Wednesday 14th April 2021
(3 years, 8 months ago)
Lords ChamberFinancial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Amendment Paper: HL Bill 162-R-III Third marshalled list for Report - (14 Apr 2021)
15:52 - Division conducted remotely on Amendment 15 - Ayes: 249 / Noes: 279 - Amendment 15 disagreed.
21:18 - Division conducted remotely on Amendment 21 - Ayes: 273 / Noes: 235 - Amendment 21 agreed.
“Regulated activities and application of Consumer Credit Act 1974
(1) This section applies on or at any time after the making of an order under section 22 of the Financial Services and Markets Act 2000, after this section comes into force, which has the effect that a relevant credit activity becomes a regulated activity for the purposes of that Act.(2) Section 107(6) of the Financial Services Act 2012 (power to make provision about the application of the Consumer Credit Act 1974) has effect as if—(a) the reference to an order of the kind mentioned in subsection (1) of that section included an order of the kind mentioned in subsection (1) of this section, and(b) the references to a transferred activity included a relevant credit activity which is the subject of an order of the kind mentioned in subsection (1) of this section.(3) “Relevant credit activity” means the activity of—(a) entering into an agreement described in article 60F(2) or (3) of the Regulated Activities Order (certain borrower-lender-supplier agreements for fixed-sum credit or running-account credit) as lender, or(b) exercising, or having the right to exercise, the lender’s rights and duties under such an agreement,so far as the activity is not a transferred activity (as defined in section 107(1) of the Financial Services Act 2012).(4) “The Regulated Activities Order” means the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) as it has effect on the passing of this Act.”Member’s explanatory statement
Section 107(6) of the Financial Services Act 2012 provides that the Treasury may disapply provisions of the Consumer Credit Act 1974 in relation to an activity previously licensed under the 1974 Act, or exempted under specified provisions of that Act, where the activity has become a regulated activity for the purposes of the Financial Services and Markets Act 2000. This amendment extends that power to certain other activities of lenders.
The Minister of State, Cabinet Office (Lord True) (Con)
My Lords, the Government have brought forward Amendment 14 to ensure that buy now, pay later products can be brought into scope of regulation in a way that is proportionate to the risks that they pose to consumers. As noble Lords will recall from previous debates, to which the Government listened carefully, on 2 February following the publication of the Woolard Review into the unsecured credit market, the Government announced their intention to regulate interest-free buy now, pay later products. Following that announcement, the Government have been working at pace to ensure that this can be done in a proportionate and timely manner. Amendment 14 is the next step in this process. Many noble Lords were keen to see progress on the issue, so I hope that they will welcome the amendment today.
The Government recognise the concerns that exist with these products as the market continues to grow in the United Kingdom. We are therefore acting decisively to address the risk of detriment to consumers. The Government intend to bring buy now, pay later products within the scope of the regulatory framework, which includes the application of the Consumer Credit Act 1974. However, as noble Lords have previously heard, it is important to note that those products are interest-free, and thus are inherently lower-risk than most other forms of borrowing. Used properly, they can provide a lower-cost alternative to mainstream or high-cost credit. The Government’s view is that they can therefore be a useful part of the toolkit for managing personal finances and tackling financial exclusion, a topic that I will return to later in the debate. It is therefore essential that when buy now, pay later products are brought into regulation, it is done in a way that provides robust consumer protection, while ensuring that it is viable for firms to continue to offer these products. Amendment 14 will ensure that that can be done.
Some of the provisions of the Consumer Credit Act could be disproportionate, given the short term, interest-free nature of buy now, pay later products. They could also materially impact the way in which consumers are able to access these products. As a result, this amendment seeks to provide the Government with the power to ensure that the provisions of the Consumer Credit Act 1974 that will apply to buy now, pay later products are proportionate to the risks that the products present. This will allow the Government to apply only the provisions of the Act that have been determined to be proportionate to the risks posed by buy now, pay later products.
The Government intend to publish a consultation later this spring where the views of consumers, buy now, pay later providers and the retailers that offer these products will be sought on this matter. We will carefully consider these views to inform our approach to creating a proportionate regime, including decisions on which provisions in the Consumer Credit Act should apply to buy now, pay later agreements. Following this, we will take forward the necessary secondary legislation to bring buy now, pay later agreements into regulation. That secondary legislation will be subject to the affirmative resolution procedure, meaning that noble Lords will have the opportunity to further scrutinise and comment on the Government’s proposals. I therefore ask that your Lordships support this amendment to ensure that the regulation of buy now, pay later can proceed both at pace and in a proportionate manner. I beg to move.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to follow the Minister. In doing so, I declare my financial services interests as set out in the register. I would like to be the first to offer my support for Amendment 14 and what it seeks to achieve. I congratulate my noble friend on the decision to use the affirmative procedure to bring these powers into force.
I will now speak to Amendment 35 in my name. The thinking behind it is quite straightforward: financial exclusion has dogged our nation for decades, ruining individual lives and putting down potential. Solutions exist and thousands of people are working so hard in this area, but we need to do more and we need more innovation: hence the two elements in Amendment 35. It seeks to give the Bank of England—our central bank—a more significant role when it comes to financial exclusion. The Bank has an enviable brand, respected right across the UK and revered around the world. This brand could be well put towards solving the problem of financial exclusion.
The first part of Amendment 35 seeks to give the Financial Policy Committee of the Bank of England an objective to monitor financial exclusion. As noble Lords know, the FPC is responsible for financial stability in the UK. I believe there are 407 billion new reasons to take this opportunity to reconsider financial stability and include financial exclusion within the remit of the FPC.
