Financial Services Bill

Baroness Kramer Excerpts

Wednesday 24th October 2012 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I will try to address a number of those points. I will stick to the amendments that have been moved or spoken to rather than those that have not.

This group of amendments, as we have heard, relates to two of the mechanisms by which the PRA and the FCA can be held to account for regulatory failures. One of the key lessons learnt from the crisis, of course, is that we need greater openness and transparency about where things go wrong and about what lessons can be learnt. In that context, I think that my noble friend has got it completely right about the circumstances in which an independent inquiry might be called for, as opposed to self-investigation. I will leave that one at that.

I would also just say to my noble friend that Section 14 of FiSMA is being repealed. That is dealt with in Clause 5(1). However, the Treasury can use the new power in Clause 64 to arrange an inquiry into action that predates the Bill.

[Baroness Kramer]

I appreciate the Minister giving way. I request some clarification. He talked about investigations into the FCA and the PRA, but surely the regulatory body referred to in subsection (3)—the clearing house—is actually the Bank of England. Can he confirm that it is included in this rubric, as it were?

[Lord Sassoon]

I believe that that is the case. If it is not, I will clarify things as I reply to my noble friend Lady Noakes.

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[Lord Flight]

My Lords, in relation to these proposed new clauses, can the Minister tell me where lender-of-last-resort doctrine stands with regard to this legislation? A brief piece of history I observed in the course of my career was that at the time of the collapse of Johnson Matthey and Barings, there was a change in lender-of-last-resort doctrine. Since the 1870s it had operated on the basis that, in the event of a run, the central bank stood behind any bank that was properly managed. It was changed to stand behind any banks which were too big to fail. That led on to moral hazard and cartel, and a lot of smaller banks like Hambros closed, resulting in much less competition. At the time I had conversations and correspondence with Eddie George when he was Governor of the Bank of England, who virtually said he agreed with me but it was the way the then Conservative Chancellor of the Exchequer, Ken Clarke, had cast things.

Some of what the Minister just talked about touched slightly on the issue, but I would very much hope that the intent is to go back to lender-of-last-resort arrangements as originally intended, and as operated amazingly well for more than 100 years. I am not at all clear where we are.

[Baroness Kramer]

I have a couple of comments —they are really questions—on both amendments. Amendment 193F, as the Minister has said, essentially extends the Banking Act 2009 special resolution regime to investment firms. In the next two groups there are similar amendments extending that same resolution regime to holding companies and clearing houses. I am sure the Minister does not want me to speak three times on the same point, so perhaps he could extend his comments to those two groups as well.

I share some of the concerns expressed by the noble Lord, Lord Barnett, that we are getting a set of amendments which, by definition, will have to change fairly significantly because this area is being driven by European directives. Even the definition that we are using for an investment firm is a European directive. It is very difficult to understand how this works when the context and framework will be constantly changing. Perhaps the Minister could help us understand how that process is going to happen. With ring-fencing likely to change the way in which we look at and define an investment firm, that is one obvious set of problems. It may end up being different under European law from the application in the UK, because we may draw lines at different points. We may choose ring-fencing, and others separation. I cannot see how this set of language manages to comprehend all those complexities.

It is not just me who is concerned; I know that I have raised this issue before. This time, the BBA is very concerned about marching all the troops up the hill in one direction, finding that there has to be substantial change, and marching them all the way down and back up in another direction. I cannot understand why we are doing this now when we will have clarity in just a few months’ time.

I also want to raise a question which I have asked before but to which I have not had much of an answer, under Amendment 193BA. Again, it concerns the central clearing houses and the central counterparties. I am trying to understand if that amendment deals with an issue that concerns me: the waterfall of the resolution and whether, at the end of that waterfall, it is permissible under the legislation to tear up contracts. That is a reading which the Minister will know that the industry has asked about. When he talks about the protection of client assets, does that apply to contractual relationships—for derivative contract or whatever else—where the clearing house may not be able to meet its obligations because it has got into difficulties and has been put into a resolution procedure? I am unclear whether the legislation establishes that that contract may be torn up as the last resort in the resolution process. That is a big issue that needs general discussion, if that is right. It would be extremely helpful if the Minister could give us some clarity on that.

[Lord Davies of Oldham]

My Lords, the Minister has a few interesting issues to respond to, but I must say that I am very much on the Government’s side with regard to these two amendments. After all, they are the result of consultation. We agree with the Government that investment firms and clearing houses have the potential to cause instability in the financial system and that therefore, including them within this scheme to ensure their orderly resolution or, perhaps, wind-down in the event of failure, is obviously sensible.

