Financial Services Bill

Lord Flight Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord Flight]

My Lords, the noble Lord, Lord Borrie, pointed out that this chapter addresses the transfer of the regulation of consumer and small business finance from the Office of Fair Trading to the new FCA. My two amendments, Amendments 118D and 147K, address a specific point: the suggestion that the regulation of claims management companies might be transferred from the Ministry of Justice to the FCA, on the grounds that this area has attracted quite a lot of complaint.

I also wanted to make the point that, as the Minister will be aware, the industry is slightly concerned that the re-drafting of all the arrangements that presently operate through the CCA regime to come under financial regulation and to end up in an FCA rulebook is a pretty monumental task. It is questionable whether that can all be accomplished with due care to become operative by April 2014. Therefore, might it be wise and/or possible for at least some of the CCA activities to be able to continue beyond April 2014, allowing sufficient time for consultation and for rewriting everything into what is required as a new format? Apart from anything else, there is some £50 billion worth of lending finance to very small businesses, which are substantially one-man operations and represent a few million businesses. It is really quite an important commercial area, and it is important that things do not get through by mistake in the re-drafting that could cause problems.

[Lord Stevenson of Balmacara]

My Lords, my noble friend Lord Borrie kindly drew the Committee’s attention to my position as chair of the Consumer Credit Counselling Service and I declare my interest again. I would also like to thank him very much for his kind remarks about the work of the charity, which does so much for people who have unmanageable debt.

This is a wide-ranging group of amendments in the sense of issues that have been raised. I will focus on two areas: the claims management area and the debt management space. Claims management companies have increased in number and have come to the attention of the public, and the industries in which they operate, much more in recent years. You have only to turn on the TV or listen to the radio to be bombarded with advertisements from claims management companies. E-mail traffic is also increasing.

There are apparently more than 3,200 authorised firms operating today. Of course, many in the claims management industry act responsibly. The part of the industry that does not adhere to best practice breaches guidelines on cold calling, text messaging and e-mails. Some will take up-front fees and/or fail to disclose properly the amount of compensation that a consumer will pay if their claim is successful. Through high-pressure sales they will sign up people who have no possibility of making a successful claim on the basis that they can get you thousands of pounds in compensation.

That sort of activity is prohibited under existing regulation, but unless it is effectively policed it comes to nothing. However, large numbers of those in the industry do not adhere to best practice and a few could even be described as rogues. In a recent debate on this subject in your Lordships’ House, the noble Lord, Lord Kennedy, said that the Government need to take a long, hard look at the industry, look at existing provisions and make a number of changes to beef-up existing regulation and ensure that existing provisions are used effectively in an industry that needs effective policing.

In those circumstances, it is also fair to pick up a point made by the noble Lord, Lord Flight, that the current arrangements with the Ministry of Justice acting as both the sponsoring department and the regulator appear to have broken down. It would be good if the Minister could report on what progress has been made on this list of helpful suggestions.

My noble friend Lord Borrie drew attention to the debt management sector and in particular to the 2007 Act. There are nothing like as many private sector debt management firms in the UK, as much of the debt advice is undertaken by charitable bodies such as Citizens Advice and my own body the CCCS, which offer a free service of high quality. Collectively, commercial firms administer some 200,000 debt management plans and about 50,000 IVAs. The trade body, DEMSA, estimates that this is some 40% of all the debt management plans currently in operation.

DEMSA states that its goal is to promote best practice and protect the interests of clients and the lenders to which they owe money, but in its review of the sector in 2010 already referred to, the OFT found instances of non-compliance among DEMSA member firms, albeit DEMSA members received a clean bill of health compared to the rest of the sector, and action was taken on a number of firms.

On the publication of its report on debt management in March 2012, the chair of the BIS Select Committee, Adrian Bailey MP, said:

“During these difficult economic times, increasing numbers of people up and down the country—not least some of the most vulnerable members of our society—are relying on the provision of consumer debt management services and payday loans to make ends meet. And yet this industry remains opaque and poorly regulated. Despite a Government consultation that ended almost a year ago little has been done to remedy the situation. The Government must take swift and decisive action to prevent firms from abusing the needs of such a vulnerable customer base”.

The committee’s main recommendations are worth repeating. The Government must work to phase out up-front fees: the provision of guidance on this point by the OFT is inadequate. The Government should introduce the necessary regulations to ensure companies publish the cost of their debt advice and their outcomes if an agreement cannot be reached during discussions with the industry. The Government should establish effective auditing of debt management companies’ client accounts. The report concludes that greater transparency in the commercial debt advice market would benefit consumers hugely and that voluntary codes of practice are highly unlikely to achieve this aim. The Government must be prepared to regulate if consumers are to receive the protection and the level of information they require.

