Consumer Credit

HC Deb 10 December 2003 vol 415 cc101-20WH

2 pm

Mr. Mark Lazarowicz (Edinburgh, North and Leith) (Lab)

It is a pleasure, Mr. Cook, to speak in a second debate in Westminster Hall today. I begin by drawing attention to my declaration in the Register of Members' Interests. I am also an unpaid director of the Centre for Scottish Public Policy, which recently received sponsorship for a project from Co-operative Financial Services.

Hon. Members who know of my interest in these issues will be aware that I have spoken from time to time on debates on this subject, and have put my name in the ballot for the draw for Westminster Hall debates. Perhaps I should now start doing the lottery regularly, given that I have managed to come out of a ballot only two days after the publication of the White Paper on consumer credit and at the same time as the pre-Budget report. It certainly makes the debate timely, even if it faces competing attractions elsewhere.

The White Paper has been a long time coming, but that is understandable given the complexity of the proposed measures. I am glad that the time was taken to ensure that the package is comprehensive and will go a long way to tackling the problems that many of us have raised here. The White Paper is valuable not just in what it proposes, but for the information it provides about the impact of heavy levels of debt on individual consumers. Getting into debt does not just affect people's pockets; it can have severe personal consequences. The stress can affect people's health. High levels of debt can cause marriage and other family breakdowns.

The consequences of over-indebtedness are often worse for the lowest income groups who are more likely to have debts with serious repercussions such as eviction, imprisonment, disconnection or repossession. The consequences of getting into debt can be much worse for such people because they are less able to reorganise their lives in the way that people on higher incomes can.

Debt affects the affluent and the poor alike; but escaping the jaws of debt can be much harder for the poor, particularly if they fall prey to loan sharks. Some legal lenders focus on the poor and charge excessive rates of interest. In any debate on debt or credit it must be emphasised that debt is not bad by itself. Most of us now have a mortgage and as a result live in accommodation that we could not have enjoyed unless we had been saving for 20 years or more. Borrowing and lending is at the heart of economic activity. The problem is not debt but over-indebtedness, with people being dragged into debt that they cannot sustain and which has serious consequences.

People get into debt for many reasons and there are many solutions to the problem, but too many people are encouraged, or enticed, into entirely unsuitable credit arrangements and that is a major cause of excessive levels of debt. Cracking down on the businesses and the business practices that bring that about is a major solution to the problem. That is why I welcome the White Paper, and why I wanted to raise the issue of consumer credit again in Westminster Hall.

In the time available, it would not be right for me to comment on every aspect of the White Paper. I shall highlight four areas in which I support the proposals in principle, and suggest ideas—and how they might be implemented-that can be developed in detail. I hope my hon. Friend the Minister will consider them; if he cannot respond today, I hope that he will do so on another occasion.

First, I strongly welcome the proposal to make lenders provide standard information, such as the so-called honesty boxes. It is vital that information should be provided in that way. I am glad that the Government and the industry have taken that initiative, and I congratulate the Nationwide building society, which is the first institution to take up the idea. Customers need to know the real rate of interest that they will pay on a loan or a credit agreement and the real cost to them of buying goods or services on credit. They need to be able to compare like with like, and they should not be bamboozled by clever language or glossy advertising designed to obscure the reality of the financial deal that they are being encouraged to sign.

The key is that the information provided must be simple and easy to understand. It is important to be transparent, but transparency loses much of its appeal if it is accompanied by excessive complexity. There is little point in producing so much information that few people bother to read it, and it cannot be effectively drawn to people's attention. I hope that the Government and the industry take that on board when the proposals are developed in the next few months.

There is an argument that if products are so complex that the essential details cannot be set out and explained simply, clearly and succinctly, they should not be on sale to the general public. I should like the Government at least to consider that point.

I am pleased that, in the White Paper, the Government are proposing to widen the current definition of extortionate credit terms. The law already allows loans of that type to be struck down but, in 25 years, few successful challenges to credit agreements have been made. It is disappointing that there are no proposals in the White Paper for extending the definition, but I welcome the fact that the Government have set out a clear timetable for introducing such proposals.

How the definition of extortionate credit is extended is crucial to the success of the strategy in the White Paper. If the redefinition is broad enough, it will encourage lenders to exercise their own self-discipline, which would go beyond any formal regulation by the regulators or by Government. Lenders will be much less likely to risk advertising and selling products that they know are, to be blunt, dodgy—even if they fulfil the strict terms of the rules—if the products are at risk of being struck down later. Extending that definition is crucial to the success of the Government's package.

Malcolm Bruce (Gordon) (LD)

I apologise for missing the start of the hon. Gentleman's speech. I have just struggled in after taking two hours to get from Heathrow. He makes an important point. Does he acknowledge the Government's difficulty in this matter? They want a definition that deals with cowboys who rip people off but does not destroy the cash, small-debt market. Interest rates are not the only measure, and the Government must get the balance right.

Mr. Lazarowicz

I accept the hon. Gentleman's argument. That balance must be struck, which is no doubt why the consultation on the details has still to take place. However, I was talking about the type of offer or arrangement that everyone knows is wrong or dodgy, but which does not lend itself to the type of solution that the law provides. We must make it clear that such an agreement will not stand up and can be challenged successfully.

What is described as a "stakeholders group" will be consulted on the proposal. I hope that because I have mentioned that group, my hon. Friend the Minister will give an assurance that when he sets it up, it will include representatives of consumer and advice organisations from Scotland, given that the financial sector in Scotland is so important and, of course, the separate Scottish legislation and legal system covering some of this sphere.

The Minister for Employment Relations, Competition and Consumers (Mr. Gerry Sutcliffe)

I do not want to stop the discourse that my hon. Friend is unleashing on us, which is welcome, given the White Paper. On the point about the body and Scottish representation, I can give that undertaking now.

Mr. Lazarowicz

I welcome that assurance, which will be welcomed also by the sector in Scotland.

