| Previous Section | Index | Home Page |
(2) 'Retail credit-token' means a credit-token (which has the meaning given by section 14(1)) which results in the provision of credit under a credit-token agreement provided by a retailer or group of retailers which can only be used for purchases from the retailers concerned.
(3) A 'retailer' means a person or business providing goods and services to an individual.
(4) Accordingly, a 'retail credit-token agreement' is a regulated agreement.".
(3) For section 67, substitute-
(1) A regulated agreement that is not a retail credit-token agreement may be cancelled by the debtor or hirer in accordance with this Part if the antecedent negotiations included oral representations made when in the presence of the debtor or hirer by an individual acting as, or on behalf of the negotiator, unless-
(a) the agreement is secured on land, or is a restricted-use credit agreement to finance the purchase of land or is an agreement for a bridging loan in connection with the purchase of land, or
(b) the unexecuted agreement is signed by the debtor or hirer at premises at which any of the following is carrying on any business (whether on a permanent or temporary basis)-
(ii) any party to a linked transaction (other than the debtor or hirer or a relative of his);
(iii) the negotiator in any in any antecedent negotiations.
(2) A retail credit-token agreement may be cancelled by the debtor in accordance with this Part.".
(4) For section 68, substitute-
The debtor or hirer may serve notice of cancellation of a cancellable agreement between his signing of the unexecuted agreement and-
(a) the end of the fifth day following the day on which he received a copy under section 63(2) or a notice under section 64(1)(b), or
(b) if (by virtue of regulations made under section 64(4)) section 64(1)(b) does not apply, the end of the fourteenth day following the day on which he signed the unexecuted agreement, or
(c) if the cancellable agreement is a retail credit-token agreement, the end of the seventh day following the day on which he signed the unexecuted agreement.".'.
Rob Marris: First, on a personal note, may I express my sadness that the Economic Secretary to the Treasury, my hon. Friend the Member for Dudley, South (Ian Pearson) has announced his intention not to stand in the next general election? That is a particular sadness to me, because he has been a personal friend of mine for 25 years. He will recall that I and many others worked on his successful by-election in what was then Dudley, West in 1994. He has been an outstanding Member of the House and will be sadly missed. The Financial Services Bill is a tribute to his work as a Member of Parliament and as a Minister.
Overall it is a good Bill. It has many good bits, such as those relating to the remuneration of executives, recovery and resolution plans, collective proceedings and the Financial Services Compensation Scheme, but it also has some gaps, which new clauses 1 to 7 seek to address. Nor does it grapple with the concept that some banks are too big to fail, and when we discussed that in
Committee the Minister understandably said that he was looking for international agreement. Since then, President Obama has said that the US will go down that route, and I hope that the Government will look at the issue again, because there is still time to add it to the Bill. The Bill also does not address the issue of overdraft costs following the Office of Fair Trading's unsuccessful court claim, and that should be looked at again.
Nor does the Bill address the repossession of properties that were owned by buy-to-let landlords when the tenants had no idea that the landlord was in difficulty with his or her mortgage. Happily, the issue will-I hope-be resolved by the private Member's Bill tabled by my hon. Friend the Member for Bolton, South-East (Dr. Iddon).
The fourth gap in the Bill is the question of doorstep lending and the extortionate credit rates that doorstep lenders charge, although they are not entirely alone in doing so. I am grateful to the Centre for Responsible Credit and their excellent officer Damon Gibbons for his assistance on this issue. The problem with doorstep lenders is the huge cost. The debate in this country has become clouded by core considerations about the existence of competitive markets and how those would be affected by the restrictions that would be enabled, although not necessarily introduced, by the new clauses. The concern is that price caps, which the new clauses would allow, could have adverse effects on the credit market. However, we have to consider whether doorstep lending credit markets are competitive. The concern is that they are not competitive and that prices for doorstep lending and other fringe, albeit legitimate, lending are artificially high, allowing those few lenders in the market, who are, of course, taking greater risks, to charge considerably more than would be the case if the market were competitive.
For example, the Centre for Responsible Credit has estimated that Provident Financial has 70 per cent. of the market. Provident Financial disputes that figure, but it is fair to say that it is a dominant player in the market, and the concern is that its dominance has led to an abuse of market position. Under the law at present, Provident Financial and other similar lenders are operating legitimately, but there are grave causes for concern. The cost of doorstep lending from a company such as Provident has gone up as interest rates have come down. That may be because risks have gone up-I understand that-but the Competition Commission has reported that a Provident loan of £100 repaid in 55 weekly instalments carried a total cost in credit of £65 and an annual percentage rate of 177 per cent. in 2006. Today, the same loan would have a cost in credit of £82 and a massive APR of 272.2 per cent. That is an extraordinarily high amount to charge for such a loan, even bearing in mind the additional risks and collection costs that a company such as Provident incurs.
