Payday lenders are taking over many high streets across the UK. This new form of high cost credit lending is growing rapidly but still operates as a wild west.
Yesterday the Prime Minister said there should be self-regulation – I disagree. A voracious and dangerous industry like this needs hardcore controls, not self-regulation.

To explain, here’s the transcript of the evidence to the Business Select Committee I, alongside others gave a couple of weeks ago. I think the collective view explains the problem and solutions perfectly.

If you agree with regulation I would urge you to sign an e-petition on the matter, which was launched in support of proposals by MP Stella Creasy – while I’ve a few issues with the wording of the e-petition, overall it’s the most cohesive call to get something done we have, and should bring everyone together.

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This is the uncorrected version of the transcript made on 22 November. I’ve tweaked a few of my bits where there were minor errors). In case you’re looking for what I said (well it is my blog) I’ve coloured that in blue.

Chair: Good morning and thanks very much for agreeing to speak to us today. You may well have been in when I made my opening remarks to the previous panel, but if you were not I will just repeat them. Obviously some of the questions will be fairly general questions.  I would be grateful if every member of the panel did not feel obliged to comment on every question unless of course they either wish to contradict what another panellist has said or feel that an area has not been sufficiently outlined to us. We do want to get away some time before lunch. Before I start, can I ask you to introduce yourselves for voice transcription purposes? If we start with you, Martin.

Martin Lewis: Martin Lewis from MoneySavingExpert.com.

Delroy Corinaldi: Delroy Corinaldi from Consumer Credit Counselling Service.

Teresa Perchard: Teresa Perchard, Citizens Advice.

Sarah Brooks: Sarah Brooks from Consumer Focus.

Chair: Thank you very much. Unfortunately the representative from Which? had to withdraw today, but their submission highlights that the value of payday loans taken out by borrowers has increased from £1.2 billion in 2009 to £1.9 billion in 2010. What do you think are the reasons for this? Are there more loans or are they higher value loans, and are you concerned by it? Who would like to lead?

Sarah Brooks: We did some research on this market last year and we estimated that it had grown fourfold in a year, so we are not surprised by the latest figures showing that this market has grown. There are several reasons for that, which you have heard before, around the sort of macro-economics that people are experiencing. All sorts of indebtedness are increasing across the piece.

The other thing is to do with the growth of the market entrants. There are very low barriers to entry to the high-cost credit market: £500 for a consumer credit licence and obviously some checks, and away you go. It is obviously a very profitable market as well. So some of the reasons are to do with demand and some are to do with supply. What we have seen is that, without some checks on the market, the problems associated with the payday loan market will also grow as well.

Teresa Perchard: Can I just add to that? It is quite interesting.  We give advice to 2 million people a year, and many of them have debt problems. Among our clients, the number of people who have debts to payday lenders has gone up fourfold in the last couple of years, so that is perhaps mirroring the fact that this is a source of credit that is fairly new to our market. We would expect to see debt problems with repayment.

That slightly contradicts the purpose of the product. It is intended to be a short-term, small-value borrowing to get you to the end of the month, and that is it. What we are seeing is that providers are rolling over loans and people never get to pay them back. We are also seeing that people are taking them out to pay off other debts. It is consumers doing something they thought was useful to help them meet their other credit commitments. Instead of turning to the bank or some other credit provider or using their credit cards, they have turned to this new supplier, which we have heard earlier is very accessible and very quick, with very few questions asked, so perhaps they feel it is quite discreet as well and they will not be judged if they use it. Given that on some estimates we have 5,000,000 people in need of debt advice, it is not surprising to see the market grow if people are using it to get them through to the end of the month and meet their commitments, which includes paying off other credit.

Chair: Thank you. Martin?

Martin Lewis: Let us make no mistake about this: the United Kingdom is a crock of gold at the end of the rainbow for payday lenders who have been shut down all over the world and have been regulated. We are unregulated; they are taking over our high streets; there is a massive supply of advertising. They are using technological means to make it very easy, very quick and feel, initially, very painless. It is an attractive proposition. It is simple; they give you the money. It is their limited credit scoring that’s appealing.

You understand why people do it. While I would not want to shut them down completely, because we do not want to push people into the hands of real loan sharks, who threaten to rape your children if you do not repay, what we do need to do is not be the only Wild West for payday lenders. We need to start regulating how they operate rather than letting them regulate themselves. This is a massive growing problem that is only going to get worse unless there is some form of radical and quick intervention.

As Teresa says, though, it is not the loans themselves and those astronomically high APRs, which mean nothing; it is the rollover. It is the continued borrowing, which is when an APR and compound interest kicks in. It is wonderful that you are addressing this, but this needs regulating quickly because it is growing so rapidly that we are losing control. That is what we must do and you must tell the legislators that.

Chair: This brings me on to a question that occurred to me. I believe it was Sarah who said you just need £500 to enter into the market. If I, heaven forbid, decided I wanted to set up a payday loans company, what sort of regulatory hurdles would I have to jump to establish myself as a bona fide business delivering this service?