The second limb of the amendment seeks to suggest the opportunity for the Bank to offer basic bank accounts to those who find themselves financially excluded. The take-up of bank accounts for those financially excluded is not just a measure of what is currently available from retail providers. The history of those individuals also plays a key part, so, again, the brand and the central place of the Bank could play a critical role here. If we considered some of those accounts potentially being digital accounts—perhaps central bank digital currency accounts or digital pound accounts—the Bank might play a critical role in addressing digital as well as financial exclusion.
The Old Lady of Threadneedle Street could be not just lender of last resort but potentially, through Amendment 35, provider of first support for those individuals en route to financial inclusion. Provider of first support is certainly worth a thought. Does the Minister agree?
Lord True (Con)
My Lords, nearly 190 years ago, the great Duke of Wellington came into a new House and famously commented, “I never saw so many shocking bad hats in my life.” Looking round today, I have to say that I never saw so many magnificent new haircuts in my life—and I look forward to seeing many more in the next days and weeks.
I thank all those who have contributed to the debate, on a subject that I assure noble Lords we shall continue to consider very carefully, as the noble Lord, Lord Tunnicliffe, asked. I am grateful for the general support that has been given, and the generous remarks made by the noble Lord. I am sure I speak for my noble friends the noble Earl and Lady Penn when I say how much we have appreciated the constructive engagement of Peers on all sides with this legislation. I assure the noble Lord that, through the consultation and leading forward to the affirmative instrument we have promised, we will continue to give the most careful consideration to all ideas.
For my noble friend Lord Naseby, I can again confirm that there will be a full public consultation as soon as possible after Royal Assent. That will allow input from all interested parties, as my noble friend asked.
I thank the noble Baroness, Lady Kramer, for her broad support. She criticised the product, albeit that it is a lower risk than some other types of credit. We certainly agree that a proportionate approach to regulation is the right goal, and that is what I set out. The Government are engaging with stakeholders and will, as I say, consult in the spring to ensure that regulation provides the appropriate degree of consumer protection. I assure the noble Baroness that the Government are not complacent. Indeed, that is why we are taking action and are open to continuing consideration and discussion on this matter. All in all, I am very grateful for the response from your Lordships to government Amendment 14.
I will now address the second amendment in the group, Amendment 35, from my noble friend Lord Holmes of Richmond. I join others in paying tribute to his indefatigable work in this regard, which we all so much admire. His amendment similarly deals with products that aim at increasing financial inclusion.
Amendment 35 would make the Financial Policy Committee of the Bank of England responsible for monitoring financial exclusion and reporting on progress on offering basic bank accounts to financially excluded individuals. The Financial Policy Committee has responsibility for addressing systemic risks and protecting and enhancing the resilience of the UK financial system. As my noble friend Lady Noakes has argued, I am afraid the Government do not believe it is an appropriate body for this task. By the way, I hope no one listening to our debates will draw from the fact that the Bank took away my noble friend’s cheque book any conclusion about her creditworthiness, nor indeed start a run on the Bank of England. It is a question of principle, and we do not believe the body is appropriate.
However, I reiterate that reducing financial exclusion remains a key priority for the Government and one we continue to drive forward. I think we in this debate are all agreed on that, albeit with due caution, as expressed by my noble friend Lady Neville-Rolfe and others. We are committed to ensuring that everyone can have access to useful and affordable financial products and services. This has also been a particularly important part of our work during the pandemic.
Noble Lords asked for examples. One way we are doing this is through the biannual Financial Inclusion Policy Forum, of which the Economic Secretary is co-chair. Just a few months ago, in November, the Treasury published its latest annual Financial Inclusion Report for 2019-20. It sets out all the recent work on financial inclusion. Not only this, but the Treasury’s Basic Bank Accounts report came out in January this year.
Access to a bank account is the first step on the path to financial inclusion and capability. Basic bank accounts are an important product and allow those who are financially excluded in the United Kingdom to access mainstream banking services, providing people with a way to receive their income and manage their money securely and confidently. To my noble friend Lady McIntosh, I can say that this includes those with low credit scores.
In 2014 the Government negotiated a voluntary agreement with the banking industry on the establishment of basic bank accounts, in which industry agreed to the publication of basic bank account data. Indeed, since 2016 the Treasury has published data on basic bank accounts annually, including data on firms’ basic bank account market shares. We have made progress on this issue. The most recent report shows that, as of June 2020, there were 7.2 million basic bank accounts open in the United Kingdom.
I do not in any way underestimate the importance of the points put forward by my noble friend Lord Holmes of Richmond, but the Government are confident that Amendment 35 as drafted would not do more than what the Government are already doing to tackle financial exclusion or to monitor financial inclusion and report progress on basic bank accounts. Though we admire its intent, it bears a significant risk of duplication of effort, and the Government therefore cannot accept it. Having listened carefully and undertaken to continue to listen carefully to my noble friend, I ask him not to press his amendment.
Lord True (Con)
My Lords, I am grateful to all those who have spoken in this short debate. As has been said, Amendment 15 seeks to require the Government to make regulations to facilitate the availability of sharia-compliant financial services in the UK, including a sharia-compliant student finance product, within six months of the passing of the Bill.
Institutions across the United Kingdom have been providing sharia-compliant financial services for nearly 40 years, and the United Kingdom is the leading western centre for Islamic finance. I do not believe that anyone would dispute that the United Kingdom is a world leader in this area. This Government continue to promote the growth of this sector, supporting domestic financial inclusion and our connections with key markets abroad. With respect, I think that, in this context, the charges from the noble Lord, Lord Sharkey, of “casual contempt” for the Muslim community and of discrimination were a little misplaced.
