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The Exchequer Secretary to the Treasury (Damian Hinds)
It is a great pleasure to see you in the Chair, Mr Hollobone; I think it is the first time I have served under your chairmanship in this way.
I start by congratulating my actual and honourable Friend the Member for Blackpool North and Cleveleys (Paul Maynard) on bringing this important subject to Westminster Hall. I also thank Mr Speaker for granting time for the debate. It has been good to hear from all the other contributors to the debate. There was the hon. Member for Ross, Skye and Lochaber (Ian Blackford), representing the SNP, and the hon. Member for Strangford (Jim Shannon)—the renaissance man of the 2010 generation in respect of the breadth of subjects on which he contributes in this place; he should be much congratulated on that.
It is always a joy to hear from the shadow Front Bencher, the hon. Member for Walthamstow (Stella Creasy), and I pay particular tribute to the hon. Member for Makerfield (Yvonne Fovargue), who brings a great deal of personal experience to these subjects from her time with Citizens Advice. She has been a great campaigner on fee charging, debt management companies and other aspects of the broader sector.
My hon. Friend the Member for Blackpool North and Cleveleys spoke powerfully and persuasively about the market—not only through personal stories, anecdotes and his experiences with his constituents, but far more broadly. He raised a number of very important points on disclosure, affordability, comparability, repossession, debt advice and financial management. Others have also touched on those subjects; I hope to cover most of them during my remarks and come to some others at the end.
On my hon. Friend’s point about meetings, the Government are always open to hearing from him and other colleagues who have special knowledge and interest in this area, because we have a shared objective to minimise consumer detriment and generally make the market work better.
The Government are committed to supporting hard-working people to be financially independent and resilient, and to save for unexpected events and for the future. Financial matters, as we all know, can be daunting, and making a poorly informed or sometimes just bad financial decision can have far-reaching consequences over a long period. The Government have taken a number of significant steps to improve the consumer credit market and ensure better outcomes for consumers. As well as fundamental reform of the regulatory framework, there is now, as we have heard, a cap on the cost of payday loans to help protect consumers from harm.
Crucially, the Government are also committed to ensuring that consumers are given the education that they need to make better informed financial decisions. Financial education is now on the national curriculum—something that I know a number of hon. Members campaigned for over an extended period. Pupils now learn about the importance of budgeting, sound management of money, credit and debt, as well as how to understand different financial services and products. It is really important in financial education to understand the principles behind these things and not just the products that might currently be on the market. If we had learned about the financial services products on the market when we were all at school, that would have been of absolutely zero relevance to the world we find ourselves in today: we have to learn about the principles of sound personal financial management and budgeting.
The Government are committed to providing sustainable financial services that give customers greater choice in accessing credit. With greater choice comes greater competition, and from greater competition should come—and generally comes—better outcomes for consumers. For example, the Government have already introduced several initiatives to support the credit union sector, including the credit union expansion project—up to £38 million—and the raising of the maximum interest rate from April 2014, which makes it that bit more possible for the credit union sector to compete in higher-cost, higher-customer-risk markets. That will help to allow consumers access to more alternative forms of consumer credit. For example, a consumer may now use a credit union for a loan to buy a household product, rather than go directly to a rent-to-own store.
That said, as my hon. Friend and, I think, the hon. Member for Walthamstow acknowledged, the rent-to-own sector is an important and legitimate part of the consumer credit landscape, allowing people to purchase essential items that they would otherwise have difficulty in finding the lump sum to buy. However, it is important that consumers who use rent-to-own agreements are protected appropriately from harm and adverse outcomes. There are times when unexpected, one-off expenses mean that consumers require access to credit—that happens throughout the income scale in different ways—either to fund shortfalls in income or to replace essential goods. Rent-to-own agreements allow payments to be spread over a long period, which is valuable for some customers on low incomes who do not have access to more mainstream forms of credit such as credit cards or overdrafts, and who lack the savings to be able to purchase household goods up front.