Teresa Perchard: Basically, if you are an out and out criminal with a record of violence or discrimination, which is one of the other areas of the law, you will not get a licence, but beyond that you do not have to prove any technical competence to get into the market. You will not be tested on your knowledge and you will not be tested on your business capability, whether you know about the service, whether you know about the law or whether you have enough money to run a decent business. It is easy.

Sarah Brooks: I would agree with that. One of the other problems is that there is no differentiation in the fees that the Office of Fair Trading will charge you. If you are setting up a business that is going to be more risky and need more supervision because of compliance problems, such as some of the issues around not all but some operators in the payday loan market, you will pay the same fee as anybody else. It is a flat fee. You can imagine that £500 does not buy you an awful lot of supervision.

With the payday loan market there are two types of detriment that arise: one, where firms do not obey the rules such as they are. That is around advertising and credit checks; some of them advertise that you just will not have a credit check. I hope we will have a chance to talk about credit checking later on. There is also an issue about the way in which they try to recoup their loans if you have problems repaying—when you have continuous payment authorities they can keep dipping in to your bank account, etc., etc. Those are the compliance problems, and the OFT has about 100,000 credit licensees, not all in payday loans but it is a big share of the market now to supervise.

There are also issues around regulation, as Martin has said. We know that countries like the United States have limited the number of rollovers, so you cannot roll over more and more times. If you are rolling over or taking out a loan five times, you have a long-term credit facility, so this is not suitable for you. At the moment we know that 3.2 is the average number of loans that consumers have in the payday loan market. If we act now, we can act before the market is dependent on consumers operating that way, so there is still a window of opportunity here to legislate. We would say that rollovers and credit checks are really crucial.

Delroy Corinaldi: For those who do not know the Consumer Credit Counselling Service, last year we advised 400,000 people with debt management problems. That is about 1,000 people a day. We see people that have multiple debt problems. You will come on to debt management plans and various other things later, and we are in that space. Last year we did not collect data on payday lenders, but this year we are. In August—as I said, we help 400,000 people a year—one in eight of those people who came to us had a payday loan. So there is a transition in the numbers of people having payday loans as a product.

That is not to say there is not necessarily a need for them—some people want them and some people can repay them. Certainly, when we look at the data that are coming through to our social policy team, there are questions about the level of credit checking that goes on, and there are questions about the fact that these individuals have debt that they are struggling to repay and yet they are able to get payday loans. The other thing to reiterate is not all of the payday loan companies are as bad as each other, but we are now in a situation where there are so many of them and they have many companies underneath them. It is very difficult to tell which are the best and which are the not so good ones. In addition, you have the OFT, which is quite under-resourced and yet trying to deal with a whole host of companies in this area and, as we will come on to later, the debt management companies. It is a very difficult area.

Chair: You talked about broader regulation. Is there anything that could meaningfully be done at the initiation stage to stop irresponsible payday lenders opening up and starting their activities?

Martin Lewis: The first problem is that we have this farce of financial regulation being split between the FSA and the OFT, where the FSA is a lot more stringent than the OFT. The regulation Teresa talked about is not regulation; that is, "You are a criminal, you can’t do it." It is a farce. I have a member of my team looking to write a guide about payday loans. We are going to call it Best Buy Payday Loans, and what it is actually going to do is list the 20 things you should do before you get a payday loan, the alternatives and everything you can check, and then right at the end it will tell you how to do it safely.

While researching, the member of my team found in the space of 10 minutes a payday loan company that is not registered with the OFT. We reported it to the OFT. It is not regulated, and for the ones that are, if most of the rates they are quoting are representative rates, then my name is Anne Widdecombe. It is just not true. Those rates are not representative. What they do is they jemmy them so that they have the lowest possible rate, which is not what representative APR should be. It is a farce and it does not exist.

So yes, the barriers should be far more similar to what the FSA operates for people who have an FSA registration. Hopefully there is going to be some merger of the two, but it is for the on-going protection of the public. While the Wongas of this world get a lot of stick—I am not a fan—they are a lot cleaner than some of the smaller ones out there. You ask how we would start; we would start by regulating because we are not right now.         

Teresa Perchard: You really need to speak to the OFT about this because what they would probably say is, "We do what we can." They do have powers. They have powers to determine how much they are going to charge for the licences in the first place, having regard to the costs of regulating. This could enable them, if they generated more fee income from licences, to have the resources there to take action when they found out that one of these companies was in breach of the OFT good policy guide on responsible lending.

They could, more quickly than they have in the past, say this practice of rolling over small loans is irresponsible lending because you are not making a new judgment about why that individual needs that line of credit. They could take more action than they do. It is all about resources and get up and go, and evidence about what is going on in a fast-moving market of lots of small businesses, in most cases. It is just not designed for the job.

The consumer credit framework that we have was built for old-style consumer credit products that were not sold on the web in the blink of an eye. Product regulation and control of the design of these products would prevent some of this harm building up. It would be cheaper than regulators chasing after businesses after the event. That is why the opportunity to move credit regulation to the new Financial Conduct Authority is appealing because the product intervention approach is mapped out as the approach that the regulator will take.

