. There is still uncertainty about whether it will be tackled in the consumer credit review.
Andrew Percy (Brigg and Goole) (Con)
I am a huge supporter of what the hon. Lady is trying to do. I agree that there is concern about how quickly we are moving, but we had 13 years of her party’s Government. Can we try to keep this a cross-party matter? Members of all parties are concerned about it, so let her not bash the Government, and when I speak I will not bash the Labour Government for their inaction. Let us all try to keep it positive.
Stella Creasy
I very much hope that there will be cross-party agreement, but, as I will explain, I fear that that consensus is being broken for the purpose of choreographing coalition conferences. That worries me greatly. I hope the hon. Gentleman will agree that when so many people are suffering by having to pay the high costs of credit that companies charge, any delay is unacceptable, and I hope he will vote accordingly.
I know that we are not alone in wanting action as soon as possible. The campaign has the widespread backing not just of MPs or policy makers but of debt experts, campaigners and members of the public. They are deeply concerned that doing nothing to regulate these firms is feeding a growing crisis of personal debt for families across the country, and they want action.
I fear that I am going to end up condemning the Government today, because we are debating not whether to act, or whether regulating for a cap on the cost of credit would be effective, but when to do so: debating when, not if, is unforgivable.
Neil Carmichael (Stroud) (Con)
I am concerned that the action that the hon. Lady recommends might well drive people into the worse position of having to appeal to really rather unpleasant loan sharks. That must be the great worry.
Stella Creasy
The evidence on which that presumption —that myth—is based is very uncertain. I would argue that there is a strong parallel with the debates on the minimum wage and the fear that its introduction would drive companies out of business. We now know that that is simply not the case. Evidence shows that a cap on the cost of credit would lead to a fairer deal for consumers, for which we are arguing today. It is important that we get it right, given the number of people involved in the market. I ask Members to support the new clause because it proposes regulatory action now, given the consensus that there is a problem. It states that it covers
“other measures relevant to the high cost credit lending sector that may prevent consumer detriment.”
By consumer detriment, we mean lending that drags people into debt.
We might all agree that there is a problem in the market, and that something needs to be done, but the coalition’s choreography is getting in the way, and I fear that our constituents will lose out. In making the case for Government Members to change their mind about the political fancy footwork and instead dance with us to action now, I want to set out what the problem is, what is causing it, what could be done about it and why doing nothing, or even delaying doing anything, should not be an option.
This question is important when we are debating a Finance Bill, because we can use taxation and regulation to deal with social and economic problems. For example, we could tackle problem drinking by raising taxes on high-strength alcoholic drinks. Indeed, in Committee, the Economic Secretary to the Treasury said:
“We can see that such a measure will have a disproportionate impact on tackling problem drinking, because the change in taxation will make it less attractive for producers to make such strong products.”––[Official Report, Finance (No. 3) Public Bill Committee, 17 May 2011; c. 166.]
By the same principle, the Treasury could tackle problem lending by penalising companies that fail to meet certain standards in their provision of consumer credit.
The problems in the lending market make the issues clear. The UK has one of the highest levels of personal debt in the world. As of April last year, Britain owed more than £1.4 billion in private debt. As the hon. Member for Tiverton and Honiton (Neil Parish) pointed out, borrowing money is sometimes essential, whether to enable someone to pay for training or a house, or to start a business. Indeed, borrowing is critical for our future economic recovery. I am therefore saying not that we want to stop people borrowing, but that we want to stop problem borrowing. However, the current signs are that personal debt is on the rise, and that is a problem.
Pat Glass (North West Durham) (Lab)
Does my hon. Friend agree that the evidence suggests that this country is now becoming a haven for such companies, which are targeting this country because of the lack of regulation? Does she also agree that that is making things far worse for our constituents?
Stella Creasy
My hon. Friend is exactly right. It is not just evidence; the companies have specifically said that the lack of regulation in the UK compared with other countries makes it a target market for them.
