John Battle in Parliament About Loan Sharks

Mr. John Battle (Leeds, West): I welcome my hon. Friend the Member for Tyne Bridge (Mr. Clelland) back to the land of the living from the Whips Office. He has done his constituents, the House and the country a service by raising this deeply serious matter, and I hope that this will not be the last time that it is debated in the House. Unjustifiable charging locks the poorest into deep and long-term debt and people are left with no alternatives to get the basics that they need to survive.

In the heady world of economics, we refer to financial shocks. My hon. Friend put it well when he spoke of unexpected events. A new baby will need a pram or a carrycot. If a relationship breaks down, people may need a new home, for which a bed, sofa, cooker and curtains will be needed. To people who are poor, £4.99 a week may seem a manageable offer. However, in practice, a degree in maths is usually needed to work out the compound annual percentage rate noted in the small print.

I am pleased to see the Minister, who is the hon. Member for Bolton, West, here today. She was at the launch of the "end doorstep debt" campaign, which was set up by Church Action on Poverty and others. I know that she takes these matters seriously, so I am pleased that she will be responding to the debate today.
We must take steps to tackle this injustice. The loan system is generating poverty. All our efforts at regeneration are being undermined by the increase in poverty that is caused by the loan system-loan sharks and the legal lenders, who lend at incredibly high rates of interest.

In my neighbourhood, at the corner of Armley town street and Branch road, in Leeds, West, a Lloyds bank was boarded up for some months but has now been reopened as the Western Union Cash Connector. It sounds like something from the wild west. It is plastered with luminous red and yellow signs advertising financial services, pawn broking, cash loans, cheques cashed, and pay day advances. The signs also say "Goods back later, raise your cash today." It is not the only such lender in the neighbourhood. Non-standard loan companies offer loans to people who cannot get credit from banks and buildings societies and who do not have enough money to have a bank account or an ordinary credit card. Such companies are proliferating, especially the cheque-cashing companies or what are known euphemistically in my constituency as the wage-stretcher businesses. A company called Clear-a-Cheque has two branches in Wortley and Old Farnley and it offers to cash wage cheques, pension payouts, social security cheques, giros or even a lottery ticket if it can be seen to be a winner.

Companies, such as Provident Financial, First National and others, put leaflets through doors advertising their rates of interest, but their charges for cashing a third-party cheque include a deduction of between 8 and 15 cent. They then add on a cheque-handling charge of between £2 and £5. Therefore, in practice, cash advanced against a personal cheque for £100 to be settled 28 days later can run up interest charges of at least 17 per cent.

The injustice is that a loan of a £100 can mean repayments of-to quote three companies-£191.76, £202.80 or £220.24 at unbelievable APRs. I have worked out the APR in those cases at 280.5 per cent., 329.9 per cent or 440.1 per cent. respectively. How out of line those rates are with the current bank rate of 4 per cent! As my hon. Friend the Member for Tyne Bridge spelt out, a credit union commendably offers a rate of 12.6 per cent. The previous figures I cited illustrate how the poorest in our neighbourhoods are being deliberately targeted to tie them to long-term unsustainable debt.

In my neighbourhood, there is a company called Brighthouse, which used to be called Crazy George's, and it put a catalogue through doors with the offer:

"Discover Affordable Shopping Made Easy".
12 Feb 2003 : Column 258WH
Its brochure says:

"All our products are available with no deposit and no credit checks."
Unlike other discount stores, the goods are expensive and all the goods are quoted at the per week hire purchase price which appears, in bold letters, as £4.99 a week. However, the total cash price is buried in the small print underneath. The cost of a bed is £4.99 for 156 weeks-that is three years-and that runs at an APR of 29.9 per cent. In other words, the actual cost of the bed, without a mattress, works out at £432.38. At MFI, the same bed costs £189 with a mattress. People are getting over-priced goods at incredibly high rates of repayment.

Mr. Mark Lazarowicz (Edinburgh, North and Leith): I am glad that my hon. Friend has mentioned Crazy George's as there is also branch of that outfit in my constituency. Does he agree that action should be taken to ban such activities or, at least, ensure that the true costs of lending and the true interest rates are made clear and visible to customers, who should not be misled in the way that he has highlighted?

Mr. Battle : I completely agree.
We should be open about the fact that this activity is perfectly legal. It can be licensed. But we need to spell out who is paying the highest price. Brighthouse is funded by a major bank, so we are all locked into an unjust loan system for the poorest. Those involved are fostering deep debt, so I could argue that use of credit cards by the rest of us is at the expense of the poorest, because the cards are being subsidised by those paying the highest rates, inflated rates, as in the case of Brighthouse customers.

