The battle against legal loan sharks hit Westminster this week when the Labour MP Stella Creasy's Consumer Credit Bill got the nod for a second reading next February. More excitingly, Stella has secured a debate on the Bill next Tuesday in Westminster Hall, where the Government will have to respond to her proposals.
To remind you, the Bill suggests a cap on the total lending rate that can be charged for providing credit, including any late payment and default charges. Its aim is to crack down on the so-called legal loan sharks – such as doorstep lenders – who add excessive charges on to high interest rates so hard-up borrowers can end up owing twice as much as they borrow.
On Thursday, John Denham, the shadow Secretary of State for Business, Industry and Skills, added his support to the campaign. "The Government has already made it clear that it is willing to look at the cost of borrowing on credit cards and store cards in its Credit Review, but seems hesitant to commit to finding ways of helping those for whom such sources of borrowing are out of reach," Denham said. "I hope they will listen to the points being made about the need to act to protect those on low incomes too and publicly confirm that this will be considered in the Credit Review."
But the Bill has been criticised by the Finance & Leasing Association, which represents a range of lenders. The FLA has warned that restrictions on legal lenders could force some to raise rates and push others out of the market. That, in turn, could leave many hard-up people with little option than to resort to unscrupulous illegal loan sharks, who often use bullying and physical intimidation on the poor unfortunates who fall into their clutches.
Fiona Hoyle, head of consumer finance at the FLA, said: "Coming on top of all the recent new regulation, further restrictions will have the unintended consequence of forcing legitimate and responsible lenders to leave the market, or raise their prices, or both. We hope MPs will instead focus on the illegal loan sharks who prey on people in financial difficulty."
If there is a danger that new laws could, effectively, unleash the dodgy loan sharks, then the Government needs to tread carefully. But that doesn't mean it should allow legal companies to continue charging outrageous rates and fees. There is a need for short-term loans, but anyone forced to turn to a payday lender should not face the risk that they're entering a cycle of debt that they will struggle to escape from. A cap on the amount that lenders can charge – as proposed in Stella's Bill – would ensure that people don't end up taking on a lot more debt than they can really afford. But the Government must work with the loans industry to ensure that any proposals don't force legitimate firms out of business, leaving the market to scary illegal sharks.
The Bill also aims to improve access to the service that credit unions provide, by integrating them with the Post Office network. I'll be interested to hear the Government's view of that, especially in light of its recent proposals to sell off the Post Office.
Why haven't more people switched their current account? According to Consumer Focus, just 7 per cent of people have switched current accounts in the past two years, and three-quarters have never even thought of switching. There are lots of reasons to switch, not least to get a better deal, such as high-paying interest on credit balances, or lower charges on overdrafts. You could even consider switching to an ethical bank to avoid the probability of your cash being used to fund weapons or drugs (see my feature this week on pages 60-61 for more on this).
In fact, many people are unhappy with their bank but still don't switch. There's a presumption that things will be just as bad elsewhere or that moving will be a real hassle or, worse, hit their credit rating. These days, there's little hassle and banks must transfer accounts quickly and efficiently. As for your credit rating, switching accounts won't have a great effect on your score.
More worrying is the fact that some people have a kind of loyalty to their bank, simply because they've been with them for years. This is no reason to stick with them, as Sarah Brooks, head of financial services at Consumer Focus points out. "The unacceptably high level of bank complaints suggest that loyalty is often misplaced. Until people start voting with their feet, banks have little incentive to raise their game and consumers may be missing out on better deals and service."
Consumer Focus wants banks to introduce clear, transparent and comparable charges and pay goodwill payments for errors or delays in switching. That's something I'd delight in seeing too but, let's face it, chances are slim.
Brian's royal appointment
brian cunnock (pictured with the Duke of York) has just retired from the Yorkshire Building Society. He joined, aged 16, in September 1964 and worked for a number of departments until leaving this month on his 63rd birthday. I trust he has a happy and healthy retirement but I'm saddened at the thought that we may never see his like again. There's slim chance now that any of us will work loyally for 46 years for the same business.