To help deliver the Government’s vision for a well functioning and sustainable consumer credit market that is able to meet consumers’ needs, the Government have fundamentally reformed regulation of the consumer credit market. That has created a new, more robust regulatory system and transferred regulatory responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April last year. The new regime has been designed to strike the right balance between proportionality and consumer protection. The Government have ensured that the FCA has the robust powers that it needs to protect consumers. It will thoroughly assess every firm’s fitness to trade as part of the authorisation process and has put in place binding standards on firms. It proactively monitors the market, focusing on the areas most likely to cause consumer harm, and it has a broad enforcement toolkit to punish breaches of its rules. There is no limit on the fines that it can levy and, crucially, it can force firms to provide redress to consumers.
In the evidence session for the all-party debt and personal finance group’s inquiry into the rent-to-own sector, the FCA expressed concern about firms in the market. It stated—this quote was used earlier—that practices in the sector “rang alarm bells”. For that reason, it has brought forward the authorisation period for these firms to this summer. Rent-to-own firms that wish to obtain authorisation needed to apply by 30 June. That will ensure that any firms that do not reach the rigorous standards required are not able to continue in business and that poor standards start to be driven out of the market.
With regard to the price of credit, the Government believe that consumers should be protected from unfair costs and charges in the market. The Government showed their commitment by legislating to require the FCA to introduce a cap on the cost of payday loans, which came into force on 2 January 2015. The Government were clear that an interest rate cap or a cap that covered only some of the fees and charges that payday lenders may impose would be ineffective; I remember discussing some of the finer points of that sentence at some length with the hon. Member for Walthamstow. The FCA therefore designed a cap to include all fees and charges that may be incurred in relation to a payday loan, including arrangement fees and default penalties.
The Government legislated to give the FCA the power to cap the cost of all forms of credit. They have placed a duty on the FCA to use that power to impose a cap on the cost of payday loans because of the clear evidence of consumer detriment in that sector. The objective was to target payday lenders. However, the FCA retains the power to cap the cost of all forms of credit if it thinks that that is necessary to protect consumers, and it has said that it will keep the issue of capping the cost of credit in other markets under review.
Stella Creasy
Can the Minister set out for us, then, what evidence he would look for in order to introduce a cap on the charges that the rent-to-own sector may impose? I wonder whether he has a note that will help him to explain what levels of detriment, of costs, would have to apply. Some of us may argue that the cap on the payday lending industry is a little high at the moment, but it could be brought down. The Minister makes the point about a test. What tests would he set?
Damian Hinds
The test would be to appoint a regulator that we believe in and give it the tools to be able to make the decisions—give it the enforcement powers and the analytical capability—rather than, as a Government, meddling in the individual decisions on the details of the regulation. Appointing a regulator is historically how we have done things in this country, not just in this market but in others. It does not always please everyone all the time. Sometimes, people may feel that things should move more quickly or more slowly or be somewhat different, but in general it is a good way to protect consumers.
If at some point we think that the regulatory system in toto is not working, we change the regulatory system, but I do not think that it is right for Government necessarily to have a prescriptive answer to every subsection of the market; as the hon. Member for Walthamstow rightly said, this market, in its broader form, has a remarkable ability to shape-shift. If we go very specifically after one part of it and try to change one specific practice, we will find that something else changes somewhere else that we did not know about. That is why it is important to have this broad regulatory framework that includes high-level principles of fairness to the consumer, with the regulator stepping in to license and delicense operators when it feels that that is necessary.
Stella Creasy
Obviously, the Minister will be conscious that doing nothing has consequences, too; we have seen that in relation to all the people we have been talking about today, who have been ripped off by these companies. The Minister will also be aware that, on payday lending, the Government did not accept the argument that he is putting forward—that the Government should not intervene and set a cap—and did recognise the need to set a series of tests. Opposition Members would be incredibly sympathetic if he wanted to break his vow of libertarian conservatism and say, “Actually, there is a need to intervene because we see this predatory behaviour in this industry.” I want to press him. Is he saying that he would be opposed to learning the lessons from payday lending and to the Government’s stepping in and introducing proposals for a cap on the rent-to-own sector, despite the consequences of doing nothing, which we are seeing now?