Mr. David Drew (Stroud) (Lab/Co-op): I congratulate my hon. Friend on tabling his new clauses. Does he accept that one of the problems is that people live in complete ignorance of the levels at which they pay for credit? In other parts of the credit industry, we have got much better at demanding that those who sell credit have to explain what the repayment terms are and what problems could arise if someone does not pay the money back. That does not seem to happen in that end of the market to which he refers. Does he accept that?
Rob Marris: I agree with my hon. Friend. Often it is a combination of ignorance and desperation, and that is an explosive combination when people want to get money. As the Crowther committee on consumer credit reported in 1971, there is a level of cost for the total package of credit at which it becomes socially harmful to permit such lending to take place. I agree with that assessment from 40 years ago, because genuine social harm is done in extending credit at such high prices to people who, frankly, one would think perhaps ought not to get credit. One really wonders whether people should get credit at 272.2 per cent., even if-I stress this point-it is quite legitimate. My new clauses are an attempt to address that point.
One alternative method of assisting people with bad credit ratings who need credit-I know that this proposal will appeal to my hon. Friend the Member for Stroud (Mr. Drew) and others-is to boost credit unions' share of the market, which is significantly underdeveloped in the United Kingdom, compared with other countries such as Ireland and Canada. However, it has been suggested by the financial inclusion taskforce that at the current rate of growth, alternative lenders such as credit unions would take 10 years or so to fill the gap that is currently being filled by the doorstep lenders who charge such large amounts of money. Not surprisingly, Provident Financial is a little concerned about the new clauses.
Mr. Mark Hoban (Fareham) (Con): Is the hon. Gentleman proposing that credit unions offer a home credit service to people who are currently serviced by Provident Financial? The Joseph Rowntree Foundation has suggested that the cost of such a service on a not-for-profit basis would lead to an APR of about 120 per cent.
Rob Marris: I am well aware of the Rowntree research. The figure is indeed very high-from memory, I think that it is 123 per cent.-because there is a collection issue, which I will come to in a moment.
There are seven new clauses and they come as a package.
Mr. Hoban: The hon. Gentleman did not answer my question. Does he expect credit unions to replicate the service currently offered by Provident Financial?
Rob Marris: I am not sure about the word "replicate". What credit unions do in my constituency, for example, is make themselves available in places such as pubs for people to come and pay the loan, and so on, so there is not necessarily someone visiting them at home, but there is a less formal atmosphere than in a bank. Credit unions could move into doorstep collection as well. For some credit unions, if they replicated the model used by some of the mainstream fringe lenders, if I can put it that way, it is likely that their costs would be lower, because in many cases not only do credit unions have paid staff, but they have volunteers-the credit union to which I belong in Wolverhampton is one of those-which lowers their costs. That is a social input by volunteers to produce what they regard as a better social output-I agree with them on that-namely, lower costs of lending for people who might otherwise have difficulty borrowing money.
To canter through the seven new clauses briefly, new clause 1 would mean that a credit agreement was not enforceable if it breached a cap on the cost of credit.
New clause 2 is permissive and would allow a cap to be set on the cost of credit if there were insufficient competition in that market. New clause 3 recognises that there are different fragments of the credit market and would allow different caps to be set for different markets.
New clause 4 would address linked transactions, which is where a lender might issue, say, a token, so that the headline rate of credit might be lower than any cap that had been set, but the borrower has to buy a particular item-for example, a television-from a particular supplier at a particular price, which would circumvent that cap. New clause 4 is intended to prevent such circumvention, by including the cost of any such retail goods in the calculation of the credit price in a linked transaction.
New clause 5 would provide for publicity for any caps that were set. That addresses the issue raised by my hon. Friend the Member for Stroud, which is partly about the ignorance of some borrowers. If the new clauses were accepted by the Government and passed into law, and caps were set because it was found that parts of the market were not competitive, it would still remain a challenge for prospective borrowers to find out whether a cap existed. We as a society find it difficult to reach certain people through the instruments of the state-and often through political parties, I have to say-although loan sharks and legitimate fringe lenders do not seem to have any problem doing so. We need to be inventive about publicising any restrictions on excessive credit costs. New clause 6 would establish a scheme to impose penalties for breaching any caps, and new clause 7 is simply a definitions clause.
Provident Financial has e-mailed several parliamentarians, and that e-mail has been passed to me. Provident did not e-mail me personally. The e-mail states:
"Home credit is the provision of small unsecured loans (typically £100-£500) with manageable, flexible repayments. Repayments are collected each week from the customer's home by an agent, most of whom are female and live in the communities they serve. Provident Financial agents visit one in twenty homes in the UK each week."
That bears on the point raised by the hon. Member for Fareham (Mr. Hoban) about replicating the costs. Of course, these collections have to take place, which can increase costs and lead to rates of up to 123 per cent. APR, as the Joseph Rowntree Foundation pointed out. Provident's e-mail goes on to talk about home credit APRs being higher than for some other products, as we would expect, because smaller sums are lent over a shorter period compared with those of other financial services providers. The cost of weekly home collection is a factor, but the e-mail goes on to say that
"there are no default or extra interest charges".
