|Previous Section||Index||Home Page|
Overall, there is a long background of concerns about extortionate, as I would call them, or high, as others would call them, interest rates, going back to the Crowther report in 1971. In 1991, the Office of Fair Trading identified the extortionate credit provisions of the Consumer Credit Act 1974, following on from the Crowther report, and said that they were not working. Nothing happened. In 1999, the DTI commissioned research into what improvements could be made, but
that report was not published for another three years, until 2002. In 2003, we had a consultation from the DTI on a new unjust credit test and three years after that, in the Consumer Credit Act 2006, we saw the introduction of the unfair credit relationship test as a replacement for the extortionate credit provisions of the 1974 Act.
I hope that the Minister can clarify whether his Department, or any other Department, is monitoring whether the unfair credit relationship provisions introduced in the 2006 Act are working. It has been suggested to me that no such monitoring is taking place. We have a continuing situation in which more financially excluded people are having difficulty getting access to credit in this country than those in France, Germany or parts of the United States of America where they have anti-usury laws. People are paying very high interest rates and we have a market in which demand for credit has fallen but the cost thereof has risen, suggesting that there is not a competitive market for credit for such borrowers. Against that I would contrast the new clauses that I propose, which are permissive and would enable caps to be introduced if it were found that part of a credit market was not working competitively. I urge the Government to take this issue seriously.
Mr. Hoban: Consumer credit is a feature of everyday life. Our society has become increasingly dependent on credit, as we saw in the run-up to the recent financial crisis. The hon. Member for Wolverhampton, South-West (Rob Marris) talked about the credit position in France and Germany, but it is worth pointing out that the UK had higher consumer debt than France and Germany combined. We have seen a cultural change, too. No longer do consumers have to save for new purchases; they can take out a credit card, a store card or a personal loan, or they can withdraw equity from their house. For many people, rising levels of debt were seen as manageable, so long as the economy motored along with low unemployment and rising levels of income. That optimistic outlook, however, was predicated on an end to boom and bust and we can see the cost of that assumption today.
The change to the cultural norm on debt was driven partly by a society that takes on much more debt through home ownership, going to university and so on and partly by the marketing of credit. The Bill tackles that, in part, through banning unsolicited credit card cheques. Those cheques were an indefensible practice that even people in the industry found rather hard to defend.
My new clause 14 considers another aspect of the marketing and availability of credit-store cards. It seeks to address two issues: the rates at which store card debt can be charged and the sales practice surrounding them. We need to distinguish between a store card and a credit card. Store cards are offered for exclusive use in the shops of a particular retailer, whereas a credit card can be used at a wider range of outlets. Of course, some retailers, such as John Lewis and Marks & Spencer, have a credit card rather than just a store card. If one shops at a major department store, one is likely to be offered the chance to take out such a card at the checkout, often in combination with an attractive offer, such as a 10 per cent. discount on that day's purchases.
It sounds quite attractive, until one looks at the rates charged by store cards. A survey last year by Which? highlighted the high cost of some of the store cards that
are available. Argos charged an annual percentage rate of 27.9 per cent., and New Look charged 28.9 per cent., whereas cards issued by retailers such as Ikea, River Island and Topman all cost about 19.9 per cent. According to Which?, the average APR of store cards is about 25.2 per cent., compared with an average for credit cards of about 16.8 per cent. That shows that store cards tend to be relatively more expensive, compared with reasonable alternatives. Even cards at the bottom end of the scale, such as those issued by Ikea and River Island, still charge a higher APR than the average for credit cards.
High rates in conjunction with low minimum payments mean that it can take some time to pay off relatively small amounts charged to a card. For instance, it would take six years to pay off a balance of £100 on an Argos store card, for which the minimum monthly repayment is either £2 or 4 per cent. At the other end of the scale, it would take two years and 10 months to pay off the same balance on the River Island store card, which has a lower interest rate and a higher minimum repayment. It appears, therefore, that high rates of interest make store cards a poor way to borrow, yet there are more than 14.6 million of them in circulation.
In 2006, the Competition Commission, recognising the high cost of credit, announced that any providers offering a card with a rate above 25 per cent. should issue a wealth warning telling customers that there are cheaper ways to borrow. Despite that, however, store cards remain in wide circulation.
We might assume that, on seeing the wealth warning, a rational consumer might decide to shop around for another form of credit before taking out a store card-that such a person would leave his or her goods in the shop and pop down to the bank, or go home and search online for a form of cheaper credit. However, the evidence suggests that things do not always happen that way, as the rational consumer will see the opportunity to reduce the cost of shopping offered by the day-one discount. He or she will take advantage of that discount and then repay the balance straight away, thus avoiding the interest cost.
Of course, if consumers were always that rational, there would be no store card business, because people would simply take advantage of the discount, pay off the balance and walk away. However, despite people's best intentions, the reality is that the desire for short-term gratification overcomes the rational response. If it did not, retailers would not offer these deals.