Student finance is not regulated by the FCA. I did, however, listen very carefully and respectfully to the noble Baroness, Lady Sheehan, who spoke from a position of personal commitment. I can assure the noble Baroness and the noble Lords that the Government wish to extend the reach of the student finance system so that everyone with the ability to benefit from higher education can do so. That is why we have legislated to make a system of alternative payments that is compatible with Islamic finance principles possible.
As I said in my remarks in Committee, a range of complex policy, legal and systemic issues need to be resolved before a Sharia-compatible product can be launched. Despite these challenges, the Department for Education has been working with specialist advisers to establish an appropriate product specification that meets the requirements of Islamic finance.
I also heard the concerns raised in Committee, and by the noble Lord, Lord Sharkey, again today, that it is not clear enough when the Government will take the next step. Since Committee, when I was concerned to hear those criticisms, I have discussed the matter with the relevant Minister in the Department for Education. Based on this, I can report that this matter is being considered as part of the wider review of post-18 education and funding.
I hope, therefore, that noble Lords will appreciate that it is not the right time to act until the wider strategy on post-18 education has been settled. I appreciate that some noble Lords, including those who have spoken, would like to see faster progress here—the question of when was put. I am able to reassure the House that there will be an update on this work as part of the review of post-18 education and funding when it is published, which will be at the next multi-year spending review. The Government will conduct the next spending review later this year. Further details on the nature of that spending review will be set out in due course.
On that basis, and with the commitment to progress as part of the review, I hope that the noble Lord will accept the assurance that the Government are committed to making progress on this very important issue and feel able to withdraw his amendment.
Lord Sharkey (LD) [V]
I thank all noble Lords who have spoken in this brief debate and I thank the Minister for his response. I point out, however, that we legislated to take powers to do this four years ago. Nothing has happened since. I remind the Minister, too, that the Help to Buy system was up and running within five or six months—and that was Islamic finance.
I also note that references to the post-18 education review seem to me—and have always seemed to me, as I said in my letter to the Minister, to which I did not get a response—completely irrelevant. We want students, Muslim or not, to be treated equally. If there is a change, after the post-18 Augar review, to the way that student finance happens, it should apply to Muslim and non-Muslim students equally: there should be no need to wait to establish the principle that Muslim and non-Muslim students should have equal access to finance. There is no need to wait.
I note, finally, that the promise of an update is not a promise to do anything at all, and does not even come close to setting a date by which these cohorts of Muslim students can gain access to finance and go on to university. In the Minister’s response there was no promise and no clarity, just talk of commitment. But after 13 years of this promise, talk of commitment is not enough, and I wish to test the opinion of the House.
Lord Tunnicliffe (Lab) [V]
My Lords, the issues covered by this group are wide-ranging in nature but all important. Amendments 16 and 25 return to issues that we explored in Grand Committee, while the right reverend Prelate the Bishop of St Albans and the noble Lord, Lord Young of Cookham, have found interesting ways to bring important issues to our attention.
The noble Baroness, Lady Meacher, made a convincing case for the need to reform how bailiff activity is regulated. One interesting thing about the Covid-19 pandemic has been its ability to make us look at long-standing issues in a new light, and issues of personal debt are no exception to that. It is promising that both sides of the argument—bailiffs themselves and charities providing advice to those with problem debt—seem to agree on the need for change. This is not a common occurrence, and it provides an opportunity that I hope the Government will seize in the weeks and months ahead.
I know that my noble friend Lord Stevenson, working alongside the noble Baroness, Lady Meacher, has been pushing on this in the background in the hope that the Ministry of Justice can provide a more meaningful response than we had in Grand Committee. What we really need is for the department to identify an appropriate legislative vehicle for this matter. We very much hope that this will be signposted in the document promised for later this year.
Amendment 26 seeks to broaden the scope of the Financial Ombudsman Service to allow potential customers to submit complaints against financial services firms. This is a fair question to ask: clearly the noble Lord, Lord Leigh, is not satisfied with the previous answer to it. On day 1 of Report, we passed an amendment that would enable the FCA to impose on regulated financial services entities a statutory duty of care towards customers. We hope that, despite their misgivings, the Government take this forward, as we believe that new consumer-centric working practices could negate the need for a proportion of complaints to the ombudsman.
Amendment 27, tabled by the right reverend Prelate the Bishop of St Albans, is not only an impressive interpretation of scope, but raises important questions in relation to the tools available to those experiencing issues with problem gambling. Labour has previously been critical of the Government’s lack of urgency in launching reviews and introducing legislation and regulation. That process is now under way—indeed, I believe that the initial call for evidence has now closed. It is clear to all colleagues that the current regulatory regime has serious shortcomings. Without seeking to pre-empt the outcomes of the DCMS-led review, I hope that the Minister can demonstrate that the Government will take the right reverend Prelate’s suggestions on board.
Finally, Amendment 37C raises what looks to be an important issue in relation to certain payments made from child trust funds or junior ISAs on behalf of children with learning difficulties. I do not believe that we have touched on this issue previously, so I hope that the Minister will commit to a future discussion with the noble Lord, Lord Young of Cookham, and my noble friend Lord Blunkett.
