Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014

Monday 10th February 2014 Grand Committee

Motion to Consider

16:10

Moved by

[Lord Newby]

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014.

Relevant document: 18th Report from the Joint Committee on Statutory Instruments.

[Lord Newby (LD)]

My Lords, I am pleased to introduce the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014 and the Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014. With the Committee’s permission, I will refer to them as the regulated activities amendment order and the designated activities order.

A well functioning consumer credit market is vital to the economy and to society. However, the market is not functioning as it should and consumers are not being properly protected. The current licensing regime run by the Office of Fair Trading and established under the Consumer Credit Act 1974 lacks the capacity and powers comprehensively to tackle consumer detriment. It cannot keep pace with this fast-innovating market. That is why we are moving the regulation of consumer credit to the Financial Conduct Authority from this April. We will make sure that the regime is proportionate and supports a sustainable and competitive credit market. The Government laid statutory instruments last summer to provide the framework for this regulatory transfer. However, there remain a small number of largely technical issues to address to ensure that the transfer runs smoothly and is proportionate for business. I shall set out how the statutory instruments we are considering today will address these outstanding issues.

The regulated activities amendment order addresses the following principal points. As regards local authorities’ credit activities, they are not required to hold a consumer credit licence under the current regime. The Government set out in their March 2013 consultation their intention to preserve this status quo. Local authorities will need to be FCA-authorised only where this is necessary for compliance with the consumer credit directive. This will minimise burdens on local authorities and avoid gold-plating. To further minimise burdens on local authorities, the instrument provides that those which require authorisation should be eligible for the FCA’s limited permission regime, where costs and regulatory burdens will be lower.

As regards the provision relating to the retained Consumer Credit Act provisions, the Financial Services and Markets Act, on which the new consumer credit regime is based, provides for a rule-based approach to allow more flexible and responsive regulation of this market. The Government have already repealed many provisions in the Consumer Credit Act and associated secondary legislation so that they can be replicated in FCA rules. However, the Government decided to carry forward a number of important consumer rights and protections from the CCA where they cannot be replicated easily under the Financial Services and Markets Act.

In the longer term, however, the Government are confident that many of these provisions can be replaced by rules-based consumer protections. This instrument therefore places a requirement on the FCA to review retained CCA provisions by 2019. It will recommend to government which remaining such provisions can be repealed and replaced with FCA rules, taking into account the implications for consumer protection and burdens for firms. The FCA will report to the Treasury, but the order requires the Treasury to lay a copy of the report before Parliament. This review was proposed in the Government’s March 2013 consultation and was well received by respondents from both industry and consumer groups. Ultimately it will help to ensure that the consumer credit regime is based on the powers and requirements set out in FiSMA, unifying the basis for conduct regulation of financial services in the UK.

The order also makes provisions relating to peer-to-peer lending. The Government are keen for regulation of this sector to balance the protection of consumer borrowing and lending through the platforms with a proportionate regime that can support the growth of the sector.

16:15

This instrument makes sure that there is a clear distinction between the activity of credit broking and the activity of operating an electronic system in relation to lending. Credit brokers were concerned that they might be treated under the new regime as electronic systems, for which they would need additional regulatory permission. We have listened to these concerns. The instrument also extends the definition of a credit agreement to include loans from an individual to a business, via a platform. This ensures that individuals lending to businesses through a platform are afforded the same protection as individuals lending to individuals via such a platform.

With regard to insolvency practitioners, the Government are committed to avoiding double regulation by excluding such practitioners from consumer credit regulation where professional insolvency rules apply, or where the insolvency practitioner provides debt advice in genuine and reasonable contemplation of formal appointment as an insolvency practitioner. However, where an insolvency practitioner is carrying out other regulated consumer credit business, such as debt management, it is important that he is FCA-authorised and regulated in order to protect consumers. This instrument, therefore, includes provisions to provide greater flexibility and a more proportionate solution for insolvency practitioners, by replacing the current statutory exemptions for certain debt-related activities with exclusions.

In response to concerns raised by industry, the instrument also allows firms to refer to both the OFT and the FCA as the supervisory authority during a five-month period following this order coming into force. This will help to smooth the transition for firms and avoid their having to change all their systems and documentation on the stroke of midnight on 31 March, while still ensuring that consumers are clear on the regulatory status of the firms that they are dealing with. The instrument also makes a number of other consequential amendments.

I turn now to the designated activities order, which addresses illegal trading. The Government tabled an amendment to the Financial Services Act 2012 to make it a criminal offence for an authorised person to carry out particular FiSMA-regulated activities outside their permission. This instrument specifies that debt collecting and lending will be the activities in question. This is where there is the clearest evidence of exploitation of consumers. A number of loan sharks and unscrupulous debt collectors have been prosecuted for lending and debt collecting under the cover of an OFT licence for a lower-risk credit activity. This instrument will make sure that such practices remain criminal offences under the new regime.