My new clause 14 therefore contains two provisions. First, it would give the Office of Fair Trading the power to cap excessive interest rates, where they are not in the interests of the consumer or the debtor. In a way, that mirrors some of the suggestions made by the hon. Member for Wolverhampton, South-West, and I shall return to some of the differences when I address his proposals directly. The new clause would place no obligation on the OFT to use those powers, but it would provide some tools for going beyond the wealth warning approach announced in 2006.
The second element of new clause 14 is the provision that would enable the decision to take out a store card to be decoupled from any requirement to buy from that shop on that day. It would mean that people taking out a store card would have a seven-day cooling off period in which they could not use it. That would enable
consumers to shop around for a better rate, and it would also tackle one of the sales practices that incentivises the take-up of cards.
It is worth thinking about what happens when a store card is taken out in a shop. There was an article on store cards in Which? Money magazine last month, for which a researcher went to open a number of store card accounts. In the course of a couple of days, he managed to rack up nearly £3,000 worth of credit, even though his income for that year was about £1,000. The article says that half the companies that he approached rejected his application, so I suppose that we should take some reassurance from that.
"none of the stores we visited verbally warned James about the high interest rates and the low minimum payments on the card and none of them told him that they were unsuitable for borrowing. This could only be found in the smallprint of the terms and conditions given to James...waiting in a queue in a busy shop is not the ideal place in which to read the small print on an application."
My new clause would give the purchaser, or the person taking out a retail credit-token agreement-as it is described in the new clause-the opportunity to go home and think carefully about whether they want to use the card. It would not close off the provision of credit to those customers, but would give the person taking out the card the opportunity to think carefully about whether they want to pursue that route.
One might ask why I have focused on store cards and not on the personal loans offered by some retailers at the point of sale. That is a valid question and it is worth exploring. There is a difference between a loan and a store card, which is a form of revolving credit, whereby a person enters an arrangement with a retailer that enables them to spend up to a certain amount. There is no fixed repayment schedule and there can be relatively low minimum repayments. In the Which? sample, repayments ranged from 2.5 per cent. or £5 for British Home Stores to 4 per cent. or £4 for companies such as Topman or River Island.
It is possible to take on additional commitments without deliberate thought. Many store cards adopt the low and grow approach to credit-a subject we touched on in our debates in Committee, and which was initiated by the hon. Member for South-East Cornwall (Mr. Breed). People start with a relatively low credit limit and it is then increased.
A personal loan is different. There is a fixed repayment period for a fixed amount, so when a person takes out a loan they make a commitment. They know the repayment level and they know how long the loan will last. It is a well determined, well defined commitment, unlike a store card, for which the agreement is open-ended and there is no fixed repayment period and no fixed amount of borrowing because the credit limit can be increased. The argument that applies to store cards is very different from that which applies to the loans offered by our major retailers. That is why new clause 14 is linked to store cards. The measures set out in my new clause are proportionate and reasonable. They reflect our party's policy, and it has been our party's policy since well before the economic crisis.
I am not entirely sure what the new clauses tabled by the hon. Member for Wolverhampton, South-West represent. The hon. Gentleman is, I think, a Parliamentary Private Secretary; he is part of the payroll vote and he is here to support the Government in debates. He should be a loyal supporter, yet it appears to me that his new clauses question settled Government policy, unless they are a teaser-opening the way for the Minister to accept new clauses 1 to 7. Is this a sign of independence of mind finally breaking out? In Committee, when my hon. Friend the Member for Chichester (Mr. Tyrie) tabled a new clause about competition, the Minister thought the proposal should be part of the regulatory objectives of the FSA, but recognised that Government policy was rather different. Perhaps he opened the floodgates for the hon. Member for Wolverhampton, South-West to table all sorts of amendments.
Mr. Drew: May I come to the defence of my hon. Friend the Member for Wolverhampton, South-West (Rob Marris)? He is always independent-minded, even though he may happen to have a job that some of us would love but never seem to curry favour for. I have always seen him as an independent, forward-thinking and-dare I say it?-concerned Member on the Government side.
Mr. Hoban: There we have it: the hon. Gentleman is queuing up to replace the hon. Member for Wolverhampton, South-West as a PPS, if the latter feels he ought to fall on his sword after moving his new clause.
Rob Marris: I have been independent-minded on certain things for a long time and I quite frequently question Government policy-sometimes successfully. Even though I say it myself, I think that a measure of my independent-mindedness, which seems to surprise the hon. Gentleman, is the fact that I was voted Back Bencher of the year in 2008, and someone is not voted Back Bencher of the year by Members of all parties if they are a complete lickspittle.
James Duddridge (Rochford and Southend, East) (Con): Although it is good that we have with us a Back Bencher of some independence, surely the hon. Member for Wolverhampton, South-West (Rob Marris) is one thing or another. He is either part of the Government and acting under collective responsibility, or he is an independent Back Bencher-he cannot be both things at the same time. Will my hon. Friend the Member for Fareham (Mr. Hoban) put it to the hon. Gentleman that if he truly wants to be independent, he should leave the Government and make such comments from the Back Benches?