Lord True (Con)
My Lords, this has been a long and important debate, which I found to be of great interest. As many will know, I am not responsible for the grouping of amendments. That is not a matter for the Executive; it is a matter for the House. However, following on from the noble Lord, Lord Addington, I feel a little like the “MasterChef” hopeful who presents his dish to the judges and is told that there are too many things on the plate. There are different issues conjoined here: the important issue of the behaviour of bailiffs—as, being an old boy, I still call them—credit card applications, gambling protection and child trust funds in the case of incapacity. It is a diverse group of amendments, but they all relate to the protection and fair treatment of consumers and, as we have heard today, of the most vulnerable people in society. I will try to respond to each of them, but I am not certain that I will be able to satisfy every hope of everyone who has spoken. I hope, however, because I am confident from the discussions that I have had with colleagues in different departments—I come as an outsider to this—that I can assure your Lordships that my perception is that the Government are positively engaged on all these fronts and are listening, have listened and will listen.
Amendment 16, from the noble Baroness, Lady Meacher, and others, would commit the Government to making the activities of enforcement agents—also known as bailiffs—in relation to taking control of goods a regulated activity under the Financial Services and Markets Act 2000. The Government understand the importance of debts being enforced in a fair and proportionate manner. Since Committee, I have had the great advantage of speaking directly to the noble Baroness and others, including the noble Baroness, Lady Morgan, and the noble Lord, Lord Stevenson of Balmacara, along with my colleague, my noble friend Lord Wolfson from the Ministry of Justice, which is the department with responsibility for the regulation of enforcement agents. I know that my noble friend Lord Wolfson and the Minister of Justice have heard the arguments of noble Lords. I can reassure the House that the Ministry of Justice is currently reviewing the case for strengthening the regulation of the enforcement sector. As we have heard, that would be widely welcomed, as representatives from the enforcement and debt advice sectors have united to form a working group, led by the Centre for Social Justice, to consider how an independent oversight body could raise standards in the sector. The Government welcome this.
The Ministry of Justice recognises the important momentum of this development and looks forward to continuing to engage with the working group on its proposals for an enforcement conduct authority. The Ministry of Justice has also assured me that it would want to work closely with the working group to monitor the operation of the enforcement conduct authority and will review its operation within two years. At that point, it will consider whether there is a case for legislation to provide statutory underpinning to the body if necessary, as some noble Lords have argued. I stress that the Ministry of Justice will look to work with the enforcement authority as soon as it is established to assess what can be done to improve standards on the ground. It does not see the two years as a target: it would be willing to review the authority operation and consider legislation before the two years if necessary. I hope that that has reassured noble Lords that the Government take this offer from industry very seriously.
On the amendment itself, it would by default require the FCA to act as the regulator of enforcement agents unless its functions were delegated to another body within two years following the passage of this Bill. As I set out in Committee and in the valued exchanges that I have had with noble Lords involved, I think that there is now agreement—indeed, that has been expressed by the noble Baroness, Lady Meacher, and others—that the FCA would not be the right body for such a function. I must underline that the Government’s view on this will not change between now and Third Reading. We do not believe this Bill to be the right legislative vehicle for any changes to the regulation of enforcement agents. I hope that, having heard the assurances that I and my noble friend Lord Wolfson have given, noble Lords will withdraw the amendment and continue to engage with the Government as we go forward.
My noble friend Lord Trenchard asked about the use of the Corporate Insolvency and Governance Act moratorium to give UK companies a formal breathing place in which to pursue a restructuring plan in case of indebtedness. The power is working as intended. A handful of firms have already successfully applied to use the moratorium under the Act. As government support and regulatory easements come to an end, we expect the number of firms using the moratorium to increase. The new restructuring plan is also being used to good effect with Virgin Atlantic and other large firms using the new tool to recapitalise balance sheets.
Amendment 26 from my noble friend Lord Leigh of Hurley seeks to expand the jurisdiction of the Financial Ombudsman Service to include potential customers. I am grateful to my noble friend for his characteristic persistence on this important issue and I know that he is keen to make sure that the regulatory system ensures that others are not faced with the same potential risk of fraud that he experienced. As I sought to reassure noble Lords in Committee, it is already the case that both customers and potential customers of a firm can seek redress through the FOS scheme under the FCA’s existing rules, notably rules in the FCA dispute resolution handbook.
If we have understood the specific case correctly, my noble friend was the unfortunate victim of attempted fraud and did not intend to be a customer of the firm. He was therefore not a potential customer as defined by the relevant rules that cover people seeking to be a customer. As I said in Committee, I assure the House that had this incident led to financial loss or to my noble friend being pursued for a debt that was not his, he would have had recourse to the FOS and been supported by the current regulatory framework.
Lord Young of Cookham (Con)
My Lords, I thank my noble friend for stretching the constraints that we understand are forced on him as far as we could reasonably expect. I ask him, without trampling on the independence of the judiciary, to convey to the Court of Protection before the next meeting the strength of feeling on all sides of the House about the need to streamline, accelerate and simplify the process.
In not ruling out legislation, does he understand that, in the next Session, if I, and others who have been good enough to speak, believe that progress has not been sufficiently speedy, we will be back with the first possible legislative vehicle to press the issue again, having taken on board some of the reservations expressed during the course of this debate?
Lord True (Con)
My Lords, I am confident that your Lordships’ Official Report is breakfast-time reading for every member of the Court of Protection, as indeed for every other citizen in this kingdom. I assure my noble friend that we will make sure that all those interested are made aware of the arguments that he and others have put before the upcoming meetings that have been referred to.
On going forward, I assure my noble friend that the Government will be happy to provide updates on progress on this matter to Parliament. We are very happy to continue the conversation with him, particularly on the issues that he has just raised.