We could also make it plainer that there are other alternatives. The cost of a secondhand washing machine at £421.51, with a payment of £6.50 a week over three years, will work out at £1,028.04 on an APR of 29.9 per cent. In addition, service and insurance charges can be as much as the price of the machine. Remploy is reconditioning washing machines that can be bought for a quarter of the cost. Therefore, people need to be aware that there are alternatives.

I stress that what the companies are doing is not illegal, but what little the poorest have is being taken off them by incredibly exorbitant interest rates. The poorest are being forced to pay the most in our society, not least because they have nowhere else to go. An estimated 7.9 million people in Britain, one in five, unable to obtain money direct from a high street bank or a finance house, have no choice but to borrow at very high rates of interest from those money lenders.

This sub-prime lending market, as it is sometimes described, is not illegal, but it is highly lucrative. The market analyst, Datamonitor, claims that it is huge, being worth at least £16 billion a year. Who is that money coming from?

Answer, the poorest.

Datamonitor published in January a report on sub-prime lending, "UK Non- Standard and Sub-Prime Lending 2003", which provided five-year forecasts for these markets, examining competitive and regulatory developments. It suggested strategies for new business developments, providing non-standard lending products to the poorest. Chapter 6, on home-collected credit, contained an assessment of the impact of the debt on the doorstep campaign, led by Church Action on Poverty and other charities, commenting:

"Government initiatives: despite the hype they currently pose little threat"
If my hon. Friend the Minister wants her Department to buy the Datamonitor report, it will find it quite difficult, because the report costs $3,215, which is beyond the budget of the Library of the House.
If this organisation is suggesting to sub-prime lenders that the Government will do nothing to interfere with them, but will enable them to expand their market, we should be interfering more to tackle the problem and not leave reports advising the bankers buried in documents that no one can afford. It is big, lucrative business.

On 26 January The Sunday Times spelt out that some of Britain's banks are behind the sub-prime lenders. They are making millions by charging interest rates of up to 80 per cent. on loans and credit to the poorest. The Associates, owned by Citibank Group, is pushing unsecured personal loans at rates of up to 36 per cent. Next the newspaper referred to First National, then owned by Abbey National, which recently sold it to GE Capital.

I pause for a moment to reflect on Abbey National and First National. First National was the consumer credit arm of Abbey National. It was sold to GE Capital last week for £848 million. GE Capital pointed out on its website that the £848 million price included £355 million cash or "surplus equity" as well as £630 million underlying net tangible assets. Where has that £355 million surplus come from? Answer: the poorest in our society, locked into paying high interest rates for years.

Brighthouse is owned by Nomura bank, which is making money out of the poorest and hiding behind the high street banks and finance companies, perhaps hoping that we shall not notice.

The huge profits that are going to the banks are being sucked out of the poorest areas. A study of residents of the Meadowell estate on Tyneside found that 85 per cent. of households on three streets were paying moneylenders nearly a third of their weekly income on credit. Collectively, they were paying an astonishing £370,000 a year. The average income was £200 a week. What are we playing at when that amount of money is being sucked out of poorer neighbourhoods? Those companies, which charge up to 20 times more than the base rate through their subsidiaries, are targeting low earners in a £16 billion lucrative sub-prime money lending market.

It is not simply a matter of leakage, as the New Economics Foundation calls it, as money is pulled out of poor areas, but a matter of the banks making a profit from the poorest which they use to run their whole organisations. In practice, the banks are forcing the poor to subsidise the credit cards of the better-off by making them pay the highest rates of all. What sense can we make of social inclusion policies when the poorest are forced to pay the most? It is a complete inverse of justice. It is not just one circle according to which poor people go to those companies because they do not know any better and cannot add up while the rest of us sit by and say, "If only the poor were not so ignorant and organised their affairs better, the world would be a better place." We are all locked into the problem. Our lower cost credit cards are on the backs of the poorest in society who are locked into deeper debt by extortionate lenders. We are tied into the same system. The credit cards of the better-off are provided at the expense of the poorest who are crippled by debt.

What should we do about it? I have three suggestions, and I thank the 140 Members who signed early-day motion 257. The first is to have a cap on lending rates, as set out in the Consumer Credit Act 1974. Let us put that cap back so that people are not allowed to lend on APRs of 100 per cent., 200 per cent., 80 per cent. and so on. The second is to ask the Minister to ask her colleagues in the Department for Work and Pensions to revamp the social fund. People who apply to the social fund are told that they cannot get a grant. Instead, they have to get a loan and, as they are not wealthy enough to pay it back, they are locked into the system run by the sub-prime lenders. The social fund should give people an alternative.

My third suggestion is to back up the plea by my hon. Friend the Member for Tyne Bridge for more support for alternatives, such as credit unions, in our neighbourhoods to give people a practical choice. They need a collective bank and lending organisation that lets them get at the basics. The issue will not go away overnight, but I am convinced that the Government could do more to introduce preventive measures now to ensure that the poorest do not pay the highest price.