I am slightly embarrassed by the fact that, although 35 years ago, as his PPS, I was used to agreeing with every word that my noble friend Lord Barnett uttered as a Member of Parliament, I have to say to him today that I do not quite agree with the line which he has adopted. I entirely recognise that we will be enmeshed in many of these issues in the not too distant future with another significant Bill but, on the whole, when the Government have a good and constructive idea, it is best for the Opposition to seize it with both hands as early as possible, and that is what I want to do.

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[Lord Sassoon]

First, my Lords, these clauses fall properly in the Bill because essentially we are giving powers to the Bank of England to resolve things. I would not like to leave the thought that we were somehow using the Bill as a Christmas tree to add on other unrelated things; this is definitely related to the purpose of the Bill because we are talking about the powers of the authorities.

Secondly, the noble Lord, Lord Peston, could be mistaken for giving the impression that somehow we just discovered these things last week or last month. As I have already said, very important new powers were put in place in the Banking Act 2009. Over a period it was then, partly after seeing the collapse of other investment firms and partly by talking to the market, a consultation process, so this is not something that has just emerged. In this area, we have nothing else up the Treasury’s sleeve, as it were. If anyone identifies any other gaps in the regime, of course we will consult on them and do all the proper things that Parliament would expect us to do.

That leaves one area that my noble friend Lord Flight asked about: the doctrine of “lender of last resort”. Fascinating and important though it is, I am reluctant to get into this area because it does not directly impact on where the lender of last resort doctrine, as he puts it, has now got to. It was the Banking Act 2009 that made sure that the authorities, including the Bank, had the full suite of powers. The Bill further improves those tools and clarifies responsibilities, but of course it does not alter the basic premise that the Bank will continue to be the lender of last resort to the banking sector and to the resolution authority for a variety of firms. As for the precise doctrine of how they operate, that is a matter for the Bank of England and should remain so. I recognise that that is clearly called into question by the events in 2007 and 2008, but I assure my noble friend that it is not affected by the substance of the clauses that we are discussing today.

[Baroness Kramer]

Will the Minister basically send me a note on how the resolution process is going to work with the clearing houses? I have an outstanding concern. In our discussions in Committee last week, he was very keen to assure the House that, in a resolution situation, clearing houses would not turn to their members and ask for additional funds in order to meet their outstanding obligations. He made it clear that the resolution process would contain the liability that would fall on members. However, we have had no discussion of what happens with an outstanding contract entered into in good faith by a party with that clearing house for, say, the future delivery of FX, or foreign currency. What happens to the person with that outstanding contract in a case of resolution? Where do they stand in that process? We need some clarity at some point on who is carrying the liability. Of all the innocent parties involved, they would seem to be the main one.

[Lord Sassoon]

I apologise to my noble friend because I forgot to answer her question. The answer to her question on whether contracts will be torn up is an unequivocal no. Contracts will not be torn up. That is quite clear. In answer to the other question—

[Baroness Kramer]

Can I ask—

[Lord Sassoon]

If my noble friend will forgive me I will answer the other question first. It is an important question about the call on members and shareholders of firms. I thought that I had made the position completely clear last week: there will be no new powers here to call on shareholders and members to put up new funds, except in circumstances where there are already agreements in place for contingent calls or other ways of calling down funds in arrangements that exist before this situation kicks in. I know very well that there are one or two clearing houses and others who do not seem happy to accept that assurance of last week. I can only give it again—that is the position under the clauses that we have been debating. There is nothing here that causes calls to be made on members if it is not under an existing arrangement.

[Baroness Kramer]

I am afraid that the Minister misunderstands where my concern is coming from. I recognise that there are some in this House who are very concerned to give that kind of assurance to the various members of the clearing house—that there will be no further call other than that which has been agreed in their fundamental arrangements. However, that leaves open the question of the open contracts that are left if a clearing house fails. This becomes very serious as we move to a limited number of extremely large clearing houses with a very significant number of contracts in their hands. Who will meet the obligation under those outstanding contracts? If it is not going to be the members of the clearing house, because there can be no further call on them, will it be the taxpayer? If the taxpayer is not standing behind this then we are in a “tear up contract” situation. We really need to understand how that waterfall is going to work rather than end up in the actual situation in life and find that we have lawsuits served from every direction and some real undermining of the whole system. That is what I am trying to get to the bottom of. If the Minister has not really sat down and addressed that question, perhaps somebody in his team could send me a note.

