The new clauses lie at the heart of consumer issues: if consumers have no money in their pockets, they will not do very much consuming. A personal debt crisis is brewing because millions of people are trying to make ends meet and pay for the debt they took on to try to make ends meet previously. Household debt is at its highest since 2009, with people owing £1.6 trillion in personal debt. Some 43% of us say that we often or sometimes struggle to make it to payday—little wonder, given the way in which the cost of living has escalated. The new clauses come into play because debt repayment is increasingly the reason that people struggle to make it to payday. They reflect an attempt not to continue the good work that has been done in this House to address the consumer credit market, but to recognise that the Government’s belated conversion to the Opposition’s approach on payday lending needs to be just the start of the conversation on how we ensure that people have the pounds in the pocket they need. This is intrinsic to our economic future, given that consumer spending has accounted for so much of the growth we are now seeing. That, in itself, is perhaps one of the problems we face.
Let me explain the new clauses I wish to speak to today, because I know that other Members want to speak to the new clauses they propose. New clause 6 concerns what Members might call my bête noir—payday lenders. There are now 8 million loans annually, which are worth £2.2 billion. Those loans come with a cost. The National Audit Office estimates that they cost consumers £450 million a year of direct consumer harm, because of the failure to regulate the payday lending industry. For several years we proposed regulation of the industry, but it will come in only next year.
One in 10 British adults are likely to take out a payday loan in the next six months. That figure is going up, not down. It is little wonder that companies such as Wonga are making £1 million a week from our constituents—a 36% increase on the previous year—even though it is writing off huge swathes of its loan book. Some 40% of those who took out a payday loan said that it made their financial position worse, but many feel that they have little alternative. Credit unions are desperately trying to fill the gap, but it is an impossible gap to fill with the current level of need. It is time for payday lenders to pay their way. New clause 6 would enable an additional levy to be made on high cost credit companies to ensure that they provide funding for the debt advice and extension of credit unions that this situation requires. In fact, we believe the pressure on debt advice agencies and, indeed, credit unions is likely to increase, not subside, in the years ahead. We therefore think it time for the payday lenders to pay for the damage they have done.
New clause 7 also speaks to the growing personal debt bubble in our society, and to the conduct of the cowboy debt management agencies. We have already talked about legal loan sharks, and now it is time to look at the cowboys, but these are not just the stuff of nightmare. These companies are profiting from the misery of our constituents, exploiting the way in which debt management is done in this country.
The Government themselves admit that in excess of 1 million consumers each year are seeking advice on how best to deal with their financial difficulties. Many of us will know from our constituency surgeries the people who come to us in desperate need, often because they are about to be evicted for falling behind with their rent. We also encounter people who are struggling financially and who need help forming a debt management plan to deal with their creditors. That is the gap that these companies have filled.
About 7% of British adults report struggling to payday due to debt management payment plans, and 6% blame their payday loan problems on debt repayments. Bank loan repayments are the cause of 13% of those who struggle to payday. People are struggling because they are trying to pay back the debts they have accrued, especially over the last couple of years. It equates to about 2.5 million people that we know of who are already in a debt management plan.
Some debt management plans are available free, and I pay tribute to organisations such as Christians Against Poverty and StepChange for the work they are doing in providing people with free debt advice. After all, it is the most perverse of experiences for people struggling with financial debt to be charged to get out of the hole they are in. That is the challenge we are facing. It was estimated in 2010 that commercial debt management companies were making about £250 million a year from over-indebted clients. As I say, that was back in 2010. The Money Advice Service now tells us that there are 9 million people in our country who are over-indebted, so these are the people for whom these sorts of services may well be apposite. The need to reform how they work therefore becomes even stronger.
Ministers admitted in 2002 in response to questioning by the BIS Committee that there was evidence of some abuse of upfront fees, so let us talk about what is meant by that. We have an example from Clear View Finance of a gentleman for whom 90% of the money he was paying to the company was being taken in a fee, so a mere 10% of the money he was paying to clear his debts was going to his creditors—little chance for him to get out of the cycle of debt he was in any time soon! Yet when the Minister admitted that there was such abuse, he said that these companies had a role to play, so there was not really any need for any further regulation of them. We disagree, and we were disappointed when the Government voted in Committee against our proposals to deal with debt management companies.
We recognise that the Financial Conduct Authority has taken over the management of these companies, and it proudly trumpets that it is going to limit to 50% the amount a company can take in fees rather than pay out to creditors. We believe that we should go much further. We do not believe that people should be charged
for being in debt when they come forward for help, and we want to see the phasing out of fees for debt management altogether.
Let me provide an example of why that would make a difference. StepChange, which provides this service for free, found that a client with a typical debt of £30,000 would have to pay for a commercial product almost an extra £6,000 in fees—£6,000 over and above the loan repayments. That extended the plan by approximately 18 months in comparison with one that StepChange had put together.
Taken in concert with new clause 6, which would provide the funding to increase debt advice, we believe that we can phase out fees for debt management, and we believe that that is the right thing to do—not to charge people for getting into debt, but to help them get out of debt. As millions of Britons are already in this cycle and millions more are likely to get into it as interest rates rise and they have increasing problems with their credit card and personal debt repayments coming home to roost, the case for reforming our debt management cowboy firms grows all the stronger.
Finally, new clause 23 speaks to another legal loan sharking practice in this country, which we believe is long overdue for overhauling. Citizens Advice chief executive Gillian Guy has said:
“The logbook industry is still in the dark ages and has been getting away with lawless practices. It is absolutely absurd that a firm should be able to take away someone’s possessions without any due legal process.”
Millions of people are affected, both those who take out logbook loans and those who buy a second-hand car without knowing that there is a charge against it, only to find that the car is being repossessed and that they have no recourse to any legal practice.
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The Financial Conduct Authority itself found that some 40,000 consumers had taken out logbook loans in 2013, typically borrowing about £1,000 a time—again, at astronomical interest rates—although lenders were offering loans of up to £50,000 a time on their cars. That was done by means of a bill of sale agreement, an agreement that harks back to the Victorian era and contains no modern consumer protection measures. It is estimated that one in four second-hand cars in this country is sold with an outstanding charge against it as a result of a bill of sale agreement. That means that the company that provides the loan retains ownership of the car, and can therefore repossess it. Even if the new owner is unaware of the loan, if it has not been paid off he will have to forfeit the car.
This is possible only because we allow bill of sale agreements to continue, which is why I am so disappointed that, in Committee, the Minister led her side to vote against our proposals to abolish the present arrangements. We believe that the whole House should look at the matter again. We believe that the case for removing the ability of bill of sale agreements to be abused in this way is overwhelming. The Minister said that there might well be a case for updating the legislation, but that she did not believe that that was a matter for the Bill. Earlier, she had said that she did not believe that the Bill applied to the public sector. She has performed a welcome U-turn, so let us hope that she will also take account of her own words, uttered in 2007. She said then that we
needed to crack down on the illegal and unethical practices of some banks, credit card companies and loan companies. If there was ever an example of an unethical practice, it is the way in which such companies use bill of sale agreements. Is it not time to finish the job and end these agreements? New clause 23 would enable us to do that.
I pay tribute to my hon. Friend the Member for Makerfield (Yvonne Fovargue) for all the amendments she has tabled, and for the work she is doing in the industry. She has been trying to clean up the consumer credit market and end the damage that it is doing to many of our constituents. Government Members may laugh at the idea that the cost-of-living crisis is affecting people in our communities, but we see at first hand the way in which consumer credit companies are making a mockery of the idea that we have adequate consumer protection in our country. We believe that the new clauses would go some way towards continuing the conversation.