Sarah Brooks: I just wanted to say a bit about some of the options for regulation because there is always the possibility of self-regulation. After we did our research on the payday loan market, we convened a round table with industry regulators and some of my colleagues here to see what we could do by agreement. To give them credit, the Consumer Finance Association, which represents quite a number of the players came along, as did Wonga and a few others, and they took forward a plan to put into place a code of practice to address some of the concerns that we and other organisations had. Disappointingly, we could not sign up to the code that was produced because we did not feel it went far enough. Some of the things would be nice for some of the consumers, but they did not get to the heart of the difficult issues for vulnerable consumers.

The Government yesterday announced that they were going to work with industry to drive forward the self-regulatory approach here, but we think there does need to be the stick of regulation if that does not work. 

Nadhim Zahawi: I wanted to pick up on the point that Martin made earlier about Britain being seen as the pot of gold at the end of the rainbow for many of these companies because they have been shut down internationally. Sarah, you mentioned a couple of areas where we could look at regulation: the rollover and the credit check area. What are you seeing, Martin, that is best of breed around the world in terms of regulation? Which countries have got it right?

Martin Lewis: I think it is very difficult to find a balance, because we are absolutely guaranteed to have loan sharks if we close payday loan companies down. This is the same issue as with drugs – telling people not to use them won’t stop everyone, you need to also educate people about how to use them as safely as possible if they will. People are always going to need low-cost credit, whether it is right or wrong for them. What we want to do is provide it. There are other ways to provide it. You discussed credit unions before, and the Social Fund is something I would love to come on to later. I will just put in a marker now for that, if that is all right.

I think first of all, to go back to basics, one of the great problems is that the APR percentages that companies are asked to produce are a farcical nonsense when it comes to short-term borrowing. I always use this example, and we will have a smile since it is a Tuesday morning. If we were in a pub and you said, "Lend me £20," and I said, "I will give you £20 but buy me a pint next week," and the pint cost £3, that is —I will not test you—143,000% APR. That is the problem with APR regulation on short-term borrowing because £3 on £20, over a week, if you compound it over a year becomes 143,000%.

The first problem here is that these lenders are advertising 5,000%. It means nothing. There is no price competition in this market, because if there were then nobody would do it. The current idea of comparison sites, which is a plan, is relatively weak; it is not about price. What we first of all should do is incorporate total cost. This should all be about cost; get rid of rates—rates are nonsense. Companies should have to dictate the cost of the loan, and there should be a limit on the total cost of any individual transaction, including rollovers, which is how I have come up with the rollover issue. I have not studied the numbers. It is not what I do; we look at individual products and what the system is now. As a concept, if you borrow £100, you should never have to pay back more than £150. That is roughly how I would do it; I would base it on cost. Do not take the £50 as my limit—that is conceptual. That would incorporate any number of rollovers, which would be effectively a ban on the number of rollovers going on. What you have to do, though, is be very careful, because the problem with the marketplace, with the proliferation and lack of regulation, is I go to Delroy as one lender, and I borrow from him but I cannot pay it off, so I then go to Teresa and say, "Can you lend me £150?" So effectively you have a personal rollover going on. We have to be quite careful about that issue.

If I were doing this, I would put a total cost cap on. I would talk to the decent players out there about what the total cost cap should be. I would make them portray total cost, which includes all possible fees, which they do not do right now. The APR is a farce. I will get on my normal hobby horse, as I do every time I give one of these. I would put compulsory financial education in every single school so that there is no one in this country, unless they have mental capacity issues, who cannot understand what they are getting into. At the moment what we have is a financially illiterate nation being duped by companies who have very swift and clever marketing.

Nadhim Zahawi: Thank you. Sarah, in your recent research, Affordable Credit – Lessons from overseas, you found that mainstream financial institutions from other countries were more willing to provide lending to low-income consumers.  Why do you think that is not happening here and what can we learn from that?

Sarah Brooks: The example you are thinking about is Australia, I think. We looked at France, Germany and Australia, and in Australia there was a role for the mainstream banks in working with almost the equivalent Citizens Advice and CCCS in providing low-cost loans. Why is that not working in the UK? We held an event last year where we got together low-income consumers and industry providers and we tried to tease out some of the reasons why this is not working. Some of the banks were talking about regulatory hurdles to doing that, which was not particularly clear. We do need to do some more work in exploring that, but there are issues around cost.

However, there are also, we discovered, reputational reasons. For example, the first thing that anybody who works in high-cost credit has to get over is that, say, 40% APR would be very reasonable. I remember a colleague saying, "This not-for-profit company wants to charge 40% on a loan; that is absolutely ridiculous." But for a small organisation you would need to charge that just to cover your costs. Now banks could potentially charge less because of their scale, but they obviously need to turn a profit. There has been a reason in that they do not want to have those high APRs. They are worried about reputation, they are worried about being seen to discriminate between other firms, but perhaps if they could partner with organisations, as they do in Australia, that would help with some of the brand issues because it would be a sort of badge, and I am not setting up Citizens Advice as a lender here.

