Dáil debates

Thursday, 10 March 2022

Consumer Credit (Amendment) Bill 2022: Second Stage


1:50 pm

Photo of Róisín ShortallRóisín Shortall (Dublin North West, Social Democrats) | Oireachtas source

Moneylenders have been a feature of this country since the 19th century. They have acted as a source of credit for low-income households when mainstream providers simply did not do that. However, this easily-accessible credit comes at a cost and as we know it is a very high one. For households that are already struggling, these loans are a heavy burden. They may seem at the beginning to be helping people out of a difficulty but they inevitably end up being a heavy burden.

According to a report from University College Cork, entitled Interest Rate Restrictions on Credit for Low-income Borrowers, there are an estimated 330,000 moneylender customers in Ireland. The average loan size is €566 and these loans are most commonly offered over nine months at an APR of 125%. Compare this with the credit union where a loan is capped at 12.67% APR. It is difficult, if not impossible, to justify this large differential, not least when one considers the prevailing profile of borrowers who turn to moneylenders. The same report found that the majority of moneylender customers were female, in the lower socioeconomic group and aged 35 to 44 years. Typically, loans were taken out to purchase household goods and clothing along with covering the cost of family occasions as well as the exceptional cost of children returning to school.

The immediate access to credit and convenience of home collections are some of the reasons for many low-income families and individuals resorting to moneylenders. Satisfaction with legal moneylenders is high, with an average customer rating of 83%. This is attributed to the ease with which people are able to borrow. However, this convenience comes at a high cost for low-income families. In the UK, 52% of home credit users believed that using this form of credit trapped them in a cycle of debt and borrowing. This is an all too familiar experience. They felt trapped because most were living on low incomes and had limited options for accessing credit outside of moneylending. Unfortunately, moneylenders are eagerly meeting this unmet need with high interest rates that reach 187% and APRs of up to 287% when collection charges are included. These rates are eye-watering and are being offered to the individuals and families least able to repay them, namely, those living below the poverty line. In many ways, this is unconscionable and needs to be tackled on a number of different fronts.

Our fundamental difficulty is that there are significant problems with low incomes in this country. I mean this in terms of people who are dependent on welfare and those who are often described as the working poor. There was no increase in basic social welfare rates in 2020 or 2021. People dependent on welfare would have needed an increase of €10 in this year's budget just to stand still, but the allocation was a mere €5 per week. I appeal to the Minister of State that we need to move away from increases in welfare rates at budget time being dependent on the whim of the Minister of the day. That is not an acceptable way of operating. There needs to be a yardstick for what we consider an essential income to live a life with any kind of dignity.

The Vincentian Partnership for Social Justice has done outstanding work in this area and it has for many years been working on producing the minimum essential standard of living, MESL. It examines various categories of people who are on welfare or who have income from work. Through very detailed research, it establishes the figure that would represent the minimum needed to survive. It includes the incidentals people face, general overheads and small amounts for family occasions - critical things we need if we are to live any kind of normal life or a life with dignity. The Vincentian Partnership for Social Justice estimates that the basic social welfare pension rate - the State pension rate - would need to be increased to €252 to reach the essential levels for survival. This is a good yardstick to use. If inflation increased, there would be a corresponding increase in social welfare rates. Other bodies recommend that the basic social welfare rate should be a percentage of average wages - this is another way of doing it - but we need to have some kind of clear yardstick to measure the adequacy of the basic social welfare rate, and we do not have that at the moment.

Many social welfare recipients started this year already behind where they would have been two years ago. Then they were faced with substantial increases in the cost of living, including the cost of energy, even before what happened in recent weeks. They are under extreme pressure. They are the same people who are forced to turn to the moneylenders calling to their doors. They are in desperate straits, so if someone calls to their doors and offers them €200 or €500, there is a great temptation to take it. It is not just a matter of temptation, though. Often, many of these people need to accept such loans just to survive or get through particular points in their lives.

Another issue we cannot ignore is the fact many people are on low pay and in precarious working conditions. We have the second highest percentage of population on low pay at 22% or 23%. This is a dreadful reflection on the State. I made this point last night when discussing the Finance (Covid-19 and Miscellaneous Provisions) Bill. The figures for the tax take for the past two years, which were during the pandemic, said it all. There was not a major issue because, in the main, the people who were out of work, forced onto the pandemic unemployment payment, PUP, and so on were those who were on such low pay that they had actually been paying very little tax anyway. This serious structural problem in our economy needs to be addressed and cannot be ignored in a debate on moneylending.

Moneylenders have filled a gap in the market for decades by targeting the most vulnerable in society. The gap is widening, though, with MABS, credit unions and others reporting client creep into more groups of consumers since the recession. I suspect the figures will be even starker following the experience of recent months and what we are likely to face over the coming months. Since the recession, more higher income groups have been utilising this service because they are also struggling to cope financially. This is further compounded by the spiralling cost of living, including rent, fuel and food, that all households are facing. More and more people are turning to high-interest options or solutions - of course, they are not solutions in the long term - and Government intervention in the sector is needed urgently, but more than the modest offering that is currently under consideration is required.

One of the most glaring omissions from the Bill is a cap on APR. APR represents the annual cost of the loan over its full term, including fees and additional costs that are not included in the simple interest rate. This is the true cost of the loan. It should be noted that this issue is dealt with in Deputy Doherty's Bill, which is on Committee Stage. It is a shame the Government did not learn from that Bill and pick up on some of its most important aspects. It is disappointing the Minister has not provided for a similar cap on APR in this legislation, especially when we know that shorter term loans have a higher APR and that these account for the majority of moneylenders' loans.

