Public Sector: Debt

Debate between Lord Kirkwood of Kirkhope and Lord Newby

Thursday 23rd January 2014 Lords Chamber

[Lord Newby]

My Lords, the Government are determined to bear down on the level of public debt. Under current plans the debt will peak at 80% of GDP in 2015-16 and will then begin to fall. Whether the fiscal consolidation is dealt with entirely by cuts in expenditure or whether there will be a balance between further constraint on expenditure and additional tax increases, is, I suspect, one of the battle lines that will be drawn in campaigning for the general election.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, reducing the annual deficit is one thing; eliminating net public sector debt by 2018 is quite another. Can my noble friend give the House an assurance that in future, deficit reduction policies, including the capping of annually managed expenditure, will be pursued by the coalition Government only if protection is made available for low-income households?

[Lord Newby]

My Lords, sadly, we are not going to abolish the debt by 2018, although I hope that we shall abolish the annual deficit by then. The Government have set out expenditure plans for 2015-16; how expenditure falls beyond that will, as I said, be the task of the next Government. The parties will set out their plans, and my party has already explained that it would expect further fiscal consolidation to take place, but that a proportion of that fiscal consolidation will need to be borne by the shoulders that are broadest.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013

Debate between Lord Kirkwood of Kirkhope and Lord Newby

Wednesday 17th July 2013 Grand Committee

[Lord Newby]

My Lords, I am pleased to introduce the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 and the Financial Services Act 2012 (Consumer Credit) Order 2013. I will refer to the former as the RAO order and the latter as the consumer credit order.

I am sure that we can all agree that a well functioning consumer credit market is vital to the functioning of a healthy economy. However, the market is not functioning as it should, and consumers are not being properly protected. The current licensing regime, run by the Office of Fair Trading and established under the Consumer Credit Act 1974, lacks the capacity and powers to comprehensively tackle consumer detriment in a fast-innovating market. The National Audit Office estimated that there was £450 million of unremedied consumer detriment in this market last year. This Government are determined to ensure that the market functions well for consumers, firms and the economy. That is why we are moving the regulation of consumer credit to the Financial Conduct Authority next April. Consumers will be far better protected; the FCA will require higher standards of firms and will have more robust enforcement powers. However, we will also make sure that the regime is proportionate and supports a sustainable and competitive credit market.

There is widespread support for the transfer to the FCA, and agreement that we have got the balance about right. We first consulted at the end of 2010 on broad policy options. Then, following extensive work on regime design with firms and consumer groups, the Government published detailed proposals on 6 March this year.

The statutory instruments that I am introducing today take into account the feedback that we received from a wide range of stakeholders during the consultation period. These instruments effect the transfer of consumer credit regulation to the FCA under powers taken in the Financial Services Act 2012. The RAO order amends the Financial Services and Markets Act 2000, or FiSMA, and associated secondary legislation, to bring consumer credit into the scope of FCA regulation and to apply the FiSMA regulatory regime to consumer credit. The order also makes extensive amendments to the Consumer Credit Act 1974—or CCA—in relation to the functions of the OFT. The consumer credit order ensures that retained provisions of the CCA continue to apply appropriately and can be effectively enforced.

Before turning to the specifics of the new regulatory regime for consumer credit, I draw attention to the scope of regulated activity in this market. The Government’s policy is to carry forward the current scope of consumer credit regulation. We are, however, making a few key changes that were well supported by respondents to the consultation. The most significant of these relates to a new growth sector in the market, peer-to-peer lending.

First, the RAO order creates a new, bespoke regulated activity that brings together what peer-to-peer platforms do when they arrange credit agreements between lenders and borrowers. It ensures that the consumers who borrow and those who lend via the platform are both protected. Secondly, we are aligning the definitions of credit broking and credit intermediation, and narrowing the definition of credit reference agencies to capture only those who provide credit references as a primary activity. Thirdly, we are removing third-party tracing agents from the scope of regulation, as they do not carry on a financial activity. Fourthly, we are clarifying that not-for-profit debt advice is carried out by way of business and is therefore a regulated activity. This was called for by not-for-profit debt advice providers themselves, and will ensure consumer protection is consistent. Finally, in view of responses to the consultation, we are extending the current exemption for insolvency practitioners to include advice that they may reasonably provide in their professional capacity in anticipation of a formal appointment.