Something must be done about the way in which some lenders market their products. If we spend any time watching daytime television and reading adverts in newspapers, time and again we will see advertising that is designed to prey on the poor and vulnerable. I strongly welcome the Government's proposal in the consultation documents accompanying the White Paper to tighten the rules on consumer credit advertising, but again I have one or two doubts as to whether the proposed new regulations will go far enough. These suggest, among other things, that advertising must be in plain English. With some adverts, the problem is not that they are not in plain English; they are often very plain indeed. The problem is the way in which they are set out and the practice of giving the impression that the service offered—perhaps, say. by a debt management company—is a public service rather than a commercial offer.

I am worried that it is the nature of the shadier end of the business that people will always try to get round, whatever rules are designed to prevent that practice. I wonder whether powers should be given to an appropriate regulator—be it the Financial Services Authority, the Office of Fair Trading, the Department of Trade and Industry or even local councils—to step in and issue a stop notice to end such advertising, in the same way as stop orders can be made in respect of other trading practices.

Last but not least, there must be much wider provision of financial education and free debt and money advice. The White Paper recognises that, which is one of the very good points in it. Much good work has already been undertaken by the industry, as many hon. Members will know. An exhibition in the Attlee suite in Portcullis house shows the work being done on financial education by many financial institutions and advice agencies. I invite hon. Members to visit that exhibition later this afternoon.

Good work is being done, but we must ensure both that there is provision throughout the country and that what is provided nationally fits in well with local advice and education. We do not want so much advice to be provided that the public are not sure which is bona fide, which is supported by the independent agencies and by the Government and which is simply commercial marketing masquerading under the cloak of advice. Perhaps there should be a national brand to which independent advice service providers can sign up, so that the public know where to go when they want independent advice and education, as that is so important.

These comments are made in the context of my general welcome for the White Paper. Reforms are urgently needed. I am sorry that they will not be taken forward in the current year's programme. However, I understand why; the measures are complex and it is important to get them right. I welcome the fact that the proposed statutory instrument will be taken forward as soon as possible.

It is essential that the reforms that require primary legislation are included in next year's legislative programme. I understand that the proposals have received wide support across the sector and across parties. I hope that the welcome that they have received will make it easier for my hon. Friend the Minister and the Secretary of State to achieve the necessary time in the Queen's Speech and the Government's programme in the next legislative year.

Mr. Frank Cook (in the Chair)

Order. I feel that it might be advisable for me to remind those hon. Members who have not been in Westminster Hall for some time that it is the practice to commence the first of the three wind-up speeches 30 minutes before termination, which means 3 o'clock. I am sure that hon. Members will bear that in mind when making their contributions and accepting and responding to interventions.

2.15 pm

Ross Cranston (Dudley, North) (Lab)

I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on securing the debate. I hope that after the debate he will give me some advice on how to be as lucky as he has been in recent times.

I also congratulate my hon. Friend on the work that he has done in setting up the all-party group on debt and personal finance—a group that is much needed in this place. I also congratulate him on hosting this afternoon's exhibitions by a group of agencies that focus on financial education and information, a topic that he emphasised in his speech.

I welcome the White Paper; it is high time that such measures were taken. As early as 1978, I was publishing pieces criticising measures such as the rule of 78. Over the years, I have criticised the Consumer Credit Act 1974 and pointed out the need for it to be amended to accommodate it to the modern credit industry. I congratulate the Minister, and hope that the necessary legislation will be introduced in the next parliamentary Session. It is certainly needed, although a certain amount can be done by means of statutory instruments.

I shall highlight a few issues. The first issue—the need to ensure that credit providers lend responsibly—was raised a number of years ago when Lord Borrie was the director general of fair trading. There is much concern at present about over-indebtedness, and it is certainly the case that some parts of the community, generally the lower-income groups, are taking on a burden which may become too great, if, for example, there were illness or family tragedy, and which might, in some cases, lead to personal bankruptcy. The White Paper is useful in bringing together information that demonstrates that such problems are faced particularly by low-income groups.

The British Bankers Association, in the briefing that it produced for the debate, makes the point that over-indebtedness is not generally a problem, and I accept that point. We have a healthy economy, with low inflation and high employment, and over-indebtedness is not faced by the majority of people. However, there are vulnerable people in the community who are potentially over-indebted and so, as my hon. Friend the Member for Edinburgh, North and Leith said in his opening remarks, it is important that financiers and credit providers lend responsibly. I therefore welcome the notion that guidance will be provided. It seems to me that that must be taken into account in the licensing process by the Office of Fair Trading so that if lenders, even reputable lenders, are advertising credit irresponsibly they must be brought to book.

Mr. David Drew (Stroud) (Lab/Co-op)

I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on all his work on this subject. I received the memo from the British Bankers Association but I must say that its view that it only engages in responsible lending is completely contradicted by my local citizens advice bureau. It makes it clear that even the most reputable banks often approach people who are clearly in debt on the basis that the bank will be able to secure the money that it is owed regardless of other debts that are being paid. That is a serious problem, and I hope that my hon. Friend will comment on it.

Ross Cranston

I did not completely accept the BBA briefing. As my hon. Friend rightly says, all lenders must ensure that they lend responsibly. The brief produced by Citizens Advice and the work that it has done over several years, particularly the detailed report on over-indebtedness that it produced two years ago, pointed out that even high-street names sometimes promote credit irresponsibly. We must consider the problem across the board.

The licensing system is a powerful tool. It is proposed that we move away from five-year licensing, and I had initial doubts about that. However, I have been persuaded by the White Paper that it is better to award a non-renewable licence as long as there is constant monitoring of all credit providers, as my hon. Friend the Member for Edinburgh, North and Leith rightly said, and action is taken if they step out of line. It is also pointed out in the White Paper that some exemptions, which are no longer defensible given the development of the consumer credit market, will be removed. Powers of investigation comparable to those of the Financial Services Authority are necessary and are proposed in the White Paper, and I welcome that.

