(11 years, 11 months ago)
Lords ChamberRead Hansard Text Read Debate Ministerial Extracts
16:02 - Division on Amendment 107AG - Ayes: 201 / Noes: 242 - Amendment 107AG disagreed.
17:53 - Division on Amendment 116ZB - Ayes: 175 / Noes: 229 - Amendment 116ZB disagreed.
Lord Eatwell
“( ) The first case requires the Bank of England, FPC, FCA or PRA to provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given, and full information about the circumstance.”
Lord Eatwell
My Lords, this set of amendments is inspired by the words of the noble Lord, Lord Sassoon, in Committee. He said:
“It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies—the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade”.—[Official Report, 10/7/12; cols.1051-2.]
The noble Lord’s words are an important warning to us all, in considering this part of the Bill, on the relationship between the Treasury and the Bank of England at times of crisis. That relationship will depend not only on the personalities involved, but on the statutory responsibilities which the Bill places on those personalities. This group of amendments is intended, in some parts, to extend the statutory responsibilities of the Bank and the Treasury; but, most especially, to clarify those responsibilities, so that the failures which we saw under the previous arrangements, which were due to the principals in the tripartite structure not actually meeting for a decade, will not recur.
Amendment 107AA requires the Bank to give early warnings to the Treasury of a threat to public funds. At the moment, the Bill refers to the possibility of a threat to public funds, which must be immediately notified. However, I think that this notion of possibility is far too vague. Suppose that the Bank thinks there may be a catastrophic event, with a probability of 5%. Is that a possibility? But then, what if the probability is 1%—is that a possibility? What if the probability is only 0.5%—is that a possibility? In our view, a full, continuous exchange of information between the Bank and the Treasury, and the addition of a requirement of an early warning, does just what is needed. It ensures that the Bank is required to convey the information when it first has any indication of a threat—let alone any notion of possibility, whatever “possibility” might mean. If we incorporate the idea that the Bank must give early warning to the Treasury as soon as it knows what is going on, or has some inclination of a threat, without fussing about whether it is “possible” or not, then information will flow in an appropriate way.
Lord Newby
My Lords, this group of amendments was debated at length in Committee. I am sure that, like the noble Lord, Lord Eatwell, many of us were indeed inspired by the way that my noble friend Lord Sassoon sought to reject them. Amendments 107AA and 107AB, and Amendments 107AD and 107AE, attempt to create an early warning system for public funds notifications. I understand that this reflects a concern on the Benches opposite that the drafting of the Bill—specifically, the legal effect of the term “material risk”—does not require the Bank to notify the Treasury in enough cases, even those in which there is a very low probability of public funds interventions being required.
After our debate in Committee, my noble friend Lord Sassoon asked Treasury officials and legal advisers to look again at the material risk wording to make absolutely clear that it delivers the low bar that we are looking for: a possibility test rather than a probability test. Our officials have concluded that the legal effect of the existing wording is indeed to require the Bank to notify the Treasury where there is a realistic possibility of circumstances arising in the future in which public funds could be put at risk. I do not think it would be appropriate to lower the bar even further from “material risk”. The result of doing so would be to require the Bank to notify relatively trivial and implausible risks, which could mean the Treasury receiving a large number of notifications of far-fetched risks that require no action or engagement from the Treasury whatever. I am satisfied that the material risk terminology will give us the right result.
Let me reassure the House that I agree entirely that the Treasury must be informed well in advance of a risk to public funds crystallising in order fully to consider and evaluate different options for managing or mitigating the risk and, ultimately, with a view to avoiding entirely any recourse to public funds. As my noble friend Lord Sassoon said in Committee, no one would be keener than us to have an early notification mechanism in place if we believed it necessary to achieve this aim. However, I am confident that the existing trigger in Clause 57 already sets the very low bar that we need.
The other aspect of these amendments is to extend the duty to notify to the PRA, FCA and FPC. I feel strongly that diluting accountability in this way would be a mistake. As we saw with the failed tripartite system, the clear disadvantage of spreading responsibility across several different organisations is that each can blame the others when things go wrong and risks can fall between the gaps. I believe that the system set out in the Bill, which makes the Bank the single point of responsibility for financial stability and crisis management, is the correct approach to eliminate confusion and overlap and ensure that the Treasury is always informed of risks to public funds.
In a similar vein, Amendments 107AC and 107AF seek to add references to risks to the objectives of the PRA and FCA into the notification duty. I can reassure the noble Lord that any risks that arise in the spheres of responsibility of the PRA and FCA that could potentially pose a threat to public funds must be notified to the Treasury by the Bank in the normal way. As was made clear in Committee, the duty to notify the Treasury of risks to public funds will require the Bank and its senior management to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA and the FCA. The Bill itself places duties on the PRA and the FCA to co-ordinate with the Bank in this work. New Section 3P(1)(b) of FiSMA, as inserted by Clause 6 of the Bill, requires the regulators to take steps to co-operate with the Bank in connection with its duty to notify the Treasury of risks to public funds. We believe that that is an adequate provision.
Amendment 107AG would add “comprehensive” to the requirement that the crisis management MoU make provision regarding the obtaining and sharing of information. I do not quite see what “comprehensive” would add. Surely the most sensible approach here is for the Treasury and the Bank to agree between themselves what information the Treasury would find useful, including the format of the information and its frequency. That is exactly the approach taken in the MoU. Paragraph 18 makes it clear that the Treasury and the Bank will determine between themselves a suitable frequency for updates on each different risk, reflecting the severity and immediacy of the risk to public funds. Paragraph 21 states:
“The Bank will provide the Treasury with information needed on the options for managing the situation, including on options commissioned by the Treasury”.
I therefore do not think that Amendment 107AG is necessary.
Amendment 107AH attempts to turn the MoU into a piece of secondary legislation, subject to parliamentary approval via the affirmative process. I agree with the noble Lord that the MoU is a very important document, which sets out how the Bank and Treasury will interact in a crisis, to a level of detail and in a style that simply would not be possible in legislation, either primary or secondary. Having looked again at the MoU, I continue to believe that its content and style make it unsuitable for inclusion in secondary legislation. I would be loath to lose the level of nuance and detail that is currently included in the draft MoU but which is not legislative in nature. It would also make the MoU less flexible and make it more difficult for the Bank and Treasury to adapt or change the MoU to reflect changing circumstances. On the basis of these explanations, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Eatwell
Will the Minister explain why he always qualified the notion of “threat” as a threat to public funds and failed to accept the argument of serious threats to the financial system that do not necessarily pose a direct threat to public funds?
Lord Newby
The reference in the Bill to public funds goes to the heart of the Treasury’s responsibility vis-à-vis the regulators in managing the financial services sector, and we have been very clear that we want to do that. On the more general issues that the Bank may want to raise with the Treasury, which go beyond a risk to public funds, the Bank and the Treasury are in regular contact via non-statutory routes, as it were, which give ample opportunity for the two to discuss at great length and with great frequency any emerging issues that they feel the other should be aware of.
Lord Eatwell
My Lords, we have seen a display of remarkable complacency from the Minister, even in his final remark suggesting that the Bank and the Treasury can informally arrange regular contact. I remind him that the head of the FSA and the head of the Bank did not meet for a decade within the tripartite structure. Now we are going to have a structure of not just three regulators but five or six regulators and he is not even willing to contemplate ensuring a statutory requirement for them to provide a suitable exchange of information.
I am sure that the noble Lord’s officials assured him that the term “material risk” was satisfactory. It would not be surprising as they drafted the legislation. It would be nice to hear that some independent opinion had been taken. He said that our amendments would lead to the Bank notifying “trivial and implausible risks”. Yes, trivial and implausible risks, such as credit default swaps, might fail to transfer risk. Those were trivial and implausible. There was the trivial and implausible risk that an economy of just 2% of the eurozone—the Greek economy—would lead to stagnation in the whole zone. There is another trivial and implausible risk.
The extreme complacency being displayed by the Government over these arrangements really beggars belief. With respect to the amendment which would insert the word “comprehensive” before “sharing of information”, “Oh, it’s unnecessary. We know that they will exchange all the necessary information”—just like they did not do in the past. Why can we not create a proper statutory requirement when there has clearly been such a deficiency in these procedures in the past? That, after all, is what this Bill should be for.
Having said that, and I hope having established some matters for discussion at Third Reading, I beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
My Lords, Amendment 107AG is very simple. It seeks to insert the word “comprehensive” before “sharing of information”. The very least we can do to ensure that there is proper exchange of information between the Bank and the Treasury, particularly given the comments by the Treasury official that such information exchange does not take place, is to take this amendment seriously. I should like to test the opinion of the House.
Lord Sassoon
“(1) This section applies where—
(a) the Treasury consider that it is in the public interest that either regulator should undertake an investigation into any relevant events, and(b) it does not appear to the Treasury that the regulator has undertaken or is undertaking an investigation (under this Part or otherwise) into those events.(1A) The Treasury must”
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this group of amendments concerns Part 5, which is concerned with inquiries and investigations. It carries forward provisions relating to independent inquiries called by the Treasury and applies these powers to both the PRA and the FCA, also introducing a number of new provisions for the regulators to carry out investigations when regulatory failure has occurred, or may have occurred. As such, Part 5 is a very important part of the Bill, as indeed my noble friend Lady Noakes noted when she described the provisions in it as “crucial to the Bill” when we last discussed these matters on 25 October. During our discussions on that day, I indicated that I would go away and consider carefully the important points made by my noble friend and the noble Lord, Lord Davies of Oldham. I also promised to reflect further on a topic on which we have spent many a happy hour—namely, the uses of “may” and “must” in the Bill.
I hope that noble Lords will be pleased to note that the Government are bringing forward a number of amendments informed by our previous discussion of Part 5. Amendments 107B and 107C amend Clause 76, which provides the Treasury with a power to require either regulator to carry out an investigation when the Treasury considers it in the public interest for the regulator to do so. The current drafting of Clause 76 provides that in such circumstances the Treasury may order an investigation. Amendment 107B changes this discretion to a duty by changing “may” to “must”, and Amendment 107C is consequential on Amendment 107B. The Government agree with the points made that when the public interest test is met, surely the Treasury must require an investigation. Changing “may” to “must” is the right course of action. If an investigation by the regulator is in the public interest, and the regulator is not already carrying one out, then it is right that the Treasury should be required to order an investigation.
Amendment 107D responds to issues raised by the noble Lord, Lord Davies of Oldham, in Committee. The amendment provides that where the Treasury directs either regulator not to carry out an investigation into possible regulatory failure or otherwise gives a direction to the regulator as to how it should carry out such an investigation, then such a direction should be laid before Parliament. The amendment also provides that the Treasury should do so as soon as is practicable after issuing the direction. I share the view of those contributing to debate in Committee that this will increase transparency and therefore confidence in the regulatory regime. However, in recognition of the fact that there may sometimes be circumstances where laying the direction before Parliament could have negative and unintended consequences, the amendment provides that the Treasury need not lay the direction before Parliament if doing so would be against the public interest. I beg to move.
Lord Barnett
It behoves me to say thank you to the noble Lord. It is hard to believe that the amendment that my noble friend and I tabled has now been accepted. I do not know what to say. Thank you is the only thing I can say.
Lord Davies of Oldham
My Lords, given the persistence of my noble friends in debates throughout the Bill as regards “may” and “must”, I imagined that their efforts would result in one signal victory, and this is it. We appreciate the Government’s movement on this point.
I accept what the noble Lord, Lord Sassoon, said about the public interest being considered before a matter is laid before Parliament, but that in normal circumstances Parliament should be informed. I am very grateful to him for the fact that the assurances which he gave in Committee have been amply fulfilled with these amendments.
Lord Peston
My Lords, my remarks will change the atmosphere of “love fest” between the two Front Benches with regard to the “may/must” question. There seems to be a semantic problem here in that “must” appears in new Section (2) proposed by Amendment 107D, which one could interpret to mean must. Unfortunately, however, new Section (3) proposed by the same amendment converts “must” into “may”, because it says that if the measure is not in the public interest the “must” does not apply. That shows how difficult it is to draft Bills, particularly in circumstances such as these. I assume that lawyers will flourish when they read “must” in proposed new Section (2) and then discover that the Treasury has decided that it is not in the public interest to publish a direction, and therefore “must” no longer applies. I thought that I ought to add that to the otherwise very pleasant interchange to which I have been listening.
