With Christmas just around the corner, it's that time of year when statistics emerge to tell us how many people will fund their annual festivities with some form of short-term credit. This year, the Government-backed Money Advice Service has said that over a million people are considering using a payday loan to fund Christmas; a worrying indication of how deeply ingrained this form of high-cost credit has become in British life. The Business, Innovation and Skills committee held an evidence session to investigate the subject this week.
The session underlined just how rapidly the payday instant lending industry sprang up in this country. This is a market that barely existed just five years ago. It has grown during a cost of living crisis that the Government is currently failing to do anything about, in which every increase in energy bills or food price inflation causes more financial stress for millions of people on wages too low to cover the cost of these daily essentials. But instead of taking meaningful action to rein-in the industry and curb the most irresponsible lending practices (see my comments on Paul Blomfield MP's High Cost Credit Bill here), the Government has watched this industry grow like Frankenstein's monster, to the extent that 4% of UK households now rely on it every month. Payday lending now has a visible presence on every high street, and its advertising bombards our TV screens around the clock.
As Martin Lewis of moneysavingexpert.com told the committee this week, the industry has been subject to a 'desert of regulation', which has enabled lenders until this year to expand rapidly with little fear of sanction. The industry purports to be responsible in its lending and the major players created their own voluntary Charter last year. But the only sanction available is suspending or removing trade association membership which in practice means there is no real incentive to raise standards at all. The Office for Fair Trading's recent investigation into the sector, which resulted in the closure of some of the worse lenders, was a welcome development. More action is now needed.
Why, for example, do lenders routinely employ the Continuous Payment Authority (enabling them to go on a fishing expedition into borrowers' bank accounts, withdrawing any money they find, even if it's only a fraction of the overall debt) if they maintain that they are lending responsibly? Basic checks on the eligibility of borrowers are clearly not being carried out if lenders need to use this excessive power to claw their money back - a point picked up by the FCA in its evidence at the committee hearing. StepChange Debt Charity has reported numerous examples of the use of the CPA leaving distressed borrowers with no money to buy food or pay rent. When debts are so overdue that lenders need to use the CPA, the debt clearly needs to be frozen and restructured.
Then there is the questionable practice of lenders referring rejected loan applicants on to other payday loan companies via their website. These other lenders - often described as 'friends' of the company, who 'may be able to help you' - clearly have even lower barriers to entry than the original lender, and should not be capitalising on the desperation of borrowers in this perverse way. Worse still, lenders are even paid commission for doing this. Adam Freeman of Mr Lender told the committee that his company pockets a fee for every successful referral it makes. This is a totally irresponsible way for a business to act. Borrowers should not be pushed towards an alternative high cost credit package at all if they cannot pass the 'sound, proper and appropriate affordability assessment' that Mr Lender's website says it carries out on all applicants.
It is difficult to escape the industry's advertising on TV, radio and emblazoned on buses and billboards wherever you look. We should all be concerned that payday lending is increasingly being normalised by this constant barrage. Martin Lewis told the committee that even children's TV programming now features adverts for payday lenders, and 30% of under-10s surveyed by his website show an awareness of payday lending. I've even found an example in my constituency of payday adverts on a bakery shop sandwich bag. The Government can fund programmes for young people teaching money management and budgeting skills, but there is no way it can compete with the constant advertising from the big payday lenders. Ministers have a duty to ensure that high-cost credit - which should really only be used as a last resort - does not become normalised in our society. As a first step, it's now time for the television industry to stop this type of advertising during children's programme times.
Given the damage irresponsible lending is doing across the country, Members of Parliament need to keep this issue on the agenda in Parliament. I urge you to sign my colleague, Paul Blomfield M.P.'s Change.org petition calling on Martin Wheatley, Chief Executive of the Financial Conduct Authority, to Back the Charter to Stop the Payday Loan Rip-off and to visit the Clean Up Credit campaign from Which? It's good to hear that due to the OFT inquiry, a number of irresponsible lenders are quitting the market altogether because of the increase in scrutiny and that enforcement must ensure all of them are rooted out. But in the long term, we must move towards the cost of credit being capped at a reasonable proportion of the original loan, avoiding the stratospheric sums that people have been required to pay back because of excessive fees and charges. The industry must accept that it is largely at fault for not conducting proper affordability checks. But as lenders make half their revenues from rolling over existing loans (the clearest sign of financial distress for the borrower), it is obvious why they prefer the status quo. The Prime Minister must ask himself whose side his Government is on: a million households struggling to pay their bills and feed their families, or an industry intent on profiting from that desperation.