We know that borrowing is becoming a problem for people. More than four in 10 people are worried about their current debt, and in recent months 4 million have taken on more debt than they ever have before. One third of families say that they have no emergency savings whatever. However, this debate is not about a lack of rainy-day money. The number of people who say that they are likely to exceed their overdraft limit has more than doubled in the past year, and the number of people who say that they are likely to use an unauthorised overdraft this month has nearly doubled since July last year, from 900,000 to 1.6 million.
That means that more people are getting into financial difficulties. In recent years, personal insolvency in the UK has reached a record high. On average, there are more than 160 personal insolvencies every year in each constituency, which is a dramatic increase since the start of the last decade.
New clause 11 covers not only those who are formally in financial difficulties but those who are affected by debt and who have not sought help. The proposal reflects the growing inequality in our society between those who can borrow affordably and those who cannot. Research by the Department for Business, Innovation and Skills shows that most households have a debt-to-income ratio of 10% or less, but that one in five households have debts worth more than 100% of their annual household income. There is growing evidence that such households are using multiple forms of unsecured credit—a mixture of high-cost credit and credit cards. Thirteen per cent. have four or more types of debt.
The question for many of us is this: who is borrowing? Eleven per cent. of lone parents use non-mainstream loans compared with just 3% of households overall. The Consumer Credit Counselling Service tells us that one in eight people who contacted it during the first half of 2010 were claiming jobseeker’s allowance. However, one thing that might concern many hon. Members is the growing evidence that the people who are suffering in this market are not just those whose incomes have always been fragile, but many middle-class families. Experian data show that the biggest increase in insolvency is among those with suburban mindsets—people who are in work, married and have kids, and who are trying to make ends meet.
Lorely Burt
Is it a matter of regret to the hon. Lady that the previous Labour Government presided over the greatest expansion of consumer credit in the history of this country? In their 13 years, the previous Government tried to do a number of things, but rejected the proposal in new clause 11. Does she agree that this Government, one year in, should be given the opportunity to finish their consultation and make proposals of which she might approve?
Stella Creasy
I am interested in the hon. Lady’s impression that consumer credit is a bad thing, because I do not agree. I would also be interested in her views on research by the Office for Budget Responsibility, which shows that as a direct consequence of the Government’s Budgets an extra £10,000 of debt is being put on to households. Perhaps she would like to comment on the implications of that for family finances. No? Then I will continue.
The problem is not just the high-cost credit industry but the nature of the industry and the way in which it operates, which is causing so many problems. What most worries many Opposition Members is that so many families are struggling. Indeed, we know that 46% of families say that they do not earn enough in a month to pay all their bills. Crucially, of that 46%, 10% say that the reason they are struggling is the repayments on high-cost credit. It is those very products that are pushing them into financial difficulty.
For the avoidance of doubt, I say clearly that I am not trying to put Wonga and the other companies out of business. I do not hold with the constituent of mine who argued that we should learn a lesson from Dante and put them in the seventh circle of hell, but we can make the credit market fairer for all concerned. It is important to set out, therefore, the kind of companies we are talking about and just how quickly this industry is growing in the light of recent economic circumstances.
Many people know about payday lending—the form of credit whereby a borrower gives a creditor a cheque or an authorisation to make an automatic withdrawal from their bank account. That is used as security for a short-term loan to be repaid, supposedly on the next payday. It is a long-established form of credit in other countries, but it is relatively new to the UK—and it is growing rapidly. By 2009, the payday lending industry was worth more than £1.2 billion, and the figures I have gathered from the Department for Business, Innovation and Skills, which were released under a freedom of information request rather than being put in the public domain, show that it is now worth £1.9 billion. Indeed, in its “Keeping the Plates Spinning” report, Consumer Focus estimates that payday lenders are expected to quadruple the scale of their operations in the UK in the next few years alone.
Richard Fuller
The hon. Lady says that the payday lending market was £1.2 billion in 2009. According to the Office of Fair Trading review of the payday loan market, it was £600 million. To clarify the situation, and for my education, will she explain the difference between the two numbers?