I shall now move on to the topic of extortionate credit bargains, which my hon. Friend the Member for Edinburgh, North and Leith mentioned. The White Paper addresses the issue of whether there should be an interest ceiling. I am sympathetic to the idea of an interest ceiling. Having seen some cases that Citizens Advice has brought forward, with interest rates of more than 1,000 per cent., I understand the argument for a ceiling. However, any ceiling will be arbitrary. I can accept the proposals in the White Paper as long as the extortionate credit bargain provisions are properly enforced.

Historically, the measures in the Consumer Credit Act 1974 have not worked, and that has been a failure on the part of the courts. In outrageous cases, in which interest rates and credit practices were completely unacceptable, the courts found that the tests for unconscionability set out in sections 139 and 140 of the Act were not satisfied. If there were variable interest rates, the courts found that the tests were not satisfied. In a commercial context there must be variable interest rates, but the consumer context is different. None the less, the courts found those to be acceptable under the provisions.

I welcome the proposals in the White Paper to update the 1974 Act and to introduce a broader test of unfairness, and we look forward to seeing the detail. In particular, I welcome the proposals, already included in the Enterprise Act 2002, to enable consumer groups to take collective action on behalf of individual consumers to pursue unacceptable credit practices.

I understand that there is a disagreement between the Department and the National Consumer Council about redress mechanisms. It is important to provide a redress mechanism for individual consumers who get into problems. In other comparable jurisdictions, there is provision for credit tribunals. The courts here have failed, so we must provide another mechanism. What will that be? The National Consumer Council is keen that the financial services ombudsman should provide that service. The White Paper addressed the issue, although it does not come down on one side or the other.

Mr. Sutcliffe

On that matter, we are still consulting. My hon. Friend will know that there is a review of the financial services ombudsman and that discussions with the consumer groups are continuing. We want to be clear about what the redress mechanism will be. We are speaking to the National Consumer Council.

Ross Cranston

I thank my hon. Friend for that. I welcome the Government's commitment to a new redress mechanism, and I hope that a clear conclusion on what that will be can be reached as soon as possible. The financial services ombudsman provides a suitable mechanism that is cheap and quick for consumers in that area. I should like my hon. Friend to consider whether that model, or something based on the ombudsman service, is to be introduced.

I should like to talk about some of the specific provisions. Penalties for early payment are subject to the rule of 78 that I mentioned earlier. The White Paper usefully points out the benefit of abolishing that rule, especially for lone parents and low-income families. I was disappointed that the director-general of the Finance and Leasing Association was very critical about that proposed abolition. He has a technical point about the securitisation of consumer credit receivables, and I understand why the problem of retrospectivity concerns him. He says: These changes could lead to a trouble-makers' charter where all agreements could potentially be challenged. He goes on to criticise the removal of existing penalties retrospectively. I welcome the comments of both the British Bankers Association and of the director-general of the Consumer Credit Trade Association, who said: I don't think anything in this paper is a surprise. The issue of early penalties has been raised over many years, so the proposals in the White Paper cannot be a surprise to the industry. As in the book of Daniel, the writing has been on the wall for the rule of 78 for some time; the industry has been found wanting in this area and judgment day has arrived.

Finally, I shall say a few words about new mechanisms. The White Paper mentions in passing the promotion of credit unions. The Economic Secretary to the Treasury, my hon. Friend the Member for Wentworth (John Healey) recently visited the Castle and Crystal credit union in my constituency, which was celebrating its tenth anniversary. That union is developing collection points all around the borough. One in the Castle and Priory ward, which is a deprived ward in my constituency, involves the possibility of using a post office as a collection point.

The big surprise about credit unions is why they have not taken off in this country as they have in other comparable jurisdictions. The Treasury has been doing useful work in trying to promote them. In my constituency, a theatre company called Urban Voice recently visited the Castle and Priory ward to perform an hour-long play called "Living on the Never Never", which highlighted some of the difficulties that people can get into with certain ways of borrowing money. That work is necessary, and we have to promote the idea of credit unions. We need people in deprived communities to be switched on to the notion of putting savings into credit unions and borrowing from responsible bodies such as them.

I want quickly to mention two other institutional changes. The OFT must be an effective enforcement body, but in recent years, competition policy has dominated its agenda. It has responsibilities for consumer protection as well, and it is vital that the resources and commitment of the OFT are addressed to that area. The other institutional change is with legislation. We need amendments to the Consumer Credit Act 1974 on the statute book as soon as possible.

2.31 pm

Mr. Wayne David (Caerphilly) (Lab)

I began to take an interest in indebtedness and consumer credit soon after I was elected because I visited my citizens advice bureau in Bargoed for a meeting with its manager. I asked him point blank what issue was brought to the citizens advice bureau more than any other, and without hesitation, he said that the real problem facing people in that community was massive indebtedness. He explained how hundreds of people came in with the most pitiful tales of how they had got into dire situations.

Soon after that, I began to hold constituency surgeries and have similar cases brought to me by my constituents. I should like to cite two examples that reflect a much wider problem. The first example is of a young woman, who came to my surgery and explained that she was an unmarried mother whose son was on drugs. He had been having difficulties with his local suppliers in paying for his habit. and with the law. She had been in touch with the police, who had been helpful, and then came to me because she was having enormous difficulties with a local loan shark, whom she had met in her local club. She explained how one night, when she was with her friends and feeling upset, someone suggested that she should have a word with this nice, helpful young man, who could provide some ready cash.

Rather naïvely perhaps, the young woman accepted £200 from the man with a vague verbal agreement about her paying it back when she was able. A couple of weeks later, he turned up at her house and started making threats to her, demanding not just the original £200, but a further £200 as interest. There had been no agreement other than a verbal comment and a nod and a wink in a club. Then, when she was unable to pay back that money, the threats, intimidation, bullying and physical violence began. In desperation, she came to me, and we managed to sort something out with the assistance of the police and citizens advice bureau. I suspect that that is just one case among many and will be replicated time and again not just in Bargoed but in many other communities throughout the country.