Lord Sassoon
“Publication of directions
(1) This section applies to a direction given by the Treasury under any of the following provisions—
(a) section 72(4);(b) section 73(5);(c) section 77(5).(2) As soon as practicable after giving the direction, the Treasury must—
(a) lay before Parliament a copy of the direction, and(b) publish the direction in such manner as the Treasury think fit.(3) Subsection (2) does not apply where the Treasury consider that publication of the direction would be against the public interest.”
“PART 6AOffences relating to financial servicesMisleading statements
(1) Subsection (2) applies to a person (“P”) who—
(a) makes a statement which P knows to be false or misleading in a material respect,(b) makes a statement which is false or misleading in a material respect, being reckless as to whether it is, or(c) dishonestly conceals any material facts whether in connection with a statement made by P or otherwise.(2) P commits an offence if P makes the statement or conceals the facts with the intention of inducing, or is reckless as to whether making it or concealing them may induce, another person (whether or not the person to whom the statement is made)—
(a) to enter into or offer to enter into, or to refrain from entering or offering to enter into, a relevant agreement, or(b) to exercise, or refrain from exercising, any rights conferred by a relevant investment.(3) In proceedings for an offence under subsection (2) brought against a person to whom that subsection applies as a result of paragraph (a) of subsection (1), it is a defence for the person charged (“D”) to show that the statement was made in conformity with—
(a) price stabilising rules,(b) control of information rules, or(c) the relevant provisions of Commission Regulation (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments. (4) Subsections (1) and (2) do not apply unless—
(a) the statement is made in or from, or the facts are concealed in or from, the United Kingdom or arrangements are made in or from the United Kingdom for the statement to be made or the facts to be concealed,(b) the person on whom the inducement is intended to or may have effect is in the United Kingdom, or(c) the agreement is or would be entered into or the rights are or would be exercised in the United Kingdom.”
“Misleading impressions
(1) A person (“P”) who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any relevant investments commits an offence if—
(a) P intends to create the impression, and(b) the case falls within subsection (2) or (3) (or both).(2) The case falls within this subsection if P intends, by creating the impression, to induce another person to acquire, dispose of, subscribe for or underwrite the investments or to refrain from doing so or to exercise or refrain from exercising any rights conferred by the investments.
(3) The case falls within this subsection if—
(a) P knows that the impression is false or misleading or is reckless as to whether it is, and(b) P intends by creating the impression to produce any of the results in subsection (4) or is aware that creating the impression is likely to produce any of the results in that subsection.(4) Those results are—
(a) the making of a gain for P or another, or(b) the causing of loss to another person or the exposing of another person to the risk of loss.(5) References in subsection (4) to gain or loss are to be read in accordance with subsections (6) to (8).
(6) “Gain” and “loss”—
(a) extend only to gain or loss in money or other property of any kind;(b) include such gain or loss whether temporary or permanent.(7) “Gain” includes a gain by keeping what one has, as well as a gain by getting what one does not have.
(8) “Loss” includes a loss by not getting what one might get, as well as a loss by parting with what one has.
(9) In proceedings brought against any person (“D”) for an offence under subsection (1) it is a defence for D to show—
(a) to the extent that the offence results from subsection (2), that D reasonably believed that D’s conduct would not create an impression that was false or misleading as to the matters mentioned in subsection (1),(b) that D acted or engaged in the conduct—(i) for the purpose of stabilising the price of investments, and(ii) in conformity with price stabilising rules,(c) that D acted or engaged in the conduct in conformity with control of information rules, or(d) that D acted or engaged in the conduct in conformity with the relevant provisions of Commission Regulation (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments.(10) This section does not apply unless—
(a) the act is done, or the course of conduct is engaged in, in the United Kingdom, or(b) the false or misleading impression is created there.”
“Misleading statements etc in relation to benchmarks
(1) A person (“A”) who makes to another person (“B”) a false or misleading statement commits an offence if—
(a) A makes the statement in the course of arrangements for the setting of a relevant benchmark,(b) A intends that the statement should be used by B for the purpose of the setting of a relevant benchmark, and(c) A knows that the statement is false or misleading or is reckless as to whether it is. (2) A person (“C”) who does any act or engages in any course of conduct which creates a false or misleading impression as to the price or value of any investment or as to the interest rate appropriate to any transaction commits an offence if—
(a) C intends to create the impression,(b) the impression may affect the setting of a relevant benchmark,(c) C knows that the impression is false or misleading or is reckless as to whether it is, and(d) C knows that the impression may affect the setting of a relevant benchmark.(3) In proceedings for an offence under subsection (1), it is a defence for the person charged (“D”) to show that the statement was made in conformity with—
(a) price stabilising rules,(b) control of information rules, or(c) the relevant provisions of Commission Regulation (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments.(4) In proceedings brought against any person (“D”) for an offence under subsection (2) it is a defence for D to show—
(a) that D acted or engaged in the conduct—(i) for the purpose of stabilising the price of investments, and(ii) in conformity with price stabilising rules,(b) that D acted or engaged in the conduct in conformity with control of information rules, or(c) that D acted or engaged in the conduct in conformity with the relevant provisions of Commission Regulation (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments.(5) Subsection (1) does not apply unless the statement is made in or from the United Kingdom or to a person in the United Kingdom.
(6) Subsection (2) does not apply unless—
(a) the act is done, or the course of conduct is engaged in, in the United Kingdom, or(b) the false or misleading impression is created there.”
“Penalties
(1) A person guilty of an offence under this Part is liable—
(a) on summary conviction, to imprisonment for a term not exceeding the applicable maximum term or a fine not exceeding the statutory maximum, or both;(b) on conviction on indictment, to imprisonment for a term not exceeding 7 years or a fine, or both.(2) For the purpose of subsection (1)(a) “the applicable maximum term” is—
(a) in England and Wales, 12 months (or 6 months, if the offence was committed before the commencement of section 154(1) of the Criminal Justice Act 2003);(b) in Scotland, 12 months; (c) in Northern Ireland, 6 months.”
“Interpretation of Part 6A
(1) This section has effect for the interpretation of this Part.
(2) “Investment” includes any asset, right or interest.
(3) “Relevant agreement” means an agreement—
(a) the entering into or performance of which by either party constitutes an activity of a kind specified in an order made by the Treasury, and(b) which relates to a relevant investment.(4) “Relevant benchmark” means a benchmark of a kind specified in an order made by the Treasury.
(5) “Relevant investment” means an investment of a kind specified in an order made by the Treasury.
(6) Schedule 2 to FSMA 2000 (except paragraphs 25 and 26) applies for the purposes of subsections (3) and (5) with references to section 22 of that Act being read as references to each of those subsections.
(7) Nothing in Schedule 2 to FSMA 2000, as applied by subsection (6), limits the power conferred by subsection (3) or (5).
(8) “Price stabilising rules” and “control of information rules” have the same meaning as in FSMA 2000.
(9) In this section “benchmark” has the meaning given in section 22(6) of FSMA 2000.”
“Affirmative procedure for certain orders
(1) This section applies to the first order made under section (“Interpretation of Part 6A”).
(2) This section also applies to any subsequent order made under that section which contains a statement by the Treasury that the effect of the proposed order would include one or more of the following—
(a) that an activity which is not specified for the purposes of subsection (2)(a) of that section would become one so specified,(b) that an investment which is not a relevant investment would become a relevant investment;(c) that a benchmark which is not a relevant benchmark would become a relevant benchmark.(3) A statutory instrument containing (alone or with other provisions) an order to which this section applies may not be made unless a draft of the instrument has been laid before Parliament and approved by a resolution of each House.”
“Consequential repeal
Section 397 of FSMA 2000 (which relates to misleading statements and practices and is superseded by the provisions of this Part) is repealed.”
Lord Sassoon
“(fa) provide for any provision of sections 162 to 165 and 174A of CCA 1974 which relates to—(i) the powers of a local weights and measures authority in Great Britain or the Department of Enterprise, Trade and Investment in Northern Ireland in relation to compliance with any provision made by or under CCA 1974, (ii) the powers of such an authority or that Department in relation to the commission or suspected commission of offences under any provision made by or under CCA 1974, (iii) the powers that may be conferred by warrant on an officer of such an authority or that Department, or(iv) things done in the exercise of any of those powers,to apply in relation to compliance with FSMA 2000 so far as relating to relevant regulated activities, in relation to the commission or suspected commission of a relevant offence or in relation to things done in the exercise of any of those powers as applied by the order;”
(a) “relevant regulated activity” means an activity that is a regulated activity for the purposes of FSMA 2000”
“(b) “relevant offence” means an offence under FSMA 2000 committed in relation to such an activity.”
Lord Mitchell
“Power of the FCA to make further provision about regulation of consumer credit
(1) The FCA may make rules or apply a sanction to authorised persons who offer credit on terms that the FCA judge to cause consumer detriment.
(2) This may include rules that determine a maximum total cost for consumers of a product and determine the maximum duration of a supply of a product or service to an individual consumer.”
Lord Mitchell
My Lords, yesterday I had tea with a dear friend here in your Lordships’ House. Unsurprisingly, the subject of payday loans came into the conversation. He told me about his son, who has mild attention deficit disorder, is frequently unemployed and had taken out two payday loans. The loans were for £800. His son could not pay them back and, to cover his embarrassment, rolled them over several times. In a few months, the amount due to be repaid had escalated to £5,000. My friend reluctantly had to settle the bill. That is the essence of the amendment that I put down at Committee stage, and which I have put down today. It is this that we are seeking to control.
Ten years ago, this amendment probably would not have been tabled, but today it is very much of the hour. The fact is that legalised loan-sharking, or payday lending—call it what you will—has gone viral. It is out of control, dangerous and is causing great distress to many vulnerable people. Two developments have come together to cause the rapid growth of this lending industry. The first is the dreadful state of the economy. People are desperate for money and they will take it from whatever source they can, whatever the price. Take a walk down any high street, particularly in deprived areas—payday loan shops are abundant. Recently, I went to Walthamstow with my honourable friend Stella Creasy MP and my right honourable friend Ed Miliband. There, on the high street, we saw more than 15 money shops of one form or another. Business was brisk.
The second development has been the astronomic growth of online lending. As I said in Committee, I went on to one of the most successful websites and what struck me was the slickness of the process: just some cursory information to fill in and the money would have been in my bank in 15 minutes. It is simply too easy. A straitened economy and the ease of usage of online lending have combined to create this booming business sector.
One online company—Wonga—is projected to be making more than £70 million profit this year, probably valuing the company well in excess of £1 billion if it were to go public. The annual size of the payday lending industry is at least £2 billion; it is growing at a fast clip and in time will become a major source of consumer credit in this country. I do not understand why this Government—who are determined to reduce personal indebtedness at the macro level—are at the same time allowing this sector to grow unchecked. I would have thought that both parties opposite would be encouraging me on this amendment, rather than opposing this very important piece of legislation. Perhaps the Minister will have some good news for me when he replies.
Payday loan customers, by their very nature, are people with very low credit ratings, who have no other options open to them. They borrow money on an unsecured basis at extortionate rates of interest. Does this not strike a familiar chord? Uncontrolled lending to people who are barely able to meet their repayments in a marketplace that is expanding at a massive rate: does that not sound like what happened in the United States with sub-prime lending? Sub-prime was off everybody’s radar screen until it hit the US and world economy like a hurricane. It was the initial cause of the financial crash of 2007 and few saw it coming. If Her Majesty’s Treasury does not buy into the moral repugnance that most of us feel about the dangers of payday lending, at least it should be on its guard about the economic consequences of this ticking bomb.
However, it is the moral argument that concerns us this afternoon. I am delighted that the right reverend Prelate the Bishop of Durham has added his name to this amendment. He has spoken previously on this subject and I am sure he will be making his views very clear. I am pleased that the noble Baronesses, Lady Howe of Idlicote and Lady Grey-Thompson, have also added their names to this amendment. Both have long records of standing up for the vulnerable and I await their speeches with anticipation.
I want to make one point very clear. This amendment does not seek to ban payday lending; it seeks to give the FCA the power to cap interest rates when they are causing consumer detriment. It is a “may”, not a “must”. It puts the responsibility squarely into the hands of the FCA. I will go further: we need payday lenders; they fulfil a vital role. There are many people who cannot get credit from traditional sources, and without legalised payday lenders, their alternative is the backstreet loan sharks whose penalty for non-payment is often pretty brutal.