Martin Lewis: Can I just add in to what you are saying? Let us remember that banks do exactly this and they charge way more than payday lenders. If you go beyond your overdraft limit at the Clydesdale bank, at £35 per unpaid transaction, and you are £1 over, that isn’t 5,000% APR—that is billions. So they do it, but they do not dress it up as interest rates. I asked a credit union what they could do instead. They said, "Well, we would not get in because we would have to use the payday lending infrastructure. If you lend £100 it will cost you a fiver, and that will be a 600% interest rate, so we do not want to do it." The whole way it is communicated is a barrier to entry for legitimate lenders because of reputational damage.

Sarah Brooks: I would agree with that. Certainly when we have raised with banks why they might not be able to provide small value loans, small units, particularly to holders of basic bank accounts, there are several issues. There is a distribution issue around small units—how they get that into their product lines when they would rather lend in thousands rather than hundreds—and the brand reputation of charging what they thought they might need to charge for the small units for high-risk customers, but it should still be a better deal than consumers are getting elsewhere. 

Nadhim Zahawi: How have they dealt with that in Australia? Or do the Aussies just not care about brand reputation?

Sarah Brooks:  I think partly with these organisations they have been able to explain what they are doing and to reduce the costs, because if this is the sort of Citizens Advice product, they get the kudos for working with them.

Teresa Perchard: We are not doing payday lending yet.

Sarah Brooks: It is only £500 for a licence.  The other issue is, of course, that there are some things that the banks do that drive people into the arms of the high-cost credit industry. Those are some of the things that Martin, Teresa and Delroy have brought up, but there are other issues around what they do not do. They do not provide short-term credit facilities for people—people who either use their overdraft or do not want one or do not want a credit card.  So there are some people who use these products because they do not want the temptation of a long-term facility.

Not everybody who uses a payday loan is irresponsible. Things happen in life. People feel that this is a way of controlling their finances. So the banks could do more to have a buffer zone. We know that yesterday there was a voluntary agreement that the banks do that, but that is maybe £5 or £10, which is helpful. Perhaps a larger amount, more akin to some of these small payday loans of £100 or so, would be more helpful.

Delroy Corinaldi: It would be interesting if you spoke to the BVA, for example, the representative body for the banks, because we have mentioned the idea of their members being involved in this market, and they say it is not an area that they want to get involved in. I guess the profit is not there and the reputational risk is potentially there as well.

Just talking about payday lenders in particular, in the UK, what we discovered at CCCS, because we only deal with people who are in debt, is that when people fall into debt and we approach the payday lenders and say, "Look, we have one of your clients; will you accept a payment from us?" a number of them reject the payment. They do not want to deal with us. I am sure we will come on to this later when we talk about the fair share contribution. We then ask whether they are going to support a debt advice charity in helping these people through financial difficulty, and a number of them push back on that as well. It is moving them from seeing it as an innovative way of engaging with people and making money to actually being responsible as well, and not all of them are committed to being responsible. That is part of the difficulty.

Ann McKechin: I am tempted to say that perhaps our mainstream banks should be working with the Post Office. That seems to be the most obvious way to rebrand it in a way that would help the people on the lowest incomes by providing exactly the types of products you are mentioning. They already have a readymade network for it; we will perhaps touch on that later on.

Sarah, your evidence stated your concerns that payday loan providers are not complying with their obligations. You mentioned three things: advertising, credit checks and the way in which they are pursuing repayments. I wonder if you could just give a wee bit more information about those three things, and say whether there is a difference between the Wongas, the major payday providers, which Martin mentioned have a known structure and practice, and the very small providers that set up for £500? 

Sarah Brooks: We should be careful not to give Wonga too much good advertising, I think. There are so many different lenders, some of whom are better than others, and they are the best known.

In terms of advertising, we monitor the press and we see all the different claims that come in. The latest one is, "If you borrow from us, there is no interest, provided you pay us back within eight days." There are other ones saying, "We do not do credit checks," which is illegal. There are all sorts of different ways in which they try to get you in, and once you have that conversation they can bring you in. We look at the OFT’s website, which gives details of the enforcement actions they have taken as they work through some of the complaints. That is the issue in terms of advertising, and there are plenty more examples of that. I can write to the Committee if you want further details.

In terms of credit checks, there is a big problem and it spills over to other parts of the credit market. One of the things that we looked at is whether payday loan and indeed other providers are doing proper credit checks to make sure you are not borrowing from here, there and everywhere, and you have no chance of paying it back. If you are, you should be sent to get some debt advice rather than robbing Peter to pay Paul.

We looked at those issues and we found out that the problem is that, despite the rules under which payday loans companies should take steps to do credit checking, they were using some of their own methods. They were not necessarily going in through the main framework as is done by the Experians and Equifaxes to check that there were not loans elsewhere, and that means they were borrowing wrongly. The system works by not only checking but also putting into it. If I borrow something from you, it is your job to make a note on the system that I have done so. So somebody else can come along and see that I have this debt. If the payday loan companies are not putting the information in, other companies cannot check. Even mainstream providers could then wrongly lend because of that.