I hope I have reassured the Committee that these SIs will help to ensure that the Government’s plans for fundamental reform of consumer credit regulation run smoothly, and strike the right balance between improving consumer protection and ensuring that regulation is proportionate.

[Lord Sharkey (LD)]

My Lords, I shall speak to both orders. The first takes up little more than a page, while the Explanatory Memorandum attached to it takes up 49 pages. The second order takes up 30 pages and the Explanatory Memorandum for that also takes up 49 pages, but is essentially the same text as the first one. That is not a complaint: the Explanatory Memorandum is a model of its kind—it is clear, thorough and indicates clearly areas of doubt or uncertainty.

There is one area of doubt or uncertainty arising: the effect on SMEs—not as providers of credit but as customers of credit providers. The impact assessment estimates the cost of the measures over 10 years at £336 billion and the benefit at £689 million—an estimated net benefit of £353 billion. However, the impact assessment does not say how this net benefit is distributed. That is my first question: are SMEs net beneficiaries or is all the benefit delivered elsewhere?

The impact assessment also makes it clear that it expects a shrinking of the credit market. It estimates that 9,000, or 20%, of credit organisations will exit the market. It is true that these organisations represent only a small percentage by volume of total credit, but is this lost lending concentrated in the SME sector? That is my second question to the Minister. We know that net lending to SMEs continues to decline. Can the Minister provide some general reassurance that the measures before us will not make the position worse?

The note in paragraph 53 on page 13 of the impact assessment makes the point that the FCA’s most effective regulatory tools and framework to be brought about by these orders will be,

“effective in tackling known consumer detriment occurring in the non-mainstream lending market such as: payday loans, credit brokerage, debt management and home collected credit”.

That is an important improvement and I welcome it, especially as it will apply to payday loans. However, at first reading there seem to be some areas missing from the list. The impact assessment notes in paragraph 25 on page 8, as a rationale for intervention,

“that the market is not functioning as well as it should and the regulatory regime cannot keep pace with the market”.

However, as far as I can detect, no explicit mention is made anywhere in the orders or the Explanatory Memorandums of crowdfunding or peer-to-peer lending. As the Minister knows, these are rapidly growing credit areas, and ones that offer additional opportunities for SME funding. Can the Minister confirm for the Committee that crowdfunding and peer-to-peer lending will fall within the ambit of these orders? I think I heard the Minister say that that is the case for peer-to-peer lending, but I should like to know whether it is also the case for crowdfunding.

Before I conclude, I should like to ask the Minister a little more about the effects of these orders on payday lenders. The Minister has previously confirmed elsewhere that under the terms of the EU e-commerce directive, the UK has no power to cap the cost of payday loans extended by companies based in the EEA and trading only electronically in the UK. However, I notice in paragraph (5)(e) on page 16 of the second order that the authority has the power to prohibit the entry into credit agreements by an EEA authorised payment institution if that institution,

“engages in business practices appearing to the Authority to be deceitful or oppressive or otherwise unfair or improper (including practices that appear to the Authority to involve irresponsible lending)”.

Does this provision apply to payday lenders based in the EEA and operating only electronically here in the UK?

[Lord Tunnicliffe (Lab)]

My Lords, I welcome these two orders. It is the duty of Her Majesty’s Opposition to study secondary legislation and then to oppose it where we find errors and faults, but I have to say that I have not been as successful as the noble Lord, Lord Sharkey, in finding questions to pose to the Minister, so at least my words will give him a little time to collect together his notes on those technical areas. While we welcome the orders, my honourable friend in another place did ask one or two questions which seemed to be answered satisfactorily. As far as I can tell, the orders do their job. With the permission of the Committee, I should like in a sense to celebrate these orders because they represent the last hurdles of effecting the transfer of responsibilities for consumer credit from the OFT to the FCA. Over the past many months, we have all been concerned about the consumer credit market, in particular its grey areas and payday lending.

I, too, have studied all 49 pages of the impact assessment, although I did not find the same inconsistencies as the noble Lord. I did pick up an implication that the resources to be devoted to the area seem to be tripling from around £10 million per annum to £30 million, and I would be grateful if the Minister could confirm the extent to which new resources are being made available for this new activity. What does this represent in terms of resources and people at the FCA devoted to the consumer credit market? Will it involve the transfer of people from the OFT? Will it involve new and perhaps more capable people working in this market? Will there be a change in attitude and culture on the part of those working in this area?

As has been pointed out, there are some detailed areas, but the really serious evil here is the loan sharks, the rogue lenders and the payday loans market. That market is pretty worrying at every level, from the one-person operator through to major organisations. It involves probably some of the most vulnerable consumers in the land, who are people making decisions in very difficult and stressful circumstances. If ever a market needed intelligent, proactive government regulation, it is this one, and I hope that what the Government have designed will do it.