A second woman who came to my surgery explained that she had taken out a loan of £20,000—a significant sum. She did not have a prosperous background, but she signed a credit agreement to pay an interest rate of only 1.97 per cent. a month. That did not sound much to her, or to me. She did not realise that that is an annualised percentage rate of some 22 per cent. Before she knew it, she was paying back well over £70,000 for a £20,000 loan. She could not meet the repayments and found herself in court, with a bill around her neck of well over £100,000, which was completely beyond her means. She had had no idea that she could possibly get into such a situation. The transaction was perfectly legal as the company that loaned her the £20,000 was properly registered.

I feel strongly about the issue, and very much welcome the Government's initiative. In 2002, the Welsh Consumer Council conducted an in-depth survey of levels of indebtedness in greater Gwent. It concluded that indebtedness was greatest in some of the poorest communities in Wales, mainly in the heads of the valleys. Uncomfortably for me, it confirmed that some of the worst cases of indebtedness and borrowing from unregistered moneylenders were in a Caerphilly borough, part of which I represent. The report concluded that some 7 per cent. of the respondents in the Caerphilly borough who had used credit in the two years before the survey was conducted borrowed from a moneylender, compared with only 4 per cent. overall. The figure of 4 per cent. is bad enough, but 7 per cent. is extremely worrying.

As a result of that survey and my experience, I ran a campaign with my local newspaper, the Rhymney Valley Express. The campaign had three objectives. The first was to alert people to the activities of loan sharks and unscrupulous registered moneylenders. We were simply encouraging people to be less trusting and to ask lenders more questions before they got themselves into difficult situations. The concept of public education is very important.

The second objective was to let people know that there are alternatives to moneylenders and loan sharks. We stressed the fact that there are, for example, two credit unions in the Rhymney Valley, which are expanding and proving to be very effective. I am glad that the White Paper refers to credit unions, because they are the alternative to loan sharks for many ordinary people in working-class communities. I encourage the Government to do as the National Assembly for Wales has done and give every possible support to the development of credit unions in this country. The National Assembly has given excellent support to credit unions in Wales through objective 1. That was a tremendous fillip for the movement in Wales, and we are making progress because of it.

The third part of our campaign was arguing the case for legislative changes, especially to the Consumer Credit Act 1974. We made several suggestions to the Government in a seven-point plan, some of which reflected ideas that were mooted nationally and centrally by citizens advice bureaux, and others that arose from our practical experience. The first of our seven points was that the Consumer Credit Act should be changed to outlaw extortionate interest rates. The second was that serious consideration should be given to an interest rate ceiling, which would mean that interest could not be charged above a certain rate. The third was that all credit agreements should be required to show the total amount to be repaid by the borrower over the term of the agreement. Fourthly, we suggested that credit agreements should show the average interest rate for a particular type of loan, alongside the interest rate figure actually charged in the specific agreement.

The fifth point was that all lenders should be obliged to recommend that the potential borrower take independent advice before agreeing to end a loan agreement. The penultimate point was that there should be provisions to make the early settlement of loans fairer and easier. Finally, we said that when the Consumer Credit Act is modified it should be simplified and made more straightforward and understandable.

I recognise that not all those seven points were accepted in the White Paper. On my evaluation, it seems that four of the seven were. That is a significant step forward. As my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) mentioned, there is the crucial reference to replacing the term "extortionate test" with a wider "unfairness test". That is important. However, I would be grateful if the Minister could clarify what it means. I understand that the European example has been taken on board and that we are taking European legislation into account. Given the importance of the terminology, I would appreciate some clarification.

The White Paper is a milestone. There has already been a great deal of consultation and a long gestation period. Many people throughout the country will welcome it. It is a huge step for the Government to take, and I would like to see it firmed up as legislation as quickly as possible.

No matter what legislation we have, what alternatives to loan sharks there might be or whether loan sharks are outlawed, at the end of the day we need a greater understanding of what indebtedness means. I would like to see greater discussion of credit and indebtedness in schools.

2.42 pm

Malcolm Bruce (Gordon) (LD)

I will ensure that the other two winding-up speakers have at least an equal share of the time. I congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) on the work that he has done on this initiative, which is extremely timely given the publication of the White Paper and the development of public concern about the statistics, which have been a matter of debate in recent months.

I hope that we all recognise that credit is a vital component of a healthy economy. There has been a huge development in credit and the varieties of credit, giving many people more choices and opportunities. Clearly, that has also led to a situation in which some people have been forced, seduced or have in some other way got themselves into a position where they are out of their depth, to use the jargon. It is worth reflecting on one or two statistics that bear that out. Over the last year, 33,945 people have been served with bankruptcy orders; almost the end of the line in terms of failure. That figure is 13 per cent. higher than that for the previous 12-month period. The increase in the latest quarterly statistics is 17 per cent. compared with the equivalent period the year before.

Personal debt has risen by 50 per cent. The average person now owes more than £5,300 in unsecured loans; the average annual household debt stands at more than £37,000. The focus of attention has been on two things—apart from some ill-chosen responses to Select Committees by certain people that should know better—that concentrate the mind. First, there are products that are appropriate and not appropriate for different sorts of debt. Secondly, people do not always realise what they are paying and what it is costing them.

In a way, Mr. Barrett did us a favour—even if he did not do himself a favour—when he admitted before the Select Committee on the Treasury that he would not borrow from his credit card company because it is too expensive. That revelation was compounded when the Office of Fair Trading revealed only two or three weeks later that it had forced Barclays to withdraw its credit card advertisement of 0 per cent. interest for life. It occurred to me that there might have been a change of policy, because if 0 per cent. for life meant what it said, even Mr. Barrett would surely borrow on his bank's credit card. The fact that he chose not to do so was a further reinforcement that the bank did not mean what it said, but something quite different. It is such practice that the White Paper is trying to address—successfully, I hope—by setting up measures and responsibilities that will enable people to be protected and better informed.

