FSB Report Stage Amendment 114D 271112

Lord Parry Mitchell

My Lords

Yesterday I had tea with a dear friend.

Unsurprisingly the subject of payday loans came up in the conversation. He told me about his son who has mild attention deficit disorder, is mainly unemployed and who took out two payday loans. The loans were for 800 his son rolled them over several times and in a few months the bill came to 5,000. My friend had to settle the bill.

That my Lords is the essence of the amendment which I put down at Committee Stage and which I have put down today. It is this which we are seeking to control.

Ten years ago this amendment would probably not have been tabled - but today it is very much of the hour. The fact is, that legalised loansharking, or payday lending - call it what you will has gone viral, is out of control, is dangerous and is causing great harm and distress to many vulnerable people.

Two developments have come together to cause the rapid growth of this lending industry.

The first is the dreadful state of the economy. People are desperate for money and they will take it from whatever source they can - whatever the price.

Take a walk down any high street particularly in deprived areas - payday loan shops are abundant. Recently I went to Walthamstow with my honourable friend Stella Creasy MP and my Right Honourable friend Ed Miliband. There on the high street we saw over 15 money shops of one form or another business was thriving.

The second development has been the astronomic growth of online lending. As I said at Committee Stage, I went onto one of the most successful websites. What struck me was the slickness of the process. Just some cursory information to fill in and the money would

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have been in my bank account in 15 minutes. It is simply too easy.

The combination of a straitened economy and the ease of usage of online lending, have together created this booming business sector.

One online company, Wonga, is projected to be making over 70 million profit this year, probably valuing the company well in excess of 1 billion were it to go public.

The annual size of the payday lending industry is at least 2 billion. It is growing at a fast clip and in time will become a major source of consumer credit in this country.

What I dont understand my Lords, is why, when this Government is determined to reduce personal indebtedness at the macro level, it is at the same time allowing this sector to grow unchecked?

I would have thought that both parties opposite would be encouraging me on this amendment, rather than opposing this very important piece of legislation.

Maybe the minister will have some good news for me when he comes to reply?

Payday loan customers by their very nature are people with very low credit ratings, who having no other options open to them borrow money on an unsecured basis at extortionate rates of interest.

My Lords doesnt this strike a familiar cord?

Uncontrolled lending to people who are barely able to meet their repayments, in a market place, which is expanding at a massive rate doesnt it sound like what happened in the United States with sub-prime lending?

Sub-prime was off everyones radar screen until it hit the US and then the world economy

FSB Report Stage Amendment 114D 271112

like a hurricane. It was the initial cause of the financial crash in 2007 and few saw it coming.

If Her Majestys Treasury does not buy into the moral repugnance that most of us feel about the dangers of payday lending, then at least they should be on their guard about the economic consequences of this ticking bomb.

But it is the moral argument that concerns us this afternoon.

I am delighted that the Right Reverend Prelate the Lord Bishop of Durham has added his name to this amendment - he has spoken previously on this subject and I am sure he will be making his views very clear. I believe other Right Reverend Prelates will be speaking too.

I am also very pleased that the Noble Ladies Baroness Howe of Idlicote and Baroness Grey-Thompson have also added their names to this amendment. Both Noble Ladies have long records of standing up for the vulnerable and I await their speeches with anticipation.

My Lords I would like to make one thing very clear. This amendment does not seek to ban payday lending - it seeks to give the FCA the power to cap interest rates when they are causing consumer detriment. It is a may and not a must. It puts the responsibility squarely into the hands of the FCA.

I will go further. We need payday lenders - they fulfill a vital role. There are many people who cannot get credit from traditional sources and without legalised payday lenders their alternative is the backstreet loan-sharks whose penalties for non-payment are often pretty brutal.

Payday lenders fill a vital gap, but they need to be controlled.

Interest rates charged by many payday lenders go well beyond the obscene.

Any lender is bound by law to display the Annual Percentage Rate APR - that they are

FSB Report Stage Amendment 114D 271112

charging. In many cases payday lenders are charging an APR in excess of 4,000%.

These lenders avoid the use of the expression APR . They say it is not appropriate for a short-term loan. I have heard them say that quoting APR on a payday loan, is as relevant as quoting APR if you hire a car for a week, or stay in a hotel for a similar period.

We mustnt buy this argument and we mustnt let them get off the hook. Hiring a car, or staying in a hotel, is a rental of an asset and its associated services. It incurs no repayment of principal and it is not a loan.

They further say that quoting APR on a short-term loan is ridiculous. How can you use the word annualised to measure something that lasts for just a few weeks?