I would be grateful if the Minister could say a few words about how the regulators will be more proactive. The documentation makes the point that the FCA can be forward-looking and create regulations quickly. I would be grateful if the Minister could expand on that and give me some reassurance—in response to a point made by a colleague—that the new unit will be able to strangle products at birth; in other words, will be sufficiently proactive to sweep the market for the emergence of new products and move quickly to kill them before they do the social harm that we know they can do.

One of the aspirations of these changes is to bring rogue firms under control, which I think we all welcome. The problem is that it might increase opportunities for illegal operations. I feel as though I am in a pantomime now and saying, “Look behind you”, because notes are at the Minister’s right hand. To what extent will the unit work with the police where it sees the early emergence of illegal operations and stamp them out before they can create the evil which we know happens in communities under stress?

[Lord Newby]

I am grateful to both noble Lords who have spoken. Even by the standards of statutory instruments, these are extremely opaque, but the powers they contain are important and, as the noble Lord, Lord Tunnicliffe, said, tidy up and, one hopes, finalise the secondary legislation that is needed to effect their transfer.

The noble Lord, Lord Sharkey, asked a number of questions about the extent to which SMEs could be adversely affected by the regulations. While there may be some impact on lending to SMEs by some non-bank lenders, we would expect it to be extremely small. The stock of lending to business that is consumer credit is estimated to be, at most, 5% of total lending to SMEs. If we are talking about a small proportion of that 5% disappearing, it is a very small impact. We believe that the Government’s wider initiatives, such as the Funding for Lending scheme, will over time far outweigh the negative impact of the transfer. It is worth bearing in mind that SMEs, like any other consumers, can enter into credit agreements that may drive them into unsustainable levels of debt. The enhanced consumer protection that we hope and expect will flow from this transfer will benefit SME debtors.

16:30

The noble Lord, Lord Sharkey, asked me a specific question about whether the orders apply to crowdfunding as they do to peer-to-peer lending. I confirm that that is the case. Does this make it better or worse—or easier or more difficult—for the P2P and crowdfunding sectors to grow? Enhancing the protection—the order extends protection to individuals lending to businesses as well as individuals lending to individuals—will, we hope, reassure potential investors that they are covered by the legislation and, therefore, will result in an enhanced level of interest in the sector.

On the broader issue of how we increase lending to small businesses, which we have debated many times in your Lordships’ House, it is extremely interesting to note that the number of lenders to SMEs reached 91 last year, having reached a record low when the crisis bottomed out in 2009. There are a lot of new players in the market and the Government encourage that. An initiative that we are trying to promote is to encourage the high-street banks, which very often cannot make loans to SMEs, to refer the latter on to P2P and crowdfunding sources. It is fair to say that this is still at an embryonic stage but that is a way in which we hope, and expect, the sector will grow. However, the key thing about P2P lending is that as people see that it works—this will be its biggest impetus to further growth—and as those running small businesses see their colleagues running businesses successfully, having raised funds in that manner, word will get around even more quickly than it is already doing. We expect the sector to continue to grow.

The noble Lord, Lord Sharkey, also asked a question about the EU and how the provisions allow the FCA to stop payday lenders passporting into the UK from abroad. This is a big issue, as we know, but it is separate from the application of this SI. As the noble Lord knows, the FCA is looking at the whole complex issue of how to ensure that we can effectively cap payday lending costs.

The noble Lord, Lord Tunnicliffe, asked a number of questions about the resources and attitude that will now be brought to bear on this sector. He asked about the level of overall resource devoted to consumer credit regulation. I can confirm the figures in the impact assessment. The relevant figure will roughly triple as a result of the transfer. There will be a transfer of personnel from the OFT to the FCA, but, obviously, the FCA has fundamentally different powers and objectives from the OFT, particularly as regards consumer protection objectives. Therefore, while we hope that we can get the best of the experience coming across, we feel that needs to be augmented.

This bears on the second point made by the noble Lord, Lord Tunnicliffe, about the extent to which there will be a change of attitude and culture in regulating consumer credit. We certainly think that there will as, compared with the outgoing OFT regime, the FCA has a far more rigorous and proactive attitude towards consumer detriment generally, and this will impact on how it approaches the consumer credit market. It will, we think, be able to keep pace with developments in the market to a greater extent than the OFT was able to. It is more flexible and contains stronger powers for the regulator to tackle detrimental practices and root out rogue firms. As to whether it will be able to do it at an early enough stage—the “strangling at birth”—the key power that the FCA has that the OFT did not have in the same form is the product intervention power, which allows the FCA to mandate, restrict or ban certain features of a financial product, to restrict its sale to certain groups of consumers, or to ban it outright. It can use these powers at any stage, including at an early stage. We are confident that it will want to do so.

The noble Lord’s final point was on whether the FCA would be working closely with the police in cases where rogue firms are established and seen to be operating. Yes, I am confident that it will. The FCA is very clear that that forms part of its overall mandate in dealing with consumer credit. On that basis, I commend the SIs to the Grand Committee.

Motion agreed.