It is important that the first recommendation of the White Paper is the duty to lend responsibly. The Minister will be aware that, on the matter of fair trading policy, the Liberal Democrats have suggested that we ought to discuss the duty to trade responsibly. Although we did not succeed in getting that point into the Enterprise Act 2002, the concept is being considered by the European Commission and may yet form the foundation of a general trading standard. It would not preclude the need for other specific regulations, but it would give a peg to demonstrate where someone had clearly traded unfairly and, in the context of credit, lent irresponsibly.

As the hon. Member for Edinburgh, North and Leith has said, there are some stark examples in the White Paper of people being drawn into taking out loan after loan, thus compounding their debt until the interest ends up being about five or six times the total capital payment. That is extortionate, even given that long-term loans have a high multiplier. The steps that the White Paper proposes will be effective if we can really work with the grain of the operators in the market, and identify the rogues—the problems and practices that we are trying to eliminate—without destroying the variety of products that people want and can choose responsibly.

I shall mention briefly the role of credit cards, as opposed to bank loans and mortgages. I am astonished by the number of people, even among those who one would think were reasonably confident about financial services, who have significant amounts of credit that they repay monthly on a credit card, but who clearly have access to cheaper forms of credit. One argument is that it serves them right; if they cannot be bothered to use the facilities available to them, perhaps they should pay the extortionate rate. However, helping people by making the comparators and the real costs clear helps the market to operate. That is a proper role for the Government; to give people information to enable them to work in the marketplace with confidence and surety. If something sounds too good to be true, it probably is, but if the regulation that we are putting in place is effective, it might mean what it says. That will be the real test; whether a bargain really is a bargain, rather than a come-on. If we can get that right, it will be extremely beneficial.

I hope that the Minister will not take that amiss because, in other contexts, my colleagues and I have expressed some concern about the cost and size of both regulation and his Department, which has more than 10,000 staff and a budget in excess of £5 billion. I do not say that those services are not required. The right hon. Member for North-East Hampshire (Mr. Arbuthnot) and I have discussed this matter. Have the Government assessed whether they would require extra staff, or a redeployment of staff, and what cost might be involved? I do not say that there is no role for the Department, but it is important that we should know what we are letting ourselves in for.

I should like to address the small loan and cash-based borrowing at what is patronisingly called the lower end of the market, that which involves small amounts of borrowing. I am a strong supporter of credit unions. Although I am not directly involved with one in my constituency, I attend meetings of the very active Strathbogie credit union, which operates over an extensive rural area and to which I am happy to give support. They serve a useful purpose, enabling many people to save, borrow and manage the fluctuations in their incomes. They feel that some FSA regulations are restrictive in their scale of operation, but it is necessary to maintain a balance. I would give wholehearted support to any measure that the Government might take to strengthen, deepen and broaden access to credit unions across a wider community.

One of the cash debt collection companies regarded by the Consumer Credit Association as extremely reputable has told me that it is concerned that the measures might adversely affect it. It explains that there are those for whom even a credit union requires too much of a commitment; in particular, one has to save with a credit union before one can start to draw money out. People can find themselves in a situation in which they need money immediately. They are vulnerable and can fall into the hands of people who will exploit them as illustrated in the White Paper; they are locked into a cycle of debt at a disproportionate interest rate, and they are taken for the little that they have.

We have to deal with that, but we must also take account of those who work in the cash-based credit market who maintain that they are giving a genuine service to such people. They do so at a high cost with good reason; they regularly send people to collect debt because—to use movie-type jargon—they have overheads. However, those overheads are real; they have to employ the people to make the collections.

I do not suggest that those firms should not be subject to regulation or investigation, but they have expressed to me their concern that if they were over-gulated—if simple interest rates were attached to some of their agreements, for example—it might make them sound extortionate and make them fall foul of the regulations. If that were the case, they would withdraw from the market. That would leave their clients with nowhere to turn but to criminal money lenders who, it has been suggested, profiteer on contraband cigarettes and alcohol. They have cash that they can use to make more cash by lending it to people who have none and putting the heavy twist on them, both physically and by getting an extortionate amount of money.

Mr. Sutcliffe

I agree with what the hon. Gentleman is saying about small loans and protecting people in the marketplace. I am aware of representations that have come from the licensing agency about which he is talking, and I will take them into consideration.

Malcolm Bruce

I am grateful for that assurance, because I am certain—even without having heard the Conservative contribution—that all of us would like there to be a climate in which lending is open, transparent, understood and fair, and that credit is not operated in a way that is abusive, extortionate and on the margins of reputability. At the same time, we do not want to destroy a vital, viable and diverse market. The figures for the extension of credit are a matter for concern, and could become a serious issue, not just for people at the lower end of the income scale. I am still interested to know what developments the Government expect in the information and education that influence people's understanding and use of credit.

I am amazed, as I have already said, that people whom one would expect to have a reasonably good handle on how to obtain and use credit still manage their finances wrongly. Many use the wrong products and even have wrong balances, either because they do not regularly review their finances or because they do not have enough understanding. As the hon. Member for Caerphilly (Mr. David) said, 1.5 per cent. per month works out at more than 20 per cent. a year. Although most people understand the difference, they do not always make the calculation.

Of course, the credit card companies are constantly pushing us. I do not know how many letters I receive a week, but they all go unopened into the bucket. However, I guess it is different for people going through a bad patch when a letter arrives saying that £10,000 is available or that they can transfer their balances. On the other hand, some sharp people can do very well out of transferring balances every six months. One need never pay interest if one shops around, but how many people have the time to do that? The credit companies are hoping for inertia. They want to seduce people into using that money or transferring their balances and accumulated debt onto one card; they want people to build up debts and to pay a heavy rate of interest. We cannot ban or outlaw that, but we can help people to understand the information that they receive. It should be transparent; comparisons should be made on the same basis, and people should understand their rights.

