My Lords, yesterday I had tea with a dear friend here in your Lordships’ House. Unsurprisingly, the subject of payday loans came into the conversation. He told me about his son, who has mild attention deficit disorder, is frequently unemployed and had taken out two payday loans. The loans were for £800. His son could not pay them back and, to cover his embarrassment, rolled them over several times. In a few months, the amount due to be repaid had escalated to £5,000. My friend reluctantly had to settle the bill. That is the essence of the amendment that I put down at Committee stage, and which I have put down today. It is this that we are seeking to control.
Ten years ago, this amendment probably would not have been tabled, but today it is very much of the hour. The fact is that legalised loan-sharking, or payday lending—call it what you will—has gone viral. It is out of control, dangerous and is causing great distress to many vulnerable people. Two developments have come together to cause the rapid growth of this lending industry. The first is the dreadful state of the economy. People are desperate for money and they will take it from whatever source they can, whatever the price. Take a walk down any high street, particularly in deprived areas—payday loan shops are abundant. Recently, I went to Walthamstow with my honourable friend Stella Creasy MP and my right honourable friend Ed Miliband. There, on the high street, we saw more than 15 money shops of one form or another. Business was brisk.
The second development has been the astronomic growth of online lending. As I said in Committee, I went on to one of the most successful websites and what struck me was the slickness of the process: just some cursory information to fill in and the money would have been in my bank in 15 minutes. It is simply too easy. A straitened economy and the ease of usage of online lending have combined to create this booming business sector.
One online company—Wonga—is projected to be making more than £70 million profit this year, probably valuing the company well in excess of £1 billion if it were to go public. The annual size of the payday lending industry is at least £2 billion; it is growing at a fast clip and in time will become a major source of consumer credit in this country. I do not understand why this Government—who are determined to reduce personal indebtedness at the macro level—are at the same time allowing this sector to grow unchecked. I would have thought that both parties opposite would be encouraging me on this amendment, rather than opposing this very important piece of legislation. Perhaps the Minister will have some good news for me when he replies.
Payday loan customers, by their very nature, are people with very low credit ratings, who have no other options open to them. They borrow money on an unsecured basis at extortionate rates of interest. Does this not strike a familiar chord? Uncontrolled lending to people who are barely able to meet their repayments in a marketplace that is expanding at a massive rate: does that not sound like what happened in the United States with sub-prime lending? Sub-prime was off everybody’s radar screen until it hit the US and world economy like a hurricane. It was the initial cause of the financial crash of 2007 and few saw it coming. If Her Majesty’s Treasury does not buy into the moral repugnance that most of us feel about the dangers of payday lending, at least it should be on its guard about the economic consequences of this ticking bomb.
However, it is the moral argument that concerns us this afternoon. I am delighted that the right reverend Prelate the Bishop of Durham has added his name to this amendment. He has spoken previously on this subject and I am sure he will be making his views very clear. I am pleased that the noble Baronesses, Lady Howe of Idlicote and Lady Grey-Thompson, have also added their names to this amendment. Both have long records of standing up for the vulnerable and I await their speeches with anticipation.
I want to make one point very clear. This amendment does not seek to ban payday lending; it seeks to give the FCA the power to cap interest rates when they are causing consumer detriment. It is a “may”, not a “must”. It puts the responsibility squarely into the hands of the FCA. I will go further: we need payday lenders; they fulfil a vital role. There are many people who cannot get credit from traditional sources, and without legalised payday lenders, their alternative is the backstreet loan sharks whose penalty for non-payment is often pretty brutal.
Payday lenders fill a vital gap, but they need to be controlled. Interest rates charged by many payday lenders go well beyond the obscene. Any lender is
bound by law to display the annual percentage rate—the APR—that it is charging. In many cases, payday lenders are charging an APR in excess of 4,000%. These lenders avoid the use of the term APR whenever they can; they say it is not appropriate for a short-term loan. I have heard them say to me that quoting APR on a payday loan is as relevant as quoting APR if you hire a car for a week or stay in a hotel for a similar period. We must not buy this argument and we must not let them get off the hook. Hiring a car or staying in a hotel is a rental of an asset and its associated services. It incurs no repayment of principal and is not a loan.