Payday lenders fill a vital gap, but they need to be controlled. Interest rates charged by many payday lenders go well beyond the obscene. Any lender is bound by law to display the annual percentage rate—the APR—that it is charging. In many cases, payday lenders are charging an APR in excess of 4,000%. These lenders avoid the use of the term APR whenever they can; they say it is not appropriate for a short-term loan. I have heard them say to me that quoting APR on a payday loan is as relevant as quoting APR if you hire a car for a week or stay in a hotel for a similar period. We must not buy this argument and we must not let them get off the hook. Hiring a car or staying in a hotel is a rental of an asset and its associated services. It incurs no repayment of principal and is not a loan.
Payday lenders say that quoting APR on a short-term loan is inappropriate—how can you use the word “annualised” to measure something that lasts just a few weeks? That is exactly what the finance industry does every day. If one bank borrows £100 million from the money market on an overnight basis, the charge is quoted as an annualised interest rate. Stating that APR is the wrong measure is simply disingenuous. APR is there for an express purpose and in my opinion it should be included in all advertising, but that is a debate for another time.
Last Sunday, we saw an interesting development. In an article in the Sunday Telegraph, Wonga was reported as saying that its rate of interest is equal to 1% per day. This is a big change from a company which has previously refused to admit that its repayments should be quoted as a rate of interest. What it says is true—it does charge 1% per day, or thereabouts—but it is playing games. If you borrow £100 from Wonga for seven days, the simple interest that you pay will be 1.82% per day. If you borrow £100 for a month, the simple interest will be 1.21% per day. For its maximum of 43 days, it will be 1.16% per day. The game it is playing is that this is calculated on the basis of simple interest, but interest is seldom calculated on a simple basis. The accepted measure is of course compound interest. A loan that costs just 1% per day becomes 4,000% per annum when aggregated in compound interest terms, which is exactly what APR is all about.
Lord Sassoon
My Lords, it may be helpful to the House if I speak early in this debate. The amendment explores how the FCA will regulate the payday lending sector. The Government have been clear from the outset that the FCA should be able to take action to address the problems that are rife in the payday loans sector and, indeed, in the consumer credit sector more widely. That is why the Bill in its current form already empowers the FCA to make rules regarding the regulation of payday loans when credit regulation is transferred to the FCA in 2014.
I welcome the opportunity to debate this important issue. The Government are, like all of us, concerned about the appalling behaviour of some firms in this sector and the harm that vulnerable consumers suffer as a result. I shall say up front that, if the noble Lord agrees to withdraw this amendment, I will table a government amendment for debate at Third Reading that will address the issues raised by the noble Lord. The Government will go further, not only embedding stronger payday loan regulation in primary legislation but ironing out the potential weaknesses that they see in today’s amendment.
I cannot accept the noble Lord’s amendment as I think that the Government can, with the additional resources provided by officials and parliamentary counsel, improve on it in a number of ways. But, first, allow me to put on record three important points about the problems in the payday loans sector and how the Government will ensure that the FCA will be able to address these problems. Just last week, the OFT set out a wide range of concerns about detrimental practices in the payday loans sector, from firms failing to perform adequate checks that customers can afford a loan to a lack of forbearance when consumers are in financial difficulty. While restrictions imposed on the cost and duration of credit may address some of these problems, it is clear that regulation of the high-cost credit market as a whole needs to improve. Compared to the current regulatory regime under the OFT, the FCA will have a broader and more effective toolkit to monitor and tackle developments in the market and to supervise practice among firms. Its consumer protection objective provides the FCA with the mandate to use those powers and tools.
Secondly, capping the cost of credit and the number of times the loan can be rolled over is a major market intervention. It could bring huge benefits for consumers, as a recent study in Japan has indicated, but experience in Germany and France has shown that there can be equally momentous unintended consequences, including reduced access to credit for the poorest and most vulnerable consumers, even driving them to illegal loan sharks. These international lessons demonstrate that we need robust evidence to support any decision to introduce such a cap.
As noble Lords may be aware, the Department for Business, Innovation and Skills has commissioned research from Bristol University into the impact of a cap on the total cost of credit. This is one of the most comprehensive pieces of research undertaken into the UK high-cost credit market. I am pleased to confirm that the research will be published in the next few weeks and will enable the Government and, in future, the FCA to take an evidence-based approach to regulating the high-cost credit market and, in particular, to assess the pros and cons of a cap on the cost of credit.
However, we need to ensure that the FCA grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and to ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution. In this, I am entirely in agreement with the noble Lord. So, while I support the spirit of the amendment, I cannot accept it as it is framed as it may have unintended consequences and introduce loopholes which could be exploited by unscrupulous firms. For example, the amendment refers to the,
“maximum duration of a supply of a product or service”.
Firms might offer an ostensibly new product or agreement in order to circumvent the cap on the duration of the agreement. The amendment also focuses on the terms of the credit agreement and does not pick up charges imposed under connected agreements, which may often be significant. Again, this would open up a potential loophole for firms to exploit.
However, the Government believe that there is scope to go further than this amendment and to put in place stronger, automatic consumer protections and make the deterrent effect more robust by providing that a breach of these rules would make the agreement unenforceable by the lender. I will draft an amendment and discuss it with the noble Lord, Lord Mitchell, to ensure that it fully meets his concerns, as I believe it will—I believe it will go further—and I can confirm explicitly that it will cover both the total cost and total duration of credit.
Lord Sassoon
If the noble Lord will permit me, I will allow him to intervene in a moment, but let me conclude my argument.
Our objectives here are the same: they are to ensure that consumers of financial services have access to credit when they need it and at a price they can afford; and to ensure that the regulator is under a clear obligation, and fully empowered, to ensure that consumers are protected. I hope and expect, therefore, that when the noble Lord, Lord Mitchell, sees the draft amendment he will feel able to add his name to what the Government propose.
Lord Peston
What the noble Lord said is extremely welcome and conciliatory to all of us. However, he left out one part: when will the rest of us get to see this draft amendment—I believe it is proposed that Third Reading should be next Wednesday—so that we, too, can scrutinise it to see whether it meets the requirement? One of the most compelling parts of the noble Lord’s argument was how difficult this area is—I thought it was all very simple—and he outlined a series of problems which he claims that he and his officials will solve. Has he actually solved them? Does the draft amendment exist and will we see it no later than, say, this Friday?
Lord Sassoon
I assure the House that I will get the amendment drafted as soon as we possibly can. I have given as clear a commitment as I can give to the House that the amendment will cover the two specific points that the noble Lord, Lord Mitchell, and the other noble Lords who have put their names to the amendment are looking for. However, we want to go further. If we are going to do this, we should get it right. This is a critical area which needs cleaning up and I am fully confident that when your Lordships see the draft amendment it will command the acceptance of the House.
In conclusion, I hope that the noble Lord will feel able to withdraw his amendment. I look forward to further debate on this important issue at Third Reading and on the stronger and more effective amendment that we will bring forward.
Lord Kirkwood of Kirkhope
My Lords, if I may interrupt the exchanges between the two Front Benches, this is a very welcome development from the Government. I absolutely support the course of action that is being taken and I can assure the noble Lord, Lord Mitchell, that I have the same concerns as him in terms of the argument he mounted, but this is a more sensible way to proceed.
I was pleased that the noble Lord, Lord Mitchell emphasised the fact that access to credit for low-income households is an important part of some of the changes we are introducing to the benefit system over the next five to 10 years. As we know, because colleagues have had important discussions about this matter, one of the changes brought into being by universal credit is that credit for all benefits taken together is paid, not weekly or fortnightly—as we have been used to in the past—but monthly. It will be a dramatic change for many low-income households that are used to weekly or fortnightly management of cash budgets in order to get through payment of their weekly responsibilities without getting into debt. When universal credit is fully rolled out in 2018—so we have a little time to get this right—I am absolutely certain that families will need access to small amounts of money to see them through when benefits either run out or, as I think is inevitable, fail to be paid. At the moment, if you do not get your housing benefit, your jobseeker’s allowance can tide you through. If you do not get your universal credit, you get nothing. If you get nothing for one month it is really serious; if you do not get the benefit paid for two months, you are in penury. Controlled access to this kind of loan is an important part of the process and we must not throw the baby out with the bathwater.
I know, as well as anybody in this House, the effect of loan sharks and the many sharp practices which must be controlled. What I cannot understand—this is the reason why I rose at this moment, to say to my noble friend that his suggestion is very welcome—is why we do not have a statutory code of conduct for licensed practitioners who are members of the Consumer Finance Association. If they had licences and they breached the code of conduct, whether it was about inappropriate, usurious rates of interest or criminal methods of collecting outstanding amounts of money, their licence would be withdrawn. I am just about to finish a period as a lay member of the General Medical Council so I know what a regulator can do and what fitness to practise means to a medical practitioner who is on the shady end of clinical practice, and it works.
In taking away this amendment, I hope the noble Lord, Lord Mitchell, will look at the Bristol work, which is a serious piece of work—I know because I have checked—that will contribute a lot to the debate and which many colleagues in this House might like to get access to before they make a final decision on this matter. I hope that he will weigh that in the balance. I hope the Minister, when he comes to recast the amendment—bilaterally, I trust—will think seriously about whether there could be some way of at least not ruling out the FCA adopting a statutory code of practice which would meet all the legitimate concerns that are coming from all sides of the House. I hope common sense will prevail and I hope that the noble Lord, Lord Mitchell, feels able, in all conscience, to withdraw the amendment. I can assure him that there will be as much pressure put on from this side of the House as is coming from that side to get this thing right before the Bill is passed.
The Lord Bishop of Durham
My Lords, I welcome with other Members of the House the statement made by the noble Lord, Lord Sassoon. One of the points made by the noble Lord, Lord Mitchell, in his excellent speech was about the dysfunctionality of the market. As was said, interference and capping of interest rates normally drive people towards loan sharks with unintended consequences of a very serious order, as we see in many parts of the country at the moment. However, if you look at the profits being earned in this market, it is clear that the barriers to entry are so high that there is absolutely no way in which people can come in and start shaving off the abnormal rates being achieved through participation in this market. If it was working, the interest rates would drop—it is as simple as that. The rates are clearly usurious—to use an old-fashioned expression. It used to be said in the old days that you could not take away people’s beds and cloaks because they were essential for life—that is the Hebrew Scriptures; today, equivalent things are being taken away as a result of those very high rates of interest. It is a moral case, and it is bad for the clients and bad for all of us in this country when it is permitted to happen.
I hope that over the next few years, thanks to two other amendments that have been agreed by the Government over the past few weeks during the Report stage—one puts an obligation on the FCA to look at access to finance in areas of deprivation and the other, through other means, will enable the FCA to know exactly what is happening in terms of lending in areas of deprivation—we will put together in this House a package of measures that will enable this market to be effective. But that will take time. The proposed amendment that will come next week will be permissive, not obligatory, and will enable regulatory authorities to ensure that, in the interim, there is not this abnormal rate seeking which has been so damaging in so many of our areas, including many in my own diocese.
Baroness Howe of Idlicote
My Lords, I thank the noble Lord, Lord Sassoon, for what he has said; it sounds like an interesting and potentially successful solution, but I am still quite confused as to whether we will get to the right conclusion on time. I thank the noble Lord, Lord Mitchell, and congratulate him on tabling his amendment, to which several of us have added our name. I am glad to have been able to hear the comments of the right reverend Prelate the Bishop of Durham, because he gained great expertise in financial matters in his career before he joined the Church.
There has been plenty of support for the amendment of the noble Lord, Lord Mitchell, from other areas around the country, from councillors and from MPs. For my own part, having sat through the Welfare Reform Bill, with its drastic consequences for the poor and disabled, and subsequently witnessed for the same group the extent to which voluntary legal aid and advice services were being curtailed so that they were not getting the help that they had had in the past, my first reaction to the amendment was that it was far too weak. However, I have listened to what people have said and accept that consumers without bank accounts or with no credit history—that is some 25% of credit users and 23% of payday loan users, I was amazed to find—have no choice when facing a financial crisis but to resort to these loans. Nor should we forget, as has been pointed out by the noble Lord, Lord Mitchell, and by Which? reports, that some 78% of payday loans are used for basic essentials such as food or household bills. So if these organisations—I am tempted to call them by less pleasant names—are to stay, undoubtedly the amendment of the noble Lord, Lord Mitchell, will be a huge help. It may be that it will be a reserve weapon, as it were, but it will nevertheless be a very important weapon. I hope that I can feel confident at the end of our discussions. I want reassurance from the noble Lord, Lord Mitchell, that he is sufficiently satisfied with what he has heard, that otherwise he will bring back further amendments at a later stage, and that that will be acceptable to the whole House.
