Mr. David Clelland (Tyne Bridge): It is a pleasure to initiate this very important debate, which is my first debate in Westminster Hall, having been locked up in the Whips Office for quite a long time.
For many of us, Christmas is now a distant and, I hope, happy memory of good food, companionship and gifts. We might even wince a little as we think of the cost. Perhaps we will joke with friends about the need to cut back on our waistlines, as well as our credit cards, but for many families the cost of Christmas is no laughing matter. Indeed, for many of those whom we represent, the phrase "the cost of living" is no abstract economic theory. Many families are paying for last Christmas, the one before that and the one before that, too, and will go on paying not only until next Christmas, but even far beyond.
One mother told me, quite calmly, that she fully expected to die in debt. She is not a profligate woman, simply a single mum caring for a severely mentally handicapped son in a household dependent on benefit. She first got into what she called "a little bit of debt" when the washing machine broke down and she could not get another social fund loan because she was still repaying a previous loan. So she borrowed money to buy a second-hand washing machine. Then Christmas came along, so she borrowed more money, as she put it, "to give the bairns a good Christmas."
She was struggling to keep her head above water when her son was re-classified from a dependant to someone in receipt of benefit in his own right. Inevitably, there were delays in processing the claim and, although the family are now once again receiving all due benefits, they had two weeks without any income at all. In those two weeks, it was necessary to borrow money to feed the family, as well as the electric and gas meters, and she was unable to pay the catalogue, with the consequence that an already tightly stretched budget simply ripped apart. That case, which is replicated a hundred times over in estates in my constituency, illustrates the problems that face those on low incomes in our country. For too many people, debt is part of their day-to-day financial reality.
Debt has always been with us, of course. I have a 96-year-old aunt who regales family parties with tales of family members or friends pawning dad's suit on Monday, redeeming it on Friday for the weekend and pawning it again the following Monday. Often, those were laughably called "the good old days", but poverty in this day and age is no laughing matter. When people are poor, money is very expensive.
A recent survey by the company Datamonitor estimated that more than one in five adults - 7.8 million people - are victims of financial exclusion. They are routinely refused credit by banks, building societies and conventional lenders. We stand at the beginning of the second millennium, in a wealthy country, yet hundreds of thousands of people have to borrow money not for foreign holidays, but for food, gas, electricity and rent.
Although hon. Members look at those figures and try to reconcile them with the raft of initiatives to fight financial exclusion - I am proud to say that they have come from a Labour Government - there are others who view the concept of social exclusion as a wonderful business opportunity. The only alternative, for most people refused credit from a conventional source, is to borrow from loan sharks. Loan sharks come in different guises and different sizes - some in the guise of reputable businesses - but they all have one thing in common: extortionate interest rates and charges.
Some weeks ago, during Deputy Prime Minister's questions, I raised the plight of one of my constituents - I shall call him Mr. X - whose £7,500 debt in 1986 had risen to a staggering £43,000. My constituent had multiple debts, and I must take this opportunity to correct the record because I attributed the £43,000 debt to Provident Financial when I should have placed the blame fairly and squarely on another company, where it belonged, Paragon Finance - a successor to Universal Credit. Provident Financial was naturally upset about that mistake and felt that it damaged its good name, so I am pleased to put the record straight now.
Provident Financial is, however, a major player in my constituency and one of the most successful credit providers. It was actually founded by a Wesleyan Methodist preacher, Joshua Waddilove, to provide small loans to the poor. Nowadays, its main business is to offer short-term, unsecured loans of between £100 and £400, with weekly payments collected by company agents. On the face of it, Provident Financial's most popular loan of £100, requiring weekly payments of £3 over 53 weeks, sounds easily manageable to low-income families. The overall cost of borrowing that £100, however, is £59. I am told by the Library that that is equivalent to an annual interest rate of 95 per cent. In this industry, however, interest rates can reach a staggering 160 per cent. and more.
For many in Tyne Bridge and elsewhere, taking out a loan with the "Provy" is an accepted way of life. The "Provy" deliberately recruits friendly, local members of the community to collect its money: incidentally, they are paid a commission on what they actually collect, not on what is owed, which also means that they are self- employed, thus saving Provident the tedium of personal injury insurance and other employment expenses. There is no doubt that they know their customers well, and help their clients to take out new loans for Christmas, birthdays, new school uniforms and so on. Knowing the market is a feature of the enterprising lender.
Cattles, another big shark in the pond, claims that it knows when to collect because
"we have to get our money back before they spend it on alcohol, cigarettes, horse racing or whatever".