I now turn to the three main components of the new FiSMA regime for consumer credit. The first one is authorisation. Unless they are exempt, all firms will need to be authorised by the FCA in order to carry on consumer credit business. They will have to meet a much higher bar than under the current licensing regime. The RAO order revokes the OFT licensing regime to allow for the move to authorisation under FiSMA, but the Government recognise that a one-size-fits-all approach will not deliver their vision for a competitive and sustainable credit market.

The RAO order therefore provides for what is known as the “limited permission regime”. To be eligible for this regime, firms must only conduct certain specified lower-risk credit activity. The quid pro quo is that those firms will face lower costs and fewer regulatory burdens. The RAO order defines the activities which are eligible for the limited permission regime. They include: credit brokerage, where firms do this as a secondary activity to their main business, such as car dealers; and sellers of goods and services who provide credit without interest or charges, for example a gym or golf club.

The FCA must assess firms against prescribed threshold conditions. Limited permission firms will have to meet a smaller, modified set of threshold conditions which have been designed to suit the lower-risk nature of their business. For example, a simpler solvency test will apply. One of the advantages of the FCA regime is that it can make rules to tackle actual or potential detriment in the market much more quickly than the Government could legislate. Its rules are also binding on firms, while the OFT’s guidance is not.

The RAO order repeals certain provisions of the CCA and related secondary legislation to allow the FCA to make rules in these areas. It revokes advertising requirements so that the FCA can make rules under its financial promotions regime instead and it revokes “form and content” requirements in the CCA so that the FCA can cover these requirements in its rules.

Finally on enforcement, the FCA has a more flexible and robust enforcement toolkit than the OFT, and will have greater resources to take action on breaches of its rules. The RAO order therefore provides that certain requirements in the CCA that are currently subject to criminal penalties should instead be punishable by the FCA’s regulatory powers. Some criminal offences in the CCA will remain in force under the FCA regime, where there is greatest risk of consumer detriment.

In addition, the consumer credit order applies the FCA enforcement toolkit to provisions of the CCA which will still apply under the new regime. It also ensures that there is no double jeopardy—a person may not be convicted of an offence under the CCA where the FCA has already used its enforcement powers in relation to the same breach. The consumer credit order provides for the continued role of local authority trading standards, and the Department of Enterprise, Trade and Investment in Northern Ireland, in investigating and prosecuting offences under the CCA. Trading standards will play an important new role in supporting the FCA to police the regulatory boundary and to take action against illegal loan sharks.

Consumer credit firms should not see this transfer as wiping the slate clean. The RAO order gives the FCA the power to take enforcement action against any breach of the CCA prior to the transfer, but it will not be able to apply its rules or sanctions retrospectively, as this would be unfair to firms. Unlike the OFT, the FCA also has the power to require redress to be paid to consumers. In addition, customers of consumer credit firms will still have recourse to the Financial Ombudsman Service.

The timetable for the transfer to the FCA is driven by the demise of the OFT on 31 March. We recognise that this is a challenging timetable for firms, which is why the Government have introduced provisions to help smooth the transition. We recognise that firms will need to prepare for FCA authorisation, so the RAO order allows the FCA to grant interim permissions based on firms’ existing OFT licences. Interim permissions will allow firms to continue to trade from 1 April, but all firms will still need to apply for full authorisation by April 2016.

This approach will mean business as usual for firms but allows the FCA to deploy its full enforcement powers to protect consumers during this period. The RAO order includes transitional provisions, so that firms who have already applied to the OFT for a licence do not have to reapply from scratch for FCA authorisation and live enforcement action will be seamlessly picked up by the new regulator.