Baroness Meacher (CB)
My Lords, I thank the many noble Lords who spoke so powerfully in support of Amendment 16. I also note the powerful speeches in support of the other significant amendments in this group, as has been pointed out. I reassure the noble Viscount, Lord Trenchard, that, in fact, we are very clear that the Financial Services Authority is not the right vehicle to become the regulator for the enforcement industry—we made that very clear to Ministers in our meeting, as the Minister knows, and I tried to make that clear in my speech. I am also very grateful for his response to Amendment 16 and the other amendments in the group.
Of course, the Minister will not be surprised that the many people involved in Amendment 16 will continue to work with the noble Lord, Lord Wolfson, and others to try to achieve statutory underpinning for the enforcement regulator from the start because the industry regards this as absolutely essential. We will look to the PCSC Bill as a possible vehicle for that. On that basis, I beg leave to withdraw my amendment.
Lord Tunnicliffe (Lab) [V]
My Lords, I shall be brief in responding to the amendment, which was ably introduced by my noble friend Lord Stevenson of Balmacara. We are grateful to the Minister and officials for their time discussing this and other consumer issues during the passage of the Bill. Those meetings have been useful, particularly for better understanding the numbers of people affected by financial agreements enabled by the antiquated bills of sale Acts referenced in the amendment. We understand that the Government cannot simply accept the amendment, because of the complexity of the issue and the scope for unintended consequences. Normally we would roll our eyes on hearing that phrase, but, as my noble friend noted, this amendment was tabled as a means of starting a conversation. We hope the Minister can give a strong commitment from the Dispatch Box that the Treasury will undertake a proper review of this part of the credit market, and will have regard to the earlier Law Commission recommendations when deciding on a policy response.
Lord True (Con)
My Lords, again I thank all those who have spoken in this slightly shorter debate. I thank the noble Lord, Lord Stevenson of Balmacara, very much for his continued engagement with all aspects of the Bill and with the underlying issues of credit—on which he has long been such a distinguished advocate—and for his interest in this issue. I hope I will be able to give him an assurance that he will find satisfactory.
First, however, I must respond to my noble friends Lady McIntosh of Pickering and Lord Holmes, who asked about the Law Commission report. The noble Baroness, Lady Kramer, also alluded to it. I set out in Committee the reasoning behind the Government’s decision not to take forward their proposed goods mortgages Bill, which had followed from the Law Commission report, in 2018. That Bill would have repealed the bills of sale Acts and replaced them with a new goods mortgages Act, and it was the result of the Law Commission’s report on bills of sale, to which my noble friends referred.
However, when the Government consulted on the proposed goods mortgages Bill, the consultation responses—not all of them, I confess, but the serious responses—showed that while there was broad support for the proposed approach set out in the Bill, some stakeholders raised significant concerns about the degree of consumer protection afforded by the proposed regime. Furthermore, there was a risk that a more modernised, streamlined regime for consumers could lead to more consumers using goods that they already owned as security for a loan, which is inherently a higher-risk form of borrowing. Given the concerns raised in the consultation and the shrinking size of the market, the Government decided not to take forward the goods mortgages Bill. Still, I highlight again that the use of logbook loans has fallen substantially and continues to decline: the number of bills of sale registered at the High Court has fallen from 52,000 in 2014 to just 3,758 in 2020—and a little higher the previous year. Obviously, we will watch this figure.
A number of other points were also raised in Committee. The noble Lord, Lord Stevenson, raised the cost of logbook loans. It has been suggested that some of these loans have very high interest rates. There is already a power for the FCA to cap the cost of all forms of credit, including logbook loans. It will use that power where it thinks it is necessary to protect consumers. Most recently, it capped the cost of rent-to-own products in March 2019.
My noble friend Lady McIntosh questioned in Committee why a model that used hire purchase could not be used for logbook loans. Hire purchase is a financing option that allows borrowers to hire a car and then gives them the option to buy it by the end of the contract. This model would be inappropriate for borrowers who already own their vehicle, as ownership of a vehicle should automatically revert to the borrower when they have repaid their loan.
I turn to the amendment itself. As I explained in Committee, it is likely to have unintended consequences that could lead to a greater risk of detriment, particularly to borrowers. The repeal of the bills of sale Acts would not necessarily prevent this type of credit being offered. Rather, it would remove the statutory framework that governs this type of credit, which could inadvertently lead to a greater use of such lending through the removal of some of the frictions to which some who have spoken have alluded—“frictions” is a polite Treasury word—that the bills of sale Acts impose. Given that, the Government do not believe that repealing the bills of sale Acts would be an effective way of increasing protection for borrowers. Furthermore, the Government do not believe that it would be proportionate to introduce new legislation to specifically implement a replacement for the bills of sale Acts, given the continued decline in their use.
However, I recognise the strength of the feelings of the noble Lord, Lord Stevenson, on the subject of logbook loans, and I have heard the echoes that his resounding voice has provoked. I understand that he wants to know what plans the Government have to review the regulatory treatment of logbook loans. I have had the opportunity to discuss this issue with the noble Lord. As we look beyond the Covid-19 crisis, the Government are keen that work should progress to consider reform of the broader consumer credit regulatory framework to ensure that it remains fit for purpose. That is a substantial piece of work. As part of it, I can give the noble Lord the specific assurance that he asked for: the Government will consider the extent to which that regulatory framework can provide robust protections for logbook-loan borrowers and third parties who may unknowingly buy a car subject to a logbook loan. On that basis, I hope the noble Lord will feel able to withdraw his amendment. I have every confidence that, even if he does, he will continue to knock at the Government’s door.
