The hon. Gentleman suggested that credit unions might fill that gap. I am a great supporter of credit unions, which do an excellent job, and I agree that it would be good to see them grow so that they supplied a share of the market comparable with what they are able to supply elsewhere. However, even credit unions have to turn people down. Many people are concerned about the fact that credit unions want a cap on the rates that they charge. Credit unions will not supply the whole demand, and others will move into that space, which I
am concerned will be filled by illegal money lenders and loan sharks. As I said in my intervention on the hon. Member for Wolverhampton, South-West, there has been a great deal of discussion about whether there is a sustainable model for not-for-profit home credit. The Joseph Rowntree Foundation suggested that the APR would probably be 123 per cent., so it is an expensive operation.
Mr. Andrew Love (Edmonton) (Lab/Co-op): I agree with much of what the hon. Gentleman has said. Something he has not touched on is the role of the social fund in providing support for people who have difficulty obtaining credit, and who will fall into the hands of the illegal credit sector if we restrict the provision by capping interest rates.
Mr. Hoban: The hon. Gentleman makes an important point. I have not touched on it, nor was I intending to do so. However, a significant increase in the social fund would be required if it were to replace the home credit market. I cannot remember whether the hon. Member for Wolverhampton, South-West cited the amount that Provident Financial raised in its bonds.
There are alternatives, but I am not sure that they will plug the gap if the people in the home credit market choose to withdraw. It is an expensive business to collect money door to door from consumers on low incomes who want flexibility. Many organisations would not want the reputational risk of working in that arena and charging high rates. I am not persuaded by the arguments of the hon. Member for Wolverhampton, South-West, although I understand where he is coming from. Members on both sides of the House would want a cheaper alternative to home credit, but we have yet to see evidence that one exists. If the home credit people withdrew from the market, some individuals would be picked up by credit unions, community development finance institutions and similar bodies, but many of them would go to loan sharks, and we know the personal costs that can result from their doing so.
The credit market is difficult to get right, and there are real challenges in how we deal with high rates and marketing. We welcome the measures in the Bill, but new clause 14 is a sensible and proportionate solution to the problem of store cards so, with your agreement, Mr. Speaker, I should like to press it to a vote at the appropriate time.
Mr. Colin Breed (South-East Cornwall) (LD):
All of us would have a great deal of sympathy with what has been said over the past hour or so, because the provision of small, unsecured loans to vulnerable people or people on very low incomes has been a problem for an extremely long time. It is difficult to see how we can legislate totally for the sort of things that people sometimes knowingly get into when they have no alternative or choice. The truth is that interest rates are often not a particularly good guide to the way in which we try to
control the costs. A relatively small amount of money paid back over a relatively short period of time with what appears to be a reasonable fee for doing so translates into an extraordinarily high APR. If someone repays £50 within three months and pays £10 of £15 for the privilege of doing so-perhaps £5 a month-that does not seem very much, but when we do the maths, it translates into a large APR. Rate caps have been under consideration for a long time but are not the only measure by which we can try to control that practice. Administration, door-to-door collection, the lack of security and the potential for default all add to the cost of providing low-level loans.
There may not seem to be many defaults, because the debt is often rolled forward. When somebody is about to default, the existing amount is rolled into another credit agreement. That is the slippery slope that gets people into difficult situations. Perhaps we ought to be more insistent about restricting such roll-overs.
There is not much competition because not many people want to get into the business in a formal, legitimate sense. Much has been said about Provident. In my neck of the woods, I have had no complaints about Provident. Some people swear by the firm; because they have acted sensibly, Provident has been only too pleased to do business with them. Unfortunately, its major competitor, Cattles, failed a year or so ago. It is regrettable that the business was not picked up by another firm, to provide some measure of competition. There was clear evidence that Cattles was doing good business, but the way in which it managed that brought about its failure.
Those whom I have come across who desperately want some emergency money are, in many cases, people whose benefit has not turned up although they were promised it, or who have been denied the opportunity of accessing the social fund. They may talk to their friends and neighbours and get into some arrangement that they did not intend. Credit unions could well provide greater opportunity to access money, but more credit unions are needed, their rules should be more relaxed, and there should be greater depth of business in the communities that they would want to serve. There are not enough credit unions in many parts of the country and the way to access them is not as well known as it should be.
Although I agree that this area needs to be examined, I am deeply concerned that in an effort to protect the relatively small number of people who take on difficult contracts or resort to loan sharks, we might cut off some of the low-level unsecured lending that is well understood by a very large number of people who use it properly and do not default.