That brings me to the escape and penalty clauses. I raise two slightly contradictory points. People who are paying a reasonably competitive rate of interest— good from the lender's point of view—and who pay regularly may find that their circumstances have changed for the better. They may wish to reduce their indebtedness; it seems wrong that they should face a penal redemption rate, particularly if they are paying a flexible rate of interest. It would be commendable if the Government were to address that issue.

My overhanging concern relates to fixed mortgage rates. That is being discussed in the newspapers, but people are reluctant to go for fixed interest mortgages, particularly if they have experience of lower interest rates. One of the deals that mortgage providers offer is a fixed-interest mortgage for a significant time, but we want that to be longer than two or three years. It should be five years or even 10 years, but borrowers will have to make a risk assessment of what the interest rates will be over those 10 years. However, one consequence of the fixed rate is that people often want to exploit the situation. They will say, "Well, things have improved. I have decided that the flexible rate is cheaper, and I want to opt out." There has to be some balance to the deal; those who take the risk of a fixed rate should share the benefits, but it must be done fairly and equitably

In that context, the White Paper and today's debate are timely. I hope that interest rates do not go up much, but we may be seeing the beginning of an upwards turn. It is clear that if interest rates go up by 1 or 2 per cent., the figures that I gave on the rates of bankruptcy and indebtedness will rise sharply. That could cause problems for the British economy; such a move could result in a significant downturn or slowdown. We need to ensure that when people take out loans, particularly mortgages, they build in a margin for an increase in the interest rate. They must not borrow right to the limit, so that an increase of even 1 or 2 per cent. tips them into a position where they simply cannot manage their borrowing. Of course people should be responsible, but the mortgage providers and the regulators should ensure that the information that they make available to the public helps them to be responsible.

2.58 pm

Mr. James Arbuthnot (North-East Hampshire) (Con)

I echo the congratulations given to the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz). The debate is suspiciously timely; it is almost as if he knew the White Paper was coming. I congratulate him on his prescience and on being so highly informed; the opening of the debate was worthwhile and useful. He gave an interesting analysis of the problem.

I also echo the hon. and learned Member for Dudley, North (Ross Cranston), who congratulated the hon. Member for Edinburgh, North and Leith on his work in the all-party group on debt and personal finance and on the e-mail that he sent us all today about the day of financial education. I am looking forward to visiting the citizens advice bureau, the Financial Services Authority, the British Bankers Association, the personal finance education group and especially "then add the rest", as it says at the end of the e-mail.

Today's debate is worthwhile and timely and we have heard some interesting speeches. The hon. and learned Member for Dudley, North dissected many of the White Paper's details in his usual highly experienced manner. The hon. Member for Caerphilly (Mr. David) gave two moving constituency examples of why the issue is so important. I particularly appreciated the comments that the hon. Member for Gordon (Malcolm Bruce) made about credit unions and the need to strengthen and deepen them. He also expressed fears about people being scared into the arms of criminal money lenders, which we must be careful to avoid in any action taken on this important issue.

There has been a huge shift, in this country and in the world, in the way we run our finances. We used to save money in order eventually to spend it on something that we had decided in advance that we needed. Now, much the more usual course of events is to spend money and then try to work out how to pay it back. If one thinks about it, there is no particular reason why the course we take now should be more fashionable than saving. There is a lot to be said for saving. At some stage we might be able to return to the savings culture that we used to have. However, with tuition fees, the likelihood of graduate debt being about £33,000 by 2010 and the prospect of the savings ratio halving, it might take a long time to do so. I should very much like to see a savings-based society rather than a debt-based society. We can achieve that only gradually, but we should move towards it.

We are now a debt-based society, as the hon. Member for Gordon said. He set out how much debt we have and said that for most of us debt is not a problem. On the contrary, it is a huge convenience and in many ways powers the economy. For all too many individuals, however, the consequences of getting into debt can be devastating, as the hon. Member for Edinburgh, North and Leith said. A quarter of the people who go to citizens advice bureaux with debt problems have visited their doctors because of stress and anxiety. Many people do not even know to go to the citizens advice bureau, while many others find themselves in debt through failures in the benefit or child support systems or for reasons that are none of their doing.

For such people credit cards are often the way through the problem in the short term, but the expense of credit cards can create much larger problems in the longer term. The hon. Member for Caerphilly said that such people are the most vulnerable in other ways—he was referring to people who live in the heads of the valleys—and he is absolutely right. Those people are likely to suffer most as a result of debt.

I should like to pay particular tribute to the people in citizens advice bureaux, who are the front line of dealing with debt. In my constituency we have two excellent citizens advice bureaux, in Fleet and Bordon, but they are the same all over the country. MPs and the population of the country rely heavily on people in citizens advice bureaux. Those highly trained volunteers are very successful in dealing with problems caused by debt, out of which they are utterly dedicated to helping people. I admire and sympathise with citizens advice bureaux all over the country; many other voluntary organisations do the same thing. I do not know how we would cope without them.

The White Paper, rightly, has been the main subject of today's discussion and a great deal in it is welcome. At first sight, I particularly liked the section on transparency. We would like to see the proposals on easily comparable rates and terms translated into action. The abolition of rule 78 and the penalties for early repayment is welcome. Transparency is essential to understanding debt.

I wonder about some of the details in the White Paper. Will the increase in the size of print mean that people receive masses of large-print bits of paper, which they will not want to wade through, instead of a small illegible piece of paper? A way of not telling somebody something is to tell them so many other things that they get drowned in the mass of paper.

I should like the Minister to address the question of the programme. Page 97 of the White Paper states that the primary legislation is subject to the parliamentary timetable as soon as parliamentary time is available. It is a shame that the White Paper came out a mere two weeks after the Gracious Speech. I wonder whether that means that the legislation will not get into this year's programme.

