Debt Management: Responses to the Committee's 14th Report of Session 2010-12 - Business, Innovation and Skills Committee Contents

Appendix 1

Letter from Norman Lamb, Minister for Employment Relations, Consumer and Postal Affairs, dated 7th March 2012

I am writing to thank the Committee for your report following its recent investigation into debt management. The report is timely as Government have been looking very closely at a number of issues surrounding consumer debt, including how consumers deal with their debt, where they get debt advice and high cost credit, including payday lending.

The report contains a number of important recommendations for Government and I will be responding to them all in due course. However, I wanted to write to you at the earliest opportunity regarding the Committee's recommendation on our research on capping the total cost of credit in the high cost credit market and to explain why this research is crucial to Government better understanding a difficult policy area.

In your report the Committee recommends that there is no need for Government to commission research from the University of Bristol, with all the associated costs, given the amount of evidence and research available on the Canadian and US markets. The Committee states that a report by the Centre for Responsible Credit highlights the situation in Ontario, Canada where a total cost of credit is in operation and that the Ontarian Government carried out a large amount of research before putting this into place. The report goes on to state that if Government continues to believe that new research is necessary, it will need to set out which specific areas lack existing data.

I am pleased to say that the research is well under way and is on course to report back to Government in the summer. The research will be a comprehensive study aimed at identifying the impact not just on consumers but on business of introducing a cap on the total cost of credit that can be charged. What makes our research different and what makes it so important for future policy decisions is that the researchers are not concentrating on one sector of the high cost credit market but are establishing the impact of introducing a total cost of credit cap that can vary between different parts of the high cost credit market.

The report by the Centre for Responsible Credit concentrates only on payday lending. The Government believes that this is too narrow a focus. The high cost credit market is highly complicated with a number of different sectors. The research commissioned by BIS will not just be looking at the impact of introducing total cost of credit cap in the payday lending market but also in the home collected credit and pawnbroking sectors, both of which have previously attracted similar headlines to those we are now seeing regarding payday lending.

Caps on the total cost of credit that vary between different sectors are not to our knowledge in operation in any other market and are certainly not covered by either the Canadian or the US research which concentrates on payday lending.

In addition the paper by the Centre for Responsible Credit states that it has called on payday lenders to provide independent academic researchers with access to their customer base to establish how payday lending is being used in the UK. The Centre goes on to criticise payday lenders for not co-operating and states that there is a lack of information available on the UK payday lending market. Before commissioning this research BIS worked hard to engage with lenders and their representatives in the payday, home credit and pawnbroking sectors to ensure that the successful bidder for this research would have access to their customer base. Lenders in these markets have been very co-operative and we are confident that the research will enable one of the most comprehensive pictures ever built up in the UK of who is using high cost credit, why they are using it and what other options they have when trying to access credit.

The Canadian research dates from 2008 and was published in 2009. It is clear to everyone that the UK payday lending market has grown and evolved over the last three years. The UK market has a number of large companies who only offer payday loans online, unlike the findings of the Canadian research which found that the vast majority of payday lending in their market was done via high street stores.

The Select Committee is right that there is a considerable body of research on the high cost credit market. However, much of this research is contradictory and some of it has been criticised by organisations like the Centre for Responsible Credit. Bristol University started their research by carrying out a comprehensive literature review of previous research in this area, something that will be extremely valuable to informing policy decisions going forward.

Finally, the Government is committed to evidence based policy making and at a time of difficult decisions on public spending would not commit funds for this research unless we thought it was absolutely necessary. Previous research has identified the difference between the UK and other credit markets and the different impacts that introducing credit controls could have in the UK compared with other markets. There is a real risk that intervening in the market and introducing credit controls could reduce access to licensed credit for some consumers, leaving them with no other options other than unlicensed illegal lenders. The Government believes that this is a vital piece of research that will enable future decisions on policy in this area to be taken with the confidence that we are fully aware of the potential impact.

Norman Lamb MP

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