We should not forget the growth that has taken place in other types of credit. An early-day motion has been tabled about log book loans, for example. That is an informal sort of credit that needs to be knocked out. We know that pawnbroking has changed, and that household items are now being pawned for small amounts of money. We have heard recently about advertisements which say, "Send us your bits of gold," for which very poor prices are paid, and about people being desperate enough to sell even family jewellery for relatively small sums. The practice of people accessing small amounts of money when they are in difficulty must be considered
holistically, but the proposals we are considering concentrate on one area and may have the unintended consequence of reducing the provision of low-level credit for those who require it and are able to use it successfully.
Turning to store cards, I must say that I hate the things-they should be banned-but I recognise that people ought to have a choice. None the less, the atmosphere in which people make an informed choice is entirely inappropriate. Some large stores almost seem more interested in selling people a store card than in selling them the thing that they went in for, and that is because the card makes the store more money. There is no doubt about that. The 10 per cent. that the business can give away on a purchase is small compared with what it will potentially get from the future use of the card. Putting some control on the use of such cards and fettering it a bit, so that people had cooling-off periods in which to reflect, would help. Perhaps our new financial education body will prompt those issues in people's minds before they sign up, willy-nilly, to such cards. That would help.
If we are to go down the avenue of choice, so that people are able to exercise it if they wish to, we must make certain that it is an informed choice. Information must be provided prior to signing up, making certain that people understand exactly what they are signing up to, and after signing up, so that people not only have the information that enables them to repay at a rate with which they are comfortable, but understand the underlying costs of their decision to pay a certain rate. For example, they should know that it will take years to pay off the debt through minimum payments or that, despite the small amount of money that they have borrowed, ultimately, they will pay a multiple of that, having chosen a given store card,. There is a lot of merit in restricting such credit, in providing people with information and a cooling-off period for reflection, and in ensuring that they receive some real information about the exact costs of their choice.
This is an interesting area of finance, and the Financial Services Authority and, perhaps, the Office of Fair Trading will have to continue to bear down upon it, because people are finding ever more ingenious ways to provide low amounts of credit. Undoubtedly, there are some unscrupulous firms. I certainly do not put Provident or, indeed, some others in that category, but some unscrupulous individuals deliberately target people who get into difficulty-often, for all the right reasons when they need emergency purchases, not luxuries. Sometimes their purchases are school uniforms, or something for the family, but people often fall foul of such unscrupulous individuals, and we need to try to protect them. However, to deny such credit services to those who use them satisfactorily would be a retrograde step, so I cannot support the new clause tabled by the hon. Member for Wolverhampton, South-West (Rob Marris). If the proposed restrictions on store cards were subject to a vote, I would support them because, although they do not go as far as I would like, they are a step in the right direction.
Mr. Love: The proposed changes do not touch upon the widespread practice by store card and, indeed, other credit card organisations of ensuring that the part of the credit with the lowest interest rate is paid off first and the highest interest part is left until last. That practice should be much more widely publicised, and action should be taken against it.
Mr. Breed: I agree entirely. The segmentation of balances and their treatment for interest and repayment purposes is not well understood. In fact, anybody who is even reasonably financially educated would find it difficult to make a precise distinction between them.
A hard-nosed approach must be taken to the repayment of high-cost credit. I would like the minimum repayment rates to be increased, as well as a clear indication given on the statement of precisely how the amount added as interest is calculated-that could be done easily. The interest element could be made up of two or three different parts so that the card owner would be able to understand how the charge had been calculated and therefore better able to understand how they could manage it in the most effective and economic way. I agree with the hon. Member for Wolverhampton, South-West that a lot more information could be provided on all credit cards and store cards. The new clause is a step in the right direction, although I would prefer it to go a little further.
The Economic Secretary to the Treasury (Ian Pearson): Let me begin by thanking my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) for his kind comments at the beginning of his speech. His new clauses 1 to 7 would give the Office of Fair Trading the power to set a statutory limit on the total cost chargeable for credit in a particular credit market where it is satisfied that consumers are, or may be, suffering detriment through insufficient price competition. He outlined the purposes of the new clauses very well, as he always does.
I want to say at the outset that the Government share his concerns about low-income and financially vulnerable consumers, who can struggle to obtain cheaper credit from high street banks and building societies. That is why we welcome the review that the OFT is conducting into the high-cost consumer credit sector, which has a particular focus on whether competition in the high-cost credit market is effective in current conditions. The review will examine, among other things, the experience of other countries that have introduced a cap on the cost of credit, which should help to establish the effectiveness of such tools as a form of consumer protection.
My hon. Friend will be aware that this issue has been previously considered, and it has been concluded that such measures could be detrimental to consumers-a view shared by leading consumer groups, as the hon. Member for Fareham (Mr. Hoban) said. My hon. Friend is of independent mind on these matters, and it is always right to take a fresh look at them. I stress to him the independence of the consultants who were commissioned by those at the then Department of Trade and Industry who considered these issues. I would not want there to be any confusion about the role of Elaine Kempson, to whom my hon. Friend referred several times. She is very much an independent person, as Professor of Personal Finance and Social Policy Research at the university of Bristol, and she is a member of the Government's financial inclusion taskforce. She is an expert on these matters, and it is right that her views are carefully considered.