Ann McKechin: Is that going on at a wholesale level? Could you give any idea of rough percentages?

Sarah Brooks: As far as I am aware, this is fairly commonplace practice among the payday loan market.

Ann McKechin: We are talking about £1.5 billion of debt that has not been properly recorded.

Sarah Brooks: It is hard to say whether they all do not record the debts. I really do not know, but one of the things we found is that there is no commitment to do this. I do not want to exaggerate this because it is very difficult to tell. The reasons for that are also very difficult to ascertain. If you speak to the Equifaxes, they would tell you that they make these products available, they are affordable and they are there. If you speak to the payday loan companies, it does not seem to be so clear with their products. They might say it is impossible to do the real time checks because the system does not work like that and it is very expensive.

It is very difficult, and we have tried, to get to the bottom of what is happening. In other countries like Germany there is one system, the Schufa, which is their credit checking system and which seems to be more widely used and recognised. However, here we have got to a system where the main providers, the Equifaxes, Experians and Core Credits, have for some reason not been used by the payday loan companies, who have set up their own systems.

Delroy Corinaldi: I guess we are quite fortunate in that, as I said, people come to us because they have multiple debts or they are referred to us because they have multiple debts. As a result of that—I think it was mentioned in the previous session—every year we produce an annual stats yearbook, which points to individuals, the type of debt that they have, their gender, etc. As I said in August this year, one in eight people had payday loans and we are now collecting those data on a regular basis, so that we can have a better sense of the types of people who are accessing payday loans and perhaps get under the headlines a bit more and look at some of the behavioural issues behind payday loans as well.

Martin Lewis: Generally, they are not on your credit file. There are only three companies that operate credit checking; there are only Call Credit, Equifax and Experian. It is not very difficult to check. Generally, payday loans are not on there and that leads to many problems.

Let us remember that there is a big problem with credit scoring, because unfortunately any application, even with a rejection, tends to go on your credit file and counts as a search, which is a problem in all forms of lending. For example when you want a loan, only by applying do you know what rate of loan you are going to get. If you then do not want the loan, you reject the loan but it is still on your credit file as if you had borrowed. There is a big problem there. My slight worry is that people apply to find out how much they will be charged, and that goes on their file and will then disenfranchise them from borrowing. Certainly, if you have the debt, we would like to see that on the credit file, but I am not sure that every application should be on the credit file.

Teresa Perchard: Your question is really what areas are they not complying with?

Ann McKechin: Yes.

Teresa Perchard: We would say that the business practice of some of the providers of payday loans—the rollover facility particularly, but also the way in which initial checks are done—does not comply with the OFT’s guidance on responsible lending. There is that, and also there are a wide variety of practices around handling of debt. Again, they are not all in full compliance with regulatory guidance on handling customers in financial difficulty. Those are the key areas.

Ann McKechin: You have all referred to the fact that you think the OFT is not the best regulator, but to what extent do you feel any confidence that the OFT is trying to enforce existing regulations or has tried to mount any prosecutions of these companies?

Sarah Brooks:  I think it is a bit unfair to say they are not the best regulator. I think they have a very tough job to do. We wanted to have a competitive credit market; we thought that might bring down costs, etc., but it has not, actually—it has just made it more difficult to police. I think they are trying to do a very difficult job in difficult circumstances, and perhaps they are not always given the full tools they need to carry it out.

They do take action against firms, but of course they need to be alerted to that as well. It is triggered by a complaint, either by an individual or perhaps by an intermediary. It is not necessarily a proactive way of doing it.  So there is an issue with that, and if we had stronger regulation and perhaps, as we said before, an appetite to increase the barriers to entry, that would make their jobs easier.

Teresa Perchard:  It has never been in the right place, the OFT.

Chair: Could I just intervene? We have a lot more questions and we are going very slowly. I have to give evidence on behalf of the Select Committee at another meeting and I need to be away fairly promptly. Make your questions and answers short, and of course if there is anything you wish to add, please give it in written form afterwards.

Rebecca Harris: I want to go back to an area we were talking about, which is the APR rates for short-term credit and whether they are a good indicator for customers of whether this is a good product for them or not. Are there any ideas that you have for a better way for customers to know if they are getting a good deal or to shop around for a short-term loan, if APR is not working?

Martin Lewis: The only advantage of APR is that it scares off people who understand it, even though it is a farce. My only minor regret for getting rid of it would be that, but unfortunately it is not scaring off enough people. I think total cost, based on a number of examples, is a good idea. There are ways to formulate this within the industry. That is the way it has to go on short-term lending. It has to be: if you borrow £100 over two weeks, you will repay this amount. That is what we need to be telling people. How would you compare if you were doing it yourself? You would ask yourself that question. If I borrow £100, and I pay it back in two weeks, how much would it cost me? If I pay it back another two weeks later, how much will it cost me? It is the simple and bleeding obvious answer, if I am honest.