Stella Creasy
I will happily explain the difference between the two numbers. The hon. Gentleman might have heard me say that I made a freedom of information request to obtain the most up-to-date data from the Department, and it is a source of concern that Ministers did not share the information with MPs. Research shows clearly that the market has grown to £1.9 billion. If I tell the hon. Gentleman that 5% of the population have taken out a payday loan in the last year, representing 2 million, perhaps he will understand the discrepancy. Perhaps he might like to account for why the Government did not want to put that information in the public domain.
Richard Fuller
I just wish to point out to the hon. Lady that I think there is a lot of consensus, which I hope she does not destroy in her passion for this issue.
As a point of clarification, the 5% figure in the OFT’s analysis came not from the payday loan market but from participation in the high-cost credit market, which includes credit unions and credit cards. Given that my source is the OFT, perhaps she will clarify that point too.
Stella Creasy
I am happy to share the figures with the hon. Gentleman, although I am afraid to say that his interpretation is incorrect. One of the things that I have done—perhaps I am getting a reputation for it in the House—is my homework on this market, and I have sought as much accurate information as possible. That was why I made the freedom of information request, and I would be happy to share the data with him. One of the challenges is that the Government have information about how quickly this market is growing, but they are timid about confirming it.
Nic Dakin (Scunthorpe) (Lab)
My hon. Friend is setting out carefully and deliberately the challenges that people face. Does she agree that the exponential growth in this high-cost credit lending is the very reason the Government need to act to address this issue sooner rather than later, in line with the consensus across the House?
Stella Creasy
I absolutely agree. I am quoting research by the consultancy practice, R3. It is conducting surveys because it is worried about the mix and range of credit that people are taking out and the high-cost credit itself, which is causing people to get into debt. That is why I am passionate about tackling the problem sooner rather than later. Contrary perhaps to some of the briefings that hon. Members might have had from the payday industry, the majority of people borrowing from these companies are on comparatively low incomes. In particular, one in 10 UK payday customers has an income of less then £11,000, and 46% have incomes of less than £15,000 a year. It is evident how quickly high repayment charges eat into an already meagre wage.
Stephen Williams (Bristol West) (LD)
The hon. Lady just made the hypothetical point that a 2% increase in interest rates would cause those costs to rise. Undoubtedly that might be true were rates to rise, but they have not risen, and one reason market interest rates have not risen is that the Government are dealing with the deficit at a time when the Labour party has not come forward with any policies to tackle the emergency.
Stella Creasy
I hope that the hon. Gentleman is not being complacent about the cost of living, its impact on people in his constituency and the fears of many about what an interest rate rise would mean for their monthly mortgage payments. One thing that worries me is that a lot of people are borrowing just to make ends meet; they are borrowing not for investments, holidays or fancy televisions, but to pay their rent and mortgages and to put food on their families’ tables. His complacency about interest rates not rising any time soon is misplaced.
David Rutley
I have heard the hon. Lady speak with passion in this debate and others, and I respect the point being made. However, some of the points being made by Government Members are important, particularly those concerning fiscal constraint and household spending constraint. The gap in her argument is that it is vital that households bear down on their spending. It is not just about the cost of financing a television or whatever else; it is about not going for it in the first place. There is a wider scope for this argument. This debate is not just about the cost of the debt, but about people avoiding it in the first place by lowering their expectations of what they need.
Stella Creasy
I would be interested to hear the hon. Gentleman’s advice to the nearly 500,000 Londoners who are having to use their credit cards to pay their mortgage or their rent. Right now, people are borrowing to pay for everyday essentials, and I fear that he sounds a bit like Marie Antoinette saying that people should just eat cake. That is very misplaced, given the dire financial situation that many people are finding themselves in, certainly in my constituency and, I will wager, in his as well.
Indeed, Shelter’s research shows that it is not only people in London who are using their credit cards to pay their mortgages. There are 2 million people in this country who are doing it. It is horrifying to think of the situation that those people are getting themselves into, given the interest rates that they are paying on their mortgages, let alone the rates that they are paying on their credit cards.
