Financial Services Bill

Stella Creasy Excerpts

Monday 6th February 2012 Commons Chamber

[Mr Osborne]

As I have said, when the Bill is passed, the statutory responsibility will be on the Bank of England to inform the Government if there is a material risk that public funds might be used. We are trying to get away from a system in which it is the Treasury’s responsibility to try to regulate the financial system on a day-to-day basis in peacetime. We are giving the responsibility and clear accountability to the Bank of England so that it will trigger the arrangement by informing us of a material risk. As is set out in the legislation, twice-yearly meetings between the Chancellor and the Governor to discuss these things are required, although there could also be further meetings. Once the Bank has informed the Treasury of a material risk, which it will have a statutory responsibility to do, there will be a power of direction. I should just say, for the sake of completeness, that if we wish to keep the details of the use of this power confidential, I or my successors would have to inform, on a confidential basis, the Chairs of the Treasury Committee and the Public Accounts Committee, so that representatives of Parliament were informed.

The fourth and final flaw in the system that we are trying to address is that customers and consumers too often get a raw deal from the regulation of financial services. The disappearance from the high street of names such as HBOS and Bradford & Bingley has inevitably reduced competition in an industry that was becoming more and more consolidated even before the crash. The existing regulator’s dual prudential and consumer remit means that it cannot give consumer interests its undivided attention. In response to the Vickers commission and the Joint Committee, the new authority will have an explicit responsibility to promote competition. We have listened to the Joint Committee and announced that we will also bring the regulation of consumer credit into the authority’s remit so that, for the first time, the regulation of all retail financial services will be under one roof, and things like payday loans will be subject to tougher regulation.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

The banks that have gone from my high street have been replaced by high-cost credit companies that offer exorbitant rates of interest. I know that the Financial Conduct Authority will have powers over competition. Does the Chancellor accept the argument, made by many Opposition Members, that price inevitably reflects competition, so it is absolutely right that the FCA should look to regulate the price of those products and finally tackle the legal loan sharks?

[Mr Osborne]

The Department for Business, Innovation and Skills has commissioned a review of the cost of credit, but I think that the Bill takes a significant step on that, partly because of the Joint Committee’s recommendations, because the regulation of all retail financial services will now come under the remit of the FCA. It will have the power to ban specific products, to name and shame particular firms and to publish details of misleading promotions, so there will be considerable new powers that were not previously available. On the hon. Lady’s specific concern about the price of credit, that is something the Government are looking at. Of course we are also looking at the recommendations of the FSA’s recent report on RBS—I do not wish to reopen that issue—in relation to legislation on the sanctions available for bank directors who fail in their role.

The Bill is an important piece of legislation. I believe that it replaces the confused and dysfunctional system that presided over the biggest banking crisis in our modern history. It creates clear lines of accountability by putting the Bank of England in charge of monitoring and dealing with debt levels in our economy. However, no amount of new clauses, powers or institutions can substitute for something for which Parliament cannot legislate: judgment. There were thousands of pages of financial regulation in existence in 2007, but that did not stop the queues forming outside Northern Rock or prevent RBS from making its final, fatal, bid for ABN AMRO. I hope that we have learned that financial stability depends not simply on a checklist of regulation, but on individuals within our regulators feeling empowered to trust their judgment, and our giving them the power to act on it. By putting our central bank in charge of monitoring overall levels of risk and the soundness of individual firms, we are trusting in its judgment. By giving the elected Government of the day the power of direction in a crisis, we are trusting in their judgment, and that of Parliament, to which they are accountable.

Britain has paid a higher price than most for what went so badly wrong in our banking system. The errors of the economic policy that led to such a boom have cost every taxpayer dear. Today we show that we are learning the lessons and passing on to our successors a better system than the one we inherited. I commend the Bill to the House.

--- Later in debate ---

[Stella Creasy (Walthamstow) (Lab/Co-op)]

This is the third time that we on this side of the House have proposed legislative action on the high-cost credit market in the UK. As Mae West said:

“I’ll try anything once, twice if I like it, three times to make sure.”

I can tell the House that we are absolutely committed to the argument that something needs to change drastically in our consumer credit markets. This Bill offers the potential to address some of those concerns. We have had a positive debate today about some of the large-scale problems in our financial markets, but I want to set out the other picture. I shall talk about those people at the other end of our financial markets, the people who are called the “under-banked”. There is now irrefutable evidence that millions of people in this country are unable to access credit in a manner that is positive and constructive to their financial health. We should consider that one in six of us is now what are called “zombie debtors”—paying off the interest on our debts, not the capital.

