Financial Services (Banking Reform) Bill Debate

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Department: HM Treasury

Financial Services (Banking Reform) Bill

Lord Sharkey Excerpts
Wednesday 23rd October 2013

(11 years, 2 months ago)

Lords Chamber
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Moved by
104A: Before Clause 16, insert the following new Clause—
“High-cost credit agreements
(1) The Secretary of State shall by order provide for each local authority in England and Wales to regulate high cost credit agreements entered into by any person whose registered address for the purpose of obtaining credit is within the area of that authority.
(2) An order under this section shall—
(a) set a maximum level for—(i) the amount of any loan;(ii) the rate of interest that may be charged; and(iii) the associated fees that may be leviedas part of any such agreement;(b) limit the number of times and specify the terms on which such an agreement can be rolled over for any individual to whom this section applies; and(c) require the lender to demonstrate that the borrower has no outstanding high-cost loans.(3) Any local authority choosing not to exercise its powers of regulation once an order is made under this section shall publish a report setting out its reasons for not doing so, and shall make a similar report in each subsequent year in which it chooses not to exercise its powers of regulation.
(4) For the purposes of this section—
(a) “high-cost credit agreement” means a regulated credit agreement as defined by section 137C of the Financial Services and Markets Act 2000 (as inserted by the Financial Services Act 2012) that provides for—(i) the payment by the borrower of charges of a description from time to time specified by the FCA; or(ii) the payment by the borrower over the duration of the agreement of charges that, taken with the charges paid under one or more other agreements which are treated by the FCA’s rules as being connected with it, exceed, or are capable of exceeding, an amount specified by the FCA;(b) “charges” means charges payable, by way of interest or otherwise, in connection with the provision of credit under the regulated credit agreement, whether or not the agreement itself makes provision for them and whether or not the person to whom they are payable is a party to the regulated credit agreement or an authorised person;(c) “authorised person” has the same meaning as in the Financial Services and Markets Act 2000.(5) An order under this section shall be made by statutory instrument subject to approval by resolution of each House of Parliament.”
Lord Sharkey Portrait Lord Sharkey (LD)
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My Lords, I will briefly argue in favour of four propositions. The first is that payday loan charges are much too high; secondly, that the current action on payday loans, although it is welcome, will not fix the central problem; thirdly, that we already have plenty of evidence for how to fix this problem; and fourthly, it is possible to act now to benefit payday loan customers and there is no need to wait.

The first proposition is that payday loan charges are much too high, and there is probably no need for me to argue the point extensively in this Chamber. Many Members of the Committee will agree that the scale of the charges amounts to exploitation of the poorest and the most desperate, and perhaps even that these charges are an affront to social justice, or even a sense of common humanity. In fact, there are established markets where the payday loan business flourishes with much smaller charges, of which the United States is a prime example. I shall talk more about the regulatory regime in the United States in a moment.

The second proposition is that the current action, although it is welcome, will not fix the central problem. The FCA, which will take over regulatory responsibility for the sector in April next year, published a consultation paper earlier this month. The paper noted that:

“We consider that the high-cost short-term credit sector poses a potentially high risk to consumers in financial difficulty”.

It put forward five key proposals that would require lenders to,

“assess the potential for a loan to adversely affect the customer’s financial situation; limit the number of times they can seek payment using a continuous payment authority; limit the number of times a loan can be ‘rolled over’; inform customers about sources of debt advice before refinancing a loan; put risk warnings on loan adverts”.

All these requirements were broadly welcomed, but there was no proposal to address the very high cost of payday loans themselves. The FCA confined itself to saying only that:

“After we start regulating consumer credit, our supervision teams will consider firms’ fees and charges practices to decide if we need to intervene further”.

That was it, but it is these fees and charges that are the cause of the present hardship and difficulty. Why wait until next April? The charges are obviously too high. They are lower elsewhere, and they could be lower here, too.

My third proposition is that we already have plenty of evidence about how to fix the high charge problem. I have heard it said that, in fact, self-regulation by payday loan lenders is the best way forward. Quite apart from the fact that it is difficult to see this bringing down costs, the evidence at the moment is that self-regulation is not working. Earlier this month, BIS published a large-scale and comprehensive review of how well the payday loan industry had been complying with its revised July 2012 customer charter and codes of practice. What BIS found was this:

“Overall, the results of the survey show that 9 months after the industry said they would comply fully with the charter and the improved codes of practice, self-regulation is not working effectively and compliance with key provisions is not good enough … lenders appear to fall down significantly in meeting the requirements … overall in relation to rollovers, Continuous Payment Authority (CPA) and the treatment of customers in financial difficulty”.

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Lord Sharkey Portrait Lord Sharkey
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I am happy to acknowledge the achievements of the noble Lord, Lord Mitchell. As the noble Lord, Lord Eatwell, may know, when I spoke to the noble Lord, Lord Mitchell, about my amendment, he said that, if he could, he would be happy to speak in support—qualified support, no doubt.

The question of local authorities is a red herring. I would happily trade off local authorities for the FCA if the Government would agree to the substance of the amendment. I do not intend to pursue the notion or the comments that have been made about local authorities by the noble Lord, Lord Eatwell, and my noble friend the Minister.

I am puzzled by the notion of there not being sufficient evidence to introduce a cap. I am hard put to understand how the situation in the United States—we mentioned only Florida but there are 17 other states with low interest rate caps; these systems work well—does not constitute something close to entirely sufficient evidence. I note in passing that Australia introduced the same system last year and there is evidence available from there as well. I also note in passing that this issue about payday lenders being able to avoid any cap by writing in additional charges is explicitly dealt with in the regulations that exist in Florida and the other states that cap these things. It is the total cost of any charges connected in any way with the loan that is capped; it is not just the interest rate.

I listened carefully to what my noble friend the Minister said and I will read it carefully again tomorrow morning. If we can dismiss the notion of local authorities for the moment, there may be merit in returning to this issue and of getting something done more quickly than April and afterwards so that we do not continue to have people taking on these loans at appalling costs. There may be merit in returning to that on Report but in the mean time I beg leave to withdraw.

Amendment 104A withdrawn.