My Lords, I support Amendment 50B. The evidence available on the use of payday loans heightens fears that credit is increasingly seen as the new safety net for many citizens. StepChange found, for instance, that its clients with payday loans often have other forms of debt, such as a much greater likelihood of being behind with their rent.
The FCA has taken some strong and definitive action against the payday loan companies, and is suggesting that within a year or so perhaps 95% of these payday lending companies will be withdrawing their services. However, on its own admission, even after the cap on charges is introduced, the proportion of borrowers experiencing financial distress as a result of such borrowing will remain at about 40%. But whatever the action taken by the FCA to regulate a particular market, the demand for credit among low-income households will remain, as will the problem of rising debt and the need for help and advice.
Even after addressing the business models of the payday loan companies, the systemic problem will still need to be resolved: how can people get access to affordable credit and get access to, and use of, a free debt advice service? Only the Government can drive the policy needed to secure sufficient capital liquidity for not-for-profit affordable lenders to provide an alternative source of credit. This amendment captures the need for the Secretary of State to bring forward measures to address those twin needs of free debt advice for vulnerable consumers and the provision of affordable credit.
As a comparator, for those who have assets rather than debts, the new freedom and choice agenda for pensions due in April 2015 comes with a guaranteed guidance service, captured in legislation—on the assumption, quite rightly, that the position of pension savers and consumers in the marketplace will be more vulnerable to poor decision-taking without such guaranteed guidance. How greater is the case, then, for those who have debts rather than assets?
No doubt the argument will be made that significant numbers who would benefit do not seek debt advice and that the allocation of funding to a debt advice service is proportionate to the demand. My response is to say that the Government should take the lead in creating the demand and the take-up for that debt advice service. My noble friend Lord Stevenson suggested examples based on the Scottish system. Maybe we should see the introduction of some conditionalities into the credit market on taking debt counselling in association with the giving of loans. There are lots of initiatives that the Government could take, not only to provide debt advice services but to ensure that users or takers of loans use that service.
We also need to see how structural changes in the labour market interface with the social security system to understand whether this is reinforcing the use of credit as a systemic solution to low-income families’ financial management, demonstrating the need for free debt advice services. I will take a few moments to explain what I mean. The casualisation of employment contracts, along with variable and zero-hours contracts, can result in significant volatility around hours worked and income received in any one week, let alone between weeks. In such situations, where people do not have a smooth income flow, if you have to pay your rent, buy food for your children or repair a much needed broken washing machine, you probably cannot wait until a week where you have more hours and higher wages. You need the credit to tide you over.
However, the welfare system cannot provide a real-time response. Under the current system, if you work less than 16 hours in a week, you do not qualify for the working tax credit in that week. If you are tied into an exclusive contract with an employer and provided with very few hours of work that week, and are not available for other work because of that exclusivity, then you cannot get JSA. Universal credit, when it is rolled out, may overcome the barrier of the 16 hours but it will replace it with another hurdle that will increase the need for credit. Universal credit is paid monthly in arrears, so you would struggle to catch up with your debt even under universal credit.
If you face such volatility in your hours and income and have more than 16 hours of work, you deal with the HMRC, but if you have worked under 16 hours in that week, you deal with the DWP for JSA and with the local authority for housing benefit. You also have to manage your debts. As my noble friend Lady Hollis frequently comments, being poor can be a full-time job—even more so with the changing nature of the labour market and, potentially, the greater need for credit.
The point that I am making is that for lower-income households, given what is happening in the labour market and how the welfare system operates, even under universal credit, the need for short-term credit for families—particularly vulnerable, low-income ones—to manage their finances will increase, not decline, and with it the desperate need for debt advice services. The examples that I have given illustrate the real evidence why low-income people will persist in being vulnerable to high-cost loans and in need of debt advice services.
The problems are compounded by the insufficiency of low-cost sources of credit and the absence of public policies promoting savings strategies for low-income people to provide a savings buffer. Most do not have such a thing or the means to acquire it. Tax incentives are targeted at the better off. One has to earn enough in the first instance to get the benefit of incentivised tax relief. The need for low-cost loans and debt counselling will remain very important for the foreseeable future for many on low incomes. Whatever the FCA does to the business model of payday loan companies, the systemic problem of how low-income people manage their finances, their dependency on loans and their need for assistance in managing debt will, when one looks at what is happening in the world of work, increase and not decrease.
This amendment would put a responsibility on the Secretary of State to bring forward measures to ensure,
“free debt advice for vulnerable consumers; and … provision of affordable alternative credit through credit unions”.
Much is said by politicians, including in both Houses, about protecting people in the face of the realities of today’s labour and financial markets. Helping them manage their finances, which will protect the well-being of their families though the provision of affordable credit and debt counselling, has to rank very high.
Thinking of a comment to conclude my speech, I remembered being at a discussion dinner a while ago on the duties of care of providers in the wholesale and retail asset management industry, an issue on which I engage a great deal. There was a mixed group of people there from different sides of the industry and of different political persuasions. Someone asked why the management of consumers’ assets and savings receives so much more political attention than the management of debt. There was a pause around the room. I replied that it is because unmanageable debt is concentrated among the poor.
We have to raise that issue and say that there is nothing, looking at the horizon of the labour market and at how the welfare system will operate, that provides an easy solution for families caught in this need to manage their finances. That is why this amendment is so helpful. We have to sustain the debate. Governments and the Secretary of State must take on, as a core societal issue, how they address providing or delivering debt advice and low-cost access to credit to so many people who need them.