Lord Davies of Stamford
My Lords, it is a pleasure to speak after the noble Baroness, Lady Howe. Like her, I felt that the amendment of the noble Lord, Lord Mitchell, was the very least that we should be doing in this area and I would have been happy with something even stronger. I congratulate her, my noble friend Lord Mitchell and the right reverend Prelate on their initiative in bringing this matter before the House and, indeed, before the country.
I am going to say something which I think needs to be said this afternoon and is probably best said from the Back Benches—that is, I think the Government should be hanging their head in shame. They have had many months to prepare the Bill and bring it forward and have not brought forward the clause that they are now promising, although they had every opportunity to do so. It is only because of the determination and initiative of my noble friend and his colleagues and the great moral force brought to this matter by the right reverend Prelate that, at the last minute, the Government have decided that they have no alternative but to do the right thing for once. That needed to be said; this has been a very dramatic afternoon when we have seen a U-turn.
This evil we have been talking about—and it is an evil—has, of course, got worse, for the reasons given by my noble friend, over the past two years, but it has been with us for a long time. It is an evil that I was well aware of when I was a Member of the House of Commons; most people with constituency experience came across it. The normal trick of loan sharks is to persuade people to borrow so much money at such a high rate of interest that they can never get around to repaying the principal because any cash they happen to have simply goes to servicing the debt by paying the interest. Essentially, they lend someone £500 and have their thugs go around every week, or every two weeks, collecting at their door whatever the poor family concerned can pay—£20 here, £30 there—which all goes towards the interest. The interest piles up and the principal is never going to be repaid but the lender makes a return on his capital of hundreds, maybe thousands of per cent every year.
I remember coming across a particularly nasty scam in my constituency, which I fear may still be going on. It is the targeting of people who have some equity in their house but very low cash flow in relation to their debts and persuading them to consolidate their unsecured debt into a secured loan, something one should never do, in principle, except in very exceptional circumstances. These people are, generally, financially very naive and agree to do it; they take out a secured loan of whatever amount, but they can never afford to service it at an APR of, perhaps, 20%. The lender knows perfectly well that they will default, that they do not have the cash flow to service the loan, but he has security of several thousand pounds of equity in the house and he puts into the loan agreement enormously expensive penal clauses, so that, in the event of default, thousands of pounds will be paid by way of compensation or penalty interest. He knows, of course, that the borrower is going to default; he hopes that the borrower will default at the first interest payment date, not the second or the third, because that way he turns his capital over more quickly. As soon as the borrower defaults the lender forecloses on the loan and takes all his additional thousands of pounds in penalty interest, a very large slice of the remaining equity in the house. It is extraordinarily cynical, extraordinarily cruel, and this kind of scam and others like it thrive in what we like to think of as our civilised and humane society.
We need to do something about this very rapidly indeed. What has been put forward this afternoon is an absolute minimum; I would have been much happier with something along the lines of the anti-usury laws. I am so glad that the right reverend Prelate is a churchman and not afraid to use old-fashioned but eternal concepts such as usury. I would have been happy with the sort of anti-usury laws that some American states have. We are not going to go that far this afternoon. I hope that the government amendment lives up to the promises that have been made this afternoon by the Minister.
Lord Flight
My Lords, first, I congratulate the noble Lord, Lord Mitchell, on raising this issue and, as a result, getting something done about it, and on his research in the territory. Also, I greatly welcome the Minister’s response and I look forward to government proposals that address the problem.
I shall make one or two focused points. The right reverend Prelate the Bishop of Durham made the point that we used to have anti-usury laws. We used to have a money-lending licence. When I started my career, there were rules about the maximum rate of interest that you could charge. All that had been in place going back more than 100 years. I assume that it all disappeared with the big bang, but it is a failure of regulation that the problem has been growing and getting worse with technology, but no regulator, as far as I am aware, has been suggesting to this Government or the previous Government that it needed addressing.
It is in part for that reason that I have reservations about letting the regulator just get on with running it. There need to be written in law caps on the maximum rate of interest. They could be related to the rate of inflation, to deal with that obvious problem. I do not trust the regulator to get to grips with the problem by itself.
My next point is that it illustrates the shame that we go on turning generation after generation out of schools who are financially illiterate, who do not understand what they are taking on. I remember talking to a young lady at university and asking how she was going to fund herself. She said that she had so much by way of a student loan and the rest on a credit card. I said, “How on earth are you going to pay back the credit card?”. She said, “Oh, do you have to do that?”. It is astonishing that people simply do not understand finance. Until we get financial literacy into the national curriculum, people will go on being ignorant and unable to look after themselves adequately.
It is a moral issue. I object to usury. I am sure that if my noble friend Lady Thatcher were in the Chamber, she would speak more strongly than anyone in objection to usury. We dealt with it in the past; let us get on with dealing with it again.
Baroness Coussins
My Lords, I add my support to the amendment introduced by the noble Lord, Lord Mitchell. I declare an interest as president of the Money Advice Trust, which is a charity that helps people across the UK to manage their debts. It does that by offering free advice through the National Debtline and by supporting advisers in the free advice sector.
So far this year, the National Debtline has taken more than 15,000 calls already from people struggling to repay payday loans. In the whole of 2011, it took 10,000 calls for help with payday loans, so that represents a staggering growth rate. Indeed, over the past two years, there has been an increase of 268% in the number of callers asking for help on payday loans. A telephone survey conducted by National Debtline also showed that the OFT guidance is not being followed, notably the part that states that creditors should make a reasonable assessment of whether a borrower can afford to meet repayments in a sustainable manner. The same survey showed that 66% of clients said that their lender had not conducted an affordability assessment.
This is not the right time to go into detail about what the FCA rules should be, but I suggest that they should certainly include a mandatory breathing space, with a freeze on interest and charges, if people are experiencing financial difficulty and have notified their payday lender that they are seeking support from a debt advice agency. In practice, by contrast, there is evidence of letters and requests to cancel CPAs or to freeze interest and charges being ignored, and debt advice agencies bypassed. The recent Citizens Advice conference highlighted examples where payday lenders had routinely refused to engage with advice agencies, had not answered letters, had refused to freeze charges and had not stopped CPAs even when requested to do so. I have sat in as an observer on calls to the National Debtline and witnessed the distress of people in debt as a result of payday loans. The powers for the FSA being sought by this amendment would be a small but very important contribution to the prevention of yet more unaffordable debt that ruins lives.
Baroness Kramer
My Lords, almost without exception this House has spoken and is speaking with one voice on this issue. In the United States it is quite common, when an important piece of legislation goes through, to name it after its sponsors. Whether this is the Mitchell-Sassoon amendment or the Sassoon-Mitchell amendment, it will have a very big impact on people’s lives.
However, it is important that the FCA, in the language that is already in the Bill, has the powers to do the acts for which the amendment calls. An amendment such as this ensures that the point is highlighted—that it is understood and not lost—because the FCA will have a wide range of areas to address. In the Bristol study that was commissioned and which we will be reporting in the next few weeks, the FCA and the Government demonstrated a very high level of concern around this issue, and the need to get underneath it to really understand the dynamics.
The importance of ensuring that the clause is an enabling one was well illustrated by the noble Baroness, Lady Coussins, a moment ago. There are many very complex issues around this that will need very direct attention. The devil will be in the detail to ensure that the amendment is effective in the way that the House desires, and that it does not create the opportunity for loopholes. We are talking about an industry that will game legislation if it has the opportunity.
I will pick up the issue that was addressed by the right reverend Prelate the Bishop of Durham, because it is hugely important. Almost all of this will be for naught if we do not ensure that there are appropriate sources of credit for those who need it at a reasonable price. The issue that the House is facing today has been neglected over decades; it is a challenge that the Government are picking up. It means that the clauses have to stand together with those that lower barriers to entry and which enable the community—whether social enterprises, charities, businesses, local authorities or whatever—to come together and take the initiative to build up the sources of finance that exist in many other countries.
The noble Lord, Lord Mitchell, talked about the constraints on payday lenders in the United States. One of the most powerful constraints is that there are community banks where individuals can get credit on reasonable terms. That is a far stronger constraint on any payday lenders in the United States than legislation could be. That is what we need here: the opportunity for market constraint. However, I congratulate all sides on coming together to be effective for some of the most vulnerable people in our community.
Lord Kennedy of Southwark
My Lords, I, too, congratulate my noble friend Lord Mitchell, the right reverend Prelate and other noble Lords for bringing forward this amendment today. I also pay tribute to the Member for Walthamstow in the other place, who has done more than anybody else to bring forward this issue. I would like clarification from the Government on the amendment that they will bring forward at Third Reading. Will it enable interest rates to be capped? That is key here; the cost of the charges and the interest rates levied are the nub of the issue. If that matter is not dealt with, we will unfortunately be back here at Third Reading and all sides will be very cross about it. Will the Minister clarify that?
The Lord Bishop of Ripon and Leeds
My Lords, I share the gratitude of the House to the noble Lord, Lord Mitchell, to my right reverend friend the Bishop of Durham and to others for bringing forward the amendment, and to the Minister for his response. I could talk about examples in Leeds very similar to those which people have raised. However, I will raise two particular points. The one point at which I was concerned at the Minister’s response was when he talked about the danger—which I acknowledge—of driving people into the murky world of illegal loan sharks. That is true and it can happen, but it is very important that we do not allow it to dominate the way in which we establish these provisions.
Where illegal lending is taking place, it needs to be dealt with by prosecution. We need to encourage the police to take action. That should not prevent us from being very firm in the way in which we—the law—control the debt industry. The Minister cited Japan as a good example of a society where that control appears to have worked. It would be interesting to see what contrasts there are between Japan, France and Germany, to ensure that we provide proper control and do not give in to illegal loan sharks because of their power.
I am grateful to the noble Baroness, Lady Kramer, for raising the point that there needs to be credit available. One thing that I have not heard very much about in these debates, although we talked about it often in the past, is the role of credit unions. Those unions seek to tackle debt but their growth has been sadly limited in this country and they appear to be unable to provide the necessary cover to give security to those struggling in our society, although the work that they do is excellent. I hope that as we go forward in discussing the issue of debt, we shall encourage credit unions to play a much greater part in providing a way forward and one answer to the major issues that we face.
Baroness Grey-Thompson
My Lords, I very much welcome the words of the Minister as I, too, put my name to the amendment. It is essential that we get this right because it is about people who are already in very difficult financial situations. The UK has one of the largest consumer lending markets in Europe, alongside those of France and Germany, but they have their rates capped. I will say a few words on the scale of the issue, which is important. There are 1.75 million people without transactional bank accounts and 7.7 million accounts without credit facilities, so it is very easy to see why people resort to payday loans.
One of the starkest things I read was that between April and May 2011 there was a 58% rise in people applying for payday loans via moneysupermarket.com, which means that an estimated 4 million people are using these loans, with the amount advanced exceeding £2 billion per year. In 2004, that amount was £100 million. Nobody wants to see more people in poverty. The noble Baroness, Lady Kramer, is absolutely right that the devil is in the detail. I look forward to the response of the noble Lord, Lord Mitchell.
Lord Glasman
My Lords, I will declare an interest. I was involved in the anti-usury campaign with London Citizens after the crash of 2008. I very much want to acknowledge the work of Stella Creasy in intensifying and continuing the campaign, which was based on the common good—on an alliance between the secular and those of faith to talk about a basic issue. Before we get too carried away, I will say that not since 1854 have there been any statutory constraints on interest rates. Everything else was voluntary but, in 1854, Bentham’s influence led to that. It followed the changes in abolishing usury laws in the Long Parliament in the 1630s, so we have to say that we are at an absolutely exceptional moment. There is a consensus on a cap on interest rates, which has not existed in our country for 400 years.