The Government are committed to promoting continuity in the conduct requirements that firms need to abide by to ensure that the compliance burden is manageable. The RAO order allows the FCA to designate, as rules, secondary legislation made under Part 2 of the CCA. The new regulator is also incentivised to replicate CCA requirements in its rules. Where rules are the same, or substantially the same, as CCA provisions, the requirement to conduct a cost-benefit analysis is waived and the FCA’s competition duty does not apply.

I hope that I have been able to explain the purpose and the benefits of these orders and I commend them to the Committee.

[Lord Kirkwood of Kirkhope]

My Lords, I will make a brief intervention in the Grand Committee’s proceedings. These are extensive and important orders. I confess that I defer to the knowledge that other noble Lords have on consumer credit, but I would like to tax my noble friend with a request for assurances about payday loans and unsecured household credit. There have been some big changes in that field and I want to detain the Committee for a moment on that issue.

However, before I do that—and my noble friend will understand why I have been put up to this in a moment—I want to raise an issue about Article 9 of the consumer credit order, which includes provisions for local weights and measures authorities to institute proceedings in England and Wales, and in Northern Ireland. Given my accent, he will not be surprised to know that I would like an assurance that this does not mean that weights and measures enforcement cannot take place in Scotland. I am sure that he will tell me that it is a Section 30 order or some such thing but I will be able to go home more safely at the weekend if I can say that I asked the question.

I come at these orders from the niche direction of the whole question about unsecured short-term household lending. Other people have been doing a lot of work on this but the matter has been drawn to my attention simply because of the massive increase that we have started to see in the amounts of money rolled over and borrowed under the existing payday loan provisions.

Welfare Benefits Up-rating Bill

Debate between Lord Kirkwood of Kirkhope and Lord Newby

Monday 25th March 2013 Lords Chamber

[Lord Newby]

My Lords, this amendment would require the Government to produce revised costings of this policy annually. I fully understand the inflation risk about which the noble Lord, Lord Kirkwood, is concerned. However, as I said last week, while I share his concerns about measuring the impact of government policies, I believe that additional reports on the Bill are simply not necessary. As I said last week, the Government already have comprehensive arrangements in place to report on the impacts of government policy. We publish impact assessments of every Bill, including the Exchequer impacts. These are based on the OBR forecasts available at the time.

At Budget, we publish an updated account of the Exchequer impact of any government policy that has changed due to modelling or forecast changes and has not yet been implemented. The DWP publishes benefit rates and expenditure tables of all its benefits, and we produce analysis of the cumulative impact of government policies on changes to households across the income distribution at every major fiscal event. This analysis will use updated inflation projections and will look at the cumulative impacts of all changes, rather than artificially isolating just one policy. These mechanisms go further than any Government have gone before in increasing transparency and enabling the effective scrutiny of policy-making.

Since we previously debated this matter, we have had a Budget. As the noble Lord, Lord Kirkwood, said, at Budget last week the OBR revised its forecasts for inflation slightly upwards. The forecasts increased by 0.3 percentage points for the purpose of uprating in 2014-15, and by 0.1 percentage points in 2015-16. As I said last week, it was always a possibility that the forecasts would change. Similarly, they can change again at the Autumn Statement, and again at Budget 2014. These forecasts could go up as well as down. However, Governments must make decisions based on the best forecasts available at the time. The OBR’s forecast at the Autumn Statement showed that while inflation is forecast to be above 2% in the near term, it is then forecast to fall back towards the target in the medium term. This has not changed. As I set out last week, the OBR is not alone in taking this view. The IMF, the OECD and the Bank of England all show inflation falling back to target in the medium term. Nor has the inflation target changed: it remains at 2%.

