John’s speech in the Consumer Credit Bill 2nd reading debate on 13 Jan 2005

Mr. John Battle (Leeds, West) (Lab): I, too, welcome this long overdue Bill and compliment the Minister for investing his energy and time in getting it this far. I say to the hon. Member for Eddisbury (Mr. O'Brien) and other hon. Members that the whole House understands the needs for action. If I were to make only one jibe, I would say that we do not want to get the Bill swiftly through Parliament because of speculative election deadlines. I am anxious that desperate people who are locked into long-term unsustainable debt should not wait a moment longer for us to take action.

The Bill provides a good framework. It is time to review and bring up to date the Consumer Credit Act 1974 because the markets have moved on. I shall make my next point briefly because there should be a decent discussion about it in Committee and on Report: although the Bill provides a good framework, there could be some tightening up of the nuts and bolts at the corners and the joints. We must ensure that the Bill provides greater protection for consumers who borrow money, not least the 10 per cent. of consumers in Britain who use home credit at some time in their lives—in other words, they pay back their debt through weekly doorstep payments. I want to focus on strengthening protection for low-income borrowers who are at risk from high-cost credit lenders.

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We rightly hear much talk about people getting into difficulties with credit cards and the high rates of interest charged by the high street banks, but I want to focus on the 7.9 million people who do not have a bank account or credit card and turn to doorstep lenders and television and newspapers adverts for cash because they have no alternative. Such people in practice end up paying the most to borrow money, which is sometimes used to provide their daily basics. Unjustifiable charging locks the poorest in our society into deep and long-term debt because they are often left with no alternative if they are to survive from week to week.

Experts in the heady world of economics refer to financial shocks, which are unexpected events. Such events in the everyday world could include the arrival of a new baby because of the need for a pram or carry cot and provisions for that child. If a relationship breaks down, people might need to set up a new home and thus buy a bed, sofa, cooker, curtains and carpets. Youngsters changing schools can cause financial shock because they require new gear and clothing to go there.

At first sight, and under such pressure, a person might think that a payment of £4.99 a week is a manageable offer if that is what is in front of them, but the weekly repayments from home loan companies, credit stores and cash converter businesses involve a huge rack-up of compounding annual percentage and penalty charge rates that can hardly be noticed in the small print. The problem is that people can agree to pay back £4.99 over 156 weeks, but with some firms they end up paying back £432.38. People who borrow £100 cash from some companies will be charged £191.76. Another company about which I heard in my surgery lent someone £100, but they had to pay back £220.24, which is a percentage mark up of 440 per cent. The doorstep lending system is locking many of the poorest people into long-term poverty, if not resulting in the repossession of the little property that they have. Yes, such lending is legal, but it usually involves incredibly high interest rates.

I am grateful for the work of Andrew Hutchinson, a campaigning journalist on the Yorkshire Evening Post, who has talked to people about the situation. It is incredibly difficult for people to come forward and spell out their circumstances, not least because to do so can jeopardise their chances of future borrowing. High-cost borrowing is driving people into debt and despair.

I congratulate Church Action on Poverty on its campaign to end doorstep debt. It has spelt out the need for action. I have been asked whether people who borrow from doorstep lenders are incredibly na-ve, simply trying it on or desperate. My answer is that they are all of those things in different degrees. Some people are trying it on, and lenders should be pressed to check rather better whether people have the capacity to repay, rather than simply saying, "We have a check-free approach; here's the money". However, the usual reason that turns people to the home credit market is desperation.

To protect low-income borrowers from high-cost credit, I am still minded to support those who argue for a ceiling on interest rates and charges, because so often it is the compounding of interest and charges that drives people into long-term, unsustainable debt. It can be compounded with rollover loans that translate a few hundred pounds into thousands, if not the loss of one's house, as we have seen in some recent high-profile cases.

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In the depression years, a cap was introduced. The Moneylenders Act 1927 provided that a rate of more than 48 per cent. was prima facie excessive and the transaction was therefore deemed harsh and unconscionable. In 1974, the Conservatives' Consumer Credit Act dropped that ceiling. I press the Minister and the House to reconsider putting the ceiling back. There are ceilings on interest rates in many other European countries and many states of the United States of America. Like consumer protection groups, I believe that a cap would protect the poorest from excessive credit charges, especially when people have no alternative to high-cost loans.

I welcome the Minister's commitment to review the need for a cap, but if his review comes up with the need for one, how can it be introduced if we have not used this opportunity of legislation to keep the option open of introducing one? Can we not build into the Bill the option of secondary legislation? A statutory instrument could be subject to affirmative resolution so that the House would be consulted and vote on it, but at least we would have the means to introduce a ceiling. That might act as a warning to those who overcharge.

Andrew Selous : What does the hon. Gentleman say to the counter-argument that a cap on the interest rate might end up increasing the total interest repayable because the term could simply be extended? Should the cap not be on the total amount of interest repayable, rather than on the rate?

Mr. Battle: I said that I was minded to support a cap on interest rates quite deliberately. I do not take a dogmatic attitude to this. We must look at the arithmetic in detail. The hon. Member for Gordon (Malcolm Bruce) made the point that it could all hinge on what we mean by "unfair". That is right. We shall need to clarify in Committee and on Report what "unfair" might mean. If "unfair" is to replace the word "extortionate" in the 1974 Act, everything will hinge on what that means.

Will my hon. Friend the Minister clarify the extent of the powers to control the cost of credit through the licensing system? I want to know whether the add-ons for missing payments, for example, would come under the regulatory powers. To put all that together would cast a different light on my proposition.

The Bill makes a shift from "extortionate" in the 1974 Act to "unfair", but in practice it could mean that everyone has to go to court to sort out what "unfair" is. I cannot believe that that is how the matter should be approached.

Can we not give the financial services ombudsman the power to rule that a credit relationship is unfair so that everyone does not have to go to court? That would bypass the need for individuals to go through that procedure. Why cannot the Financial Ombudsman Service determine questions of unfairness?

Clause 15 shifts the power back in favour of the lender and allows the courts to grant creditors the power to enforce agreements, even when the lender has not provided the information in the first place. That goes against the recommendations of my right hon. Friend

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the Member for Dumbarton (Mr. McFall). I would therefore be grateful for an assurance that clause 15 will not let lenders off the hook concerning the provision of information. Similarly, people bypass provisions on cold-calling. They are not allowed to sell money on the doorstep, but they can give people a hamper or a voucher. That is a con and it should be dealt with in the Bill. The hon. Member for Upminster (Angela Watkinson) said that there must be a balance between the borrower and the lender. I am not out to close the market down, because people need to borrow money. The key word, however, is "fairness". We must spell out what a fair test is so that it works in practice. I passionately believe that we should not drive more and more people under.

I welcome the framework, but we could tighten the structure slightly. We must make some definitions clearer and make sure that the Bill is soon on the statute book, not least because people enduring unsustainable debts, who pay the highest price of all to borrow money for the basics, should not be forced to live in financial misery a single day longer.

©John Battle MP 13 January 2005

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