High-interest Pay Day Loans
The final item of business is a members’ business debate on motion S4M-01558, in the name of Margaret Burgess, on high-interest pay day loans. The debate will be concluded without any question being put.
Motion debated,
That the Parliament notes with concern the recent report from R3, the trade body for insolvency professionals, regarding high-interest payday loans; understands that the report suggests that there is a likelihood that many people have turned to such loans as a last resort in the run-up to the Christmas period; highlights that the report also claims that the interest rates on such loans can be up to 5,000% per year and that the payday loan sector is worth £2 billion; notes that the UK Government could introduce stronger crisis loan regulation to protect consumers, especially vulnerable people, and that it could tackle the issue of dishonest and irresponsible lending; further notes that that those in need of assistance can seek advice from National Debt Line Scotland or their local citizens advice bureau or money advice centre before taking out such loans, and welcomes the development of credit unions such as the Kilwinning-based 1st Alliance, which, it understands, offers affordable credit and encourages saving.
17:07
I thank all the members who have supported my motion on high-interest pay day lending, particularly those from the Labour Party and the Green Party, whose support helped secure the debate.
I am aware that consumer credit is a reserved matter, but the impact of debt on individuals and their families and debt solutions are the responsibility of this Parliament, so I am pleased to have the opportunity to bring the matter to the chamber.
What is pay day lending? It has been described as a form of credit whereby the borrower gives the lender authorisation to make an automatic withdrawal from their bank account as security for a supposedly short-term loan, which has to be repaid in full, plus interest, on the borrower’s next pay day. That seems fairly straightforward and it looks like an easy way to access money, until we look at how it operates in practice—therein lies the problem.
We should not forget that the proliferation of pay day lenders on our high streets and now online came about because states in Canada and the USA, where pay day lending originated, started to regulate the industry, which made it less profitable. What did the lenders do? They moved into Scotland and the rest of the United Kingdom and have grown exponentially here ever since. It is almost unbelievable that nothing was learned from the US experience, where it was found that the cost of borrowing was so high that more than 70 per cent of borrowers could not pay back the loan and loans were rolled over time and again, with increasing penalties and punitive interest charges. It was also found that borrowers typically had loans from more than one pay day lender and that there were clear links between the growth of pay day lending and personal insolvency levels. Significantly, the experience in the US was that, despite arguments to the contrary, the pay day loan industry targeted lower-income and minority groups.
Does all that sound depressingly familiar? It should, because that is exactly what is happening here. Successive UK governments have ignored the problem, as they did with the banks and the sub-prime lenders until it was too late, and they have still not learned.
We all know that the companies target the vulnerable and low-paid. You only need to walk down the main street of any our towns, such as Irvine in my constituency, to see that. Irvine is a town in which personal debt levels are already high. When I walk the short distance from my constituency office to the station, I pass four pay day lending shops. On Tuesday, two on opposite sides of the road had billboards outside saying, “Got a job? Got a debit card? Get a loan.” That enrages me and it should concern all of us because it is people who are already in debt who are being targeted. The loans are given without regard to the borrower’s ability to pay. The borrower signs a payment authority as security and, worryingly, that type of agreement can be cancelled only by the lender, so the lender has it every way and the borrower is trapped.
Let me give you an example from my time with the citizens advice bureau. I had a couple who were in financial difficulties and had borrowed £400 from a pay day lender. By the time they came to me, they were getting £400 every month before pay day from the lender to pay essential bills, then on every pay day the lender got £479 straight back from their bank account. The loan was being rolled over every month, and that had been going on for over nine months before we intervened. It had already cost the couple over £700 to borrow £400, and they still had an outstanding payment. That is the problem: the original loan just keeps getting rolled over again and again and the interest and costs just keep increasing. In my view, that is usury and exploitation of vulnerable people, and it has to stop.
It is not hard to see how people in circumstances such as I have outlined are then forced into taking out a further loan from another high street lender as they get deeper and deeper into debt. That view is supported by evidence from Citizens Advice Scotland, which tells us that clients with pay day loans have an average of three debts more than those without pay day loans, suggesting that people in long-term financial difficulty are much more likely to take out a pay day loan. We cannot allow people to be trapped in a system that offers them little protection and inadequate access to affordable credit. Regulation is needed and it is needed now. We should ask the UK Government to consider capping interest rates, restricting the number of times that a loan can be rolled over, encouraging data sharing between lenders to ensure people’s ability to pay and referring borrowers to money advice services when it is clear that they are in financial difficulty.