That is a cynical stereotype, of course, but several common threads unite the cases of constituents who come to me for help. All are on low incomes. All bump along financially until an unexpected event - a cooker breaking down or, as in the case of Mr. X, sudden unemployment. All are at the mercy of high interest rates and charges. Unemployment meant that Mr. X could not meet his monthly repayments and was therefore taken to court. Imagine his relief when the court decided that he should repay the debt by a fixed payment of £40 per month but froze the loan at its then level of £9,500. At least he could see an end to the debt, albeit many years away. Imagine his horror when, in 2000, the House of Lords, in its wisdom, decided that lenders should be able to continue charging interest on their loans even after courts had set fixed repayments. Within months, Mr. X's loan account resembled a list of telephone numbers as the interest accrued. Perhaps the £60 it costs to borrow a Provident loan fades into insignificance in comparison, but both illustrate the same high cost of borrowing for desperate people.
I do not think that unscrupulous lending is confined only to loan sharks. Many banks offer payment protection insurance - PPI - to people taking out loans. My hon. Friend the Member for Glasgow, Anniesland (John Robertson) recently outlined a case in which a constituent of his had been advised to take out PPI, adding another £1,000 to the loan that she took out with Lloyds TSB for her daughter's wedding. That was no problem, except that PPI is insurance to ensure repayments in the case of loss of employment. My hon. Friend's constituent was unemployed and therefore ineligible for the benefits of PPI . She was not advised of that; on the contrary, she was advised that the insurance was in her interest. I had a virtually identical case in which a woman had taken out a loan with Lloyds TSB and had also taken out PPI. She, too, was unemployed. In fact, her income came from maintenance payments from her ex-husband; again, she could not benefit from PPI. Yet the policy had added massively to the cost of loan repayments: more than £1,000 extra on top of a £3,000 loan. It was virtually worthless to the borrower. To add insult to injury, interest was charged on the full amount including the insurance premium.
No one would advocate that Provident, Paragon or any other lender should lend without charging any interest. We do not expect them to behave like charities. There should, however, be a maximum level of interest that a lender can charge. Interest rate ceilings operate in several European countries and most US states. In Ireland, for example, lenders are required to register their charges, while Holland has an interest rate ceiling of 40 per cent. Right now, in the UK, the only curb comes from the Consumer Credit Act 1974 and the Office of Fair Trading. The Trading Standards Institute has admitted that the legislation is ineffective and that successful prosecutions are rare.
The Labour party has a manifesto commitment to crack down on loan sharks, and to consider statutory limits on credit interest rates. The legal definition of extortionate credit therefore needs to be redefined to provide effective protection against creditors who charge extortionate rates or operate oppressive practices or impose oppressive terms. There should also be an obligation on finance companies and banks to advise customers that payment protection insurance is not relevant in all cases.
Too little attention is given to the regulation of the activities of the alternative credit market, yet that market is growing. We are now subjected to television advertising by debt management companies, to unsolicited e-mails from loan companies, and to mountains of junk mail offering easy money. The rights of low-income customers to financial services are not sufficiently supported or enforced and too little is done to promote consumer power or confidence.
We penalise our poor several times over. For instance, it is cheaper to pay for gas, electricity and water by direct debit, but that option is not open to people who do not have a bank account. They pay correspondingly more for their fuel because they use the key system, in which a meter key is charged up to enable access.
On one estate in the North-East, two thirds of the people who took part in a recent survey had had credit applications to conventional sources refused. That was for a variety of reasons, such as post code, outstanding debts, the credit history of a previous occupant, or too low an income. Of those surveyed, 46 per cent. were in debt to buy clothes, 37 per cent. were in debt to buy food, and 16 per cent. were in debt to meet fuel bills. We drive our poor into the arms of loan sharks.
There is an alternative. Credit unions exist in many communities to offer credit to people who are excluded from the high street banks and building societies. Of course, they charge interest too, but at a much lower rate - usually about 13 per cent. A person taking out a £100 loan would pay back as little as £106.50, as compared with the massive £159 they would pay back to the "Provy". A credit union is owned and run by its members, who save regularly into a common fund and who share the common bond of where they live or work. Credit unions keep money within a community and increase people's control over their finances. In the areas where credit unions operate, they have an obvious and immediate impact on the amount of extortionate borrowing.
The Government support credit unions and have done much to promote them. I hope that my hon. Friend the Financial Secretary to the Treasury will be able to tell us today that more will be done to help the development of credit unions and to curb the worst excesses of those who prey on the financial problems of too many low-income families in our constituencies.
9.42 am
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Mr. Clelland : Does my hon. Friend agree that if our debate conveys any message to low paid people in our constituencies, it is that those who get into financial trouble should contact an accredited credit union or, if none are available, the CAB, which does fantastic work and can guide them along the right path?
Mr. Lazarowicz : Absolutely. We must always advise people not to use to such loan companies and to go to the CAB and bodies such as the Consumer Credit Counselling Service, which offers a free service, as hon. Members know. People should also use the debt helpline, which the Government have set up in various parts of the country.
| Promoted by Ken Childs on behalf of David Clelland, both of 19 Ravensworth Road, Dunston, Gateshead. NE11 9AB |