Financial Services Bill

I am not sure about the word "replicate". What credit unions do in my constituency, for example, is make themselves available in places such as pubs for people to come and pay the loan, and so on, so there is not necessarily someone visiting them at home, but there is a less formal atmosphere than in a bank. Credit unions could move into doorstep collection as well. For some credit unions, if they replicated the model used by some of the mainstream fringe lenders, if I can put it that way, it is likely that their costs would be lower, because in many cases not only do credit unions have paid staff, but they have volunteers—the credit union to which I belong in Wolverhampton is one of those—which lowers their costs. That is a social input by volunteers to produce what they regard as a better social output—I agree with them on that—namely, lower costs of lending for people who might otherwise have difficulty borrowing money. To canter through the seven new clauses briefly, new clause 1 would mean that a credit agreement was not enforceable if it breached a cap on the cost of credit. New clause 2 is permissive and would allow a cap to be set on the cost of credit if there were insufficient competition in that market. New clause 3 recognises that there are different fragments of the credit market and would allow different caps to be set for different markets. New clause 4 would address linked transactions, which is where a lender might issue, say, a token, so that the headline rate of credit might be lower than any cap that had been set, but the borrower has to buy a particular item—for example, a television—from a particular supplier at a particular price, which would circumvent that cap. New clause 4 is intended to prevent such circumvention, by including the cost of any such retail goods in the calculation of the credit price in a linked transaction. New clause 5 would provide for publicity for any caps that were set. That addresses the issue raised by my hon. Friend the Member for Stroud, which is partly about the ignorance of some borrowers. If the new clauses were accepted by the Government and passed into law, and caps were set because it was found that parts of the market were not competitive, it would still remain a challenge for prospective borrowers to find out whether a cap existed. We as a society find it difficult to reach certain people through the instruments of the state—and often through political parties, I have to say—although loan sharks and legitimate fringe lenders do not seem to have any problem doing so. We need to be inventive about publicising any restrictions on excessive credit costs. New clause 6 would establish a scheme to impose penalties for breaching any caps, and new clause 7 is simply a definitions clause. Provident Financial has e-mailed several parliamentarians, and that e-mail has been passed to me. Provident did not e-mail me personally. The e-mail states:""Home credit is the provision of small unsecured loans (typically £100—£500) with manageable, flexible repayments. Repayments are collected each week from the customer's home by an agent, most of whom are female and live in the communities they serve. Provident Financial agents visit one in twenty homes in the UK each week."" That bears on the point raised by the hon. Member for Fareham (Mr. Hoban) about replicating the costs. Of course, these collections have to take place, which can increase costs and lead to rates of up to 123 per cent. APR, as the Joseph Rowntree Foundation pointed out. Provident's e-mail goes on to talk about home credit APRs being higher than for some other products, as we would expect, because smaller sums are lent over a shorter period compared with those of other financial services providers. The cost of weekly home collection is a factor, but the e-mail goes on to say that""there are no default or extra interest charges"." In response to concerns about the activities of Provident Financial, my right hon. Friend the Member for Makerfield (Mr. McCartney) tabled early-day motion 379. When I looked this morning, there were 65 signatories to the motion, which expresses concern about the activities of lenders such as Provident Financial. It names Provident, and asks for the Office of Fair Trading to be given a power to cap prices. That is what the new clauses would do. It would be a permissive power; the proposals do not say that a cap must be introduced. I am not surprised that Provident did not send me a copy of the circular that it sent to some parliamentarians, because, when I looked at it, I found that it appeared to be full of contradictions. Because Provident has got my back up by not contacting me, I am going to go through some of those contradictions. Provident states:""The cost of credit has risen in all sectors of financial services (including fees and charges for secured and unsecured personal loans, mortgages and credit card lending). Demand for credit is weak. Consumers are being cautious about taking on debt and lenders, in turn, are exercising greater scrutiny over their lending decisions."" It is almost 40 years since I did my economics A-level, but I would have thought that if the demand for credit was weak, the cost of credit might actually come down. But Provident states:""Demand for credit is weak"," as well as saying that the""cost of credit has risen"." That seems contradictory, unless there are unwarranted and undesirable frictions on the operation of the credit market. Provident understandably goes on to quote three conclusions from Professor Elaine Kempson, whom it calls""the leading UK academic on credit and debt"." It cites her as concluding in a report in 2005 that:""An interest rate ceiling could do nothing to reduce high costs associated with lending to people on low incomes who have a high risk of default. Instead, the APR would be reduced by displacing these costs elsewhere, for example in the form of charges for default—the last thing that low-income borrowers would want."" It surprised