Government intervention in pricing clearly has the potential to create distortions such as cross-subsidy in related sectors. It could constrain supply and ultimately lead to higher prices for consumers, and damage industry
by distorting markets. That is why venturing into this area requires very careful consideration. It is certainly our view that the review will provide important information that we will all want to look at-Government, consumer groups and others.
My hon. Friend has elegantly framed his new clauses so that the price control measures would take effect only when the OFT is satisfied that there is insufficient price competition in the market-perhaps when one supplier is dominant in a number of localities or when all lenders offer much the same product and do not compete on price. However, in such circumstances, the proper solution would usually be to look for measures to increase competition rather than to substitute the judgment of the OFT as to a reasonable price for that of the market.
New clause 2 would require the OFT to assess at annual intervals the adequacy of price competition in defined markets. In competition law, it is notoriously difficult to identify where the boundary lies between competitive and non-competitive pricing, as my hon. Friend well knows, so that would be a complex judgment requiring something akin to an economic market study every year in order to withstand challenge from lenders and other interested parties.
New clause 3 would require the OFT to set limits on the total cost chargeable for credit, which must reasonably reflect the cost of providing credit in a properly functioning market. Again, however, that would be an extremely difficult task given the differing terms on which consumer credit is offered-some lenders offer much more flexibility than others-and the different risk profiles of each lender's customer base. There is also a real risk that those proposed powers for the OFT could stifle the competition in the credit market and the diversity of products that my hon. Friend wants to see.
There is evidence from countries that have adopted some form of ceiling on the cost of credit that such restrictions can be circumvented through the charging of fees or insurance costs not covered by the regulated amount, and that they can force vulnerable consumers to take up less flexible, less transparent, more expensive or unregulated forms of credit with high charges for missed payments, including from illegal money lenders. I recognise that new clause 4 is intended to reduce the scope for such circumvention, but there are practical difficulties with the approach proposed as it would potentially involve the OFT continuously monitoring the price of thousands of products offered by a number of individual companies.
Doubts about the workability of regulating the price of credit and concerns about the consequences for consumers are the main reasons why the Government have been very cautious about any measures such as those proposed by my hon. Friend. However, I appreciate that he is motivated by the desire to protect vulnerable consumers, and members of all parties recognise the importance of that. Such consumers face restricted choices in accessing credit and sometimes borrow more than they can afford to repay. We have to consider whether there are sensible steps that we can take, which is why we have considered his new clauses carefully.
We share my hon. Friend's concern, which is why we have already taken a number of measures to give consumers a more informed choice and encourage responsible lending, including greater OFT oversight of high-cost credit lenders and new mandatory OFT guidance on responsible lending. We will introduce a new requirement this year for lenders to provide adequate explanations to borrowers and assess their creditworthiness, and we are also conducting a review of credit and store cards. The consultation on so-called risk-based re-pricing of existing debt, the level of minimum payments, the allocation of payments, the need for further information and unsolicited credit limit increases closed last Tuesday, 19 January.
I have referred to the review that the OFT is currently undertaking of the market for high-cost credit, which is specifically considering competition issues and the effects of introducing restrictions on the cost of credit. We do not believe that it would be appropriate to anticipate the OFT's conclusions on the working of the market or any recommendations that it may make for further protections for consumers. However, I assure my hon. Friend that we are of course taking a close interest in the review and will want to respond quickly following its completion.
I turn to new clause 14, which also deals with interest rate caps but is focused on store cards and similar retail credit tokens. I appreciate the distinction that the hon. Member for Fareham made between store cards and loans from retailers, about which he made some very interesting points. The power suggested in the new clause is very broad and does not define the circumstances in which an interest rate may be thought to prejudice the interest of debtors.
Many of the concerns that I have described about new clauses 1 to 7 also attach to new clause 14. Constraining interest rates on store cards in this way carries a strong risk that pricing structures will simply be re-engineered to circumvent a cap, meaning that the costs of borrowing become less transparent for consumers, often hidden in contingent charges, which disproportionately fall on the least capable and most vulnerable. As I have said, caps can distort proper competition in the market. The hon. Member for Fareham made many of those points when he referred to new clauses 1 to 7. Similar concerns apply to new clause 14.
That said, the Government recognise that, in the past, competition has not always been effective in the store-card market. That was the conclusion of the Competition Commission's market investigation, which ended in 2006 and resulted in the introduction of several measures to stimulate competition and ensure transparency for consumers about the costs of store-card borrowing and ancillary products, such as payment protection insurance. As the hon. Member for Fareham knows, those measures came into force in May 2007.