This is January, when the time that people’s pay has to last is extended because they were paid early in December. I have a motion on an early January pay date for which I hope to secure a members’ business debate. However, does Margaret Burgess agree that moving the January pay date would particularly help low-income families who have to make the December pay last for six weeks?
Yes, I think that that would assist people with a short-term financial shortfall, which pay day loans clearly do not do. The advice to people thinking of a pay day loan is this: do not take it out.
Our citizens need to have access to good financial and money advice and, importantly, to credit that is affordable. We need to ensure that credit unions become the money shops of first resort in our high streets. I give the example of the 1st Alliance (Ayrshire) Credit Union in my constituency which, like other credit unions, encourages saving and offers a range of services including current accounts, bill paying, low-cost credit and emergency loans. It also works innovatively with the local authority and money advice services in tackling rent and mortgage arrears, thus preventing eviction and homelessness. That is genuine financial support, which we should support and promote.
To summarise, we need to protect financially vulnerable people from this type of high-interest borrowing and unmanageable debt, while at the same time ensuring that they have access to good money advice and affordable credit.
17:14
I thank Margaret Burgess for lodging the motion and securing this very important debate. I also apologise as I will have to leave soon after making this contribution.
From the first week of entering the Parliament, I have been working with Margo MacDonald, who, unfortunately, cannot make it to the debate, on the very issue that we are debating. Margo and her staff have been focusing on the cost of pay day loans, and developing ideas with Mike Dailly of the Govan Law Centre to see whether the Parliament can curb the scandalous and exploitative practices of pay day loans companies.
To develop our understanding of the issue, I took Ms MacDonald to the annual general meeting of the West Lothian credit union forum, where we heard at first hand about the activities and practices of the legalised robbers who run the likes of Provident, Greenwood, Wonga and the rest. We also heard about the pressing need of the credit unions to take on those rogue companies, and what would allow them to do that. The credit unions asked for our help to improve their great work, which often takes place in our most needy communities. Following on from that, in December I presented a list of proposals to the Cabinet Secretary for Finance and Sustainable Growth at a meeting in his office, and I look forward to his reply early in the new year.
In my brief contribution, I will discuss pay day loans and loans companies, the work of credit unions and the help that the Scottish Government could and should provide. However, before doing so, I feel that we need to mention briefly the elephant in the room: the reason why people end up using pay day loans companies in the first place. In the present climate of constitutional debate, we should not forget Scotland’s real shame, which is poverty and social inequality. Earlier this week, the campaign to end child poverty showed that nearly half of Scottish local authorities now have wards in which more than 30 per cent of children live in poverty. In a modern, high-tech, wealthy country, that is a national embarrassment. It is in that environment that the pay day lenders thrive.
It is poverty that means that 46 per cent of all pay day loans are issued to people who earn less than £15,500 a year, and which allows companies such as the Loan Store to operate a system that charges £1,500 in interest for a £500 loan over 12 months with the original balance still outstanding at the end. It is poverty that has Wonga carrying out direct advertising to students on very low incomes to try to lure them into its clutches.
Of course, there is a clear alternative to pay day loans companies. Credit unions, as we all know, do a fantastic job and all parties and the Scottish Government have stated their support for them, but they need practical help now. Many are constantly facing an uphill struggle to overcome barriers to progress.
Credit unions, especially the smaller ones, are toiling to keep financially afloat, and there are issues about preferred creditor status, corporation tax and use of reserves. We need to help them to get people through the doors—that would be the best help that we could give them—and they need greater visibility.
Does Neil Findlay agree with the recent call from the Association of British Credit Unions Limited that credit unions should be situated in post offices so that people have much better access to them?
I ask Neil Findlay to come to a conclusion.
Yes, I will do.