We also know that changes in the cost of living affect some more than others. The Resolution Foundation points out in its low earners audit that those on low to middle incomes spend a higher proportion of their incomes on the goods and services that are hard to cut back, such as their housing, their fuel, their transport to work or the food that they put on their children’s plates. That is what the hon. Gentleman is talking about. Those low to middle income earners spend 40% of their spending on those everyday essentials, compared with the 26% spent by higher earners. One in five pensioners have had to cut back on essentials such as food because of the rising cost of living.
This is not just a demand-side issue; it is also about the way in which the high-cost credit market is stacked against the consumer. That is why I believe that the market merits regulation. In order to make its profits, the high-cost credit market makes use of a number of the attributes of the people who have to borrow from it and of the way in which the market is structured. As has been mentioned, a quarter of the customers of high-cost credit companies cannot access any other form of credit. Indeed, Consumer Focus’s research shows that many users of payday loans are unable to access mainstream credit such as overdrafts because they have already maxed them out. That means that they have no choice; they have no power to shop around for a cheaper loan. Also, they cannot build up a credit history that would show a mainstream lender, who might lend at a lower rate, that they could be trusted to pay a loan back.
Because high-cost credit companies have fixed costs, they make their money by repeatedly lending to people. That means that their business strategy is geared towards encouraging repeat borrowing and the rolling over of loans. Friends Provident has found that 29% of payday loans are refinanced, with the refinancing rolling over on an average of two occasions. Some 15% of home credit loans are refinanced and rolled over into a new loan before the end of their term. It is worth explaining what that means for the cost of borrowing from these high-cost credit companies.
One person who got in touch with me took out a loan of £650 with Wonga, in two instalments, to be paid back within a month. When the repayment date arrived, he found that he could afford to pay only the interest that had accrued on the £650, which was £163. The original £650 loan was then rolled over for another month. At the end of that month, he paid off the loan, which cost him another £858. That was the original £650, plus interest of £208 accrued in the second month. The clock starts ticking in the first month of these interest payments, which is how 4,500% interest rates are reached. The longer a loan is rolled over, the closer it can get to the 4,500% APR that Wonga charges. The process of rolling over meant that he had paid £1,021 for borrowing £650 over two months. It is difficult to see what level of cap on the number of roll-overs would make a difference in this market, because the industry consistently refuses to release information about its business model. We can therefore only guess at the impact that the number of roll-overs has on people’s debts.
Furthermore, we know that the rates charged by high-cost credit companies often do not reflect an economic rate, due to a lack of competition in the market, a lack of regulation to drive down costs, and the absence of any ceiling being set. I recognise that using APR is problematic in understanding the cost of borrowing, especially in the payday loans industry, but as a yardstick it can help us to illustrate the issue. We know that payday loans can cost 4,500% from Wonga. They can cost 2,100% from Uncle Buck, 1,200% from Payday UK, and 1,700% from KwikCash.
John Woodcock (Barrow and Furness) (Lab/Co-op)
I apologise for coming in late to the debate. My hon. Friend uses the same tube line as I do. Did she notice on the way in that one company was advertising on the tube, offering a decision by text within a minute for a loan at an APR of 1,734%. That cannot be right; we have to do something to crack down on it.
Stella Creasy
I agree absolutely with my hon. Friend. There is no ceiling on this market, which means that company rates are going up, not down. We also know about the lack of competition with other sections of the market. Provident owns 6% of the market. In 2004, the Office of Fair Trading referred the doorstep lending industry to the Competition Commission and, in 2006, its report confirmed the lack of competition. As Citizens Advice argues, however, the fact that these problems are getting worse, not better shows that the measures suggested in 2006 have not worked and that it is time to strengthen the intervention we make in this market.
Although I am an avid supporter of the credit union movement, it cannot at this moment present any kind of alternative to this market within any relevant timetable. Credit union membership is growing by 8% a year, but the payday lending industry alone is three times as big as it was two years ago. Credit union lending therefore remains relatively small scale, equivalent to just 5.9% in value terms of the high-cost commercial sector. As a consequence, it is unlikely to exercise any real competitive restraints on the prices in the high-cost credit sector.