What it brings to our attention, and what I wish to share in honouring my noble friend Lord Mitchell for raising this historic amendment and the Government for responding to it, is the terrible condition of the poor. To quote someone who has not always been popular in this House, the Pope, usury is a way in which the rich prey upon the misfortune and troubles of the poor. I want to share with your Lordships that this is urgent; it is happening again and Christmas is coming. Overwhelmingly, it is not the unemployed but the working poor who are taking these loans.
I will raise two issues for future discussion, as we have reached such a fantastic moment of consensus. The first is in relation to credit unions, which the right reverend Prelate the Bishop of Durham mentioned, and regional banking. The proposal that London Citizens put forward, which I do not think sounds outlandish now, is that 5% of the bailout should be used to endow local, non-usurious lending institutions. The way in which the burdens of the crash have fallen on the poor is indecent, and we have to look at credit arrangements. I acknowledge what the Government have done in freeing up credit unions, but they do not have adequate resources or reach, and the establishment of new, non-usurious lending institutions in the regions of our country is the only way forward.
The other important issue—if I might interrupt the Minister’s conversation—is that data show that there is more illegal lending in Britain than in Germany. There is a 20% cap in Germany. I am not going to be bounced into any position, but it is still the case that if you put any constraints on the power of money, it automatically leads to illegal lending.
The other thing that we need to address is a living wage. When people work, they should be paid enough not to have to go into poverty. We have to build on this and intensify the conversation and the common good between secular and faith institutions. I commend the lead taken on this because the fundamental issue of our time is that the biggest growth area in our economy is debt, and overwhelmingly it falls on poor families. We need to address it as a matter of intensity and urgency.
Lord Ramsbotham
My Lords, I support the noble Lord, Lord Mitchell, and all those who put their names to the amendment. I hope very much that another government ministry will support this amendment—the Ministry of Justice. Nowhere is the misery caused by these loan sharks felt more keenly than by the prison population and their families. The damage done to potential rehabilitation suggests to me that if the MoJ is serious about the “rehabilitation revolution” that it commends, it should support the amendment to the hilt.
Lord Hodgson of Astley Abbotts
My Lords, it is greatly to the credit of the noble Lord, Lord Mitchell, that he has not ducked the challenge of balancing the accessibility and availability of credit with its affordability and the terms on which it is made available. A number of noble Lords have made it clear, as indeed has the noble Baroness, that the availability and accessibility of credit is important. My noble friend on the Front Bench made a powerful intervention; he indicated a number of ways in which the amendment could be got around because of the gaps in it. It is important that we get this right and make it bullet-proof. For example, some of his thoughts about—if I heard him right—making a contract unenforceable under certain circumstances would add a great deal of power to this. I hope very much that we will be able to have a period of reflection and ensure that the unintended consequences that could come about, as evidenced by my noble friend’s speech, are avoided and we get something that stands the test of time.
Lord Barnett
My Lords, I have a couple of points. Throughout the Bill, my noble friend Lord Peston and I have constantly raised the question of “may” and “must”. That question arises in this amendment, too. The amendment, moved so wonderfully by my noble friend, states:
“The FCA may make rules”.
That could be “must” because the amendment is already constrained by the end of that sentence,
“on terms that the FCA judge to cause consumer detriment”.
That is why it is so important, as my noble friend Lord Peston said, that we see the Minister’s amendment as soon as possible. I am not a lawyer but I do not distrust them; however, the lawyers who advise Governments can make mistakes, which are usually resolved by lawyers on both sides eventually having an argument, at great cost to everyone including the courts, until someone decides in court who was right. On this occasion we have to try to get it absolutely right. I regard what the Minister said as very helpful.
My noble friend said that we must see the amendments as soon as possible. However, nothing is built in stone. No law states that we have to have Third Reading next Wednesday. If necessary it could be delayed a little. The important thing is to get it right. I hope that the noble Lord, Lord Sassoon, will consider having a discussion with the authorities, or with the Leader of the House or whoever, about whether, if we do not get sight of the amendments as soon as possible, we should delay Third Reading until we are sure that we have got it right. That is crucial. I hope that the noble Lord, Lord Sassoon, can inform us that he will do that.
Lord Mitchell
My Lords, I thank all noble Lords who took part in this discussion, particularly those who are co-signees of the amendment. It has been a powerful and focused debate and I hope that the payday lending companies are listening. My guess is that they are glued to their screens.
The Minister has made a welcome statement of intent and to be honest that is as much as we could have hoped for. With the Government’s cast-iron acceptance of the principle of my amendments, as well as the effective force of veto that the three other signatories to the amendment will have over the revised amendment at Third Reading, this issue is now where it should be: beyond party politics. The winners are those who have tirelessly campaigned for this change in the law. I must mention my honourable friend Stella Creasy MP, who has been relentless in her pursuit of justice.
The other most welcome winners are those who live in the hellhole of grinding debt. Their lives will become a little easier. The losers are clearly the loan sharks and the payday lending companies. They have tried every trick in the book to keep this legislation from being approved and they have failed. Their failure is our victory. On the basis of the Government’s assurances, I beg leave to withdraw the amendment.
Lord Sassoon
“Payment to Treasury of penalties received by Financial Services Authority
(1) The Financial Services Authority (“the FSA”) must in respect of its financial year beginning with 1 April 2012 and each subsequent financial year pay to the Treasury its penalty receipts after deducting its enforcement costs.
(2) The FSA’s “penalty receipts” in respect of a financial year are any amounts received by it during the year by way of penalties imposed under FSMA 2000.
(3) The FSA’s “enforcement costs” in respect of a financial year are the expenses incurred by it during the year in connection with—
(a) the exercise, or consideration of the possible exercise, of any of its enforcement powers in particular cases, or (b) the recovery of penalties imposed under FSMA 2000.(4) For this purpose the FSA’s enforcement powers are—
(a) its powers under any of the provisions mentioned in subsection (5),(b) its powers under any other enactment specified by the Treasury by order,(c) its powers in relation to the investigation of relevant offences, and(d) its powers in England and Wales or Northern Ireland in relation to the prosecution of relevant offences.(5) The provisions referred to in subsection (4)(a) are the following provisions of FSMA 2000—
(a) section 56 (prohibition orders),(b) section 63A (penalties relating to performance of controlled functions without approval),(c) section 66 (disciplinary powers in relation to approved persons),(d) section 87M (public censure of issuer),(e) section 89 (public censure of sponsor),(f) section 89K (public censure of issuer),(g) section 91 (penalties for breach of Part 6 rules),(h) section 123 (penalties in case of market abuse),(i) section 131G (short selling etc: power to impose penalty or issue censure),(j) sections 205, 206 and 206A (disciplinary measures),(k) section 249 (disqualification of auditor for breach of trust scheme rules),(l) section 345 (disqualification of auditor or actuary), and(m) Part 25 (injunctions and restitution).(6) “Relevant offences” are—
(a) offences under FSMA 2000,(b) offences under subordinate legislation made under that Act,(c) offences falling within section 402(1) of that Act, and(d) any other offences specified by the Treasury by order.(7) The Treasury may give directions to the FSA as to how the FSA is to comply with its duty under subsection (1).
(8) The directions may in particular—
(a) specify descriptions of expenditure that are, or are not, to be regarded as incurred in connection with either of the matters mentioned in subsection (3),(b) relate to the calculation and timing of the deduction in respect of the FSA’s enforcement costs, and(c) specify the time when any payment is required to be made to the Treasury.(9) The directions may also require the FSA to provide the Treasury at specified times with information relating to—
(a) penalties that the FSA has imposed under FSMA 2000, or(b) the FSA’s enforcement costs.(10) The Treasury must pay into the Consolidated Fund any sums received by them under this section.
(11) The scheme operated by the FSA under paragraph 16 of Schedule 1 to FSMA 2000 is, in the case of penalties received by the FSA on or after 1 April 2012, to apply only in relation to sums retained by the FSA as a result of the deduction for which subsection (1) provides.
(12) When section 6(2) is fully in force, the Treasury may by order repeal this section.”
“Payment to Treasury of penalties received by Bank of England
(1) The Bank of England (“the Bank”) must in respect of each of its financial years pay to the Treasury its penalty receipts after deducting its enforcement costs.
(2) The Bank’s “penalty receipts” in respect of a financial year are any amounts received by the Bank during the year by way of penalties imposed under any of the following provisions—
(a) sections 192K and 312F of FSMA 2000, and(b) section 198 of the Banking Act 2009.(3) The Bank’s “enforcement costs” in respect of a financial year are the expenses incurred by it during the year in connection with—
(a) the exercise, or consideration of the possible exercise, of any of its enforcement powers in particular cases, or(b) the recovery of penalties imposed under any of the provisions mentioned in subsection (2).(4) For this purpose the Bank’s enforcement powers are—
(a) its powers under any of the provisions mentioned in subsection (5),(b) its powers under any other enactment specified by the Treasury by order,(c) its powers in relation to the investigation of offences under FSMA 2000 or of any other offences specified by the Treasury by order, and(d) its powers in England and Wales or Northern Ireland in relation to the prosecution of offences under FSMA 2000 or of any other offences specified by the Treasury by order.(5) The provisions referred to in subsection (4)(a) are as follows—
(a) sections 192K to 192N of FSMA 2000 (parent undertakings), as applied to the Bank by Schedule 17A to that Act,(b) sections 312E and 312F of that Act (disciplinary measures in relation to clearing houses),(c) sections 380, 382 and 384 of that Act (injunctions and restitution), as applied to the Bank by Schedule 17A to that Act, and(d) sections 197 to 200 and 202A of the Banking Act 2009 (inter-bank payment systems).(6) The Treasury may give directions to the Bank as to how the Bank is to comply with its duty under subsection (1).
(7) The directions may in particular—
(a) specify descriptions of expenditure that are, or are not, to be regarded as incurred in connection with either of the matters mentioned in subsection (3),(b) relate to the calculation and timing of the deduction in respect of the Bank’s enforcement costs, and(c) specify the time when any payment is required to be made to the Treasury.(8) The directions may also require the Bank to provide the Treasury at specified times with specified information relating to—
(a) penalties that the Bank has imposed under the provisions mentioned in subsection (2), or(b) the Bank’s enforcement costs.(9) The Treasury must pay into the Consolidated Fund any sums received by them under this section.”
Lord Tunnicliffe
“Power of the FCA to make provision about regulation of commercial debt management
The FCA may make rules or apply a sanction to authorised persons who offer debt management services on commercial terms, or on terms that the FCA judge to cause consumer detriment.”
Lord Tunnicliffe
My Lords, I rise to move Amendment 116ZA on behalf of my noble friend Lord Stevenson, and I hope for a response from the government Benches which produces as much happiness as we have just enjoyed.
We considered the question of regulating debt management companies in Committee, but I make no apology for returning to this issue. We estimate that there are some 6.2 million families in this country in financial jeopardy and all the signs are that increasing numbers will need help, advice and solutions to their unmanageable debts over the next period.
At present there are a variety of providers. A number of companies operating on a strictly commercial basis compete for business with the free services provided by the charitable sector. While it is right that consumers have choice, it is important that those who need independent debt advice get it in a timely way; that it is transparent, with no hidden fees or payments; and all within a regulatory environment that ensures that all providers are working to the same high standards. The Money Advice Service has a great deal to do in this area, working with the existing major players.
This amendment calls on the FCA to ensure that our regulatory structures in this area are ready as soon as responsibility for this area transfers from the OFT; that they look forward as well as back; and that we do not miss the opportunity to protect consumers from the new problems as well as learning lessons from the past.
The Bill now contains good provisions for the transfer of consumer credit regulation from the OFT to the FCA. Despite the excellent work done to date by the OFT, the current licensing regime has arguably not provided consumers with enough protection, not least because the OFT has not been given the resources properly to police the industry. It has been argued that powers already exist in primary legislation, but that does not mean that the FCA will be ready and willing to move into these areas with the speed that may be required.
We are looking for a firm commitment in the Bill that the FCA will regulate commercial debt management companies along the following lines. The Money Advice Service needs to co-operate with stakeholders, where they share joint aims, forming partnerships to improve the long-term availability, quality, consistency, efficiency and effectiveness of the advice available. The FCA must ensure that the MAS is providing clear and directly enforceable standards for business conduct and the design of products. The FCA needs to set threshold conditions that will keep rogue firms and harmful business models out of the market. There need to be tougher sanctions, including unlimited financial penalties, enabling the FCA to build a credible deterrence strategy against bad practice. There needs to be more effective supervision and enforcement. The FCA needs the power to order firms directly to compensate their customers for losses arising from business conduct that falls below required standards and to ban misleading advertising, which the OFT has found is one of the main areas of concern in this market. We think that good commercial debt management firms would welcome such an approach. I beg to move.