I do not necessarily want all the points to be dealt with by legislation as opposed to voluntary codes of practice. The Opposition would like to see as much as possible of this creditable move towards transparency being achieved through voluntary codes rather than burdensome regulation. We will, of course, examine the fine print of the primary and secondary legislation. The Government have a history of producing 15 new regulations a day. Although many aspects of the White Paper have been welcomed by the businesses that must respond to it, we want to look at the detail of the regulation and legislation.

Several Members have raised the issue of financial education. The hon. Member for Gordon referred to Mr. Barrett's remarks to the Select Committee. Mr. Barrett's decision not to accumulate debt on his credit card is fine by me, and the Secretary of State's decision not to have a credit card at all is also fine by me. We need the dissemination of knowledge and informed judgments to the whole community. The Consumers Association would like to see a radical overhaul of financial education, which must be right.

Sir Howard Davies said that we needed to improve financial literacy. We also need a national strategy for improving people's knowledge of their finances and the way in which they work. We must remind people that they should not believe everything they read in an advertisement; if something sounds too good to be true, it probably is.

3.9 pm

The Minister for Employment Relations, Competition and Consumers (Mr. Gerry Sutcliffe)

I am delighted to respond to an excellent debate and to contributions from all hon. Members. We may disagree on political issues, but there has been a general welcome for the White Paper.

I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on securing the debate. It is not suspicious; he is clearly a lucky man. I hope that he has the same success in the national lottery. I also congratulate him on his activities on wider consumer affairs issues, because not only has he facilitated the work of the all-party group and work on financial education, he has worked tirelessly on behalf of consumers. When I became the Minister for consumer affairs in June, one of the first letters I received came from my hon. Friend on hallmarking. He was to the forefront of the debate about hallmarking, and I congratulate him on his efforts. He now knows that the Government have been successful in protecting British hallmarking.

One of the reasons I came into politics was to protect, help and support people in our communities and to ensure that they are not exploited. The White Paper has been a long time coming and there has been some criticism about that, but we were right to take the time and to consult widely with a variety of organisations. As was said during the debate, the British consumer credit market is the most mature in the world and has developed greatly over the years. A figure that interested me was that before 1974 there was one credit card—Barclaycard—and annual debt was around £32 million at today's prices. There are now 1,300 credit cards and billions of pounds of debt.

It is important to consider the White Paper in the context of a changed market. I want to put on record my grateful thanks and that of my Department for the work done by many groups in contributing to the White Paper, including consumer groups, citizens advice bureaux, the National Consumer Council and many other organisations that gave the consumers' point of view. I thank also the industry for the way in which it participated and supported the White Paper.

The White Paper is vital to our manifesto commitment to deal with loan sharks. Hon. Members have told us about illegal lending and pressure on individuals.

Ross Cranston

I wish to ask about the hit squads that are foreshadowed in the White Paper. Will they operate against illegal lending? Will they operate in my area of the country, the west midlands?

Mr. Sutcliffe

The good news for my hon. Friend is that the answers are yes and yes. The pilot programme of loan shark hunters will take place in Glasgow and the west midlands. It will involve cross-agency working and bring together the police, trading standards officers and local authorities. Part of the problem, to which my hon. Friend the Member for Caerphilly (Mr. David) alluded, is that people do not come forward because they feel threatened. There is a criminal element; some inappropriate lenders use illegal lending to launder money and for various other criminal activities.

The loan shark hunters will be in place—the pilot scheme has received £2 million of investment—and we will ask local authorities and others to consider possible ways of rolling out such schemes across the country to ensure that other people are given that opportunity. The issue is important to the Government and to many MPs. We know of many cases in our constituencies in which people—usually the vulnerable and those on low incomes—are threatened by unscrupulous lenders.

As I said, the White Paper reflects the maturity of the industry and how things have progressed. I was grateful for the contributions made by the hon. Member for Gordon (Malcolm Bruce) and the right hon. Member for North-East Hampshire (Mr. Arbuthnot), to which I shall return in a moment. The British Bankers Association memorandum to us is an example of how things have changed. I cannot resist the opportunity to mention its third point: Lessons have been learnt from the last recession. In the late 80s, the UK had enjoyed an economic fool's paradise with: artificially low interest rates followed by a Budget which threw cash at the middle classes in tax breaks, and threw fuel on the blazing housing market by setting a future date for removing dual tax relief —a consumer gold rush to joint ownership concluded the folly in late 1988. Lessons have been learnt, but I do not know whether the right hon. Member for North-East Hampshire has learned them, as I did not hear him make the point that we are in the situation that we are in partly because of the previous Government's policies.

I was proud to be in the Chamber today for the pre-Budget report and to hear the Chancellor set out the macroeconomic conditions faced by the UK. More people are in work than ever before, which helps credit-related issues. I agree with the right hon. Member for North-East Hampshire that there has been a culture change in how people deal with credit, and I accept and understand that a savings culture is vital. But Britain's progress means that legislation must reflect the current situation. The Consumer Credit Act 1974 is 30 years old, and it is time to ensure that we have a credible Act and a credible regime that meet the requirements.

Individual agreements must be clear, and people must be able to understand what they are letting themselves in for. On the other side of the equation, we must have an effective enforcement regime. New powers have been given to the Office of Fair Trading, which now has the opportunity to investigate to see whether people are lending appropriately and responsibly, and the credit licensing regime is being overhauled. We are telling people that we want a fair marketplace that is still competitive, and the White Paper deals with that.

Every national newspaper carries advertisements for loans, and it is hard to determine how much one must pay back. The idea behind the honesty, or summary, box is to make that clear and simple. There are two ways of calculating the APR, which confuses people. The White Paper also considers the possibility of obtaining an agreement to ensure that there is only one way of calculating the APR.

Summary boxes make it clear how much people are borrowing, the length of time over which they must pay and how much they will have to pay back at the end of the period. They will also tell people how much longer it will take them to pay back the loan if they pay only the minimum each month, and how much more they will pay over the lifetime of the loan. We are also consulting on the size of print. We want to ensure that we do not overburden the industry but, for the sake of transparency, it must be clear at the start what people have to pay back and how much they are borrowing.