Lord Stevenson of Balmacara (Lab) [V]
My Lords, I thank all those who have spoken on this amendment and those who spoke in Committee on this issue. It must be obvious that I think the case for reform here is unanswerable and that we need to move forward as soon as we can. The Minister made a kind reference to my assiduous pursuance of this over the last four years; I can assure him I have only just warmed up. I have plenty more capacity now that I have stepped back from the Front Bench and this remains one of my main targets—so I will be calling again in the near future.
I was slightly struck by the rather defensive notes in the early part of his speech, because I do not honestly think there is much you can say about bills of sale other than that, ironically, when they were first introduced—although not in Scotland—they were in essence an early form of consumer protection. What has gone wrong, of course, as he mentioned, is that the considerable collateral damage to subsequent purchasers of goods subject to bills of sale has been devastating for many people. Yes, it is true that the numbers are down, but I do not buy the argument that it is okay to let this egregious behaviour carry on simply because there are not very many. Every single person affected by this is affected in a most extraordinary way, and it should not happen.
Earl Howe (Con)
My Lords, it is a pleasure to turn once again to the issue of parliamentary accountability of the financial services regulators, and I thank all noble Lords who have contributed to this good debate. This is an issue of considerable importance to many in this House and, indeed, has been a central topic of debate during the passage of the Bill.
Each amendment in the group proposes different things but I know that at the heart of them all is a desire for reassurance from me, as Minister, that the Government agree with the regulators that Parliament has a unique and special role in relation to the scrutiny and oversight of the financial services regulators. I therefore take this opportunity to give the House that assurance. It is Parliament that ultimately sets the regulators’ objectives and, of course, right that it has the appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. This most certainly includes the way in which the regulators exercise their rule-making powers but also encompasses their wider work on supervision and enforcement across the financial services sector.
Noble Lords will, I hope, have had a chance to read the letters of 19 March from Nikhil Rathi, the CEO of the FCA, and Sam Woods, the CEO of the PRA, that I have deposited in the House Library and the Royal Gallery. Those letters can properly be interpreted as a commitment to the openness and sincere co-operation which the noble Baroness, Lady Bowles, said she sought. I do not in the least detect the complacency that the noble Baroness, Lady Kramer, said she detected in the letter from Nikhil Rathi. Perhaps I may quote the sentence that she cited. He said:
“We are committed to ensuring that Parliamentarians have the information they need to scrutinise our policy and rule proposals, particularly during consultation”.
I do not detect any shadow of qualification to that commitment. Sam Woods, chief executive of the PRA, wrote:
“When we publish consultations, we always stand ready to engage with Parliament.”
So the regulators have clearly demonstrated that they have heard the views expressed by noble Lords during the passage of the Bill. Despite the reservations of my noble friend Lady Noakes, I hope noble Lords accept that these letters take us forward in a meaningful and material way.
Lord True (Con)
My Lords, I thank those who have spoken. I have to say to many of them that, with great respect, I will disagree that these amendments are appropriate or effective. I must make absolutely clear that there is no prospect of the Government changing their position between now and Third Reading.
I want to start by emphasising, however, that the Government take this issue extremely seriously. I believed that that was understood in the private conversations that I felt privileged to have with Peers from all around the House and that the earnestness of Ministers in this area was understood and respected. I hope that that is the case, even if we disagree today.
We have a great deal of sympathy for mortgage borrowers who are unable to switch to new deals, which is why we and the FCA have carried out so much work and analysis in this area. The FCA has determined that there are around 250,000 people whose mortgages are currently held by inactive firms. That figure has been used by the noble Lord, Lord Sharkey, and others. The noble Lord, Lord Stevenson of Balmacara, said that I might detail different categories of people within that number and implied that that would not change the position. However, as my noble friend Lady Noakes observed, Parliament must surely legislate on the basis of actual numbers and evidence of the reality of the problem overall. While that figure is the total number of customers whose mortgages are held by inactive firms, not all those people are “prisoners”. Half of them, 125,000 mortgage holders, could switch to an active lender if they chose to. They could do so right now, without any action or intervention from government at all.
The Government have sought to make it as straightforward as possible for customers with inactive firms to switch. Whenever we have sold loans back to the private sector, we have included protections to ensure that customers’ ability to remortgage is unaffected. For example, the customer protections in previous sales of Bradford & Bingley and NRAM loans have included restrictions on the ability of lenders to impose financial barriers to remortgaging such as early repayment charges.
This means that there are around 125,000 borrowers with inactive firms who cannot switch, and the Government fully accept that that remains a significant number. Within that number, every household is a household of people. However, around 70,000 of those borrowers are currently in arrears. The Government do not underestimate how stressful it can be to be in arrears, but it is important to note that borrowers in arrears with inactive firms are in a similar situation to borrowers in arrears with active lenders. In both cases, it is not possible to move to a new fixed rate deal and it is not possible to switch lender. Customers in arrears with either inactive firms or active lenders have the same protection under the FCA’s conduct rules, whereby firms are required to make all reasonable efforts to explore arrangements to resolve the situation.
Around 55,000 customers are up to date with their payments but are also unable to switch. These consumers are constrained from switching because they do not meet the risk appetite of lenders in the active market. This is not to blame or accuse people in this position—of course, the Government do not do that, and I repudiate any such implication—but it is a simple point of fact that these borrowers have risk characteristics meaning they are unable switch to the active market. However, FCA analysis has found that, despite this, on average the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active lenders who are now on a reversion rate, which will normally be their lender’s standard variable rate.