Lord Borrie
My Lords, I congratulate my noble friend Lord Stevenson on putting forward this amendment —and, indeed, my noble friend Lord Tunnicliffe, who has taken his place today. As we discussed at some length on the previous amendment, self-regulation has been attempted in the field of debt management, but with only questionable effect. Multiple debtors can, of course, be tremendously assisted by debt management companies arranging how the debts can be paid off over a period in amounts that the debtor can afford. The debtor often cannot manage their cycle of debt sufficiently, so needs assistance. Some commercial operators have sought as best they can to raise their game, but only last week, the Office of Fair Trading decided to revoke the licence of First Step Finance, a member of the Debt Resolution Forum, which runs one of these debt management self-regulation schemes. I expect that responsible operators—they do exist—and consumers would benefit a great deal from a regulatory structure under the aegis of the Financial Conduct Authority in the new legislation.
In Committee, I made an intervention about debt management that I followed up with a letter to the Minister setting out my concerns. I had an extremely helpful response from him. He pointed to the powers that the FCA will have in 2014 to make rules of conduct on matters falling under its remit. In his letter, the Minister said:
“The FCA could, for example, impose restrictions or requirements on debt management plans where it considers that such rules are necessary or expedient to advance the consumer protection or competition objectives … Under the new regulatory regime, the Government will look in the first instance to the FCA as an independent and expert regulator able to put in place the right framework for debt management plans”.
Lord Sassoon
My Lords, this amendment is concerned with the regulation of commercial debt management services. It explores the extent to which firms that supply debt management services on commercial terms, or on terms that otherwise might cause consumer detriment, can be subject to specific rules or sanctions.
I am sorry that the noble Lord, Lord Stevenson of Balmacara, cannot be here but I well understand his concerns about the commercial debt management sector. However, it is worth saying in his absence, because we have touched on these things with him before, that he does an excellent job as chairman of StepChange, the debt advice charity which also provides not-for-profit debt management services. I share many of his concerns as they are reflected in the presentation of the amendment by the noble Lord, Lord Tunnicliffe.
Unscrupulous practices in the sector can cause real harm to vulnerable consumers struggling with debt problems—precisely those who desperately need help. However, I do not agree that the FCA should take action against commercial debt management companies just because they are offering these services on a commercial basis. The Government believe that it is important that consumers have access to debt management services to help them manage their debts where this is the right solution for them. But the Government also hold firm to the principle that consumers should have the choice to pay for these services if they wish to. They also acknowledge that there is a risk that not-for-profit debt advice and debt management providers may not be able to satisfy all the demand in the market.
In that context, I would like to highlight the important role of the Money Advice Service in signposting consumers to high quality, free-to-client debt advice services and in taking a strong strategic role in working with other organisations that provide debt advice to ensure that the market works effectively to help consumers struggling with debts. In April this year, the Money Advice Service took responsibility for the funding and management of face-to-face debt advice projects from the Department for Business, Innovation and Skills, and thus ensured the continuation of an important service which is currently on target to help around 150,000 people with debt problems this year.
Money advice and debt advice are, of course, two sides of the same coin. Promotion of financial capability and better money management will prevent people from getting into problem debt, while high-quality debt advice will ensure that those who find themselves with unmanageable debt are able to access appropriate specialist debt advice. In addition to funding and managing face-to-face services, the Money Advice Service has an important role in working with other organisations that provide debt services, in order to improve the availability, quality and consistency of the service available. The expectation is therefore that the Money Advice Service will continue to work with stakeholders such as StepChange, Citizens Advice, the Money Advice Trust and others to improve the long-term quality and effectiveness of the advice available. This will result in a more consistent sector, where there is agreement on what constitutes a full and effective debt advice service. This is clearly a challenging role for the Money Advice Service to undertake, and effective dialogue with its stakeholders and proper accountability will be key. So I encourage stakeholders in the sector to work with the service and to engage with its debt advice forum and the consultation on its business plan in the new year.
I, and the Government, entirely support the intent behind the amendment to ensure that the commercial debt management sector is subject to stronger supervision, more robust requirements and more stringent sanctions than is currently the case. The transfer of debt management company regulation from the OFT to the FCA will mark a significant shift in approach and powers. The FCA’s consumer protection objective will give it a strong mandate to take effective action to ensure that vulnerable consumers are protected from rogue debt management firms. That enables it to take action in the area of fees, if it believes that that is necessary and appropriate. With that, I hope that the noble Lord has the reassurances he seeks and feels able to withdraw the amendment.
Lord Tunnicliffe
I thank the noble Lord, Lord Borrie, for his remarks. I, too, am very sorry that the noble Lord, Lord Stevenson of Balmacara, is not here; he is not only our expert on debt advice services but, apparently, our expert on the wreck of the “HMS Victory”, sunk in 1744, and he is participating in a debate in the Moses Room.
I hear what the Minister says. He goes quite a long way towards what we are seeking to achieve with the amendment. Ideally, we would like it in the Bill, but with his assurances I beg leave to withdraw the amendment.
Lord McFall of Alcluith
“Continuous Payment Authorities: debtor’s rights
(1) This section applies where a debtor has granted to a creditor a continuous payment authority for payment of any debt arising under a regulated agreement.
(2) Prior to the debtor granting the continuous payment authority, a creditor must give the debtor a statement of the debtor’s rights in relation to the continuous payment authority.
(3) A debtor may at any time cancel or vary a continuous payment authority.
(4) A cancellation or variation of a continuous payment authority must be signed by the debtor and bear the date of the signature.
(5) A bank is obliged to comply with immediate effect to a cancellation or variation of a continuous payment authority signed by the debtor.
(6) A debtor must inform the creditor within 24 hours of signing the cancellation or variation that the continuous payment authority has been cancelled or varied.
(7) In this section “continuous payment authority” means an instruction or mandate given by a debtor to a bank to pay a fixed or variable sum to a creditor.”
Lord McFall of Alcluith
This proposed new clause seeks to make the law on continuous payment authorities, sometimes referred to as CPAs, clearer and more weighted in favour of the debtor. As noble Lords know, these are harsh times for many working families under pressure from rising food and fuel costs and living in fear at the prospect of job loss and insecurity. They know only too well how difficult it is to stretch a wage from month to month, week to week, and even day to day. It is no wonder, then, that frequently these hard-pressed families and wage earners find that their money is simply not enough to stretch to all their needs from payday to payday, and that many of them have recourse to what are euphemistically called short-term lenders, more popularly known as payday lenders.
Consumer Focus research published in May this year showed that many banks’ customer service advisers were unclear about the rules concerning continuous payment authorities and could be giving customers incorrect advice as a result. A continuous payment authority is a type of regular, automatic payment arrangement set up by using a debit or credit card. It is like a direct debit. Under a CPA, consumers give a supplier or retailer permission to take payments on their cards. However, unlike direct debit, there is no written communication between the individual and the bank. Although CPAs are used by many businesses, including insurance companies, magazine companies and gyms, my concern is about how they are used by payday lenders. CPAs are sometimes known as recurring payments and are often used in the short term or payday loan market. Many payday loan companies use CPAs to retrieve loan payments from customers. This involves the debtor giving the company his or her card details and authorising the lender to take regular payments from the account.
Various reports suggest that customers are generally not aware of the right to withdraw from CPA schemes. For example, a report in the Guardian of 2 May this year stated:
“Consumer Focus raised particular concerns about continuous payments to payday lenders set up on the accounts of people with debt problems … cash-strapped consumers are having an even tougher time paying priority bills such as their rent, mortgage or heating costs due to some payday lenders ‘dipping’ into their account”.
The Consumer Focus research raised particular concerns about continuous payments to payday lenders set up on accounts of people who already have debt problems and recommended that clear and accurate information be provided to these customers from banks and loan companies, particularly regarding the right to cancel.
All that is fair enough and I know that the Department for Business, Innovation and Skills and the OFT have been doing work on this. Indeed, the Office of Fair Trading issued a warning to payday lenders on 20 November by opening formal investigations into several payday lenders over aggressive debt collection practices. It published a progress report last week as part of its compliance review of the payday lending sector and highlighted concerns about the adequacy of checks made by some lenders as to whether loans will be affordable for borrowers, the proportion of loans which are not repaid in time, the frequency with which some lenders roll over or refinance loans, the lack of forbearance shown by some lenders when borrowers get into financial difficulty, and debt collection practices. It also published revised debt collection guidance last week, focusing on continuous payment authorities. Under the heading “Deceptive and/or unfair methods”, paragraph 3.7 of the guidance states:
“Dealings with debtors and others are not to be deceitful and/or unfair”.
The OFT then gives examples of unfair or improper practices. I realised that the concept of misusing a continuous payment authority covers no fewer than five pages in the OFT report. Some of the examples made me fearful for the people who enter into these loans and give a CPA authority to their lender.
I shall give the House a number of examples of bad practice to be avoided, as mentioned in the OFT report. The report states:
“Using the CPA other than as set out in the credit agreement or without the informed consent of the debtor”.
It also refers to debiting a higher or lesser amount than agreed and debiting an account before or after the due date. The report also states:
“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.
The last example includes seeking payment before income or other funds may be reasonably expected to have reached an account, seeking payment where there is reason to believe that there are insufficient funds, or using the CPA after the debtor has informed the creditor that he or she is in financial difficulties and cannot afford to repay.
Further, the OFT identifies as a problem:
“Failing to document the CPA appropriately or to explain it adequately before entering into the credit agreement”.
Sometimes a credit agreement is not complete because relevant terms are missing; or it is written in unclear, unintelligible language; or it is confusing, unfair and misleading. The OFT guidance expects the agreement to identify that the CPA can be cancelled by the debtor or that alternative repayment options may be available.
It is all very well to issue guidance and I sincerely hope that guidance will be followed. However, my reading of this report convinces me that much more than guidance is required in this case. Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. This proposed new clause ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions. We ought to legislate to protect debtors in straitened times.
We abolished imprisonment for debt in the Debtors Act 1860. However, debt itself can create a prison and the misuse of power by creditors can be as hard a punishment as being jailed for debt. I hope the Government will accept this amendment, realising that the balance of power between debtor and creditor must be redressed in favour of the customer. I beg to move.
Lord Stevenson of Balmacara
My Lords, I support the excellent amendment moved by my noble friend Lord McFall of Alcluith. He ended with a rhetorical flourish about the way in which debt imprisons many people. I want to support him in that, because he made the point very well. He also explained in some detail the recent OFT guidance note which, as he says, is all very well and then he made some important points about timing and language and about the fact that the basic relationship between those who have debts and those who take out a CPA in order to resolve them is, in fact, wrong.
I would like to add a couple of points. It is interesting that the last Financial Ombudsman Service annual review picked up on this issue. It says:
“During the year, we also began to see a rise in the number of complaints involving short-term finance—often called ‘payday loans’. We had previously received relatively few complaints about this type of lending—59 cases in 2010/211, rising to 296 in 2011/2012. In many of the cases we saw during the year, the complaints involved the way in which the lender had operated the payment authority given to them by the consumer”.
I checked back with the FOS earlier today and I gather there has been a considerable rise in the number of payday lending complaints brought to the ombudsman so far this year; they are now running at about 50 new cases a month. This amendment ensures that debtors are informed about their rights; that only the debtor may cancel or vary a CPA and, furthermore, that the debtor’s bank is obliged to comply with the debtor’s instructions. We support the amendment.
Lord Newby
My Lords, this amendment puts on the face of the Bill a number of requirements on firms and consumers in relation to the use of the continuous payment authority. I am grateful to the noble Lord, Lord McFall, for raising the issue. It brings us back, of course, to the very important issue of payday loans, which we were discussing earlier this afternoon. Abuse of the CPA is one of the most concerning practices of payday lenders. It does not mean that the CPA is universally the wrong method to use; it can help consumers administer their financial affairs with the minimum of fuss. However, there is clearly a problem.