The form and the content of the credit agreement must be easy to understand. Some forms are very complicated, and people do not understand them. When people are hard pressed, they sometimes enter into loans and agreements that they do not fully understand. All they want to do is to obtain the loan and get the money. We have worked with the industry and with consumer groups to produce credit agreements and forms that are easy to understand.

My hon. and learned Friend the Member for Dudley, North made a good point about the early settlement of loans. I had never heard of rule 78 until I went into the detail. How can it be right to penalise people who want to pay off a loan early? That cannot possibly be appropriate, and I am quite sad that although the White Paper has generally had a good welcome, certain elements in the industry are against the proposals on early settlement of loans. We will return to that because it is important to get it right. Some 70 per cent. of people want to, and do, pay off their loans early and they should not be penalised and charged for that. We accept that there is an administration element and that it is important to have an accommodation for any administration costs, but that rule clearly needs to be changed.

Malcolm Bruce

I agree with the Minister, particularly on short-term, medium-term and variable-interest loans. However. does he accept that there is a potential problem in trying to get people on to fixed-interest loans if they can get an easy early repayment as soon as the market has moved favourably? Clearly, people will not offer fixed-interest loans if they are not equally balanced.

Mr. Sutcliffe

Yes. The Chancellor referred to that this morning, and there will be a survey and report by a group set up to examine what can be done.

We are in an era of new technology, and people want to borrow over the internet. It is important to have online agreements that are sustainable, understandable and protect people's interests.

The credit licensing regime is vital. It is important that people who lend act responsibly and are appropriate people to lend. The details of the regime will ensure that that is what takes place. Lenders will have to make sure that they are appropriate people to lend and that the risk element is well considered. I am particularly pleased about the powers that we are going to give the Office of Fair Trading, trading standards offices and others to hold spot-checks to examine the appropriateness of what lenders do.

The loan shark hunter regime that we are introducing will enable us to tackle problems such as that raised by the hon. Member for Gordon, who said that we must not stop legitimate lenders lending at low rates, with what appear to be high APR charges. If we removed that situation, their borrowers would be forced into the hands of illegal loan sharks. That was an issue when we considered whether to have a ceiling on interest rates. The hon. Gentleman was right; if the need to collect administration or other charges built into the cost of the loan forced people out of that market, the next people that come along will be the loan sharks and illegal lenders. Although vulnerable people do not often come forward, we will enable people to be prosecuted on evidence that will be collected in various ways. That will push those people out of the marketplace. It is important that they understand that the regime is in place, so that they perhaps cease to prey on the vulnerable in our constituencies.

We are considering the abolition of financial limits, on the basis that people need protecting no matter how much they have borrowed. The issue of consumer redress is important, and the alternative dispute resolution process is something that we will look at when trying to find the best way of dealing with the matter. My hon. and learned Friend the Member for Dudley, North suggested using the financial services ombudsman. We will look at that in light of the review, and if that is the best route we will consider it. We are consulting on that at the moment.

As I have said, we are working with trading standards offices on the pilots in the west midlands and Glasgow to target illegal lenders. They are the worst loan sharks, as my hon. Friend the Member for Caerphilly said, seeking out vulnerable people. The pilot will help us to identify the extent of illegal lending and how best to deal with it in a practical way so that we offer best practice to the other authorities.

I am a strong supporter of credit unions. I have seen in my constituency how they can deal appropriately with people who are outside the normal regimes. However, there is an issue relating to the 12-week saving requirement; people have to save for 12 weeks before they can get a loan from the credit union. Some interesting alternatives have been suggested in Glasgow and elsewhere, and there may be a way of offsetting that by direct grants or whatever. We have to be careful because the aim is to encourage people to save and to play their part in a responsible way. People who are in a crisis need money quickly and must not be forced into illegal lending.

The credit union movement needs to be supported. I have worked with the Financial Secretary to ensure that we do that. Every local authority should have a credit union officer. I have a slight concern about there being two national associations and about the infighting between them, which has not helped the situation. That can be resolved. Whether a credit union is community or employee-based, it can contribute tremendously and can offer alternative sources of funding.

My hon. Friend the Member for Edinburgh, North and Leith mentioned the OFT. I pay tribute to trading standards officers. They are the Cinderella service of local authorities. They do not seem to receive adequate funding when the budget is dished out, yet we ask them to do many things; their impact on our communities is tremendous. I hope that the new powers for the OFT and the support that we give to trading standards officers and local authorities will mean that their work is helpful.

My hon. Friend the Member for Caerphilly raised many points. He was particularly moving when describing the cases of intimidation. I welcome his campaign and that of his local newspaper to try to put things right. He had seven recommendations and we have delivered four of them. I hope he feels that that is a step in the right direction. He also made the point about credit unions and how we need to develop them, and asked about the definition of extortionate credit.

The OFT will take account of responsible borrowing, and will help the adjudicator to decide whether a credit transaction is unfair. Unfair practices could include the mis-selling of products, unacceptable high-pressure selling, aggressive debt collection and irresponsible lending. Consumers will be protected in cases of excessive charges for defaulting. That will include measures such as requiring default interest to be fair and reasonable and prohibiting compound interest on cost and charges. Traders will be required to give debtors a set time to pay costs or charges before interest is charged. We are considering whether the proposal should apply also to existing agreements.

We have talked about the maturity of the credit market. The hon. Member for Gordon welcomed the White Paper and explained how he saw the need for a balance between regulation and ensuring that we deliver. Unfortunately, his press release did not quite show the same spirit of consensus on how we approach these issues. However, as these matters go through the House, I am sure that his characteristic fairness will come through and he will admit that the Government occasionally get it right. He reminded me that the Liberal Democrats wanted to do away with the Department of Trade and Industry. Clearly, we have proved that if it did not exist, we would have to invent it.

Time has run out. I welcome hon. Members' contributions. This is a good White Paper and I am sure that people will benefit from it.