There has been considerable scrutiny of this figure, and the noble Lord, Lord Sharkey, simply claimed it was wrong, so I will take a moment to explain the analysis that underpins it. The FCA used its regulatory data returns, information from the third-party administrators who service these mortgages, and credit reference agencies to compare the interest rates paid by borrowers with inactive lenders to borrowers with similar characteristics in the active market. As my noble friend Lady Noakes stated, consumers with these kinds of risk characteristics would not be able to easily access new fixed rate deals in the active market. It is not the case that borrowers with similar high credit risk characteristics can access the lowest rates in the active market. Where they can access new fixed rate deals with active lenders, these will tend to be specialist lenders who will charge much higher rates than the major lenders.
My noble friend Lord Holmes of Richmond reasonably asked what the Government are seeking to do. Importantly, the Government, working with the FCA, have created additional options for some of these 55,000 borrowers who are with inactive firms but are not in arrears. This involves a new process, for which I believe time should be allowed, that permits active mortgage lenders to waive the normal affordability checks for borrowers with inactive lenders who meet certain criteria, for example not being in arrears and not wishing to borrow more. This is called the modified affordability assessment.
Inactive firms have been contacting borrowers who have been struggling to switch, setting out that new options may be available for them in the active market. I am pleased to tell the House that a number of lenders, including major lenders like Halifax, NatWest and Santander, have also come forward with options specifically for these borrowers. I encourage all borrowers with inactive firms to consider whether they may be able to take advantage of this new switching process. While this may not be a silver bullet for all borrowers with inactive firms, it represents a significant change for borrowers with inactive firms who may previously not have been able to switch.
The Government have taken other action in the period of Covid to help and support borrowers. In October, the FCA confirmed additional options to support borrowers, including guidance to allow borrowers who are up to date with their payments with a recently matured or soon-to-mature interest-only or part and part mortgage to delay repaying the capital on their mortgage while continuing to make interest payments. This guidance is in place until October 2021. The FCA also confirmed, as I have explained, that it is making intra-group switching easier for borrowers with an inactive firm; that is, the same lending group as an active lender. Furthermore, in September the Money and Pensions Service launched online information and a dedicated phone service for borrowers.
We have also considered the regulation of customers with inactive firms. It is important to be clear that all borrowers with regulated mortgages must always have their mortgages administered by a regulated firm—this is the case for both inactive firms and active lenders. Some inactive firms, such as Landmark Mortgages and Heliodor Mortgages, are also regulated by the FCA already.
As the Economic Secretary to the Treasury and we have explained, the Government are always open-minded about whether further regulation would deliver greater protection, but we are yet to see evidence to suggest that there are borrowers who are currently being harmed by the current regulatory regime in relation to borrowers in the active market, and who would therefore be helped by extending the FCA’s remit.
Amendments 21 and 37B seek to provide additional protections for borrowers with inactive firms through direct price intervention by the FCA and the Treasury. Amendment 21 seeks to cap standard variable interest rates for borrowers with inactive firms. My noble friend Lady Noakes spoke powerfully on the implications of this policy. As I have discussed, borrowers with similar characteristics in the active market are unlikely to be able to secure new fixed-rate deals in the active market. As my noble friend argued, a cap for borrowers in the inactive market would be deeply unfair to higher-risk borrowers or those in arrears with active lenders, who would continue to pay normal reversion rates, which would be higher than the cap proposed.
Capping SVRs on mortgages with inactive firms would also have an impact on their financial stability because it would restrict lenders’ ability to vary rates in line with the market conditions. I know that some in the House found my noble friend’s speech uncongenial, but this is a fact. This concern was supported by the London School of Economics’ recent report on mortgage prisoners, which stated:
“Capping SVRs at a level close to the best rate for new loans could create harm in other parts of the market, and we do not recommend it.”
Both Amendments 21 and 37B would also require inactive firms and unregulated entities to offer new fixed-rate deals. On Amendment 21, it is not clear how the FCA should take account of the range of features and characteristics that inform interest rates in the active market—for example, product fees or borrower characteristics. Amendment 37B seeks to require the Treasury to implement regulations that provide fixed-rate deals to customers with inactive firms that are in line with deals available to borrowers in the active market with broadly similar creditworthiness characteristics.
As I have noted already, FCA analysis has made clear that borrowers with inactive firms who are up to date with their payments but unable to switch on average pay just 0.4 percentage points more than customers in the active market with similar characteristics who are now on the reversion rate. Therefore, it is not clear that this amendment would lead to materially lower rates for most consumers with inactive firms.
Being with an inactive firm does not stop a consumer from applying for mortgages in the active market. Consumers in the inactive and active market applying for new credit are assessed in the same way. Consumers in the inactive market are already able to access mortgage products available to consumers in the active market with broadly similar creditworthy characteristics.
Finally, both Amendments 21 and 37B would require firms that do not currently have the expertise, systems or regulatory permissions necessary to offer new mortgage products to do so.
I reiterate that the Government do not underestimate the stress that being unable to switch your mortgage can cause. I also reiterate that the Economic Secretary has stated the Government’s concern and interest in seeking ongoing solutions to this problem. However, in making policy we must be guided by the evidence, which demonstrates that consumers with inactive firms are not in fact significantly disadvantaged versus their peers in the active market, and we must be fair to those borrowers—to all borrowers—in any steps we take. In view of this and the proportionate range of interventions that the FCA has already taken, some of which I set out in the earlier part of my speech, I ask that the amendment be withdrawn.