In seeking better visibility for credit unions, we think that they should work with post offices and local authorities—and even high street businesses, which could use their social responsibility policies to accommodate credit unions. We need to place credit unions at the heart of any anti-poverty strategy, and we should be helping to advertise them so that they become a normal place where people borrow and save. If there is no money in the budget for such a campaign, there should, as ABCUL suggests, be a levy on the high-cost lenders—some of which Margaret Burgess mentioned—that are operating on our high streets.
There is much more that I could say, but I think that there is broad consensus on the matter, and I hope that we can move forward on it early in the new year.
17:18
I congratulate Margaret Burgess on bringing the debate to the chamber. I have a particular interest in the subject, having set up Highland Council’s money advice services more than 20 years ago.
In two clicks of a computer mouse, you could be £1,000 richer: just visit christmascashloans.co.uk, fill in the form and pay off your Christmas bills in half an hour. Alternatively, there is Wonga.com, Mr Buck or the Money Shop. All those pay day loan companies promise to pour plentiful pennies into your bank account without asking many questions. It matters not whether you have a good credit rating or any real ability to pay, so for the 9 million people in the UK who do not have access to mainstream credit, it seems like the perfect solution. What could you want in your Christmas stocking more than a quick and easy loan?
Of course, Christmas has come and gone, but for many people the repercussions of buying Christmas presents on a pay day loan will continue indefinitely as extortionate interest rates make repayments impossible. The interest on loans from Christmascashloans.com is a conservative 1,940.5 per cent. Wonga.com, on the other hand, has a representative APR of 4,214 per cent.
The recent report from R3, which is mentioned in Margaret Burgess’s motion, highlights the rapid increase in pay day loans. The report states that 45 per cent of those who were questioned struggled to make it to pay day. As a result, pay day lenders are attracting higher numbers of customers, but short-term relief fades quickly. In my constituency, more and more desperate constituents are drowning in the deep sea of debt. One young lady on the Isle of Skye owes money to no fewer than five pay day lenders and the interest on her loans is escalating out of control. Unable to pay, she is being harassed by threats and demands for payment. It is ironic that she resides in an area where there are no pay day loan shops.
A local independent debt advice service called Christians Against Poverty told me that very few of the debt disasters that it witnesses are caused by irresponsible or negligent behaviour by the customer. Often, people are struggling to pay for life’s necessities. Recently, Citizens Advice Scotland joined Shelter in expressing concern at the number of people who are taking out pay day loans to avoid homelessness. Last week, Shelter published evidence showing that 2 per cent of the UK population admitted to paying their rent or mortgage using a pay day loan, and Shelter Scotland confirmed that trend in Scotland. Pay day loans are a dream today but a nightmare tomorrow for my constituents who find themselves in dire straits.
There is an alternative to pay day lenders, which Margaret Burgess mentioned: credit unions. The Lochaber, Inverness and HI-Scot credit unions operate across Skye, Lochaber and Badenoch. I encourage everyone to join, as I have done myself. Credit unions are not just for people who have poor wages—they are for everyone in society, because we can all help each other by using them.
Does Dave Thompson welcome initiatives in my council ward of Wishaw, where Wishaw Credit Union has formed a partnership with one of the local primary schools and offers the children initial savings accounts and advice about financial matters?
Yes. That is an excellent initiative that reminds me of the old Trustee Savings Bank initiative in schools. If we can encourage youngsters to start the saving habit early on, that can only lead to good things in future.
17:22
I thank my colleague, Margaret Burgess, for introducing this debate about a rapidly growing concern. I have taken an interest in the matter for some time; indeed, on 29 March 2010 I lodged a motion on it.
During this time of high unemployment, increased taxes, inflated food and energy prices, and—for many people—a reduction in working and real-terms wages, there can be no doubt that people are finding it increasingly difficult to make ends meet. The solutions to the problems are a source of continual heated debate across the chamber, but I am sure that we have very little disagreement about trying to assist those who are most in need.
Many people find themselves sucked into a debt spiral from which they find it almost impossible to escape. In manageable form, debt can be perfectly acceptable. I am sure that thousands of people throughout the country—and perhaps not a few in this chamber—spent more than could be afforded on gifts for loved ones at Christmas. However, it is a sad fact that many people face hardship that forces them to borrow in order to pay not for Christmas goodies but for basic necessities.