As reported in The Irish Timeslast year, a licensed moneylender - Penny Farthing Finance - charges 49% on a 12-month loan, which is just above the Minister's proposed upper interest limit, but the APR on that amounts to 131.59%.

This is the real burden. This Bill does nothing to address that. In its submission on pre-legislative scrutiny of this Bill, the Credit Union Development Association also cited APR as a fair metric in this regard. It is also the current comparative mechanism across financial sectors. If we were to introduce a cap on consumer credit APR, we would certainly not be an outlier because this is becoming standard practice. There are multiple international examples, including the Netherlands, which places a total cost cap of 14% APR. Further to that, the European Commission is in the process of revising its existing rules on consumer credit. Instead of a centralised approach, this proposal will place an obligation at member state level to set interest rates or APR caps with national discretion.

In some jurisdictions outside the EU, the relevant financial regulators have introduced regulatory responses which specifically deal with short-term, high-cost consumer credit. This includes the UK, Australia, Slovakia and South Africa. Unfortunately, the Minister remains vehemently opposed to any cap on APR in regard to money lending. It is very hard to understand the rationale for this. The argument is there is a danger there could be a mass exodus from the market and that this, in turn, could reduce access to credit. However, there is very little international evidence to suggest that customers would turn to illegal moneylenders en masse. Even if this were to emerge as a major risk, it could be substantially mitigated by developing and supporting existing alternatives to money lending such as credit unions.

Credit unions are local trusted institutions and they are best placed to offer free banking and micro finance to low-income families and individuals. Since its very foundation, the credit union movement in Ireland has been encouraging people to assert more control over their finances. One of the founders, Nora Herlihy, began promoting this institution in 1958 to curtail the very issue we are discussing here today 64 years later. This network needs to be developed to meet the current challenge. However, as the Minister of State will know, reform of our credit unions is happening at snail's pace. There has been very limited progress towards establishing this sector as a strong, competitive force. There are many obstacles put in the way of the credit union movement in terms of it becoming a fully fledged player within the Irish financial market, not least because it is required to put its deposits with the pillar banks and that hugely restricts its capacity to operate in a competitive manner.

The Social Democrats have long argued for a strong, not-for-profit banking sector in Ireland. Not only would this create much-needed competition in the banking sector, it would support financial inclusion. We believe this can be based on a reformed credit union movement. There has been so much talk about that over many years, it is time now for action. We also strongly endorse the recommendations of the Oireachtas finance committee from 2017 in regard to the credit union movement and the credit union recommendations contained in the UCC report, specifically that credit unions should serve communities currently serviced by moneylending firms by increasing the 1% monthly cap on interest rates for credit unions. I understand that the Minister is open to this and intends to bring forward legislation to amend the Credit Union Act 1997. This would be a welcome change to the current regime as it would allow credit unions to cater for the significantly greater costs associated with small lending. I certainly hope we will be moving towards adopting that as soon as possible.An increase to 2% per month, which would work out at 24% per month, would be much more favourable to the rates offered by moneylenders. This is exactly where we should be encouraging people to access credit. Unlike moneylenders, who are profit-driven, credit unions are a social movement. Their ethos should be utilised to the full in order to ensure that everyone can access affordable credit.

In 2015, credit unions began the personal micro credit scheme, otherwise known as the "It Makes Sense Loan". This pilot scheme was designed to provide a creditable alternative to moneylenders. It is offered in more than 106 credit unions in 280 locations nationwide. Loans range from between €100 and €2,000 with a maximum APR of 12.68%. To qualify, a person must be a member of the credit union, or join, and be in receipt of a social welfare payment. The original pilot scheme initiative was launched in 30 credit unions under a common mission to deliver an alternative to moneylenders. An evaluation of this pilot found that 52% of pilot borrowers had used moneylenders in the past, while 22% had considered using moneylenders before taking out the pilot loan. Over 90% of borrowers rated the credit union service as good or very good. Since then, the pilot has been rolled out across the country. While it has been successful, many credit unions have not signed up, unfortunately. More work is needed in this area to increase the level of small personal loans across the country otherwise a significant portion of the population will continue to be cut off from accessing the scheme and, as such, will be still subject to relying on moneylenders.

Another area of concern is the significant dearth of financial literacy education in our schools. Many people are completely unaware of the financial implications of APR and interest rates on their loans. People who are struggling to make ends meet will take the line of credit that is most easily available. That is understandable, but that is usually a moneylender. They often do so without realising the true cost of the credit or just accept that cost because it is their only option. There is an onus on the Government to ensure that basic financial literacy is a key part of the education curriculum, as well as the provision of support schemes through community projects around the country to improve financial literacy. This must be done in conjunction with renewed efforts to make low-cost credit available nationwide through our credit unions. I also think there is huge potential for extending deduction-at-source for many household bills. Very often, people have difficulty getting access to some of those schemes but they have been hugely successful where they have been used. There is a great need for an extension.

I reiterate my call on the Minister to do more. This Bill is not enough to deal with the myriad of issues in this area. While it is an improvement and that is welcome and overdue, it will not fundamentally change the current system. We need a move away from high-cost moneylending and a shift to not-for-profit banking. I accept this will not be a straightforward, easy task. The importance of tradition and friendships with door-to-door agents and so on will need to be overcome. However, these are not insurmountable issues if we are truly serious about limiting the use of moneylenders. This is all the more important now given the current context. High energy prices and rising food prices hit low-income households the hardest. This will likely cause a spike in moneylending. There is a real urgency about tackling this issue. Financial education and credit union reform, alongside tighter regulation, are part of the solution. We need to act fast, otherwise the most vulnerable in society will be saddled with even more debt. We simply cannot stand over inappropriate and misleading moneylending any longer.


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