A perfect storm has hit UK consumers in the last couple of years as pay freezes, rises in unemployment, rises in the cost of living and a lack of regulation of the consumer credit market has made us a fertile territory for the high-cost credit industry. It is not by coincidence that these companies have flourished in Britain in the last couple of years, as there has been a 200% increase in the numbers of people borrowing from payday loan companies and a similar increase in the amount of money they are making from British consumers in the last 18 months alone.

With a mind to what we could do to the Financial Services Bill, let me set out what the prices are and what they mean to British consumers. Many Members will be familiar with my own personal travails with a company called Wonga whose rates are 4,214% representative APR in a year. Some may be familiar with QuickQuid whose rates are 1,734% representative APR, while some may have come across the Money Shop in their constituencies, with a mere 219% representative APR. Some may be familiar with some of the newer players in the market—for example, Ferratum, a major European payday loan company, which has a mere 3,113% APR. Then there is Peachy Loans, which will lend people £100 at a time, with £15 interest every 10 days. That works out at a representative APR of 16,381% every year. This is not to mention companies like Borrow, recently advertising themselves on the radio and TV, which encourages people to borrow £10,000 a year at an APR of 68%.

Before we discuss any legislation, it is worth thinking about this industry and how it operates. It wants to paint itself as the new industry, the new form of financial credit that Britons are crying out for, that the Facebook generation wants, that is online, quick, easy and consumable. There is another side to this story, however, as many will have seen the people who are struggling because of the toxicities in this market. When we know that 30% of payday loans are taken out to pay off other payday loans, that should tell us that something is going drastically wrong that needs addressing.

Payplan, a debt charity company, says that 46% of its clients had six or more payday loans in the last year alone. This is not a short-term temporary measure; this is a way of life for millions of people in our country nowadays. More than half the people going to Payplan for debt advice owed more than £500 to these companies, and 61% had more than one at a time. Most crucially, 86% of its clients were using the loans for basics—food, transport and the basic costs of everyday living, not luxuries. This is not a market that is working for British consumers; it is not an industry that wants to lend people money and have them pay it off within a reasonable length of time. It is an industry that wants to lend to people, to keep lending to them and to keep taking money from them, drips at a time, raising the interest rate as it goes along, and adding money to the bill every single month.

The rates in themselves mean that debt is more likely. That is the challenge we have to address with our consumer credit regulations. We are talking about people who are short of cash now. They are not using it as a temporary stop-gap; they are struggling in Britain today. We need to be aware that 7 million Britons last year put their mortgages on their credit cards and 1 million people used payday loans to pay their mortgages. That is the sort of challenge we have to address. It is also the opportunity we have with the new Financial Conduct Authority.

I welcome the fact that Ministers have listened to the advice I gave them on 16 June last year when I suggested that the FCA could indeed take over this role and look at this industry. I welcome that, as I say, but I know there are issues over how the FCA should deal with the promotion of competition and over the real powers that the FCA needs to address these companies and to regulate this market. Indeed, I note that other consumer organisations such as Consumer Focus, Citizens Advice and the Financial Services Consumer Panel have written to the Minister asking for the FCA to have specific powers for product intervention. This must go beyond the point, which I recognise the hon. Member for St Austell and Newquay (Stephen Gilbert) mentioned, about the paucity of the response that the Office of Fair Trading has been able to make to these companies. I know all too well myself from when I tried to get the OFT to act on companies that did not display their APR how difficult it is to make progress. This goes beyond advertising and people knowing what the price is. It is about the fact that the prices reflected in the APRs I mentioned show that this is not a free market and that competition in itself is unable in this market to ensure that consumers are not put in detriment.

I know that many Members agree that things could be done, so let us give the FCA the power to intervene to make sure that there is competition and to use price as an indicator of competition. Let us give the FCA the real power it needs finally to address this country’s legal loan sharking. I agree with the hon. Member for Eastbourne (Stephen Lloyd) that there is a challenge with unauthorised overdrafts and credit cards, so let us use the FCA finally to make good on this Government’s broken promise to tackle the exorbitant rates on credit cards and unauthorised overdraft charges and cap those prices.

