Consumer Credit Regulation

My right hon. Friend makes an incredibly important point. With local authorities facing cuts of 25% or more to their budgets, it is clear that those cuts could affect trading standards and that the action now being taken on illegal loan sharking could therefore be put at risk. We should not free communities from one form of exploitation only to allow another form to grow unchecked. Indeed, as more effort is put into cracking down on the criminal activity of loan sharks, it is all the more vital that there be greater access to affordable credit, an issue I will return to at the end of my comments. We are here today to talk about the growth of the high-interest legal home credit market—a relatively recent phenomenon in the UK, and an industry that originated in America. As a result, many of the companies operating here are ““exporters””, either working online or in our town centres. A good example is Dollar Financial, a US-based lender that operates under the trading name of the Money Shop in the UK. The Money Shop has expanded from just one store in the UK in 1992, which dealt primarily with cheque cashing, to 273 stores and 64 franchises across the UK by 2009. Now, in communities such as mine in Walthamstow, these companies litter our high streets. I want to set out the sort of products such companies sell. We are talking about pay-day lenders, organisations such as Oakum or Wonga.com. In August, the Consumer Focus group published research into the use of pay-day lending. It estimated this market to be worth £1.2 billion a year and that it was used by around 1.2 million people. Its report went on to forecast a significant growth in the market. Such loans are often short-term ones with technical interest rates of anything up to 3,500% for a five-day loan—another point I want to return later. The Consumer Finance Association, which represents pay-day lenders in the UK, estimates that these companies' customers have an annual income of between £12,500 and £30,000, with £18,000 being the approximate average. However, research for the Friends Provident Foundation found that one in 10 UK pay-day customers had incomes of less than £11,000 per year. These are the people who can least afford to borrow at such high rates, even if it is only for a short time. The price of such lending is often as much as £35 in interest for every £100 borrowed, which simply drives these people further into debt, especially as these loans are often rolled over, one after another. Furthermore, these companies make a point of targeting those who are unable to access the UK banking market. Indeed, in my own constituency Oakum makes a point of hiring people who can speak two languages, so that they can target their services at communities who are new to Britain and for whom the British banking system is still alien. In the ““home credit”” market, people are approached on their doorsteps and offered loans. Generally, such loans range from £200 to £500 and have to be paid back over the course of a year. Although the companies involved claim not to charge for missed or late payments, if someone borrows £300 they have to pay back about £10.50 a week, which adds up to some £540 over the course of a year. That means a typical annual percentage of rate of 272%, compared with the 9% or 10% APR that is often offered by mainstream banks. One of these companies, Provident, has 11,500 ““agents”” who visit some 1.8 million people a week to collect payments and offer credit. Agents work with each person they serve to judge how much credit they can buy. Some 70% of both customers and agents are women. Critically, agents are paid according to how much they collect, not how much they lend, creating even more pressure to keep people borrowing at such rates. Or consider the antics of hire-purchase companies such as BrightHouse. Such organisations target those on low incomes who have been refused credit and offer goods for sale on hire-purchase terms. The goods, which often have a high mark-up already, are leased out at high interest rates, so that a computer costing £800 or £900 ends up costing £2,000 or £3,000. Should someone default on a week's payments, the company often imposes high penalty charges and requires the following week's or month's payments straight away, making it even harder to catch up. Opportunities to expand resulting from the comprehensive spending review have not been lost on many of those who work in the market. Indeed, Provident's chief executive publicly stated that he expects growth in his target market as a direct result of the CSR. Another factor driving today's debate is the failure in the credit market for such consumers. The lack of competition to serve them means that it is a seller's market. Six lenders account for 90% of the home credit market—Provident accounts for 60%—so there is little competition to drive down interest rates. Clearly, credit lent must be repaid. It is therefore inevitable and fair that interest should be charged to cover the cost of providing credit. It is not disputed that many of those on low incomes or with bad credit histories are a higher lending risk, so interest rates on products aimed at them will be higher than those for the mainstream. However, the terms on which such transactions take place are critical. It is right for both parties that credit should be affordable, which means that both sides must judge what is possible. There are concerns on that point, because many companies, however ethical and caring they may profess to be, are not. They operate in ways that undermine that profession. A pawnshop in my constituency rings customers back to offer them unsecured loans. Some lenders make a virtue of the fact that they do not consider previous credit history or assess whether a household can afford repayments. Such lenders take high-risk customers not out of the goodness of their hearts but because they know they can hook families on their services, creating a long-term cash cow. High-interest lending also adds to the difficulties faced by the public purse. Lending at high rates to people on low incomes serves only to deepen their poverty. Credit dependency, whereby such debts can never be paid off, results in debts elsewhere, such as on rent, council tax and fuel bills. It results in cold homes and people going without food. I am sure the Minister recognises that the public purse can end up picking up the pieces.