[Lord Sassoon]

My Lords, we have addressed the situation. First, the contracts are the contracts. They need to be enforced by the appropriate mechanisms, whatever they are, which may require legal routes to be gone through. What we are trying to do here is to make sure that, as far as possible, we put in place arrangements and tools which mean that some of the difficult unwinding of contracts, such as were seen in MF Global, for example, can be dealt with more quickly and effectively.

As for who pays up at the end of the day, there are well established procedures to make sure that, first, the shareholders pay, subject to the limitations on shareholders as we understand them—my noble friend is not challenging that. Then, of course, there may be holders of debt. Beyond that, the normal arrangements that exist through the financial services system will apply as regards where the liability falls. Nothing we are doing in these clauses makes any changes to the arrangements that are generally in place about the split between the taxpayer and other parts of the financial services industry to pick up liabilities.

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[Baroness Kramer]

Does the Minister have any sense of when we will have a feel for what these loss allocation rules are? I suspect that that is where my questions have generally been headed.

[Lord Sassoon]

My Lords, I do not know what the timing is but I will find out.

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[Lord Mitchell]

My Lords, by any criteria, 4,214% being charged on a personal loan is outrageous. It is usury par excellence. Yet this is the rate of interest being charged by one of our largest and most popular online payday lenders. There are many others who are charging similar amounts. This amendment does not seek to ban payday lending because it fulfils a role and, for many people, they have no choice. What we do seek is to permit the Financial Conduct Authority to place a cap on the total cost of any loan if it judges that that loan will cause consumer detriment.

Payday lending has gone viral. Noble Lords need only stand in Parliament Square this evening and see the advertising copy plastered on London buses—one says “Go on. Get money. Go on”, while another one says “Arrives in 15 minutes”—in order to realise that this really is big business. Or they can do what I did, and go to Walthamstow in north-east London and there on the high street see the plethora of payday lending shops, all of which seem to be doing good business. Or they can go on to the Blackpool FC website, there to see that this football club is selling replica kits with “Wonga” plastered all over the shirts. You can even buy a baby Blackpool FC shirt so that your baby has “Wonga” on full display.

Until a year ago, I knew nothing about payday loans. Of course I had heard about loan sharks and I knew that this is an illegal, murky underworld where desperate people seeking immediate cash can get it quickly from backstreet dealers. I also knew that if you did not repay your loan, nasty people with black gloves and baseball bats would come round and make you an offer you could not refuse. I decided to look up the definition of “loan shark”, which the OED defines as,

“a moneylender who charges extremely high rates of interest, typically under illegal conditions”.

The truth be told, loan shark is an ugly expression and baseball bats are unacceptable, so many of the new generation have gone upmarket and spruced up their image. They have become illegal and, like any good marketing company, they have rebranded their product. Now their offerings are called “payday loans”, and if you do not repay, it is no longer the baseball bat but the bailiff and the threat that your personal credit rating will be shot to pieces. Some 4 million people are using these loans, and the amounts advanced exceed £2 billion. This is an industry that is enjoying stratospheric growth—no double dip here. It is a world where the companies have jaunty, blokey names like “Quick Quid”, “The Money Shop”, “My Advance Loan” and “Wonga”. Need a few quid over Christmas? It is easy-peasy.

But I have seen another side of the fun-filled world of easy loans. I have met people whose lives have been destroyed as they are sucked into the payday loan vortex. For some of them, it becomes a never-ending cycle of payment and repayment, payment and repayment, shuffling credit cards, borrowing from one payday loan company to meet the never-ending demands of the other, and all the time the inexorable clock of compound interest keeps ticking away. It is a Kafkaesque nightmare. Once you are in, it is hard to get out. I know it shows my age, but the words from the song “Hotel California” keep reverberating in my brain:

“You can check-out any time you like,

But you can never leave”.

I am in a beneficial position to understand what is going on as I come from an asset finance background. In my day, we financed capital equipment to large companies, which is clearly not the same as consumer credit, but the fact is that I totally understand the workings of compound interest and I know the games that people play.

Wonga is a good example to examine. The payday loan companies have taken to the internet like ducks to water—no shops, more upmarket and they have become very slick. They have turned loan sharking from a shabby backstreet activity into a recreational pursuit. I decided to do my own investigation. Wonga itself has no history of illegal loan sharking. It is a true 21st-century online payday loan company and is by far and away the most well known and maybe the most successful, so it made sense for me to go on to its website. It is brilliant. In terms of user friendliness, it is right up there with Apple and Google; it is very seductive. To test it out, I set out to borrow £300 for a 21-day period. It was so easy. Wonga wanted my personal details—where I live and where I work—and required details of my debit card so that it could capture the repayment after three weeks. So far, so good.