[John Hemming (Birmingham, Yardley) (LD)]

I share the hon. Lady’s concern about the very high levels of interest rates charged on certain debts. Does she share my concern about the effect of continual late payment fees, which have exactly the same effect?

[Stella Creasy]

Yes, I agree, and I hope that Government Members will join me in condemning those banks and credit card companies that, at the very time when millions of British consumers are struggling, are ratcheting up their interest rates, following the lack of regulation on excessive interest rates on our credit cards.

[John Hemming]

rose—

[Stella Creasy]

I hope the hon. Gentleman is on his feet to agree with me that this must be stopped.

[John Hemming]

I wanted to make reference to my entry in the register, as I have certain banking shares.

[Stella Creasy]

I hope that the hon. Gentleman will use the fact that he has shares to make representations to his bank about the consumer credit market in the UK.

The consequence of doing nothing about this industry and doing nothing about how British families are being made to struggle because of the cost of credit are far too great to see. Frankly, it is not good enough for the Chancellor and the Minister to say, “Well, we have to wait until we see the research from BIS.” We have been waiting years—yes, years—for action on this issue since it was first put to Ministers.

[David Mowat (Warrington South) (Con)]

I am following the hon. Lady’s argument closely, and many Government Members are equally concerned about these practices, but will she clarify what rate of APR she thinks should be the maximum for a loan of, say, one week?

[Stella Creasy]

I have answered this question in previous debates. I do not think that we should set a single rate of APR and I do not think we should have an interest rate cap: I believe we should have a total cost cap. In the absence of the Government making progress on such a cap, however, I view the FCA as offering an opportunity to start the more effective regulation of this industry. I hope that the hon. Gentleman would agree that the opportunity to have the industry and consumers setting rates and clarifying what is excessive and what counts as consumer detriment in the listing of these products represents a way forward. That is the argument of Labour Members, and we shall seek to table amendments on that basis. It is no wonder that the number of complaints about these companies and these loans is sky-rocketing in the UK.

[Alun Cairns]

Will the hon. Lady give way?

[Stella Creasy]

I am sorry, but I will not, as I do not have much time left and I have already taken some interventions.

Between October and December last year, there was a 25% increase in the number of people complaining about these companies, and three quarters of those complaints were upheld by the financial services ombudsman. Demand for these products will only get stronger. Two in five people are expecting a pay freeze this year, and one in five expect to lose their job. Inflation rates might slow, but that will only slow the pace of the cost of living, especially in the capital city. Six million people are already considered financially fragile; if one more bill goes up—their mortgage, transport costs or even their food bills—they will be pushed further and further into debt. With banks not lending to these people, it is these legal loan sharks who will pick up the pieces.

We should reflect on the fact that the one industry growing in this country is these legal loan sharks. Cash Converters proudly says it is going to open another 40 new shops—at 1,413% APR; while Albemarle is opening 300 new shops, charging 853% APR. This is also a serious issue for our economy. If millions of families have thousands of pounds worth of debt that they cannot escape, it is clearly going to impact on consumer confidence. This will be the new economic crisis that will come to Britain in the years to come if we do not deal with this problem, as we have concentrations of communities with thousands of pounds of debt hanging around their necks, limiting the choices they can make for their futures and limiting the kind of lives they can lead. The failure to tackle these issues will leave millions of people with unmanageable debt, yet we have an opportunity to make progress through this Bill.

This problem is not going to go away. It is right to look at the industry and for consumers to be involved in setting the rates and determining what is consumer detriment. Let me tell the Minister that the public clearly want action on legal loan sharks. His own Back Benchers want action on them. I welcome the conversion of Government Members to this cause. I just hope that it is a conversion that will continue all the way through to voting in favour of our amendments. Even the industry wants action. It does not want the current uncertainty.

My simple question to Ministers, if they will not accept our amendments, will not send out the message and will not finally tackle legal loan sharking is this: how much worse does it have to get for the people affected in our communities? We know that 4 million people in Britain are already borrowing from these companies, and there could be as many as 10 million if we do not deal with these problems within the next year. That will be 10 million people stuck in a cycle of toxic debt that will damage them and their families for years to come.

I therefore ask the Minister to take on board the suggested amendments and to take account of the desire of Members on both sides of the House for action on legal loan sharking. Let us finally make the third time a charm.

[Several hon. Members]

rose—