Order. Before the hon. Member for Fareham (Mr. Hoban) responds to the hon. Member for Rochford and Southend, East (James Duddridge), may I simply remind him that, although I appreciate the
importance and good nature of these exchanges, we are discussing new clauses relating to the regulation of credit?
Mr. Hoban: Thank you for that guidance, Mr. Speaker. Perhaps I should table a new clause to the Constitutional Reform and Governance Bill setting out the statutory duties of PPSs, rather than considering them in the context of this debate. As ever, I am grateful to you for putting me back on the straight and narrow.
I have some sympathy with new clauses 1 to 7. Those of us who are in comfortable, well-paid jobs, with easy access to credit, will frankly be shocked by the APRs charged on home credit products. The hon. Member for Wolverhampton, South-West cited illustrative examples of the rates, which are indeed high. We could shine a light on other areas that involve high rates, such as pay-day cheques and lending, which involve high rates as a consequence of the relatively short duration of the loans. Such rates are eye-watering when compared with those for store cards, so we need to reflect on that too.
There is a real challenge here, however, because we need to ask whether a price cap would work and what its impact would be. The hon. Gentleman picked apart the briefing that Provident circulated among hon. Members, but it included legitimate concerns, especially those raised by independent bodies. For example, when Policis examined the home credit market in 2004, it looked at the experience of countries in which caps had been imposed. Among its findings was that where there were rate ceilings, the cost of credit became less transparent and there was less latitude for consumers. It also found that the cost of such products switched from the interest rates charged to default rates, which was a point raised by the hon. Gentleman in connection with the comments by Elaine Kempson cited in the Provident briefing.
It might be the case that default charges are not levied by home credit companies when a consumer decides that they are not in a position to pay for a certain week. Indeed, I think that the model followed by several companies assumes that there will be some weeks when people do not pay. However, in other parts of the financial services sector, competition on rates has led to other products being sold to make up the margin. For example, it is argued that a driver of lenders selling payment protection insurance has been that competition on loan rates has led them to try to recover their margin by selling that insurance, which has a relatively high margin.
My fear in such a situation would be companies, were they subject to a rate cap, starting to charge consumers an additional cost for that default. In the same way, some would argue, as the hon. Member for Edmonton (Mr. Love) might when we consider other amendments, that one reason why the penalty charges for unauthorised overdrafts are so high is that they create a form of indirect cross-subsidisation from those who go overdrawn. They subsidise so-called free banking for the rest of us.
But surely my hon. Friend the Member for Wolverhampton, South-West was saying that there is no competition. It is not that people are queuing up;
they are offered loans on the doorstep by others from their community who, supposedly, are genuinely lending money, but there is no educative process and no ability to rationalise and go out to other lenders. The lenders are preying on the most vulnerable. Is it not about time that we in this place tried to do something about it? We have had debates on whether there should be maximum repayment terms, but apparently we got nowhere with that. My hon. Friend is simply trying to put some structure in an operation that is letting people down. What is wrong with that?
Mr. Hoban: The problem is what would the consequences of that structure would be. I do not doubt that the new clauses have been tabled with the best of intentions, reflecting some of the concerns that have been raised, but we need to think carefully about the unforeseen consequences. For example, there may be a switch from high rates to low rates with additional charges. I am not sure that the demand for credit would necessarily be extinguished as a consequence of the proposals. We may not think it is right, but people would still need credit to deal with unexpected variations in income or expenditure, and where would they go if that money was not available from Provident? I will return to that point.
The Policis report suggests that rate caps ended up in a rather odd situation whereby lenders felt it was uneconomic to advance relatively small loans, so either no money was lent to customers or they would be lent a higher amount than was strictly necessary. In Committee, we talked briefly about ending unsolicited increases in credit limits. We need to think about what amounts people would lend. The hon. Member for Wolverhampton, South-West questioned the merits of this argument, but in France and Germany rate caps meant that more people used illegal lenders. That is the evidence from the Policis study.
The hon. Gentleman also implied that the only opponents of rate caps were home credit companies, but let us not forget that in 2005 a coalition including Citizens Advice, AdviceUK, the National Consumer Council, Which? and ABCUL-the Association of British Credit Unions Ltd-all urged the House of Lords to oppose a rate cap. There is a coalition here: it is not just people in the home credit market but a wide range of people with a close interest in this area who are concerned about the impact of a rate cap.
I shall not repeat in full the words of Elaine Kempson-the hon. Member for Wolverhampton, South-West cited them at length-but let us turn to the alternative and what would happen if the rate cap were applied. Elaine Kempson said:
"Finally, there is a danger that lenders would move out of this market altogether, leaving poor people even more prey to unlicensed lenders."
|Next Section||Index||Home Page|