Rebecca Harris: It sounds simple and bleeding obvious, doesn’t it? Is that the view of the whole panel?

Sarah Brooks:  I think if you have transparent charging, that would benefit across financial services.

Delroy Corinaldi: Certainly, when our helpline staff and counsellors talk to clients, particularly those who are struggling in financial difficulties, they like to know what they are going to be repaying. That is the key thing for them.  It is not about the APR because they are not looking at the APR; it is all about, "If I borrow this amount, I know this is the amount I will be repaying". It is often very difficult for individuals who have perhaps never borrowed money from payday loans; I do not know how many members around the table have actually been to a high-cost credit lender previously, but we think in different ways. Those individuals who are getting that money today from Provident or Wonga or whoever it might be, are asking the question, "How much, and how much do I repay?" That is all they want to know.  

Martin Lewis: It is important to remember that a 3,000% APR loan could be more expensive than a 5,000% APR loan because of the fees. That is what makes it all slightly ridiculous.

Rebecca Harris: You said that people who understood what a 5,000% APR was would be scared off and would not take the product, which takes us back to the issue of financial education and how we might want to improve financial knowledge. Are there any views you have on this?

Martin Lewis: I have been running a campaign for financial education for a very long time, and what’s needed is to teach every single child from an early age. We have 104,000 people who have signed the petition; I hope all members here, if we finally get it through the Back Bench Business Committee, will support it in Parliament. What we need is for both youth and adults to be financially educated. The Money Advice Service has a remit towards it. I know there was a letter to them the other day saying, "Do not take the money away from financial education." Why has that money been put into web provision when – I am rent-seeking here slightly – web provision of money information is one of the things we do rather well, as well as debt crisis information. It is a very competitive market out there. I run one of the biggest websites, so I would know. Via the Money Advice Service we are spending a lot of money on 60,000 people doing a test, rather than face-to-face advice and financial education. Well, I have already had 60,000 people use my website this morning. It does not need three months to do that. Where the Money Advice Service is putting the money is a really interesting point.

Financial education in schools, including debt lessons both in maths and in PSHE, is where you start. It is a long-term investment, and not a very expensive one, for society. It will be the thing that will stop all of us having to be here and wringing our hands every time some new clever devil comes up with an idea like payday loans that we have not regulated yet, and pulls a fast one until a couple of years later when people start noticing that it is trading on our high streets. 

Teresa Perchard: Can I just add that financial education for adults is just as important, particularly to address the issues that Margot highlighted earlier, which is how to help people get a better deal and reduce their costs, improve their earnings, reduce their cost of living, and perhaps reduce the need for them to borrow from any sources. To provide that support in communities is something that Citizens Advice is doing increasingly, because we want to reduce the number of people who come to us for debt problems by supporting people earlier. It is entirely complementary to the campaign around education in schools. 

Sarah Brooks: I just want to sound a note of caution because we absolutely support financial education—we think it is a good thing—but in a market that is very complicated, which seems to be geared to trip you up, it will never be enough. We also need to have measures to ensure the products are understandable.

Delroy Corinaldi: Very quickly, when someone is in difficulty, and a trigger is to go to a free debt advice provider like us, that income expenditure piece—when you do the budgeting bit with people and take them through what is coming in and what is going out—is exceptionally good for them. They will tell you that, because they then start looking at breaking down their budget and understanding it in a more formalised way. I think if we can get that message through to some of the parents and they pass it down, we are then in a position to see some real value from it.

Martin Lewis: We have a quite deliberately dramatised tool on the site: our budget planner. At the end you press a plunger and it tells you if you spend more than you earn, and we try to make it exciting. It has been downloaded 100,000s of times. Unfortunately most budgets are just terrible. They look at a snap shot of the month and they say motoring; they do not say MOT and tyres, and repairs and petrol and breakdown. There is a problem that a lot of the public budgets that are put out there are very poor. They miss out Christmas and buying a sofa every three years, which of course needs to be accounted for over three years in the cost.

Once you do it properly with people and they start to understand that you do your budget and then go on to think about how you are going to manage your money afterwards – a budget is just a start; it is not the end but the start – it does start to work. These are tools that most people simply do not have themselves and they are not being provided particularly well. People like me and other consumer websites have them, and we have 10,000,000 users a month. It is a large amount of people, but the problem is that we tend to reach the people who know they want the information, not the people who do not know that they want the information and do not know what questions to ask. In many ways, I suspect, the proportion of my users who take payday loans is smaller than the proportion of the general society, which is the same for This is Money or Which? and all the other websites.

Chair: I think we have probably given this issue a fair airing. Can I come on now to Julie now? I think one of your questions is likely to have been answered.

Julie Elliott: My first question has been answered, which was about education for young people and adults. I think you have well and truly answered that question without me asking it. The second thing I want to ask, and I asked a similar question of the previous group, is what role do you think credit unions have in providing consumer credit?