That quandary has led to a boom in the establishment of high street pay day loan companies, many of which no doubt recognise the market that exists to be exploited—and exploitation it most certainly is. We have already heard about how such companies exploit people who are among the most poorly paid in our society and cannot access credit through mainstream sources. During the recession, according to Citizens Advice Scotland, debt levels in Scotland have increased by some 50 per cent. The expansion of the pay day loan market has been quite remarkable. In 2006, before the recession, the industry in the UK was valued at £350 million. Last year that figure had increased to an estimated £1.9 billion.
The tactics and practices of such companies have been called into question on numerous occasions. For example, in 2008, the debt charity Credit Action made a complaint to the Office of Fair Trading regarding the use of Facebook by pay day loan companies to advertise their services. That was viewed as a deliberate attempt by pay day lenders to target young people, and many of the adverts contravened UK credit advertising rules by failing to give details of interest rates. That is perhaps unsurprising, if we consider that the annual percentage rate from pay day lenders can be as high as an astonishing 4,214 per cent. Hundreds of members of Parliament have backed a series of early day motions that have described the practice as “legal loan sharking”.
As members will know from the briefing paper by Citizens Advice Scotland, there are tragic instances of people who have taken pay day loans and who are simply unable to find a way out of rising debt. It is a spiral that can lead to family breakdown, homelessness, and in not a few instances, suicide.
It is surely sensible to impose a cap on the exorbitant rates of interest that pay day loan companies charge. Some countries in Europe, including France and Austria, have interest rate caps. Sadly, the Scottish Parliament—for the moment, at least—does not have the power to impose such a cap and it is for Westminster to legislate on such matters. In July last year, the House of Commons voted against proposals to impose a cap on interest rates that are charged by pay day loan companies, despite considerable and wide-ranging support for the proposals. That is deeply disappointing, given the impact that loan defaults have on some of the poorest and most vulnerable people and communities in Scotland and throughout the UK.
The UK Government should follow the idea of Australian legislators, who imposed a maximum APR for loans of 48 per cent. In Canada, interest above 60 per cent per annum is illegal. As Margaret Burgess pointed out, that is why American companies are moving over here. Opportunistic companies who seek to exploit the less well-off should not be allowed to continue to charge exorbitant interest rates that trap people in the debt cycle. Westminster must act now to prevent more people from finding themselves in that awful situation. If it does not act, we certainly will, once we have won the independence referendum.
17:27
I, too, congratulate Margaret Burgess on securing the debate, which is timely for the reasons that Kenneth Gibson outlined. In 2006, the high-interest pay day loans industry was worth hundreds of millions of pounds, but it is now worth the best part of £2 billion a year, and probably more. There has been pretty rapid growth. According to the R3 research, which prompted Margaret Burgess’s motion, concern over debt levels is the highest ever recorded, with 60 per cent of the population concerned, and there has been an enormous increase in what are known as zombie debtors, who are those who pay only the interest on the debt and none of the principal sum. For people in such situations, any slight change in circumstances can plunge them into insolvency.
We also have fairly depressing research from YouGov, which shows that the average adult in Scotland racked up almost £900 of debt in 2011 alone. Accountants PKF produced a paper this week and predict that, sadly, about 400 people in Scotland will go bankrupt every week in 2012 and estimate that, in total, about 20,000 people went bankrupt last year. The situation could get demonstrably worse if interest rates increase.
The debate is timely and I agree with much of what members have said, but the solutions are probably a little more complex than some of the solutions that have been outlined so far. The R3 research considered why people turn to high-interest pay day loans. Of those who did so, 39 per cent said that it was because they had been refused bank loans and 68 per cent said that they could not get credit anywhere else. For those people, there were no alternatives. As members have said, some people have the alternative of a credit union.
The high-cost credit sector across the UK is worth about £35 billion per year, according to the Office for Fair Trading. At that magnitude, even the advances that we have seen in credit unions during the past couple of years will not come close to compensating for the size of the high-cost credit sector. Yes—credit unions are a part of the solution, and I hope that they are a growing part, but given the current size of the sector, it is not realistic to suggest that credit unions can take up all the slack.