Damian Hinds
The hon. Lady, although passionate, is not right when she says, “The Government did specifically this.” The Government put a duty on the FCA with regard to that part of the market. They also, at the same time, gave a power to the FCA to do something in parallel, in other parts of the broader consumer credit market, if it deemed that necessary.
Ultimately, individual organisations make their own commercial decisions on prices, interest rates and default fees for their products. However, the Government believe that it is in the interest of lenders to consider the impact on their customers and, of course, to treat them fairly.
On the affordability of credit, rent-to-own firms must fulfil a number of requirements. When the responsibility for regulating consumer credit transferred from the OFT to the FCA, the FCA turned key elements of the OFT’s irresponsible lending guidance into binding rules. Those are enforceable with the full range of FCA enforcement powers. They set out that a firm should assess the customer’s creditworthiness, having particular regard to the potential for the commitments to impact adversely on the consumer’s financial situation and taking into account information that the firm is or ought reasonably to be aware of at the time and the consumer’s ability to make repayments as they fall due. The FCA’s rules are aimed at strengthening consumer protection and are based on the simple principle that money should be lent only to a person who can afford to repay it. Firms are also provided with greater clarity on what is expected of them and the sanctions if they lend irresponsibly.
Rent-to-own firms, like all consumer credit businesses, are required to make affordability checks for consumers taking out an agreement. The FCA makes it clear that a firm should lend responsibly and should take reasonable steps to assess the customer’s ability to make repayments in a sustainable manner, without undue difficulties and without having to borrow further. Ultimately, credit should be extended to a consumer only if they can afford it. The extent and scope of affordability checks are determined by a number of factors, which include, as well as the financial position of the customer, their vulnerability and in particular whether the firm understands that the customer has some form of mental capacity limitation or reasonably suspects that to be so. Some of the casework examples given by my hon. Friend the Member for Blackpool North and Cleveleys throw that requirement into sharp relief. In addition to that, on 23 February 2015 the FCA published a paper on consumer vulnerability and a practitioners’ pack to assist firms in addressing the needs of customers in vulnerable circumstances.
Some concern has been expressed that rent-to-own agreements are not always adequately explained to consumers before they enter into them. That point was made from the Opposition Benches. The FCA requires firms to provide adequate pre-contractual explanations to enable consumers to assess whether the proposed credit agreement suits their needs and financial situation. Consumers can compare the cash price quoted in the pre-contractual information with the price of equivalent goods elsewhere to decide on the best deal. That ensures that consumers have the ability to make the financial decision that best suits their needs.
The Government are aware that consumers are sometimes required to take out insurance and service deals when entering into a rent-to-own agreement and that that could cause consumer detriment. Although there is concern that those deals raise the total cost of an agreement, the Government have ensured that where insurance is required as a condition of credit, the cost of the insurance must be factored into the APR, so that consumers can make a comparison on the basis of total costs and make informed decisions about the agreement that they are entering into. Furthermore, when firms sell insurance products, they must do so in line with the FCA’s requirements about assessing consumers’ eligibility to claim on a product.
The reforms made to consumer regulation by the Government and the FCA have given consumers new protections, and the regulatory framework means that consumers will continue to be protected in the future. It is important that avenues of credit remain open to those who need them, while consumers are protected from harmful practices.