Sarah Brooks: The Government at the moment are examining how they can expand the role of credit unions by the use of the Growth Fund, and I think the results are expected in January. Our organisation has done some research, particularly with the Post Office, on how that could work. Certainly in other countries, credit unions are very much part of the landscape. In the United States, 20% of the market is credit unions. In this country there are pockets in Glasgow and other areas, where they have been very successful, but as a whole it is hard.

What we see is that the barriers to entry that any bank experiences are there for credit unions. People like to have a high street presence, there is the advertising, and there is also inertia—switching rates are very low from mainstream providers. So, there are all sorts of barriers there, but we think we need much more diversity in the market both for credit and for current accounts. It is not just about competition being more of the same but about different providers coming in and challenging the current model. We would very much welcome credit unions taking a bigger role.

Martin Lewis: Whilst I am a fan of credit unions conceptually, the problem is that their rates are not that good for a rate tart like myself, and that is what I do. Where are the best rates? It is not with credit unions. What is happening with payday loans especially, which is about quick, easy convenience, is also not replicated by credit unions. That is not a slur on the credit unions; it is partly the regulations, which are changing next year. But they are not a particularly attractive and easy proposition for many people, though we should enable them to be so.

It always interests me when people see credit unions as the panacea. I always think of a building society as the big brother or sister of a credit union. The problem is that when building societies grow, especially the really big ones, they give you profit forecasts, charge bank charges and operate in a relatively similar way to banks. There is the balance: how do you keep them small, friendly and community-oriented, which is when they tend to do the really good and beneficial things, but then have the quick shimmying operation and convenience, which is what people are crying out for, especially in the payday loan-type market. It is a difficult circle to square.

Julie Elliott: If you do not think payday loans are the answer at that end of the market, what kind of product can come in there to fill the gap?

Martin Lewis: I would first of all educate people. We need to cut bank charges to start with, so that people are not using payday loans to avoid bank charges, which, if you ask me on a technical basis, is the right thing to do, because payday loans can be cheaper than bank charges. You are often right to take a payday loan to avoid bank charges. That makes it very difficult. I am doing that purely on the basis of numbers, ignoring whether it is good or bad for you in the long run. On a piece of paper, certainly, a payday loan is usually cheaper than a bank charge. So, we need to improve that.

We need to improve education and budgeting so that people do not get there. What is happening to the social fund is just horrendous. You can get an emergency loan or a budgeting loan – a budgeting loan only if you are on benefits and an emergency loan for anyone with less than £6,000 of savings – which is at 0% up to £1,500. There are three big problems. One, it is very inflexible borrowing due to the repayment terms. People do not go to the social fund for payday loans because it is very difficult to repay them; it is rigid and strict, and the money is not out there. Two, it is a postcode lottery, depending on where you are. If you are in a poor area, they are all used up quickly; if you are in a rich area and you are one of the few poor people there, you’re more likely to be able to get one. Finally, it is going to become discretionary for local councils going forward, and I do not see, with the budget cuts at the moment, that they are going to be offering them. What we used to do is have a state-funded social fund that was there to supply short-term lending for people in emergencies, and in the midst of the payday loan boom, we are taking it away. I do not get that.

Margot James: Could you comment on the Government’s response to the conclusions of the personal insolvency review, particularly with regard to debt management organisations?   

Delroy Corinaldi: Most of you will know from our submission that CCCS brought debt management plans to the UK in 1993.  We probably have the largest share of the market, even though we are a charity, which is about 30%. We look very closely at what the Government said with some concern regarding the role of fee chargers and whether or not more can be done to clamp down on them. Certainly, our clients are particularly concerned that more needs to be done. When you are in financial difficulty and you are looking to go on a debt management plan, it is a distress purchase; you are feeling very vulnerable.  You are feeling quite embarrassed, and you will reach out to the first arm that reaches out to you, and that first arm tends to be the fee charger because they have the advertising budget. I heard Joanna from Money Advice Trust in the first session talk about this—the misleading advertising that goes on. If you go to Google, for example, and put in "National Debtline", you will be swamped by fee chargers who trying to get in on that sector. I think more can be done in terms of the licensing conditions around debt management companies, around the regulation, and around the lack of transparency.    

Martin Lewis: I do not do this – we tell people to go to them – but I think one of the problems is exactly as Delroy says. Within the financial advice market, we have different tiers. There are tied agents, multi-tied, and independent financial advisers. Within the debt management market, Christians Against Poverty and the Consumer Credit Counselling Service are exactly the same as somebody out there who is trying to make a lot of money and is going to make your problems a lot worse. It seems to me you could have different categories and different stamps that you could call yourself. When some companies say they are free but then charge fortunes on the back end, they are free at the point of delivery only. A little bit of categorised regulation that says you have to use the right terminology would be very useful, and not particularly expensive to do.

Teresa Perchard: On the Government’s response, as Joanna highlighted earlier, the regulator has reviewed the debt management market and found it wanting on a number of points about charges and quality, so there has been very clear evidence. That is backed up by advice agencies, who see poor and inconsistent service at a high price from that burgeoning market, but the solution proposed is to develop a self-regulatory protocol, just focusing on the debt management area.  There are nearly 4,000 people with licences to undertake debt management at the moment, and only 17 are in the leading self-regulatory membership body, so it is hardly going to touch the sides in that market.