With all the signs that this market is growing exponentially, this new clause and the review it recommends would allow us to look at a number of issues on how to tackle it effectively. First, it could consider excess profits—
Neil Carmichael
I thank the hon. Lady for giving way. I think that credit unions are really important. I have promoted them in my own constituency and I will continue to do so. I have joined one myself to demonstrate that it is something that we should all think about. Surely it would be a good idea to put out a more positive message about the role credit unions can play and encourage people to start thinking about being responsible in the management of their finances through the use of credit unions.
Stella Creasy
The hon. Gentleman is being a little unfair to accuse me of not putting out a positive message about credit unions, given that I worked long and hard to set up the Waltham Forest community credit union and to secure it more than 4,000 members from my borough. My point is that when only 2% of the British public are part of a credit union, it cannot be the answer to the problems caused by these companies. The question is how to get the right mix, and I believe that regulation needs to be part of that mix. Of course extending access to affordable credit is part of the solution, but it will take decades for credit unions to provide a serious alternative to these companies from which people are borrowing and getting into debt with now.
Frank Dobson
In response to the intervention by the hon. Member for Stroud (Neil Carmichael), is it not a further problem that because of the cuts to citizens advice bureaux, welfare rights units and law centres, good advice, which might help people to steer clear of loan sharks, is less and less available? As the years go by and the cuts continue, the problem will get even worse and the inequalities will grow.
Stella Creasy
There is a real concern about the lack of advocacy services and about people’s inability to get help in negotiating with their creditors. I believe that we have to make credit affordable for all; payday lenders could be part of the mix if they were properly regulated. That is all that the new clause calls for.
Let me present some figures that might tempt Treasury Ministers when they see what could be achieved in the way of tax through this review. The Competition Commission inquiry into the lack of effective price competition in doorstep or door-to-door lending estimated that companies were making an excess profit of at least £150 million a year. The commission considered that 90% of that excess profit was made by Provident Financial alone. On that basis, Provident has made £675 million in excess profit out of low-income communities since 2005—a sum greater than the total amount of credit union lending that took place in 2010.
The Competition Commission’s findings showed that excess profits amounted to additional costs to the consumer of approximately £9 for every £100 lent. A cap on that basis would have allowed Provident to charge no more than £53 for every £100 lent in 2006—still a lot of money. Even allowing for inflation at about 4.5%, taxing credit lent at a rate of £63 per £100 lent in this market would save consumers some £18.80 on every £100 borrowed or about £94 on the cost of a typical £500 loan. Even if Ministers rejected looking at tax measures, they could look at how to introduce an effective cap on the cost of credit.
Let me be very clear: I do not want to see a cap on interest rates. I know that Members have been lobbied extensively on this and been given information about capping the costs of credit based on caps on interest rates. I do not believe that caps on interest rates work effectively. The European research shows that low caps in America have been problematic, but it points out that the more flexible caps in Europe have been effective in controlling the market.
There are many myths about capping the costs of credit, as there were about regulation and the minimum wage. To those who argue that capping the costs of credit would cut lending and put firms out of business, I say that they should look at Poland, France and Germany, which all have such caps. To those who fear that caps would encourage all banks to start charging 4,000% interest, I say that that clearly would not happen. The EU research shows that interest rate caps have in some cases led to less illegal lending, as consumers are better able to manage their borrowing requirements without turning to informal sources of credit.
Tracey Crouch
That is a good point. In fact, what troubles me most is the impact on consumers. As we have been told by Members in all parts of the House, these companies prey on people who are incredibly vulnerable, and we need to ensure that the industry behaves much more responsibly.
A response to the Government’s call for evidence on consumer credit is due shortly, and I look forward to the findings of the review. I have always had some sympathy for the proposal of a rate cap. However, it is interesting to note that Citizens Advice does not share the hon. Lady’s view, and nor does the money-saving expert Martin Lewis.
Stella Creasy
It is true that Citizens Advice opposes a cap on interest rates, but I think the hon. Lady will find that both it and Martin Lewis have been very positive about the proposal for a cap on the total cost of credit, which the new clause would allow to be investigated. I hope that the hon. Lady will correct the record accordingly.