Liverpool John Moores University recently published a paper that contains a quote that has stuck with me:
“The demand for credit is perennial and inelastic and unlikely to go away any time soon.”
The concern that was expressed in that report was that, depending on what it is, the danger of a rate ceiling is that all high-cost lenders will depart from the market, and the poorest and most vulnerable customers will lose any access to legal credit. As Kenneth Gibson said, those people are not borrowing money to spend it on glitzy presents but to spend it on their vital needs, and if they cannot access credit legally, the danger is that we will see a dramatic rise in illegal lending and an increase in loan sharks. I therefore caution slightly against some of the solutions that have been proposed, while agreeing entirely with the sentiment.
17:31
I start by thanking Margaret Burgess for bringing the debate to the chamber. I also offer my apologies because I will have to leave once I have spoken. I have already explained to Margaret Burgess that I have a prior engagement.
Following on from what Gavin Brown said, there is no doubt that there is a place for companies who serve those who are unable to get credit in the normal way. I remember every summer going to a large store next to Glasgow Cross to get my school uniform, which was paid for by a fixed sum every week over the course of the year. I have no doubt that my mum paid much more for that uniform and those of my two brothers than she would have if she could have paid cash, but the extra cost was literally a price worth paying for her to see her three boys dressed well.
I also remember a cool 16-year-old—use your imagination—buying his first pair of hipsters at Dee of Trongate with his shopping cheque. It was more expensive but members should have seen those hipsters. We shopped like that because, back then, access to credit was nigh on impossible and ready money was tight. For me, that is the more acceptable face of higher-interest credit. It is more expensive but the cost is payable.
What is not acceptable is the surge in outrageous pay day loans. It comes as no surprise to learn that the R3 report found that 68 per cent of the people who were polled who had taken a high-interest pay day loan had done so because they could not get access to credit elsewhere. That information should form the basis of any debate on regulating such loans. Lack of appropriate identification, having a court judgment, being on benefits or even having a part-time job are all factors that can exclude people from accessing mainstream loans and, coupled with economic depression, are leading to a huge increase in the number of people who apply for pay day loans.
It is true that most of the people who take out such loans know what the interest rate is, but the accessibility of the loans often gives people a last chance to access credit that would be denied to them anywhere else. Of course, problems arise when the high-interest pay day loans cannot be paid back. Threats and worry start to hit families and we see the repercussions that Kenneth Gibson talked about earlier.
Scottish Financial Inclusion Services highlights the case of one 34-year-old from Castlemilk, in my constituency, who borrowed £493 from one of these creditors. He paid back £400 but only £60 of that counted towards the principal sum. The other £370 paid the interest. That client will remain in the debt trap because of the extortionate interest rates and the unwillingness of the lender to freeze or waive the interest.
However, help is out there for people who find themselves in that sort of financial trouble. Again in my constituency, Castlemilk Budgeting Service supports individuals in making payments to their creditors and supports vulnerable people in paying their on-going debts while, as far as possible, preventing legal action and eviction. I know that there are similar services elsewhere across Glasgow and, I imagine, across the rest of the country.
The citizens advice bureau is also an important point of contact for those who are burdened with debt. It can offer advice on the range of choices that are available to help people to cope with their debt burden.
Of course, there are also organisations out there that offer affordable and responsible lending opportunities. Margaret Burgess has already mentioned the 1st Alliance (Ayrshire) Credit Union in Kilwinning. In my constituency, the Castlemilk Credit Union has 4,000 members and gives out loans totalling between £3 million and £4 million a year. Those loans, regulated by the Financial Services Authority, have their interest rates curbed at 24 per cent per annum, compared with the 4,000-plus per cent interest rates that high-interest pay day loans sometimes offer. Credit unions definitely offer a better way to borrow money. Unfortunately, despite all the problems that accompany them, such high-interest loans have become a popular way for people who have been denied more mainstream, responsible loans to access money quickly.
As long as such lenders continue to exist, parliamentarians have a responsibility to regulate them as best they can. The Westminster Government could—and probably should—start by curbing the level of interest that any creditor can charge. It should also do all that it can to encourage the formation of more credit unions and responsible lenders who will help those who are in financial need, and we should do more to publicise the alternatives to high-interest pay day loans.