One thing that has changed since we were last in this House is the Budget announcement on public sector pay. The Budget announced that public sector pay awards will be limited to an average of up to 1% in 2015-16. This will be on top of four years of pay being either frozen or capped at 1%, which included the period when inflation was at 5.2%, far above the forecasts for the periods covered in the Bill. This is not a justification for the Bill, but it is a reminder that people face inflation risk in everyday life. The decision that the public sector should continue to face a further year of pay restraint was a difficult, but necessary, decision to support fiscal consolidation.

It is against this background that I repeat what I have said many times on the Bill: that this Government do not take decisions to find savings from welfare lightly. However, this Bill is necessary to make vital savings from welfare, to help reduce the deficit and to restore economic recovery. The Government have set out their plans for spending in advance to give confidence to the markets that we are taking the necessary tough decisions. We can do that only by using the best forecasts available at the time. These forecasts have changed, but they continue to show inflation falling back to target in the medium term. I hope I have reassured the noble Lord that the amendment is simply not necessary, and I beg him to withdraw it.

[Lord Kirkwood of Kirkhope]

My Lords, the House has a busy schedule for the rest of the day and, as I said earlier, I am happy to withdraw the amendment. I am grateful to colleagues who have contributed. We are all of the same mind that we need to be very careful and monitor the consequences of these Bills. The noble Lord, Lord King, is correct that the Treasury does that annually, but I will make it my own business to make sure that working-age, low-income families do not suffer more than the Government feel they will in the course of the next five years as a result of this Bill. I beg leave to withdraw the amendment.

Welfare Benefits Up-rating Bill

Debate between Lord Kirkwood of Kirkhope and Lord Newby

Monday 25th February 2013 Lords Chamber

[Lord Newby]

My Lords, economists say all kinds of things. For every economist who says one thing, I guarantee that I can find you an economist who says the other thing. There will be a new inflation forecast from the OBR at the time of the Budget. It would be completely inappropriate for me to speculate on what that might say and I am certainly not going to do so today.

As I said at Second Reading—and I repeat—we will continue to monitor closely the rate of inflation and its impact on the cost of living for families and the wider economy, as we always do. Again, as I said at Second Reading, the Government have taken action in response to the changes in the cost of living, including cancelling the January fuel price rise, providing further funding for local authorities to freeze council tax and, of course, for virtually everybody in work, implementing the largest ever increase in the personal allowance in April 2013.

The Government believe that what really matters to families is the impact of our policies as a whole and this will continue to be a key consideration for our policies in the future. However, that does not mean that we believe that we should add conditions to the Bill, and I am certainly not going to agree to that this evening. People have seen very significant restraint in their pay across the private and public sectors without the comfort of a safeguard against increases in inflation. Noble Lords have said a lot about certainty today. The truth is that no one has certainty, whether they are in or out of work, about their future real income. As noble Lords know, many people in the public and private sectors have not been getting pay increases linked to inflation and have been falling behind in real terms. This is exemplified by the difficult decision we took to freeze public sector pay at a time when inflation was rising to 5.2%. It is also borne out by the fact that, according to the latest figures, over the past year average earnings have risen by only 1.3%—not very different from the increase that is being proposed in the Bill. This means that on the best available forecasts—those produced by the OBR in November last year—even with the effects of this Bill, by the end of the financial year 2015-16, out-of-work benefits will still have risen faster since the start of the financial crisis than if they had been linked to average earnings, which many noble Lords are concerned about.

It is vital that we set out clear and credible plans to reduce welfare spending, tackle the deficit and secure the economic recovery. Adding conditions to the vital savings delivered by this Bill would remove that certainty.

[Lord Kirkwood of Kirkhope]

My Lords, I am very grateful to my noble friend. These are very difficult issues. I do not think that his response takes us any further forward from the Government’s position at Second Reading. I hope that he will do me the favour of reflecting carefully on what he has heard today. I am grateful to my noble friend Lady Lister for her wise counsel and support, as always.

I am seriously interested in this issue. I think it is a modest proposal. I will go away and think carefully about what my noble friend has said today but we may have to return to this at later stages of the Bill. On that basis, I beg leave to withdraw the amendment.