Tracey Crouch
The total cost of credit involves more than just the high-cost lending industry, but the hon. Lady spent most of her speech talking about individual high-cost credit lending companies such as Wonga. We must find a focus, and the fact is that wider issues of consumer credit are involved. I hope that the review will come up with a solution on which we can all agree.
The Government are considering specific product regulation as part of their draft Financial Services Reform Bill. Under the proposals to establish the financial conduct authority, a new model of conduct regulation will be established that will use early and proactive intervention to ensure that consumers are protected. That is a far more pragmatic solution than the blunt instrument of taxation, which, as I noted earlier, could have the adverse and opposite effect of creating a greater problem.
Mrs Chapman
I am very grateful to my hon. Friend for that intervention, as he put it extremely well. I was aware that credit unions in Northern Ireland were incredibly advanced. I have found that although the fledgling credit unions in my constituency are doing a marvellous job, they are unable to do the very thing that he says is unable to be done in Northern Ireland. That strengthens the argument for accepting this new clause.
Stella Creasy
I wonder whether my hon. Friend would like to comment on the irony that credit unions have a cap on what they can charge, yet these legal loan sharks do not.
Mrs Chapman
That is an excellent point, with which I shall finish my remarks. I am aware that many colleagues would like to contribute and, having heard my hon. Friend’s comprehensive speech, I will allow others to do so.
Stella Creasy
Is the hon. Gentleman saying that it is not acceptable for banks to do what he just described? What does he make of the evidence suggesting that one of the challenges in this market is the fact that a quarter of their customers cannot borrow from banks, so even if they wished to use unauthorised overdrafts, they could not actually do so and the only source of credit available to them are predatory lenders such as Wonga?
Justin Tomlinson
Absolutely, and that highlights my first point about using credit reference checks. These people should not be getting money from high-cost lenders. Many of the more reputable high-cost lenders will not lend to them, but many of them do and prey on these people—that is particularly true of the doorstep lenders. We have to try to ensure that more people have access to the affordable banking arrangements—the credit union arrangements—but we must not fall into the trap of thinking that the banks always get things right because, as in the example I just gave, they can prove a lot more expensive—
Justin Tomlinson
The hon. Lady may shake her head, but my interest lies in ensuring that people get the clearest information and the cheapest possible price. I will not defend any organisation that is going to exploit the most vulnerable people.
Unsurprisingly, the final item on my tick-list is the need for financial education. I chair the all-party group on financial education for young people, and I thank the 224 Members who are now signed up to the group. People do not understand APR and, as I have argued, it needs to be removed and replaced by a transparent approach. In addition, we need consumers to be able to understand the implications of what they are signing up for, its true cost, how to source alternatives and the best way to address the situation if they get into difficulties.
I am conscious of the time so I will conclude. We are all agreed that action is needed—nobody, from either side of the House, disputes that. I welcome the consumer credit review, but we must not fall into the trap of a quick fix to chase political headlines which simply makes matters worse. We need a measured and wide-ranging response that puts the vulnerable consumer first. Let us not chase a fix that makes things a hell of a lot worse for the most vulnerable people.
Andrew Percy
I am feeling the love in the Chamber today, which is a good thing—there must have been something in the water in Goole this morning. However, the serious point is that that hopefully proves that although there are concerns, and although lots of Members who will vote differently from each other this evening have made incredibly passionate speeches, they clearly all want to see the same thing. We might disagree on how to get to there, but the fact that I am agreeing with so many people is perhaps a sign that there is consensus on this issue, which is a good thing.
Stella Creasy
At the risk of increasing the love in the Chamber, does the hon. Gentleman agree that the new clause would put beyond doubt—along with other measures that could be taken to tackle the problems that we all agree exist—tackling the question of regulation and acting on it by the Government? At the moment, we have no guarantee that that will happen in the consumer credit review; rather, we have only vague assertions that they are thinking about it. The review proposed by new clause 11 would guarantee that that would happen, which is why we want action now.