As the noble Lord, Lord McFall, said, CPA is a recurring payment mechanism involving a debit or credit card; it allows a firm to take regular payments from a customer’s bank account without having to seek express authorisation for each payment. The OFT, as he set out in some detail, has highlighted its concerns in this area, particularly concerns that payday lenders are not explaining CPAs to consumers adequately and are using them in ways which do not take account of the possibility that the borrower is in financial difficulty and unable to repay. It is also concerned that lenders are, in effect, using CPA to securitise the loan and so may not make adequate checks on affordability. There is also evidence that some lenders mislead consumers about their right to cancel a CPA or put obstacles in the way of cancelling.
As the noble Lord explained, last week the OFT published revised guidance with the aim of ensuring that firms with a consumer credit licence do not misuse CPAs. The guidance makes it clear that the OFT expects lenders’ use of CPAs to be reasonable and proportionate, and that lenders must have regard to a borrower’s financial position when exercising a CPA. If a firm breaches this guidance and the OFT believes that this compromises the firm’s fitness to hold a credit licence, it can take enforcement action. The Bill gives the OFT the power to suspend consumer credit licences with immediate effect. Therefore, to that extent, there is a new power here which can be used to address the problem. We believe it is right that the OFT is taking action on this now and the Government welcome the new guidance.
However, like the noble Lord, I think that regulatory powers to address the abuse of CPAs and to ensure that consumers are protected need to be strengthened. The FSA has already made binding rules covering the use of CPAs by firms that it regulates. Once the regulation of consumer credit moves to the FCA in 2014, it will be able to extend those rules to payday lenders, which will be a major step-change in regulation of the payday loans market. I am pleased to inform the noble Lord that the FSA has confirmed its intention to carry across OFT standards on the use of CPAs when the transfer takes place to ensure that these consumer protections remain.
However, I do not agree that these requirements should be set out in statute, as the noble Lord’s amendment proposes, rather than in FCA rules. Overreliance on statute is exactly the problem that we have faced in the current regulatory regime, which relies on powers set out in the Consumer Credit Act and has resulted in an inflexible regulatory regime which cannot respond quickly to all the developments in the market and risks leaving consumers exposed to detrimental practices. Addressing this through rules will allow the FCA to impose requirements to address issues relating to the misuse of CPAs that might emerge in the future.
I hope that the noble Lord is able to take some comfort from the commitments made by the Government earlier in this debate on introducing new explicit powers for the FCA and giving the FCA a strong mandate to step in to tackle detriment caused by firms in the payday loans sector. I hope he is also assured that the FCA will have a strong and flexible toolkit at its disposal to ensure that CPAs are not abused by payday lenders. In the light of those comments, I hope that the noble Lord feels able to withdraw his amendment.
Lord Mackay of Clashfern
Before the noble Lord sits down, I should like to ask two questions. First, is there anything in the nature of a direct debit guarantee for the CPA system? Secondly, is it only people with credit licences who go in for being recipients of these payments?
Lord Newby
My Lords, I do not believe that there is a guarantee. I think that the vast bulk of people who use this system will fall into the category that the noble and learned Lord asked about. However, I will check and will write to him if there is any further information that I can give him to explain those points more fully.
Lord McFall of Alcluith
My Lords, CPAs are different from direct debits, as I made clear. Given the legislative complacency in the consumer credit field, I am very unhappy with the notion of guidance. I think that we sent out a message from the Lords today on an earlier amendment, and it was good to have cross-party consensus on that. There are glaring injustices and it is very important that we reinforce that message in the House today. I should therefore like to test the opinion of the House.
Lord Whitty
“The levy
(1) Section 173 of the Legal Services Act 2007 (the levy) is amended as follows.
(2) In subsection (7)(a) at the end insert “except for the purposes of section 161 (in relation to claims management services) which is to be deducted from its expenditure incurred under or for the purposes of the Act (section 173(7)(a), as with the amounts paid into the Consolidated Fund pursuant to 173(7)(b)), and”.”
Lord Whitty
My Lords, this is a technical amendment to cover a gap which I would have hoped the Government would have covered by now. It is an amendment to the Legal Services Act 2007 and it deals with complaints from consumers about the activities of claims management companies, about which we have heard a fair amount in this House, particularly at the initiative of my noble friend Lord Kennedy of Southwark.
The purpose of the amendment is to enable the Office for Legal Complaints, that is to say the Legal Ombudsman, to receive payments from the Lord Chancellor under Section 172 of that Act for its costs in relation to handling complaints against those claims management companies.
There has been a pretty widespread air of complaint in this House and in wider society about the activities of claims management companies. Citizens Advice has identified a whole range of problems in this area, from the time and resources wasted on invalid claims through to the aggressive, intrusive and often offensive methods of marketing. I suspect most noble Lords have received an odd text within the past few days, offering them untold riches under the PPI arrangements. It is not just consumer groups that want action on this front. The FLA—the Finance and Leasing Association—would look for an improvement to CMC regulation and, in particular, the tens of thousands of unfounded claims received from CMCs in respect of products which, as we all know, were never sold in the first place. This is a huge irritation which is misleading for consumers and diverts activity for providers, so we need a complaints system which is recognised as robust by consumers and providers alike. We want the Legal Ombudsman service to be able to accept complaints against claims management companies that breach the regulation.
Following discussion on several occasions in this House, the Minister has assured us that regulation is being tightened up to stamp out some of the more horrendous practices that we have heard about and, indeed, been subject to. One of these assurances was in relation to access to redress for consumers. The Government announced on 28 August that complaints handling companies would be handled by the Legal Ombudsman, using the powers under the Act to which this is an amendment. That was repeated by the Minister on 20 November in response to a debate introduced by my noble friend Lord Kennedy. However, I now understand that, due to the Government’s decision to leave claims management regulation within the department —as distinct from an outside regulator—the provisions that would have allowed the Legal Services Board to levy the claims management regulator for Legal Ombudsman expenditure are now deemed unworkable.
The amendment therefore seeks to remedy that position. It allows the Lord Chancellor—in other words the Ministry of Justice, which is, effectively, the claims management regulator—to make payments direct to the Legal Ombudsman without any subsidy by existing ombudsman levy-payers, who are lawyers and are not, of course, party to these complaints.
My understanding is that such money would need to come from a levy on claims management companies rather than the general taxpayer—quite right, too—and that the only effect of the amendment would be to allow the only body with authority to levy them, the Ministry of Justice, to pass such funds to the Legal Ombudsman. Despite this being a levy on these firms, the Treasury has stated that, under the Legal Services Act as currently drafted, the Secretary of State as the regulator of claims management services cannot be designated a leviable body for Legal Ombudsman purposes. The levy is technically considered a tax, and thus a public body, the Legal Services Board as the collector of the levy, cannot impose a tax on government.
It is for this reason that primary legislation to amend the Act is needed. I hope that the Minister, who is supportive of action on this front, can support the amendment. The legislative change that is needed to facilitate it must happen immediately, so that consumers are not left without a course of redress. This is necessary so that the ombudsman can handle complaints as well as provide better intelligence to the regulator and the industry to drive better practice.
Amendment 120, which complements the first amendment, would allow the technicalities to come into force immediately on Royal Assent without further, secondary legislation being required. It seeks to cover a gap in the present arrangements. The Minister may have a better way of so doing. If so, it is a pity that he has not come forward with it already. Nevertheless, I am prepared to hear what he says. If he is prepared to bring forward an alternative amendment which covers the same points at Third Reading or ensures that there is provision for the Legal Ombudsman to be financed in this way, I will probably be prepared to withdraw the amendment. However, it is a gap that needs covering. At this relatively late stage of the Bill, a commitment from the Government to do so is necessary. I beg to move.
Lord Newby
My Lords, as the noble Lord, Lord Whitty, said, the amendment seeks to amend the Legal Services Act 2007 to facilitate the expansion of the Office for Legal Complaints ombudsman scheme to encompass the handling of complaints about claims management companies, on which we have spent considerable time while discussing the Bill in your Lordships’ House. I understand that its specific aim is to prevent any costs incurred by the OLC in respect of claims management companies being passed on to the wider legal services profession.
The Government have announced that the OLC will assume responsibility for the handling of claims management companies next year. They stand by that commitment. I agree with the noble Lord that it is important for consumers of claims management companies to have greater access to redress when things go wrong. As a result of the Government’s policy, the OLC will be in a position to provide more meaningful forms of redress, including compensation up to £30,000 if appropriate. This compares with the current arrangements, under which the regulator can only direct businesses to apologise, redo work and, in limited circumstances, provide a full or partial refund of fees. In addition, the OLC will be able to use the feedback from complaints that it receives to assist the claims management regulator in driving up standards within the sector.
I understand the desire to implement this change as soon as possible given the proliferation of complaints about the conduct of this sector, but we are very concerned to get it right. That means ensuring that the necessary funding, regulatory and operational arrangements are in place before we commence the provisions in the Legal Services Act 2007. This amendment would not achieve that outcome. For example, it is right that the wider legal profession should not cross-subsidise claims management companies. Conversely, we need to ensure that legal firms do not gain any unintended benefit when the Legal Ombudsman assumes its new powers. Under this amendment, the wider legal profession would benefit because case-fee income generated by the ombudsman in respect of claims management companies would be deducted from the levy they have to pay.
The Government’s position, then, is absolutely clear: the wider legal profession should not bear the cost of dealing with complaints about that sector. On this we are in agreement with the noble Lord and the arrangements we put in place will be consistent with that principle. I reiterate our commitment to implementing the changes in 2013 and I hope, therefore, that the noble Lord will feel able to withdraw his amendment.
Lord Whitty
My Lords, I appreciate what the Minister said, but I am not quite clear how this then operates. We are at one in believing that the broader legal profession should not be levied for instances which relate to claims management companies—that is clearly a red line and it should be avoided—but in order to avoid it, the Legal Ombudsman, the OLC, will need to have some resources from a levy, or quasi-levy, from the CMC, unless this is to be a matter for general taxation, which would not seem to be appropriate and I do not think is the Government’s intention. Therefore, the Government need powers rapidly in order to have a levy system there, which presumably, as I said in my opening remarks, would have to be via the Ministry of Justice, even though the money would then be passed over to the OLC.
I am not sure what the Minister means when he says that we will sort this out in 2013. Does he mean that, while the other provisions of the Bill will apply, we will need further primary legislation; or does he mean that there will be almost instant secondary legislation under the Bill to ensure that that happens? Because one way or another, for that to be achieved by 2013, which is only about four weeks off—although I guess that he has the whole 12 months to fulfil his intention—a whole pile of complaints that are manifold at the moment will be held up for some months before they can go into the system and the Office for Legal Complaints will be able to deal with them.
I accept the Government’s good will and good intent in this respect, but I still think that the precise system on which it operates needs to be spelled out and that we need to be assured that it will be in place pretty much at the same time as the Bill is passed. I hope that the Minister can give that assurance; alternatively, he could come back with something else at Third Reading. I did not think that he went as far as that in his remarks.
Lord Newby
My Lords, I did not go as far as that, in terms of amendments at Third Reading, and I am not going to go as far as that now. As I said, the new system will not come into force immediately, but it will come into force during the course of 2013. I will write to the noble Lord if I am wrong about this, but my understanding is that the funding that is required from the claims management company sector, as it were, will come from the levy, which is being increased at the moment. If I am wrong in that, I will write to the noble Lord.
Lord Whitty
I appreciate that having it exactly at the point of Royal Assent is not necessarily the point; the point is that when these provisions come into play there will be resources to cover it. I would be grateful to receive a letter from the Minister and, with that, I beg leave to withdraw the amendment.
Lord Flight
“Bank account transferability
(1) If an individual customer gives notice in writing to a bank at which he holds a personal current account (Bank A) that he wishes to transfer the balance standing to the credit of that account (Account A) to a personal current account established or to be established at another bank (Bank B) and thereafter to close Account A—
(a) Bank A shall without charge within a period of 10 working days pass to Bank B a copy of all material that it holds in relation to the customer as a result of having performed checks on his identity, the source of his funds or otherwise with regard to its regulatory obligations to counter financial crime;(b) Bank B shall without charge, save where it has grounds for suspicion, accept the material provided under paragraph (a) in lieu of performing fresh checks on the identity of the customer, the source of his funds or otherwise in relation to its regulatory obligations to counter financial crime.(2) In this section a bank shall mean any person authorised under this Act and holding permission for deposit taking granted by the PRA.”