Lord Eatwell (Lab)
My Lords, Amendments 24 and 25 develop the notion of an information system—the information that will be provided by the FCA, PRA and the Government to feed into an assessment of the performance and impact of the financial services sector and the regulators. Amendment 37 goes much wider, as one might have gathered from its presentation, seeking to make, or ask for, a general economic assessment of the role of financial services generally within the UK, particularly the impact of the various regulators and the Treasury.
One of the themes particularly around the discussion of Amendment 37 was that this is not done. There are shelves of academic books that do this, and there are libraries of this material, but what has not happened is that it has not been brought together and assessed in a decision-making environment on a regular basis. The problem with Amendment 37 is that it asks the FCA and the PRA to—to use a phrase that has become popular today—mark their own homework. They are not really the right people to assess themselves; there are plenty of research institutes around this country that do a first-class job of assessing exactly these issues. However, we have not brought them together very well. What is so valuable about Amendments 24 and 25 is that they are targeted on that bringing together—bringing information into what I have called the “New Scrutiny”.
I would be interested to hear the Minister reflect, when he sums up, on the information role that is represented by the amendment of the noble Baroness, Lady Neville-Rolfe, and the role that that sort of information system will play in our regulatory future.
Earl Howe (Con)
My Lords, Amendments 24, 25 and 37 return to an issue that I know is of keen interest to many in this House. They seek to introduce requirements to publish reports on the impact of financial services regulation and to undertake assessments of the impact of the financial services sector on the UK more broadly.
The noble Baroness, Lady Bennett of Manor Castle, many not feel able to assent to what I am about to say, but, as we consider this topic, we should remind ourselves of the vital role that the financial services sector plays in our economy, employing more than 1 million people nationwide. It is also a critical source of tax revenue, which has proved especially important during these difficult times. We can argue about how we should calculate the precise amount of such revenue, but, by any measure, it is very substantial. We also should not forget the role that the sector plays in enhancing the nation’s standing abroad. The UK exported over £50 billion-worth of financial and insurance activities in 2019, a trade surplus of £41 billion.
Amendment 24 would require the Government to publish a report on the “impact of measures” taken by the FCA, PRA and the Government to regulate this most important financial services sector. In particular, it seeks understanding of the impact of measures on small businesses, innovation and competitiveness. Amendment 25 would add “consumer protection” to the list of things that the Government would be required to report on.
Lest there be any doubt, the Government are wholly committed to ensuring that the financial services sector supports competition, innovation and competitiveness. I hope that this is evidenced by the last set of remit letters issued to the FCA and the PRA by the Chancellor, which requested that the regulators have regard to these three priorities when advancing their objectives and discharging their duties.
In respect of reporting, the FCA and the PRA both have a statutory objective to promote effective competition. What does that involve? It involves promoting a financial services framework that supports new firms to enter the market and grow, promotes innovation and allows successful, innovative firms to grow and thrive. Those, surely, are the key aims for the sector when we talk about effective competition.
I remind my noble friend Lady Neville-Rolfe that both regulators are obliged to prepare annual reports that analyse the extent to which their objectives, including this competition objective, have been advanced that year. Those reports are in turn laid before Parliament for scrutiny. Moreover, I should say to her that, under the Financial Services and Markets Act, the FCA and the PRA are required to publish cost-benefit analyses when proposing new rules. The regulatory initiatives grid, a relatively recent innovation, sets out the regulatory pipeline that allows the financial services industry and other interested parties to understand and plan for the timings of initiatives that may have a significant operational impact. The grid is published at least twice a year, so Parliament has a forward look at upcoming proposals in a material and transparent way.
Turning to my noble friend Lady Neville-Rolfe’s point about small firms, in my letter to her of 2 March, I set out the Government’s actions to support smaller innovative firms to grow to their full potential, including through the FCA’s regulatory sandbox and our support for the fintech sector. The amendment would therefore duplicate reporting obligations and arrangements that already exist.
I should also note the new accountability frameworks that the Bill puts in place for prudential measures. These require the FCA and PRA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. Furthermore, the regulators will then be required to report on how having regard to competitiveness has affected their proposed rules.
On consumer protection, which is the subject of the amendment, let me first reassure noble Lords that the protection of consumers is at the heart of our existing regulatory framework. The FCA has an operational objective to secure an appropriate degree of protection for consumers and is required under the Financial Services and Markets Act 2000 to consult a consumer panel on the impact of its work. The panel ensures that consumers play an integral role in the regulator’s rule-making and policy development.
The FCA has repeatedly demonstrated its commitment to consumer protection. One of the key areas of focus in the FCA’s Business Plan 2020/21 is,
“ensuring…that the most vulnerable are protected”.
The FCA has also recently published guidance on how firms can treat vulnerable customers fairly. As consumer protection is one of the FCA’s statutory objectives, as set out in FSMA 2000, the FCA must already report on how consumer protection has been advanced in its annual report, as outlined earlier. Therefore, as with a previous amendment, the amendment would duplicate reporting that already exists. As regards the PRA, it is important to remember that it already has an important role in protecting consumers indirectly by promoting the safety and soundness of PRA-authorised firms. This means that consumers are protected from the significant distress and suffering caused by disorderly bank failures.
I now turn to Amendment 37, which would require regular reports on the impact of the financial services sector on a range of topics, including economic development and regional inequality. I have already set out some examples of the overwhelmingly positive impact that the sector has on jobs, productivity and tax revenues across the whole UK.