Wonga was able instantly to assess my credit rating, which enabled it to accept or reject my application within minutes. It highlighted the fact that it offers straight-talking money and promotes responsible lending. It told me that it would give me a decision in six minutes and that the £300 would hit my bank in 15 minutes. It also told me clearly and upfront that I would have to repay £365 in 21 days’ time. It stated, as it must, that this loan was equivalent to an annualised interest rate of 4,214%—totally transparent and totally exorbitant. Noble Lords will be pleased to hear that I did not click the “Accept” button.

Payday loan companies are correctly obliged by law to display their APR. As I say, in Wonga’s case, it is 4,214%. Some are more, others are less. Most of them claim that APR is an unjust measure. “After all”, they say, “how can you apply an annualised rate of interest to a loan that lasts for just a matter of days?”. But the fact is that you can apply an annualised rate of interest to any loan, whether it lasts for one day or 100 years. It is the only comparative measure. Attempts to rename interest and call it a fee payment must be resisted. Payday lenders are obliged to display APR on their websites but for some reason they do not have to show it on their advertising. I think they should. Imagine a bus advertisement where one panel says, “Straight-talking money”, and the other says, “APR 4,214%”.

Payday lending and loan-sharking are not going to disappear. This sector provides a vital service to those in our community who cannot get credit elsewhere. In these straitened times, it is only going to get worse. This amendment gives the Financial Conduct Authority the power to act where it sees that the terms on offer cause “consumer detriment”. I hope that the Government and noble Lords are able to support this amendment. I beg to move.

[Baroness Kramer]

My Lords, I will speak very briefly to this amendment, with which I have great sympathy.

I understand that the Government are carrying out a review of payday lending. I have two concerns. First, we really need to nail the banks, frankly, because I suspect that if the various fees charged for unauthorised overdrafts were translated into an APR, they might not be so different from that charged by Wonga. Secondly, we need to understand this dynamic between companies like Wonga and the kind of loan sharks that come after their clients with a baseball bat, because the last thing any of us want would be to see people driven back to those illegal lenders and subject to their violent and aggressive behaviour.

Would the noble Lord, Lord Mitchell, not agree that the most important way to combat this kind of exorbitant charging is to make sure that there is a proper alternative for individuals, whether it is through a credit union, community development banks—which we do not have this in this country—or some other mechanism where there is a legitimate provider that serves this particular market? Would he not agree that one of the frustrations with much of the language in this Financial Services Bill is that it is not taking the necessary actions to promote those kinds of organisations coming forward and to provide regulator backing to ensure that the alternatives are in place so that people do not have to resort to Wonga or to banks charging exorbitant fees for unauthorised overdrafts?

[Lord Kennedy of Southwark]

My Lords, I thank my noble friend Lord Mitchell for his very welcome amendment. The time has come to deal with this issue. All of us, I am sure, are greatly concerned that those in poverty or on a low income, with a poor credit rating, actually pay the most for financial services—those who can least afford it pay the most, and that is wrong.

Like the noble Lord, Lord Mitchell, I think it is outrageous that people pay 2,000%, 3,000% or 4,000% for credit. It is a great concern to me that on the streets of Walthamstow and Southwark, where I come from, you see these payday loan companies offering these services. If you are at home watching daytime television, you are bombarded with them then and at other times. It is outrageous. The Government should look to create an environment that enables people to pay a fair price for the credit they need. The noble Baroness, Lady Kramer, spoke about the credit union movement. I am a big supporter of it as well and it certainly has a role to play in finding part of the solution to this problem. The Government have got to help it. I know it had some welcome support from the Government, with £38 million from the development fund. That is great, but it needs additional support to enable it to offer some of the services discussed here today. It may also be time for the banks to do something. We often talk about the problems we have had with the banks in recent years. They could earn some credit by working to help people in this sector. These are often the people the banks do not want to lend money to. They all have charitable arms and trusts, though, so why can they not work to help those whose business the banks would not otherwise want, to access credit elsewhere? The banks should step up to the mark and look at this.

As my noble friend said in introducing this amendment, there is no attempt to stop these firms trading, but it gives power to the FCA to set the interest rate they charge. That is very welcome. My noble friend also said that the cost is displayed as an annualised rate, but it is so small, it is hard to read. What should happen is that the print is like that on a packet of cigarettes, with a great big sign saying what it costs. We should see it clearly so that if we borrow £1,000 or £2,000, we know without dispute what we are actually paying. I am delighted to support my noble friend and look forward to the response of the Government.