Lord Flight
My Lords, I think that there is broad agreement across the House that an ingredient part of a more stable banking system is that we should have healthy competition and, indeed, that a number of the problems that have developed over the past few years have been the result of a banking system that was not competitive enough, that was described as oligopolistic or cartelised. One important issue in terms of banking competition is the ease with which individuals can move their bank accounts.
I moved an amendment in Committee that largely covered all the practical things about transferring direct debits and standing orders. As many will be aware, the Payments Council has spent a lot of money on sorting that out and next September will implement its proposals to address the mechanistic aspects of changing a bank account.
My amendment in Committee raised the possibility of the Bill being used to enforce that. It is being done on a voluntary basis, and I am aware that most banks have signed up to the Payments Council arrangements. The one aspect that is not covered is the grandfathering of anti-money laundering information. I declare an interest as a senior non-executive director of Metrobank. Metrobank has pioneered removing a lot of the unnecessary—indeed, uncompetitive—measures that banks have typically used, such as requiring you to have your passport signed by a lawyer and to produce an original bill. Metrobank is able to get all the information it needs from your driving licence, so it can open an account pretty quickly. However, that cannot cover all circumstances, and as any existing bank has to have done all the necessary “know your customer” and anti-money laundering checking, it seems only sensible if, when an individual moves an account, the existing bank is obliged to pass on—to grandfather, to hand over—that anti-money laundering information to make it easier for individuals to move their accounts. Amendment 116B provides for banks to do that without charge.
I would obviously be lucky to get the Government’s agreement to include that in the Bill, but in thinking how it might be dealt with practically, this is an issue where the FCA, if not the PRA, could reasonably direct the banking system. One way or other, anti-money laundering is being used as a deliberate barrier to competition, a deliberate discouragement to people to move from one bank to another if they are unhappy with their existing bank’s service. That needs addressing and I hope that the Minister may have some clever idea as to how the point can be grasped.
Viscount Trenchard
My Lords, I support the amendment moved by my noble friend Lord Flight. Since the disappearance of the traditional bank manager from the high street, customers have increased difficulty in communicating with their banks at all, let alone to request a transfer to another bank.
What particularly irks me is that when you seek to engage with the successor to a bank manager by telephone—or when you respond to a text message requiring you to telephone the bank—you first have to go through a long process of answering questions put to you by a machine to establish your identity. If you successfully pass such questions, you may eventually be able to speak to a human being, who will then proceed to put you through an identical process of security checking. I wonder why you cannot be put straight through to a human being, rather than wasting time on your telephone, usually on an 0845 number or something like that, answering questions put to you by a computer, because it does not make any difference. When you speak to the person, the person requires you to do the security again. It is then very often the wrong person and you are transferred to another department and you have to go through the process again, probably in duplicate, first with a computer and then with another human being. Therefore, you have to allow at least 30 minutes if you are going to attempt to engage with a bank to do something that ought to take five minutes.
I welcome my noble friend’s amendment. It should be made much easier to transfer your bank account to another bank. For a long time the mobile telephone companies resisted a similar facility to change supplier; I understand that it is now much easier to change from one company to another. I see no reason why it should not be so in the case of banks.
However, in order to permit the customer to do this, banks should be required to provide forms for this purpose on request—and the request should be able to be given in writing or orally—making clear what information is needed. Otherwise, people writing in may not give the correct address or branch of the bank, and the banks will have reason not to act on the request. So the forms should be standardised and make clear what information should be given.
At the same time, the individual should be required to grant permission to bank A that it may release on behalf of the customer what my noble friend calls the anti-money laundering information—the material that it holds in that connection—because otherwise bank A will surely be prevented from releasing such information to a third party under data protection legislation. It would be necessary to agree a prescribed time limit for the transfer of such information, because in the case of somebody who has banked with a certain bank for 40 or 50 years, material that bank may hold dating many years back may be irrelevant to bank B. Does my noble friend have any comment on that?
Baroness Hayter of Kentish Town
My Lords, my noble friends Lord Mitchell, Lord Peston, Lord Barnett and Lord Davies of Oldham have all had the opportunity to thank the Minister today for hearing their arguments and meeting them. Perhaps it is now time for the Minister to do the same for one of his own side, and accept these arguments from his noble friend Lord Flight. The noble Lord, Lord Flight, is right on this: consumers will only be able to drive competition if they can swiftly, easily and cheaply change bank accounts. Without that, there really will be no way to drive up standards.
It was interesting to hear the noble Viscount, Lord Trenchard, talk about phone calls and automatic voice recognition. It reminds me of a wonderful publication produced by the National Consumer Council called The Stupid Company. This asked a whole lot of consumers, not just in financial services, “What are the things you most hate about companies?” In the top three was automatic voice recognition. It was really interesting that when that was played back to companies, they continued to use it although they knew that it was the thing their consumers most hated. Banks are like that. Until people can change banks easily, I fear that they will continue to do things that none of us likes. I hope very much, therefore, that the Minister can send Lord Flight home happy this evening by having accepted his amendment.
Lord Hodgson of Astley Abbotts
The noble Baroness leapt to her feet very quickly. I know that the House is like a horse running for the stables, and I will not detain the House long. I support my noble friend’s amendment. As regards money-laundering and transferability, I would like to pick up a point made by the noble Lord, Lord Newby, in replying to the debate on 24 October, when he talked about the transferability of direct debits and how that works as regards the Payments Council initiative.
I am afraid that this again involves the charity sector. There is general agreement that there are far too many charities and that many ought to be closed down. There are many thousands of shell charities, which are the result of mergers. There has been a perfectly proper merger and there was no problem as the Charity Commission, the trustees and the lawyers were all happy with it. However, when you ask why this shell charity remains, it is because the banks will not accept the transfer of standing orders and direct debits to the new, enlarged charity. The charity then has to go through the process of asking every single direct debit and standing order signatory to re-sign. Administratively, that is an extremely complicated process and many of course decline to do so.
I am not asking my noble friend to reply tonight but I say this in the hope—it is probably a forlorn hope—that the Payments Council is listening to this debate and might therefore see whether it can find some way to enable this administrative inefficiency to be dealt with. That would enable some of these shell charities, which no longer need to exist and exist only to collect direct debits and standing orders, somehow to be subsumed into the new charity of which they are now a part.
Baroness Kramer
My Lords, I will intervene only for a moment but in case the Government are unable to meet the hopes of the noble Lord, Lord Flight, and others today perhaps I might say that I chair the sub-panel of the Parliamentary Commission on Banking Standards which is looking at competition in retail banking. Account portability is a significant part of that and the staff are now on the alert to take the report of the comments made today in Hansard and make sure that it and the amendments are put before the panel’s next meeting
The Earl of Erroll
My Lords, this is a very sensible amendment and it should be accepted. I also agree with the comments of the noble Lord, Lord Hodgson, that it ought to be applied to all accounts. We have had to leave some family accounts open just to receive some old shares and such things coming in because we cannot really get around to changing them. If we could change them at the bank end, it would make a lot of sense.
Lord Sassoon
My Lords, I am very tempted to get a few things off my chest as well about some personal experiences of the sort that we have all had, but the horse may well have long gone if I do. However, I am sure that the banks and the Payment Council are indeed listening. My noble friend has again raised an important point. Let me address two things: first, what we can or cannot do through legislation in this area and, secondly, what to do in practical terms given that I think my noble friend was accepting that it was unlikely that the Government would accept this amendment, which indeed we will not and cannot. I will explain why but let me go on to say how, prompted by his useful thoughts on this subject, I propose to take things further forward.
The essential reason why this amendment does not work comes back to the money-laundering regulations that implement the EU’s third money-laundering directive. Rightly or wrongly, it is just a fact of life that it is not compatible with the directive to require the new bank to rely on the checks carried out by the old bank in all cases. Neither is it compatible with the directive to provide that the new bank is not legally liable where it relies on checks carried out by the old bank, because under the directive each bank is responsible for ensuring that adequate checks have been carried out on all its customers.
I know my noble friend may say that moving the information across does not necessarily take one all the way down that path, but this is getting pretty close to encouraging the banks to do something that is not compatible with the directive by suggesting pretty strongly, if not requiring it, that they rely on the checks of the old bank. We must remember that switching can be between two accounts that are already open and we should distinguish, as I am sure my noble friend does, between switching and account opening. They are not the same thing because we could be talking about switching between existing accounts that an individual has opened.
Having said that I cannot accept the amendment, I shall talk about what I am trying to push forward. I was very struck by the example of Metro Bank and driving licences, because I was not aware of it. I have asked my officials to conduct an exercise with the banks to find out who is doing what, and I have already discovered that Metro Bank is not unique and one or two others are using driving licences.
I, as the Treasury, cannot tell banks how to do their “know your customer” due diligence, and neither can the FSA. However, I am initiating a dialogue with the banks to encourage them to think constructively that a driving licence is already good enough for a number of banks, and plainly it could make things a lot easier for their banks. Because the majority of banks have done it in different ways for a number of years, at the very least I want to ensure, either directly with the banks or through the BBA, that they revisit the practices of the past few years and consider whether there is something more that they can do.
My noble friend Lord Flight has served a very useful purpose in raising this topic during the passage of the Bill, and I intend to continue to press the banks to think harder about the burdens that they are putting on their new and existing customers in relation to the responsibilities that the banks themselves have under the money-laundering regulations. I hope that with that explanation my noble friend might consider withdrawing his amendment.
Lord Flight
My Lords, I thank the Minister for his supportive response and my noble friends Lord Trenchard and Lady Kramer for their support. I am delighted to hear that my noble friend Lady Kramer will be pursuing this aspect as part of the banking review; I make the simple point that it is obvious that it should be easy to move accounts. I also thank the noble Baroness, Lady Hayter, for her support.
I would not say that I was surprised but I am interested to note that the Minister cited yet another example of protectionist practices in the EU. To the extent that what he described is there to stop the transfer of such information or to make it unacceptable, it is clearly a barrier to trade. Anyone in the financial services industry who thinks that the single market means a free and competitive one has another thought coming, because the practical barriers to trade and financial services in the EU are substantial at a retail level. I am not sure if the Minister is right, however, because the law as it stands is that it is up to each bank to do what it wants to or feels is necessary and adequate to comply with its “know your customer” due diligence, and I would have thought that if the new bank got all this information it could make it a decision that it thought was sufficient.
I say to my noble friend Lord Trenchard that my amendment provided 10 working days for the information to be transferred once you had given notice that you were going to move your account.
Viscount Trenchard
I am sorry, I did not explain my question clearly. It was how old the information should be that must be transferred—10, 20, 30 years or what?
Lord Flight
The answer is that it is the current information that the existing bank has which satisfies its “know your customer” credentials. Maybe there could be a time period of two years or something, but it is the current information that is relevant.
On the basis of the Minister’s reply I am happy to withdraw the amendment, but I would like to think that somehow, through the banking committee, the FSA and the work that the Treasury is doing, a sort of code of practice among banks could be accepted and evolved. Just as the mechanistic aspects of moving bank accounts are being signed up to on a voluntary basis by the banks at the initiation of the Payments Council, I hope that practice in this area to go along with it might be brought into a code of conduct by banks. I beg leave to withdraw the amendment.
Lord Sassoon
“Bank of England Act 1998 | Section 1(3).” |
Lord Sassoon
“( ) an order under section 36(2) (power to amend sections 391 and 395 of FSMA 2000);”
Lord Sassoon
“(1A) The FSA may disclose to the Bank of England any information which the FSA considers that it is necessary or expedient to disclose to the Bank in preparation for the commencement of any provision of this Act conferring functions on the Bank.”
Lord Sassoon
I will not take up much time. It would be nice to end this mini-marathon of a Report stage with a flourish, but this is not going to be terribly exciting and will not detain us for very long.
Amendments 118A and 118B are minor technical amendments to the transitional provisions in Schedule 20. They enable the FSA to disclose information to the Bank of England in advance of the new regime coming into force to allow the Bank to prepare for the functions conferred on it by the Bill—for example, the regulation of clearing houses. Paragraph 9 of Schedule 20 already makes provision for the FSA to disclose information to the PRA to assist in its preparations for undertaking its new functions. These amendments make similar provision in respect of the Bank. I beg to move.
Lord Sassoon
Lord Sassoon
“section (Payment to Treasury of penalties received by Financial Services Authority);”