In response to concerns about the activities of Provident Financial, my right hon. Friend the Member for Makerfield (Mr. McCartney) tabled early-day motion 379. When I looked this morning, there were 65 signatories to the motion, which expresses concern about the activities of lenders such as Provident Financial. It names Provident, and asks for the Office of Fair Trading to be given a power to cap prices. That is what the new clauses would do. It would be a permissive power; the proposals do not say that a cap must be introduced.
I am not surprised that Provident did not send me a copy of the circular that it sent to some parliamentarians, because, when I looked at it, I found that it appeared to
be full of contradictions. Because Provident has got my back up by not contacting me, I am going to go through some of those contradictions. Provident states:
"The cost of credit has risen in all sectors of financial services (including fees and charges for secured and unsecured personal loans, mortgages and credit card lending). Demand for credit is weak. Consumers are being cautious about taking on debt and lenders, in turn, are exercising greater scrutiny over their lending decisions."
It is almost 40 years since I did my economics A-level, but I would have thought that if the demand for credit was weak, the cost of credit might actually come down. But Provident states:
"Demand for credit is weak",
"cost of credit has risen".
That seems contradictory, unless there are unwarranted and undesirable frictions on the operation of the credit market.
Provident understandably goes on to quote three conclusions from Professor Elaine Kempson, whom it calls
"the leading UK academic on credit and debt".
It cites her as concluding in a report in 2005 that:
"An interest rate ceiling could do nothing to reduce high costs associated with lending to people on low incomes who have a high risk of default. Instead, the APR would be reduced by displacing these costs elsewhere, for example in the form of charges for default-the last thing that low-income borrowers would want."
It surprised me that Provident cited that quote in support of its claims since, in the earlier quote that I read out, it said that
"there are no default or extra interest charges".
So its professor, as it were, is understandably, properly and credibly saying, "You've got to be careful if you bring in a cap, because people might find a way round it by jacking up the price of default," but Provident quotes her and then says, "We do not have any default or extra interest charges."
The good Professor Kempson goes on to say:
"It is also likely that more credit would become tied to the purchase of goods and consumers would be faced with high price mark-ups as retailers seek to recover the costs of supplying credit."
I have referred to my hope that new clause 4 would address that, in terms of linked transactions.
The third of Professor Kempson's conclusions cited by Provident is that
"there is a danger that lenders would move out of this market altogether, leaving poor people even more prey to unlicensed lenders."
That is a significant concern of many organisations, commentators, academics and so on. However, Provident, which has been somewhat even-handed, although contradictory, about this, cites recent research by the Financial Inclusion Centre as finding that the use of loan sharks is on the increase, with over 200,000 people taking on illegal credit annually-an increase of 22 per cent. since 2006. This is a sort of parallel universe scenario: one does not necessarily know how many more or how many fewer people would have turned to illegal loan sharks if the situation were different and companies such as Provident did not exist or were
restricted by caps on interest rates on their activities. However, there is no cap, very high interests are being charged and an increasing number of people are turning to loan sharks, and that does not suggest a system that is working very well.
Provident also cites a report produced for the Department of Trade and Industry, as it then was, by Policis in August 2004. It stated that the "credit impaired" in France and Germany, where caps are in place, appear more likely to use illegal lenders than in the UK where there are legal credit options for such borrowers. Yet, as I have said, even-handed as ever, Provident also cites research by the Financial Inclusion Centre about the use of loan sharks increasing.
I thought to myself that if Provident can quote a professor, so can I-my guy is German. In 2005, Professor Udo Reifner from the Hamburg Institute for Financial Services published a response to the findings on the effects of the German rate cap-the cap referred to by Policis in its August 2004 report for the DTI. Professor Reifner said:
"In total, at least 9 million people cannot access credit from mainstream banks"
"as opposed to approximately 2.5 million in Germany and between 2.5 million and 4.1 million in France".
Of course, Germany has a significantly larger population than the UK and France has a population that is almost the same as the UK. On the face of it, their caps have resulted in, or certainly exist in, a system where fewer people have difficulty getting access to mainstream credit.
"Published figures from Provident Financial's statutory financial returns show that there has been a steady erosion of margins over the past three years. Profit per customer reduced by 15 per cent. in the three years to December 2008 when Provident's most recent full year results were announced."
That seems strange, because when Provident went to the market in October 2009 and issued a bond to raise £250 million of investment to expand its operations-interestingly, the rate it managed to obtain was 8 per cent. rather than 173 per cent.-it told prospective investors:
"The competitive position in the £3bn home credit segment of the market has not changed materially since the Competition Commission concluded its review of the home credit market at the end of 2006."
So for the purposes of lobbying on prospective legislation such as this Provident says that there has been a steady erosion of margins, but when it goes to the market to get money it says that the market has not changed materially since 2006. There is a bit of a contradiction there.
4 pm
| Next Section | Index | Home Page |