Financial Services Bill

Consumer credit is a feature of everyday life. Our society has become increasingly dependent on credit, as we saw in the run-up to the recent financial crisis. The hon. Member for Wolverhampton, South-West (Rob Marris) talked about the credit position in France and Germany, but it is worth pointing out that the UK had higher consumer debt than France and Germany combined. We have seen a cultural change, too. No longer do consumers have to save for new purchases; they can take out a credit card, a store card or a personal loan, or they can withdraw equity from their house. For many people, rising levels of debt were seen as manageable, so long as the economy motored along with low unemployment and rising levels of income. That optimistic outlook, however, was predicated on an end to boom and boost and we can see the cost of that assumption today. The change to the cultural norm on debt was driven partly by a society that takes on much more debt through home ownership, going to university and so on and partly by the marketing of credit. The Bill tackles that, in part, through banning unsolicited credit card cheques. Those cheques were an indefensible practice that even people in the industry found rather hard to defend. My new clause 14 considers another aspect of the marketing and availability of credit—that is, store cards. It seeks to address two issues: the rates at which store card debt can be charged and the sales practice surrounding them. We need to distinguish between a store card and a credit card. Store cards are offered for exclusive use in the shops of a particular retailer, whereas a credit card can be used at a wider range of outlets. Of course, some retailers, such as John Lewis and Marks & Spencer, have a credit card rather than just a store card. If one shops at a major department store, one is likely to be offered the chance to take out such a card at the checkout, often in combination with an attractive offer, such as a 10 per cent. discount on that day's purchases. It sounds quite attractive, until one looks at the rates charged by store cards. A survey last year by Which? highlighted the high cost of some of the store cards that are available. Argos charged an annual percentage rate of 27.9 per cent., and New Look charged 28.9 per cent., whereas cards issued by retailers such as Ikea, River Island and Topman all cost about 19.9 per cent. According to Which?, the average APR of store cards is about 25.2 per cent., compared to an average for credit cards of about 16.8 per cent. That shows that store cards tend to be relatively more expensive, compared to reasonable alternatives. Even cards at the bottom end of the scale, such as those issued by Ikea and River Island, still charge a higher APR than the average for credit cards. High rates in conjunction with low minimum payments mean that it can take some time to pay off relatively small amounts charged to a card. For instance, it would take six years to pay off a balance of £100 on an Argos store card, for which the minimum monthly repayment is either £2 or 4 per cent. At the other end of the scale, it would take two years and 10 months to pay off the same balance on the River Island store card, which has a lower interest rate and a higher minimum repayment. It appears, therefore, that high rates of interest make store cards a poor way to borrow, yet there are more than 14.6 million of them in circulation. In 2006, the Competition Commission, recognising the high cost of credit, announced that any providers offering a card with a rate above 25 per cent. should issue a wealth warning telling customers that there are cheaper ways to borrow. Despite that, however, store cards remain in wide circulation. We might assume that, on seeing the wealth warning, a rational consumer might decide to shop around for another form of credit before taking out a store card—that such a person would leave his or her goods in the shop and pop down to the bank, or go home and search online for a form of cheaper credit. However, the evidence suggests that things do not always happen that way, as the rational consumer will see the opportunity to reduce the cost of shopping offered by the day-one discount. He or she will take advantage of that discount and then repay the balance straight away, thus avoiding the interest cost. Of course, if consumers were always that rational, there would be no store card business, because people would simply take advantage of the discount, pay off the balance and walk away. However, despite people's best intentions, the reality is that the desire for short-term gratification overcomes the rational response. If it did not, retailers would not offer these deals. My new clause 14 therefore contains two provisions. First, it would give the Office of Fair Trading the power to cap excessive interest rates, where they are not in the interests of the consumer or the debtor. In a way, that mirrors some of the suggestions made by the hon. Member for Wolverhampton, South-West, and I shall return to some of the differences when I address his proposals directly. The new clause would place no obligation on the OFT to use those powers, but it would provide some tools for going beyond the wealth warning approach announced in 2006. The second element of new clause 14 is the provision that would enable the decision to take out a store card to be decoupled from any requirement to buy from that shop on that day. It would mean that people taking out a store card would have a seven-day cooling off period in which they could not use it. That would enable consumers to shop around for a better rate, and it would also tackle one of the sales practices that incentivises the take-up of cards. It is worth thinking about what happens when a store card is taken out in a shop. There was an article on store cards in Which? Money magazine last month, for which a researcher went to open a number of store card accounts. In the course of a couple of days, he managed to rack up nearly £3,000 worth of credit, even though his income for that year was about £1,000. The article says that half the companies that he approached rejected his application, so I suppose that we should take some reassurance from that. Actually what happened is quite instructive. The article states that""none of the stores we visited verbally warned James about the high interest rates and the low minimum payments on the card and none of them told him that they were unsuitable for borrowing. This could only be found in the smallprint of the terms and conditions given to James…waiting in a queue in a busy shop is not the ideal place in which to read the small print on an application."" My new clause would give the purchaser, or the person taking out a retail credit-token agreement—as it is described in the new clause—the opportunity to go home and think carefully about whether they want to use the card. It would not close off the provision of credit to those customers, but would give the person taking out the card the opportunity to think carefully about whether they want to pursue that route. One might ask why I have focused on store cards and not on the personal loans offered by some retailers at the point of sale. That is a valid question and it is worth exploring. There is a difference between a loan and a store card, which is a form of revolving credit, whereby a person enters an arrangement with a retailer that enables them to spend up to a certain amount. There is no fixed repayment schedule and there can be relatively low minimum repayments. In the Which? sample, repayments ranged from 2.5 per cent. or £5 for British Home Stores to 4 per cent. or £4 for companies such as Topman or River Island. It is possible to take on additional commitments without deliberate thought. Many store cards adopt the low and grow approach to credit—a subject we touched on in our debates in Committee, and which was initiated by the hon. Member for South-East Cornwall (Mr. Breed). People start with a relatively low credit limit and it is then increased. A personal loan is different. There is a fixed repayment period for a fixed amount, so when a person takes out a loan they make a commitment. They know the repayment level and they know how long the loan will last. It is a well determined, well defined commitment, unlike a store card, for which the agreement is open-ended and there is no fixed repayment period and no fixed amount of borrowing because the credit limit can be increased. The argument that applies to store cards is very different from that which applies to the loans offered by our major retailers. That is why new clause 14 is linked to store cards. The measures set out in my new clause are proportionate and reasonable. They reflect our party's policy, and it has been our party's policy since well before the economic crisis. I am not entirely sure what the new clauses tabled by the hon. Member for Wolverhampton, South-West represent. The hon. Gentleman is, I think, a Parliamentary Private Secretary; he is part of the payroll vote and he is here to support the Government in debates. He should be a loyal supporter, yet it appears to me that his new clauses question settled Government policy, unless they are a teaser—opening the way for the Minister to accept new clauses 1 to 7. Is this a sign of independence of mind finally breaking out? In Committee, when my hon. Friend the Member for Chichester (Mr. Tyrie) tabled a new clause about competition, the Minister thought the proposal should be part of the regulatory objectives of the FSA, but recognised that Government policy was rather different. Perhaps he opened the floodgates for the hon. Member for Wolverhampton, South-West to table all sorts of amendments.