Affordable credit for all is a difficult aim, but we should all strive to achieve it.
17:35
I, too, thank Margaret Burgess for highlighting this incredibly important issue.
The recent R3 report that is mentioned in the motion found that 45 per cent of the population struggled to make it to pay day without running out of money and that 3.5 million adults have considered using a pay day loan, particularly around this time of year.
Such loans are marketed as a quick fix but come at a high cost. Far from being a quick fix, they trap a person in debt so that they can afford to pay off only the interest rather than the debt itself. People turn to such loans in times of need, only to find that they are unsustainable. The debt starts to spiral out of control, and debtors often face homelessness when they cannot pay their rent or mortgage.
As the motion states, some interest rates on pay day loans can be 5,000 per cent APR. Unlike other countries, the UK currently has no cap on how high such rates can be. The pay day loan industry, which is worth more than £2 billion, seems to be concerned only with profits and shows no concern for people’s lives or for the pressures that it inflicts.
Is it any wonder that such companies are banned in the USA and some other countries? They target the vulnerable. As Labour MP Stella Creasy said when she introduced the Consumer Credit (Regulation and Advice) Bill, those legal loan sharks circle our communities smelling blood. With even tougher cuts and threats to the welfare system on the way, we need to start doing more to tackle this important issue.
I support the motion, which urges the UK Government to introduce tougher regulation for pay day loan companies by capping interest rates and re-examining the system of crisis loans, as there is clearly a flaw in the present system. Alternatively, it could ban such companies outright, as the USA did.
Although it is difficult for the Scottish Parliament to act on the issue—as it is a complex and mainly reserved matter—we still have tools at our disposal. Pay day loans should come with a Government health warning that dispels the myth that they are a quick fix. We also need to inform people of alternative sources of affordable credit, such as credit unions, which will be the key to tackling the issue.
Alternative sources are not well publicised, and many pay day loan companies would prefer that it remained that way, as any alternative would threaten their profits. We must not forget that pay day loans are a business, but they are a nasty business that preys on peoples’ misfortune.
A reliable source has told me that pay day loan companies make it difficult for debtors to have a credit union settle the debt and that they do not like third-party interference. However, giving credit unions more powers and increasing their involvement would benefit everyone involved.
As has been mentioned, 1st Alliance (Ayrshire) Credit Union has a lot of experience in dealing with the issue, having consolidated numerous pay day loans that range from £400 to more than £3,000. That cuts down payments and interest rates considerably.
Credit unions have been instrumental in ridding our communities of loan sharks. Now, we need their support to tackle the legal loan sharks. It is unbelievable that there is more regulation and red tape around the business of credit unions than around the business of these exploitative companies.
I am happy to work with the Scottish Government to help credit unions to explore and develop solutions, because the situation demands action now.
To allow me to call the two members who still wish to speak, I am minded to accept a motion under rule 8.14.3 that the debate be extended by up to 10 minutes.
Motion moved,
That, under Rule 8.14.3, the debate be extended by 10 minutes.—[Kenneth Gibson.]
Motion agreed to.
17:40
Like other members, I welcome this debate, and I thank Margaret Burgess for bringing it forward.
Pay day loans are not the wisest idea. However, although we criticise pay day lending, we should not forget that, in many cases, the major high street banks have charging structures that can cause distress to borrowers throughout the country. The OFT report that was published in June 2010 said:
“While the rates charged by payday lenders are high, they can be lower than for some mainstream alternatives such as unarranged overdrafts.”
One of the major problems is that, for many folk, there are, of course, few alternatives to pay day loans for short-term finance, but the need for information on loans and ways to restructure debt must be paramount. Alternatives to pay day loans and places where customers can find support and assistance for managing debts are essential, and clear advice on the problems that ensue if the loan is allowed to escalate must be available. That is where the role of the CABx and other organisations can be vital.
Inevitably, debt is a trap that companies can exploit and regulation therefore remains a necessity. For that reason, I welcome attempts to improve regulation in the industry, but they are not enough. As the OFT seems to suggest, a minimum adherence to good codes of practice is rather lukewarm. The OFT has, of course, suggested codes that cover complaints processes and advice to customers. That is all right as far as it goes, but it does not go nearly far enough.