It seems clear from all this that we have reached the stage in these two sectors whereby strong and effective regulation is required. We also think it is time that the Government should take advantage of the opportunity of the Financial Services Bill to make the new regulatory bodies responsible for this currently unregulated part of the market which affects so many vulnerable customers.

--- Later in debate ---

[Lord Flight]

My Lords, I believe that the FSA has been looking in some detail at how to regulate platforms, and has been doing so for quite a while because it is difficult territory. It is either about to or just has come forward with its proposals.

[Lord Lucas]

My Lords, I very much support what the noble Lord, Lord Sharkey, has said in this area. My Amendment 117B in this group picks up a couple of aspects of it. The first aspect is,

“the role of regulation in enabling innovative business models to compete with established businesses”.

By regulating this area so heavily we have created a structure where it can be extremely difficult for people to be innovative. The noble Lord, Lord Sharkey, drew an obvious example of that when he talked about the regulations that independent financial advisers have to work under. If IFAs are allowed to talk about ordinary money products but not allowed to talk about peer-to-peer lending products then, by not regulating them and not bringing them under the umbrella of regulation, we are making it difficult for these new entrants to compete. We are creating a barrier to innovation.

This particular innovation is not just fluff or amusement. It promises, if it gets going in a substantial way, to alleviate some of the pressure on the national financial system: you get away from borrowing short and lending long, and away from the £85,000 guarantee, and you put those risks back on the lender. It is also a structure that may prove to be extremely useful in local lending in areas where the lenders can identify that the borrowers are part, in some way or another, of the same community and can, in that way, develop substitutions for pay-day lending and other more expensive and onerous arrangements. So there are real opportunities here to improve the financial system as a whole. The FCA really ought to have regard to the way in which regulation produces barriers for entry in the way that the noble Lord, Lord Sharkey, has described.

But it is not just without government that these barriers appear; they are also within government. One of the principal barriers to the expansion of peer-to-peer lending is the tax arrangements, that you cannot offset your losses on bad debts against the interest you earn on the good ones. Banks can but peer-to-peer lenders cannot. Among the reasons why the Treasury, which is refusing to regulate, will not extend tax concessions is that these businesses are not regulated. So the Treasury itself is causing the problem that is crippling the development of this business.

It is all very well to run a business which is restricted to borrowers of the highest quality, which is effectively what it is at the moment. All the peer-to-peer lenders that I am aware of have pretty low bad debt ratios. That is because they do not lend to risky borrowers, because there is no offset for the losses. The net return to their investors if they did start making loans with, say, an average default rate of 5% would start to become extremely low because there would be no relief for the 5% of losses and they would be paying full income tax on their 12% of income. It starts to make very little sense, so none of the peer-to-peer lenders have gone into that territory. But lending to areas of the community where there is a risk of default, such as young businesses, is exactly the sort of area where this Government are trying to push the banks with so little success, and where businesses such as the Funding Circle would love to go if the Government would make it possible.

As I say, the reasons for not going there are entirely due to the Treasury, and the reasons why the Treasury cannot grant the concessions are also down to the Treasury. It really should be open to the FCA to try to break that circle and persuade the Treasury to face one direction at a time and to promote something which is in everyone’s interests, particularly the Treasury’s. Nor would I just confine our thinking to peer-to-peer lending, which is what is there at the moment. Other peer-to-peer ideas are around. Peer-to-peer investment in start-ups already qualifies. There is an FSA-registered business called Seedrs, in which I take an interest. There are proposals for peer-to-peer investment management. That goes back to an earlier amendment in terms of trying to reduce the return that stays in the pockets of investment managers by disintermediating that business.

There are certainly proposals for doing this in the field of annuities. The opportunity is obvious: old people want income and young people want capital. If you can produce a mechanism where the two can exchange that, you are looking at something where you can cut out a very large amount of cost in the middle, where you could produce for people who are trying to settle their pension fund annuity at the moment a decent rate on which to do it, and where you could provide for young people who need capital a decent rate at which to have it.

The difficulty with doing that is the forest of regulation we have put in place to tie down the existing old-style businesses in that area. The opportunity for and the benefits of innovation in that area seem obvious. So we must have an FCA which understands not just not-regulating but also how regulating constructively will enable businesses to compete where, if they are left unregulated, they may not even be able to exist.