Andrew Percy
Of course that is what we all want to see, but we await the response of the Minister. At one point, some Opposition Members seemed to be saying that the Government were going to announce something at the Liberal Democrat conference, suggesting that it would no doubt be a well attended—I will not be going —and joyous occasion. Indeed, the hon. Member for Walthamstow seemed to suggest that the Government already had a solution that they were about to announce in October, so we all look forward to hearing what they have to say.
To end where I began, this is a hugely important issue for a lot of my constituents, as it is for constituents up and down the country, and it is time that we did something about it. It is appalling that people end up on a conveyor belt and seem unable to get off it. I therefore look forward to the Minister’s response, and I genuinely hope that we have some action soon, in the interests of all our constituents.
Sheila Gilmore
I might be wrong, but I understand that the fund is not a substitute for the money that was available through the growth fund. When it was introduced, it was hoped that banks would lend to community-based lending organisations; they have not done so, yet high-cost lenders can get finance to expand their businesses to make them attractive.
Stella Creasy
Does my hon. Friend agree that it is a cause of concern that the Wellcome Trust, which is supposed to advance charitable endeavours, has lent £73 million to Wonga so that it can expand its operations in the UK? Such companies can easily access credit; indeed, that sum is the entire amount left from the growth fund for credit unions across the UK.
Sheila Gilmore
I thank my hon. Friend for that helpful intervention. If we are to put the money where our mouth is, it is extremely important that we do not just sit in the House constantly agreeing about how bad something is; we need to take action. On that basis, I urge Members, and perhaps even the Government, to accept the new clause.
The Financial Secretary to the Treasury (Mr Mark Hoban)
I think that the debate has demonstrated the potential for cross-party support for the analysis underpinning the discussion we have had this afternoon, but I gently point out to Opposition Members who seek to turn this into a partisan political issue that their Government had the opportunity over 13 years to tackle this. In fact, we had a debate on it while the Financial Services Act 2010 was going through Parliament, not long before the general election, during which my opposite number at the time ruled out acting on interest rate caps because of the impact of depriving the most vulnerable of credit services. It is not a new issue, or one that is fresh to this Parliament. Ministers in the previous Government were opposed to the idea of caps because, as the hon. Member for Liverpool, Walton (Steve Rotheram) indicated, it could restrict the supply of credit, forcing those who need it into the hands of illegal moneylenders, an outcome that Members on both sides would not want to see.
Let us be clear that credit can be a good and positive force that enables people to meet needs when there is a sudden shock, such as an unexpected expense or a cut in income, but it must be used sensibly and sustainably. When people decide to borrow, they must be mindful of what that means for them and realistic about their ability to repay the loan. That is true whether the loan is over 10 years, five years or a matter of days, as is the case with some instant or payday loans. However, all lenders have a responsibility in this regard. Lending more than borrowers can afford to repay does not benefit anyone. Under the recently introduced consumer credit directive, all lenders, including high-cost credit lenders, must ensure that when they decide to advance a loan they do so after making a thorough assessment of the lender’s ability to repay.
We know that consumer debt grew significantly under the previous Government, more than doubling from £620 billion in 2000 to more than £1.4 trillion by May 2010. Some of this debt is now being repaid as consumers begin to come to terms with their borrowing, with the amount of unsecured debt reducing in the past two years. Although much of this debt will be repaid without any problems, some borrowers get into difficulty. Lenders have a responsibility to help customers and treat them fairly when they get into difficulties with loans, not push them further into debt. Continuing to add excessive arrears and default charges is a lose-lose situation; the debt increases out of all proportion to the amount borrowed, the lender is less likely to be repaid and the borrower may have difficulty borrowing again. Lenders should work with borrowers, not against them.
We should all be concerned about people borrowing at high rates of interest. However, the high-cost credit market, whatever its faults, provides a service for those who cannot get credit from any other source. We should be careful about describing high-cost credit providers as legal loan sharks. We all recognise from our own communities that real loan sharks are far worse, resorting to violence and intimidation to recover their debts. High-cost lenders are licensed and operate within a regulatory framework, which provides some recourse when things go wrong.