The OFT is against price control remedies because it believes that the supply of high-cost credit is already constrained and that any reduction in access would have a detrimental effect on some customers who use the loans for non-discretionary spending. It is clear that there are some risks there, and obviously we have to accept that argument. Perhaps there is an argument that it would be appropriate simply to have a substantial maximum interest rate, but we know the problems with that—other members have outlined them. The difficulty, of course, lies in assessing what that rate should be. However, it goes without saying that, as a minimum, consumers should have as much information as possible, and some form of compulsion to record interest rates on a price comparison website, for example, in return for obtaining a credit licence in the first place might be a sensible move.
As other members have suggested, there is a substantial role for credit unions. In my constituency, we have the North East Fife Credit Union, which does a very worthwhile job. I welcome the Scottish Government’s service approval scheme for credit unions, but more needs to be done. We need to encourage the buddy system for credit unions that we can see elsewhere in the world. In that system, financial assistance and—perhaps more important—expertise are shared between mature credit unions and newcomers.
Whatever support we can give to credit unions, we must accept that they are unlikely at the present time to fill the substantial need for credit. That is why it is essential that a proper form of regulation is in place.
As Gavin Brown has already indicated, loan sharks are one risk in the area. The infamous loan shark is not just a character from television soaps; loan sharks present a real risk to individuals and families who need cash to cover the cost of their daily duties and essentials.
Finally, there is one group that is especially vulnerable to debt: the young. I cannot think of anything worse in the present time than a young section of the population being burdened by such debts and their experience of the financial system at an early age. Members should, please, bear in mind the effect of policies on the young.
17:44
I join other members in thanking Margaret Burgess for securing this important members’ business debate on a matter that is of increasing concern to many of us inside and outside the chamber. That is evidenced by the number of members who have contributed to the debate. More important, the issue is seriously affecting the lives of more and more of our constituents.
For a long time, there was a deep-seated taboo against usury—the practice of charging excessive, unreasonably high interest rates on loans. That taboo was common to societies around the world. The Christian Bible, the Qur’an and the Torah all contain strong words against usury, and the Romans would punish usurers by putting them in a sack with two ferrets—hence the phrase “ferrets fighting in a sack”. Although most of us would accept that international financial practices have by necessity changed a lot since those ancient days, I believe that there is still a widespread sense of disgust at those who entrap and exploit the poor, the weak and the vulnerable through the mechanism of debt. However, as is so often the case when it comes to the financial industry, ethical and moral concerns do not hold a candle to the demands of the money markets, which seem to regard it as their God-given right to take what they can from people, regardless of the cost to individuals and society.
If pay day loans are not a prime example of usury, then I do not know what is, but the taboo has now faded to the extent that, in any given ad break on TV, we are almost guaranteed to see at least one shameless attempt by a pay day loan company to present its products as a quick and easy solution to a short-term financial shortfall. I would also highlight those furniture and appliance stores that advertise the chance to buy a new sofa or dishwasher for small weekly payments over a period of years—the catch being that a person can end up paying thousands of pounds for a washer-dryer that should have cost only a few hundred pounds. What those adverts full of cheery, satisfied punters do not tell us, of course, is that—far from being a quick fix—the exorbitant interest rates on the loans are just as likely to lead to a spiral of debt that can snowball out of control and leave many people in a much worse situation than they were in to begin with.
It is easy to understand why increasing numbers of people still fall into the pay day loans trap. Times are hard for many, and with the high street banks—including those owned by the taxpayer—having all but withdrawn lending and other financial assistance for ordinary families and businesses, the quick fix can seem like the only available option. Although these companies might like to present themselves as a friend when people are in a financial bind, no one should be fooled into thinking that they have any friendly intentions at heart. Their only aim is to extort as much as possible out of their customers.
I saw a particularly distressing example of these companies’ methods recently when I helped a vulnerable person—a gentleman with learning disabilities who had bought a washer from one of the well-known appliance stores. He fell behind in his payments and was being not just pursued but relentlessly harassed by the lending company. He ended up paying thousands of pounds for a £300 washer. I do not think that anyone will be surprised that the UK’s regulatory framework for pay day loans is one of the most relaxed—perhaps we should say “irresponsible”—in the world. Other countries have caps on interest rates. In Canada, it is 60 per cent, and many regional Governments in Canada are now passing legislation that limits rates even further. We need regulation of that kind to be adopted in the UK, and soon. Let us restore that old taboo against usury and put a stop to exploitation and extortion by lenders.