We think the response should have been stronger, and particularly to implement some legislation that is already on the statute books, the Tribunals, Courts and Enforcement Act 2007, which cost a lot to put through Parliament. It provides the means to bring into play a statutory debt management scheme, which would put all of the services that are being provided on the same basis.

Because it is a distress purchase, people do not go shopping for the best debt management provider; they are cold called. They are not comparing price or service, which in a way is the same as the payday lenders. There are real differences in what they are offering, and on debt management there is quite a significant consumer detriment there, and the regulator needs to define the product and the service to prevent that occurring, which is our view. "Disappointed" is the view. 

Delroy Corinaldi:  If I could come in quickly, all roads lead back to the OFT, of course, because the OFT has a role in regulating the sector, and one of the things we call for is an increase in the amount it costs to get a credit licence. There are many hundreds of these firms around, and the client does not know where to go. If the OFT could increase the size of the credit licence for these debt management companies, then you would at least start to drive out some of the bad players in the market. That would be helpful.

I think you have two voluntary codes for the fee chargers out there, DRF and DEMPSA, and they are indicating that they are doing some good things. It was only last week or the week before that one of them identified a fee charger that is masquerading as a free-to-client debt adviser, and what they then did, which they saw as a success, was to make it public that they had actually put a fine against them and were trying to clean up their act.  Well, who is the firm? They did not identify it.  How much money did they make out of clients while they were masquerading as a free-to-client provider? They did not state that. I think there is a lot more that can be done. 

Finally on the OFT side of things, we do not know who they are and we do not know how much money they made. It is quite likely that they are still walking around with an OFT logo on their website saying that they are OFT approved. A lot more needs to be done to clean up this sector, and it needs to be done pretty soon. As the previous session said, a lot more people are going to fall into debt.

Chair:I think we have the message. You have one more?

Paul Blomfield: On debt advice, do you think the Money Advice Service is best placed to co-ordinate provision?

Teresa Perchard:  There is no reason why they cannot do that effectively. They have a statutory base for their existence. They also have a very good relationship with the Financial Services Authority to, for the first time, generate funding for money advice, debt advice, on a levy basis applied to financial firms—something that has been under debate for decades. They are undertaking a review at the moment, looking at what the services need to look like in the future. We are working very closely with them to make sure they understand what is currently available and what the needs are. There is no reason why they cannot be an effective co-ordinator. They have the resources and are being assisted by people like us to understand what the needs and requirements are in future.

Paul Blomfield: Specifically following on from that, Teresa, how is that going to affect you and the funding you receive to provide advice?

Teresa Perchard: It is difficult to be certain. Right now, the funding that the Government have been providing centrally for face-to-face debt advice in certain communities is protected for this financial year. Those services are still in place in many constituencies. The Money Advice Service has asked the Financial Services Authority to approve a budget for next year that will be sufficient to continue with those services for another year while decisions are made about what happens in 2013 and 2014.

If the service levels go down while demand levels go up in 2013 and 2014, there will be more limited capacity in CABs and other local advice agencies, and possibly also the National Debtline, which is funded out of some of that money. It could be open to competition, and that might result in a very different pattern of service delivery.  At the moment it is difficult to say what capability the Citizens Advice Bureau service will have to deliver debt advice in two years’ time.

Coupled with the reduction in legal aid funding for specialist debt advice, the funding cuts that are coming in under the Bill would mean that 100,000 people who currently get help under the legal aid scheme with debt problems would not in the future. We face rising demand and reduced resources, so you can draw your own conclusions from that.

Paul Blomfield: Martin looks like he is itching to comment as well.

Martin Lewis: The Money Advice Service is a good concept, but I think there needs to be some focus. It has unique properties to do things that nobody else can do, and I slightly worry that it is not focusing on what it can do uniquely; it is trying to brand build in areas where it is not necessary. I have spent two years keeping my mouth shut on this, and today is the first day I have said it, because I think we have got to that point. I have had e-mails from people who work in the organisation saying that it is trying to brand build and build a big website, if I am going to be absolutely frank and honest with you. Personally, I do not see the point.

I would love to have a stamp – someone to check that we are compliant and doing everything right, as I am sure many of the other big editorial money websites would love – that means we can say this is being done. We have 10 million users a month; I e-mail 6.7 million people per week. ThisIsMoney is big; LoveMoney is big; Which? is pretty big, all I believe very substantially bigger than the Money Advice Service. We all do our best. You might say that we do some things you do not like, in which case, come and tell us and we will try to improve it. But why are we spending public money competing with that?

I would love the Money Advice Service to be out there doing financial education, dealing with vulnerable people and giving face-to-face and telephone advice, which there is no provision to do on any other basis, and helping debt services. But at the moment it seems to be concentrating, to a certain extent, on brand building. They are going to hate me for saying that, but it is a very deep frustration of mine. Yes, it can do the job if it looks in the right place, is my answer.