Stella Creasy
I have asked the Minister about the Consumer Rights Act 2015 and the commitments given to hon. Members by BIS Ministers that these practices—the selling of warranties and insurance products—would be covered by consumer rights legislation. The things that he is saying do not quite match what those Ministers said. Can he clarify whether he has spoken to the Ministers in BIS about the Consumer Rights Act and its role in tackling the bundling up and selling of insurance products and warranties, and will he commit to raising that issue with the consumer rights implementation group? If nothing else, he could get that group to look at whether being required to buy an additional product when someone simply wants to buy the original product breaches basic consumer rights.
Damian Hinds
I will have to write to the hon. Lady about the details of the regulation on bundling. In general, price bundling in markets is not illegal, but on the specifics of this market I will have to get back to her.
The Government have set up the Money Advice Service, which provides a single point of debt advice for consumers and allows those who face problems with debt to obtain free and impartial money advice. This year, MAS will spend £47 million on debt advice, delivering through its third sector partners an increase of almost £9 million on the previous year.
It is important to take a joined-up approach to the provision of free debt advice. Following the independent review of MAS, the Government welcomed the creation of a debt advice steering group, which will help to improve the effectiveness and efficiency of free debt advice provision by bringing together senior representatives of the debt advice charities, high street banks, water and energy bodies and devolved organisations.
Yvonne Fovargue
I welcome the fact that there will be a body, but is it not appropriate to get local authorities involved as well, because they quite often fund free debt advice in their areas? I also feel that the Local Government Association needs to be involved in the body.
Damian Hinds
The steering group will be an open forum to involve all relevant and interested parties, and I take on board the point that the hon. Lady makes. I wanted to come back to a point that she raised earlier, which my hon. Friend the Member for Blackpool North and Cleveleys also mentioned: where the consumer stands in relation to part-paid goods. The Consumer Credit Act 1974 states that in a hire purchase agreement, a court order is required to repossess goods if a third of the total cost has been repaid. Furthermore, where 50% of the total price has been repaid, a consumer can return a product without penalty and the agreement will finish.
Stella Creasy
One thing that we see with such companies is that they move the goalposts with consumers. First, they do not tell consumers that a court order is required to repossess goods. Secondly, the amount that constitutes 50% moves, because of some of the charges applied. Will the Minister commit to reviewing that area? As he says, consumer protection exists, but because companies change how they lend to people, consumer rights are not being upheld.
Damian Hinds
The hon. Lady raises an important point. It is one thing to have rights, but another to know what they are. That is not restricted to the rent-to-own sector or to consumer credit, and organisations such as Citizens Advice have an important role to play in making that plain. It is an important part of disclosure for firms to make that known. The regulatory regime and enforcement are designed to provide confidence that that is happening in reality.
That brings me to my more general concluding point. We are in a new era, with a new framework. I pay tribute to Martin Wheatley and the FCA for the speed at which they have introduced a more positive framework. Many of us have taken an interest in consumer credit issues and detriments in the market over several years, and the FCA framework now contains a lot of what people have asked for. In addition, I pay tribute to hon. Members from all parts of the House who have taken a constant interest in the subject and kept it at the forefront of public policy debate.
None of the issues that we have talked about today is new. The leading home credit provider first came into being in Victorian times, catalogue lending has been with us for as long as anybody here can remember and rent-to-own shops existed long before 2010. Moreover, the market can and does change; we talked earlier about its ability to shape-shift. The Government have adopted a proportionate approach to the market. The hon. Lady suggested that I might have felt constrained by being in coalition between 2010 and 2015. I wonder what constrained her, or her colleagues in the Labour party, for the 13 years before 2010, when they did not do all the things that she is now demanding from the Government of today.
More broadly, I think that the approach has to be a judicious combination of financial education, sensible regulation and ensuring that alternatives are available. In all three of those areas during the past five years there has been a significant shift, with the inclusion of financial education on the national curriculum, the new FCA framework, Government support for the credit union sector and the accompanying regulatory change.
Rent-to-own is an important part of the consumer credit market. My hon. Friend the Member for Blackpool North and Cleveleys is absolutely right to keep our focus on it, and we will continue the dialogue.