We should be clear that action has been taken over the past year to improve consumer protection in this area. First, under the consumer credit directive, which came into force earlier this year, consumers now have a right to withdraw from any credit agreement within 14 days. If they do so, they have to pay back only the money lent and the interest accrued over that time. Secondly, consumers have a right to repay a loan early at any time, in part or in full. Thirdly, lenders now have to provide information in a standard format so that borrowers can easily compare the costs of different loans. Improving the transparency of information will help consumers. Fourthly, lenders must conduct a full credit assessment before advancing any loan. Lenders will also have to explain the key features of the credit agreement.
In addition, the Office of Fair Trading has recently published its guidance on irresponsible lending, which clearly sets out that deceitful, oppressive or otherwise unfair lending practices are not acceptable. The OFT, which is responsible for the regulation of credit—something that whoever tabled the new clause seemed to forget—has the power to remove the licence of those who breach the irresponsible lending guidance.
Much good work is going on, including the excellent work of credit unions, which many of my hon. Friends have mentioned. It is a shame that the hon. Member for Edinburgh East (Sheila Gilmore) is not in her place. My hon. Friend the Member for East Hampshire (Damian Hinds) is right that there is £73 million to help to expand and modernise credit unions. The money that the previous Government put into credit unions is diminishing, because the money that credit unions were able to earn on the debt was lower than the default rate on the loans given. I therefore welcome the money that the Department for Work and Pensions has found to strengthen credit unions.
As a number of hon. Members have said, we are reviewing the wider consumer credit landscape. At the end of last year, the Treasury and the Department for Business, Innovation and Skills published a joint call for evidence on the consumer credit and personal insolvency review, which covers all aspects of the consumer credit life cycle, including what happens when things go wrong. This is an opportunity to ensure that the regulatory framework is fair to consumers and the industry. Part of that review focuses on the high-cost credit market. Following an OFT review that took place under the previous Government, we have asked for evidence on five of its recommendations.
Mr Hoban
Let me just finish the recommendations, and then I will give way.
The first recommendation was to provide information on high-cost credit loans to consumers through price comparison websites. The second was to introduce a “wealth warning” on high-cost credit products. The third was to collect essential information on the high-cost credit sector so that the OFT can track developments. The fourth was for the Government and industry to develop a code of practice. The final recommendation was to work with credit reference agencies to explore ways in which payday lenders could provide suitable information about the payment performance of their customers. That would help those who use high-cost credit to build up a credit history that they can use to access more mainstream lenders.
Stella Creasy
I wonder whether the Minister can deal with an anomaly that has driven the new clause. I received a letter on 25 May, which set out that the high-cost credit market was not specifically included in the consumer credit review. Is the Treasury taking the lead on this and does BIS need to follow? Will the Minister clarify this matter, because the letter from the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey) said that BIS was not looking at this area per se?
Mr Hoban
There are a number of taxes that disincentivise certain activities. We could be here all day identifying them. The challenge is to what extent an increase in tax is passed on to the consumer and to what extent it is borne by the shareholders. There is a lot of evidence that in areas where borrowers are relatively insensitive to price, such as payday lending, the additional costs of tax measures would be passed on to the consumer. I am yet to be persuaded that that would not be the case. It might help if the Opposition had some concrete proposals on tax that could be assessed, but so far they have not. Perhaps the hon. Member for Walthamstow has a proposal.
Stella Creasy
I am saddened that the Minister did not feel that any proposals were made in the debate. I thought I had caught his eye when I talked about whetting his appetite with the excess profits that companies make. I made a specific proposal on that, which I will repeat for his benefit. Provident has taken £675 million in excess profit out of low-income communities since 2005-06, according to the Competition Commission’s investigations. Perhaps he could look at taxing the excess profits that these companies are making. Does he agree with that proposal?
Mr Hoban
I listened carefully to that point, and the hon. Lady again demonstrated the problem that she is long on analysis, but short on solutions. She talked about excess profits, but of course there is a range of solutions for that, one of which is to increase competition in the market to force prices down. I am not sure that a windfall tax, which I think is what she is proposing, would have the impact that she expects.