Financial Services Bill

Baroness Sherlock Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I declare an interest as chair of the Consumer Credit Counselling Service, a leading debt advice and debt provision charity. Currently, Clause 6 extends the scope of FiSMA by including credit information services. They are already regulated under the Consumer Credit Act 1974, but an amendment is needed to bring them into FiSMA. Clause 6 also changes the current definition of credit contracts to include both unsecured and secured loans, and other forms of credit, and includes hire agreements as a regulated activity.

Our Amendment 147L seeks to include debt adjustment and debt management services in the Bill. This issue has already been raised several times during the passage of the Bill, and we will return to it on subsequent Committee days. The Government have given reassurances that the existing text allows debt management to be included and that they intend it to be included. Perhaps the Minister will confirm this again when he comes to respond. However, this is a permissive approach and we feel that it might not be sufficient in this case. There is a case for debt management to be mentioned in the Bill, and I will run over one or two points in support of that.

The UK’s free, independent debt advice and charity sector helps to ensure that clients pay less and are able to repay their debts more quickly compared to those clients who choose a fee-charging route. Recent figures on this are illustrative. A fee-charging company will typically involve total payments of about £35,900 on a £30,000 debt, including up-front fees and a monthly administration charge. It will therefore take nearly 10 years to wipe out the debt. On the other hand, a debt charity will repay the full amount of £30,000 in full, with no additional charges made to the client, in just over eight years.

Now, the OFT has recently looked at the practices of debt management companies in this area in relation to the guidance that it already issues. It regards misleading advertising by fee chargers as the most significant area of non-compliance with its guidance. In its 2010 review of the sector, it highlighted the fact that many firms claim their services to be free when they are patently not free. We believe that regulation is urgently needed here so that there is transparency about charges. At the same time, we also think that there should be an obligation for fee-charging services to inform potential clients of the availability of free advice services. This, again, is mentioned in the OFT’s debt management guidance; it is not thought to be widely adhered to.

The practice of charging up-front fees itself supports a business model that has pernicious consequences for people trying to repay their debts. Fees undermine the capacity of borrowers to make repayments and, as I have tried to show, that extends the timescales. Advice provided by fee-charging companies is inevitably—and, I suppose, naturally—skewed towards debt management plans and individual voluntary arrangements that generate a revenue stream for those companies. As a result, people struggling with debt often end up with the wrong solution.

The Government have proposed a DMP protocol setting out what all parties can expect from a debt management plan, and the hope is that this will ensure that debtors are treated more consistently, both by creditors and by fee-charging DMP providers. However, progress on this seems to have stalled. In any case, it is no real substitute for the strong regulation that this sector now needs.

Amendment 147M would add claim management regulation to the scope of the FCA. No one—in this House, particularly—will have failed to notice the growth in CMCs recently, particularly those touting for business in relation to financial services, such as claims for mis-sold PPI in particular. I have never taken out PPI, but ironically I had a text just before I came into the Chamber this afternoon explaining that I was missing out on £2,737, which was waiting for me simply by return through a text service. Indeed, I have had several phone calls in the past week or two.

It might just be a temporary phenomenon, and existing arrangements might well be the same, but I have my doubts. The problems that are often reported to us are aggressive or illegal marketing practices such as cold calling and unsolicited text marketing; persuading people to divulge their payment card details and then using this to take unauthorised payments for service; and failing to inform people that a claim might actually be settled on a non-cash basis, where there is an offset against a remainder debt, leaving that person with no money to pay the fees that are going to be charged.

Claims management companies are not currently unregulated; they are already covered by the claims management regulator, which is part of the Ministry of Justice. There is a statutory scheme set out in the Compensation Act 2006, and regulations and rules are made under this. Quite apart from the need to question why this area is being retained within government when we are actually setting up a new regulatory structure, there is also a question about why the Ministry of Justice has not been able to get on top of the problems that I mentioned earlier. The claims management regulator within the MoJ is actually currently consulting on current practices, but there is a long way to go.

While it may be possible for these issues to be dealt with, possibly through an order such as the regulated activities order, quite serious points continue to operate to the detriment of the consumers who are involved in this area. Bringing the CMCs, as with the debt management companies, under the supervision of the FCA is surely the right way forward. I beg to move.

[Baroness Sherlock]

I will ask a couple of questions on Amendment 147M, and in doing so I remind the House of my registered interest as a senior independent director of the Financial Ombudsman Service. I am grateful to my noble friend for raising the question of claims management companies and their regulation, something that we have come to in this House once or twice in recent months.