17:48
This has been an extremely useful debate. By and large, contributions have been positive; in many cases, they have been extremely thoughtful and useful. However, I would like to pay a special tribute to Margaret Burgess for bringing the debate to the chamber. I know that it is customary to do so—it is part of the procedure that we all adopt—but, in this case, we would all acknowledge that not only has Margaret Burgess brought to the chamber a matter of current and great concern to society in Scotland and south of the border, she has spent a large part of a lifetime working in this field and therefore speaks with passion, as we have heard, and with the authority of a person who has helped people who are the most vulnerable and the most at risk of pay day loans. She speaks with real knowledge, and we are grateful to her for today’s debate.
It would be tempting to adopt a party-political or partisan approach to this speech, and it would be easy to do so and to score points about the lack of powers of this Parliament—of course, I would like this Parliament to have the powers of a normal nation to deal with this matter—but I do not want to adopt such an approach, because this is an extremely serious issue. The debate that Margaret Burgess has initiated today will not be over tomorrow. She has raised the topic in the Parliament for the first time in this session and it will be pursued, because throughout the Parliament there is a genuine and concerted desire for action. If we need to persuade another place to support us in that regard, so be it and so will we do.
To that end and with a view to examining pay day loans more closely, I advise members that, earlier this year, I arranged to convene a meeting with chief executives from Citizens Advice Scotland, Money Advice Scotland and Scotwest Credit Union, which will take place next week, on 17 January. Following that meeting we will engage more widely—with civic society in Scotland, with the Convention of Scottish Local Authorities and with others. We will report back and we will involve all members who want to get involved and make positive suggestions in the work that we take forward.
Margaret Burgess talked about the personal impact of debt. Before I became an MSP, I worked as a solicitor and acted in insolvency cases, almost always for the debtor. In the course of my work, I was struck that debt is not an abstract problem but a horrible reality, the consequences of which are often not appreciated. The consequences of debt for human existence in Scotland are truly dire, in every respect. They are dire because of the effect on individuals and their families, especially children. Debt leads to breakdown of relationships and marriages. It leads to ill health. It leads to the creation or exacerbation of addiction problems. It is a scourge on our society. People who charge usurious rates of interest in Scotland are perpetrating a practice that is simply not acceptable.
Gavin Brown made a thoughtful and considered speech. He noted that two thirds of the people who were sampled in the R3 study said that they went to a pay day loan company because there was no alternative, and he made the perfectly valid point that, if they had not done so, they might have gone to loan sharks and faced even worse personal reprisals, including the physical reprisals that are sadly still a feature of the activity of the loan sharks who prey on the vulnerable in Scotland. That is a fair point, and we cannot ignore such commonsense points.
However, Gavin Brown also said that a cap on interest rates might not work, depending on the rate. It is relevant to point out that there are caps on interest in the United States of America. I am advised that, in the District of Columbia and Arizona, rates are capped at 24 per cent and 36 per cent respectively. There is evidence that many pay day loan companies in DC and Arizona have shut down. That is surely to be welcomed, but only if the gap can be filled by another means.
It is also relevant to point out that, although there appears to be no cap on the interest that can be charged by pay day loan companies, credit unions are capped. Credit unions are restricted by law to lending at a maximum rate of 2 per cent a month, or 26.8 per cent APR, which is modest compared with the APRs of more than 4,000 per cent that Mr Thompson, Mr Gibson and Labour members mentioned. It seems to me that there is a wee hint of double standards in that regard. If there is a cap for credit unions, why is there no cap for other lenders? I do not know the answer to that question, but I am going to find out.
There is a chance for the Scottish Parliament to follow up the debate and tackle an issue that has lurked in the shadows for far too long. I am committed to the task, as I think are members from all parties. To that task we shall turn our attention, thanks to Margaret Burgess.
Meeting closed at 17:54.