My Lords thats exactly what the finance industry does all the time. If one bank borrows 100 million from the money market on an overnight basis, then the charge is quoted as an annualised interest rate.

Stating that APR is the wrong measure is simply disingenuous. APR is there for a purpose and in my opinion it should be included on all advertising. But that is for another time.

Last Sunday we had an interesting development. In an article in the Sunday Telegraph, Wonga were reported as saying that their rate of interest is equal to one percent per day. This is a big change from a company who has previously refused to admit that their repayments should be quoted as a rate of interest.

And what they say is just about true - they do charge 1% per day, or thereabouts.

But my Lords they are playing games. If you borrow 100 from Wonga for 7 days the simple interest you will pay will be 1.82% per day. If you borrow 100 for a month the simple interest will be 1.21% per day. For their maximum of 43 days it will be 1.16% per day.

FSB Report Stage Amendment 114D 271112

The game they are playing is that this is calculated on the basis of simple interest, but interest is seldom calculated on a simple basis - the accepted measure is of course compound interest.

A loan that costs just over 1% per day becomes 4,000% per annum when aggregated in compound interest terms, which is exactly what APR is all about. And it is why it is used.

Other countries do not have the payday loan free for all that we do.

In the United States rules on payday lending vary State by State. By and large they restrict the permitted interest component to 15% and the rollovers are very tightly controlled. Many of the UK lenders exceed 22%.

The State with the best record is Florida

There the maximum amount of interest is 10% of the loan amount, plus a $5 verification fee

Maximum number of loans a customer can have outstanding is ONE and they have the computer systems to monitor all payday loans State wide.

Loan terms are between 7 and 31 days.

All of this prevents long-term dependency on credit.

And the results in Florida are staggering.

Of 6.8 million loans in 2009/10 not a single loan was extended beyond the contract for additional fees

90% of borrowers repaid these loans within 30 days of the due dates.

70% of customers repaid those loans on the contract end date.

Complaints about interest rates have all but disappeared

FSB Report Stage Amendment 114D 271112

And most impressive of all, in the whole State, not one borrower was indebted by more than $500 at any time.

It has been a huge success and in my personal view a pointer as to how we should proceed in our country in the future.

Last week the Office for Fair Trading published their interim report into payday lending.

Their investigation was not directed at interest caps, but does highlight aspects of payday lending behaviour, which are disturbing. They found the following:

lenders have a higher level of compliance where statutory requirements are more prescriptive, for example advertising

where obligations are set out in guidance only, compliance is lower - for example credit checks made on lenders; loans not repaid on time; frequency of rollover and lack of forbearance when borrowers get into difficulty.

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they recommend that lenders do more to comply with the letter and spirit of the law they have found several cases where they are questioning the fitness of lenders to hold a consumer credit license

The action they are taking includes

warning the majority of the firms inspected that they must improve how they treat customers.

conducting formal investigations into firms, where they have concluded that based on their evidence some firms may call into question their fitness to hold a license.

But most damning of all, the OFT has said that the relevant trade associations need to improve standards of compliance with the law and also guidance on advertising.

The OFT is too polite to say so my Lords, but it seems to me that what they are really saying is, that this an industry run by cowboys who are constantly operating on the fringes of legality.

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Another report has come from Which?

They state the following based on a survey they conducted:

half of payday loan users have taken out credit that it turned out they couldnt afford to repay

29% of payday loan users have taken out credit that they KNOW they couldnt ACTUALLY repay

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43% of payday loan users say it is too easy to get credit 20% have been hit by unexpected charges 24% spend their loans to repay other debts and most worrying of all - 38% spend their loans on essentials such as food and fuel

Mr Richard Lloyd the executive director of Which?, stated the following Its shocking that half of all people taking out payday loans have been unable to pay the money back and its a depressing sign of the times that almost a third were hassled by debt collectors in the past year. Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by. Thats when they are hit by excessive penalty charges and roll over fees.

My Lords we have an industry flying by the seat of its pants, observing at best the flimsiest requirements of the law and their own pathetic codes of conduct. They need to be much more closely controlled. In my opinion we could do a lot worse than try and copy the success story that we have seen in Florida.

We can start this afternoon by supporting my amendment (which is simple,

As I have said payday lenders need to exist - the FCA will need to strike a difficult balance between capping the interest rates that these companies can charge, whilst allowing them to earn enough profit so that they can still produce a proportionate return.

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It will not be easy. But the FCA needs the tools to start the process and this amendment will provide them with what they require.

My Lords I beg to move

ENDS