Payday lenders say that quoting APR on a short-term loan is inappropriate—how can you use the word “annualised” to measure something that lasts just a few weeks? That is exactly what the finance industry does every day. If one bank borrows £100 million from the money market on an overnight basis, the charge is quoted as an annualised interest rate. Stating that APR is the wrong measure is simply disingenuous. APR is there for an express purpose and in my opinion it should be included in all advertising, but that is a debate for another time.
Last Sunday, we saw an interesting development. In an article in the Sunday Telegraph, Wonga was reported as saying that its rate of interest is equal to 1% per day. This is a big change from a company which has previously refused to admit that its repayments should be quoted as a rate of interest. What it says is true—it does charge 1% per day, or thereabouts—but it is playing games. If you borrow £100 from Wonga for seven days, the simple interest that you pay will be 1.82% per day. If you borrow £100 for a month, the simple interest will be 1.21% per day. For its maximum of 43 days, it will be 1.16% per day. The game it is playing is that this is calculated on the basis of simple interest, but interest is seldom calculated on a simple basis. The accepted measure is of course compound interest. A loan that costs just 1% per day becomes 4,000% per annum when aggregated in compound interest terms, which is exactly what APR is all about.
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Other countries do not have the payday loan free-for-all that we do. In the United States, rules on payday lending vary state by state. By and large, they restrict the permitted interest component to 15% and the rollovers are very tightly controlled. Many UK lenders exceed 22%. The state with the best record is Florida. There, the maximum amount of interest is 10% of the loan amount, plus a $5 verification fee. The maximum number of loans that a customer can have outstanding is one, and the verification fee is used to pay for the computer systems that monitor all payday loans state-wide. Loan terms are between seven and 31 days, and all this prevents long-term dependency on credit.
The results in Florida are staggering. Of 6.8 million loans in 2009-10, not a single one was extended beyond the contract for additional fees. Ninety per cent of borrowers repaid these loans within 30 days of the due dates, and 70% of customers repaid the loans on the contract end date. Complaints about interest rates have all but disappeared and, most impressive of all,
in the whole state not one borrower was indebted by more than $500 at any time. It has been a huge success and, in my personal view, a pointer to how we should proceed in our country.
Last week, the Office of Fair Trading published its interim report into payday lending. Its investigation was not directed at interest caps but it highlights aspects of payday lending behaviour which are disturbing. It found the following. Lenders have a higher level of compliance where statutory requirements are more prescriptive—for example, in advertising—but where obligations are set out in guidance only, compliance is much lower. Examples are credit checks made on lenders, loans not repaid on time, frequency of rollover and lack of forbearance when borrowers get into difficulty.
The OFT recommends that lenders do more to comply with the letter and spirit of the law. In several cases, it questions the fitness of lenders to hold a consumer credit licence. The action it is taking includes warning the majority of the firms inspected that they must improve how they treat customers, and conducting formal investigations into firms where it has concluded that, based on the evidence, their fitness to hold a licence may be called into question. However, most damning of all, the OFT has said that the relevant trade associations need to improve standards of compliance with the law, as well as guidance on advertising. The OFT is too polite to say so but it seems that it is really saying that this is an industry run by cowboys who are constantly operating on the fringes of legality.
Another report has come from Which?, which states the following, based on a survey it conducted: half of payday loan users have taken out credit that it turned out they could not afford to repay; 29% of payday loan users have taken out credit that they absolutely knew they could not repay; 43% of payday loan users said it was too easy to get credit; 20% have been hit by unexpected charges; 24% spent their loans to repay other debts; and most worrying of all, 38% spent their loans on essentials such as food and fuel.
Mr Richard Lloyd, the executive director of Which? stated:
“It’s shocking that half of all people taking out payday loans have been unable to repay debts and it’s a depressing sign of the times that almost a third were hassled by debt collectors in the past year. Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by. That’s when they’re hit by excessive penalty charges and roll over fees”.
We have an industry flying by the seat of its pants, observing at best the flimsiest requirements of the law and its own pathetic codes of conduct. It needs to be much more closely controlled. In my opinion we could do a lot worse than emulate the success story that we have seen in Florida. We can start this afternoon by supporting my amendment. As I have said, payday lenders need to exist. The FCA will need to strike a difficult balance between capping the interest rates that these companies can charge, while allowing them to earn enough profit so that they can still produce a proportionate return. It will not be easy, but the FCA requires the tools to start the process and this amendment will provide it with what it needs. I beg to move.