me that Provident cited that quote in support of its claims since, in the earlier quote that I read out, it said that""there are no default or extra interest charges"." So its professor, as it were, is understandably, properly and credibly saying, "You've got to be careful if you bring in a cap, because people might find a way round it by jacking up the price of default," but Provident quotes her and then says, "We do not have any default or extra interest charges." The good Professor Kempson goes on to say:""It is also likely that more credit would become tied to the purchase of goods and consumers would be faced with high price mark-ups as retailers seek to recover the costs of supplying credit."" I have referred to my hope that new clause 4 would address that, in terms of linked transactions. The third of Professor Kempson's conclusions cited by Provident is that""there is a danger that lenders would move out of this market altogether, leaving poor people even more prey to unlicensed lenders."" That is a significant concern of many organisations, commentators, academics and so on. However, Provident, which has been somewhat even-handed, although contradictory, about this, cites recent research by the Financial Inclusion Centre as finding that the use of loan sharks is on the increase, with over 200,000 people taking on illegal credit annually—an increase of 22 per cent. since 2006. This is a sort of parallel universe scenario: one does not necessarily know how many more or how many fewer people would have turned to illegal loan sharks if the situation were different and companies such as Provident did not exist or were restricted by caps on interest rates on their activities. However, there is no cap, very high interests are being charged and an increasing number of people are turning to loan sharks, and that does not suggest a system that is working very well. Provident also cites a report produced for the Department of Trade and Industry, as it then was, by Policis in August 2004. It stated that the "credit impaired" in France and Germany, where caps are in place, appear more likely to use illegal lenders than in the UK where there are legal credit options for such borrowers. Yet, as I have said, even-handed as ever, Provident also cites research by the Financial Inclusion Centre about the use of loan sharks increasing. I thought to myself that if Provident can quote a professor, so can I—my guy is German. In 2005, Professor Udo Reifner from the Hamburg Institute for Financial Services published a response to the findings on the effects of the German rate cap—the cap referred to by Policis in its August 2004 report for the DTI. Professor Reifner said:""In total, at least 9 million people cannot access credit from mainstream banks"" in the United Kingdom""as opposed to approximately 2.5 million in Germany and between 2.5 million and 4.1 million in France"." Of course, Germany has a significantly larger population than the UK and France has a population that is almost the same as the UK. On the face of it, their caps have resulted in, or certainly exist in, a system where fewer people have difficulty getting access to mainstream credit. Provident goes on to say:""Published figures from Provident Financial's statutory financial returns show that there has been a steady erosion of margins over the past three years. Profit per customer reduced by 15 per cent. in the three years to December 2008 when Provident's most recent full year results were announced."" That seems strange, because when Provident went to the market in October 2009 and issued a bond to raise £250 million of investment to expand its operations—interestingly, the rate it managed to obtain was 8 per cent. rather than 173 per cent.—it told prospective investors:""The competitive position in the £3bn home credit segment of the market has not changed materially since the Competition Commission concluded its review of the home credit market at the end of 2006."" So for the purposes of lobbying on prospective legislation such as this Provident says that there has been a steady erosion of margins, but when it goes to the market to get money it says that the market has not changed materially since 2006. There is a bit of a contradiction there. Overall, there is a long background of concerns about extortionate, as I would call them, or high, as others would call them, interest rates, going back to the Crowther report in 1971. In 1991, the Office of Fair Trading identified the extortionate credit provisions of the Consumer Credit Act 1974, following on from the Crowther report, and said that they were not working. Nothing happened. In 1999, the DTI commissioned research into what improvements could be made, but that report was not published for another three years, until 2002. In 2003, we had a consultation from the DTI on a new unjust credit test and three years after that, in the Consumer Credit Act 2006, we saw the introduction of the unfair credit relationship test as a replacement for the extortionate credit provisions of the 1974 Act. I hope that the Minister can clarify whether his Department, or any other Department, is monitoring whether the unfair credit relationship provisions introduced in the 2006 Act are working. It has been suggested to me that no such monitoring is taking place. We have a continuing situation in which more financially excluded people are having difficulty getting access to credit in this country than those in France, Germany or parts of the United States of America where they have anti-usury laws. People are paying very high interest rates and we have a market in which demand for credit has fallen but the cost thereof has risen, suggesting that there is not a competitive market for credit for such borrowers. Against that I would contrast the new clauses that I propose, which are permissive and would enable caps to be introduced if it were found that part of a credit market was not working competitively. I urge the Government to take this issue seriously.