The problem is significant. I ask two questions, one of my noble friend and one of the Minister. Can my noble friend reflect on what would happen if and when claims management companies might move on from their current obsession with the financial services sector? As he has, I have certainly received many texts. At the moment, claims management companies are focusing on financial services, primarily because of the widespread mis-selling of payment protection insurance that has created significant consumer detriment. Therefore, there is a significant problem at the moment, and that is what they are focusing on.

However, in the past the companies have focused, for example, on people who have—or fancy that they might have—sustained personal injuries such as whiplash in car accidents. In future, they might move on to other areas. I wonder, therefore, whether we could reflect on what the best way might be to regulate this industry when in fact the target could move. It is the activity itself that needs regulation, rather than necessarily the sector.

This highlights the particular problem that we have: that the activity of claims management companies—particularly the bad activity of the minority that are doing the kind of things described by my noble friend—needs addressing. In this I wonder whether the Minister could help us out. Could he tell the House very quickly what steps the Government are taking to improve the regulation of CMCs? For as long as this activity remains within the Ministry of Justice, can he assure the House that adequate resources and powers will be made available to those doing this job to redress the kind of unpleasant practices and considerable detriment that has been created on top of the original detriment that has been done?

--- Later in debate ---

[Lord Sassoon]

My Lords, my comments on Amendments 147L and 147M will be brief, because we discussed both issues in some depth in earlier sessions of the Committee. Amendment 147L seeks to enable the activities of debt adjusting and debt management to be regulated under the Financial Services and Markets Act. I can reassure the Committee on this point. The effect of Amendment 147L is already achieved by Clause 6, which enables all activities currently regulated by the Office of Fair Trading under the Consumer Credit Act to be transferred to the FCA under FSMA. I hope that is a very clear answer and the direct reassurance for which the noble Lord, Lord Stevenson of Balmacara, was asking.

I will not be quite as brief on Amendment 147M; this continues to be an important area even though we have discussed it before. The amendment seeks to add the services provided by claims management companies to the list of matters that can be regulated under FSMA. I set out in some detail in a past session of the Committee why I do not believe that the activities of claims management companies should be regulated by the FCA. The key point is that claims management companies are not financial services firms. Yes, it is correct that a substantial proportion of their activity at the moment relates to financial services, but—as the noble Baroness, Lady Sherlock, has pointed out—they may move their focus of attention back to, or on to, something quite different in the future. However, that does not alter the fact that they focus on financial services at the moment. It does not alter the fact that they have no place in the scope of a regulator concerned with financial services and only financial services, which is what we are talking about here.

I agree, of course, with the noble Lord, Lord Stevenson of Balmacara, that there are a lot of detrimental practices in the sector that need to be tackled. I reiterate that work that is already under way to strengthen the existing regime for the regulation of claims management companies. Before the summer, I flagged that the claims management unit at the Ministry of Justice was doing work to strengthen the conduct of rules governing the sector. That work is proceeding apace and further steps are being taken. I will take back the noble Baroness’s comment about resources but I have no evidence that this work is being hampered by inadequate resources.

[Baroness Sherlock]

I am very grateful to the Minister. If the barrier is not resources, will he advise the Committee of what he thinks it is? If there is no problem, is he satisfied with the regulation at present?

[Lord Sassoon]

I am not satisfied with the conduct in the industry, which is why in August, since we last debated these matters, as the noble Baroness I am sure is aware, the Ministry of Justice announced that, from April 2013, claims management companies will be banned from offering financial rewards or similar benefits as an inducement to make a claim. I understand why there are concerns but, since we last discussed these matters, there has been significant progress.

As has already been noted in this debate, proposals have been consulted on to tighten the conduct rules with which all claims management companies must comply as a condition of their licence. The consultation closed on 3 October and the responses are now being considered. Again, the target date for implementation is April 2013. Also from 2013, the Government intend to extend the Legal Ombudsman’s jurisdiction to provide an independent complaints and redress service for clients dissatisfied with the service provided to them by the claims management companies with which they have contracted.

I believe that significant and important work is going on, and that that is the right approach. I hope I have been clear on why I cannot support proposals to make the FCA responsible for claims management regulation, which applies as much now as it will in future. The Government will therefore not be including the activities of claims management companies in the enabling provisions in Clause 6. With reassurance on the first amendment and the explanation of all the work going on more generally, I hope that the noble Lord will feel able to withdraw his amendment.