Financial Services (Banking Reform) Bill

Lord Sharkey Excerpts

Tuesday 26th November 2013 Lords Chamber

Moved by

[Lord Sharkey]

121: Before Clause 30, insert the following new Clause—
“Part 4ARegulation of High Cost CreditRegulation of high-cost credit agreements
(1) The FCA shall, within 6 months of the passing of this Act, include among the regulations governing high-cost, short-term credit agreements provisions to—
(a) restrict such loans to one outstanding loan per customer at any given time;(b) provide for a 24-hour cooling off period between loans in which no new loan may be entered into less than 24 hours after the settlement in full of a previous loan;(c) establish at the lender’s cost a real time database of loans outstanding to be used in the enforcement of paragraphs (a) and (b);(d) restrict the amount of any loan to a maximum face value of £300, exclusive of permissible fees; (e) restrict any transaction fees and charges of any kind to a maximum of 10% of the face value of the loan plus a £3 verification fee;(f) restrict the term of any loan to between 7 and 31 days;(g) allow the borrower to extend the loan term for an additional 60 days beyond the due date without any additional charges of any kind;(h) require borrowers who avail themselves of the extension in paragraph (g) to undergo credit counselling with a designated professional counsellor or organisation and to abide by the plan established to retire the debt.(2) For the purposes of this section—
“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—
(a) the payment by the borrower of charges of a description from time to time specified by the FCA; or(b) 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;“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; “authorised person” has the same meaning as in the Financial Services and Markets Act 2000.”

[Lord Sharkey (LD)]

My Lords, this amendment has been somewhat overtaken by events. As little as four weeks ago, the Government were claiming in this Chamber that there was insufficient evidence for a cap on the cost of payday loans. They said:

“The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit”.—[Official Report, 23/10/13; col. 1109.]

On Sunday, the Chancellor underwent a kind of Damascene conversion. He is now convinced that there is sufficient evidence for a cap. That is very good news. Surely it would be unkind to point out that there was no more evidence available to him on Sunday night than there was four weeks ago.

After the Chancellor’s announcement that there would be a mandatory cap, there was another late intervention. At nine o’clock last night, like all of us, I was e-mailed a letter from the noble Lord, Lord Deighton. Without elaboration, it says that,

“the balance of evidence has tipped in favour of a cap”.

He says that the Government,

“will give the FCA a clear duty in legislation to use the powers we have given it to implement a cap”.

He continues:

“The FCA must ensure that it designs a cap that works in UK consumers’ interests and fits the UK market”;

but he goes on to say that the FCA will draw upon,

“the analysis and findings of the Competition Commission, whose investigation of the payday lending market is currently underway”.

The investigation is indeed under way, but it has a statutory reporting date of 26 June 2015. That is far too late. It means that any cap is unlikely to be in place before the end of 2016. That would mean millions of the most financially troubled people continuing to pay millions of pounds to PDL companies entirely unnecessarily. The Chancellor, in his interview on the “Today” programme on Monday morning, said clearly that installing a cap could happen in parallel with the Competition Commission investigation. I spoke to the noble Lord, Lord Deighton, about this issue earlier today. At the close of our conversation, he committed the Government to have the cap fully implemented by the end of January 2015. This seems to me to be reasonable and to allow the time necessary to put all the systems in place. I would be grateful if the Minister would explicitly confirm to the House the commitment made to me by the noble Lord, Lord Deighton.

The main difficulty this evening, of course, is the lack of any concrete proposals from the Government. We cannot know exactly what the Government will propose. This is a fundamental problem because the devil is very much in the detail when it comes to the regulation of payday loans. We can only make a little progress tonight, but it would help to hear the Minister confirm to the House that they will by legislation oblige the FCA to impose a cap on the total costs associated with any payday loan.

It would help to hear the Minister say that the FCA will be instructed to look again at the restrictions on rollovers. The FCA has said that it is minded to restrict rollovers to two. This is completely wrong. Some 28% of all borrowers have one or more rollovers, and a full 50% of payday lending revenue comes from rolled-over loans. Rollovers should be banned. We should do here what they have been doing in Florida for the last 11 years. In Florida, no loan may be taken out until any previous loan has been settled in full; and no new loan may be taken out within 24 hours of the settlement of a previous loan.

Will the Minister confirm that he will instruct the FCA to consider this system? In Florida there is a real-time lending database in operation. This database prevents rollovers. It also prevents borrowers having multiple simultaneous loans. Will the Minister confirm that we will have a similar real-time database here in the UK? Will he confirm that the FCA will be instructed to consider banning multiple simultaneous loans?

There are another couple of features of the Florida regulatory system which should be closely examined on the basis that we should use them here unless there is overwhelming evidence to the contrary. First, in Florida, any loan may be extended by 60 days without any additional charge at all. That is certainly not true here, but it should be true here. Secondly, any borrower in Florida who extends a loan by 60 days is required to undergo approved credit counselling and to abide by the plan agreed to retire the debt. This helps stop the spiral of increasing debt and provides a way out. We should have this here in the UK too.

The fact is that the Florida regulatory system is a model for payday loan regulation. Perhaps this is what the Chancellor suddenly realised on Sunday night. I ask the Government to ask the FCA to consider all aspects of the Florida regime for adoption here in the UK. At its simplest, in Florida, if you borrow £300 for 30 days you pay back £333. Here, if you borrow £300 for 30 days from Wonga, you pay back £397. That is three times as much—a wholly unjustifiable transfer of cash from the poor to the rich.

In closing, I simply ask the Minister to confirm that when we come to the capping amendment at Third Reading, we can operate under the less restrictive Committee-stage rules, as I think is entirely appropriate given the late stage at which the amendment is being introduced. I beg to move.

[Lord Selsdon (Con)]

My Lords, I support the noble Lord, Lord Sharkey, but I speak from a slightly different point of view. After so many years in your Lordships’ House, from time to time certain problems are raised with me when people have nowhere else to go. I want to talk about the link between the payday loan and credit and other things, particularly unemployment.

Take the situation at the moment of the young unemployed, or with some sort of weighting allowance in some form or other, who want to buy a mobile telephone or an iPad or something like this. They go along to any one of the suppliers, which then offers them a package that means they do not need to pay £500 up front but can pay it later. They sign up to something that they do not quite understand and then find that they cannot meet the necessary payments. They may have various allowances but, before they know it, the pressure builds up. So what starts as a £500 transaction can multiply into £1,000 fairly quickly. They cannot afford to pay the bill, so they go to a payday loan company—I will not mention their names—which, without the necessary research, offers them facilities at an exorbitant rate of interest. What starts with the wish to buy an iPhone or something of that sort for £500, when they have not got the money up front, can turn into nearly £5,000.

--- Later in debate ---

[Lord Newby]

Absolutely, I am very happy to do that. I hope that the rules would send that message very clearly, but I am very happy to reinforce it.

I go back to the terms of the amendments. I am concerned that some of the provisions could make it more difficult for a consumer to cancel an agreement—for example, requiring borrowers to sign for cancellation of a CPA. I am confident that the FCA’s proposals will give consumers control with respect to CPAs and in managing their repayments. I strongly support the noble Lord in seeking to protect consumers using the high-cost credit market and ensuring that they know their rights. However, I believe the objectives of transparency and protections for consumers are already provided for by the new regulatory regime; the FCA has already set out the action that it proposes to take in this area.

I turn to the amendment proposed by the noble Lord, Lord Sharkey. His proposal would require the FCA to implement a number of rules from the Florida model of payday regulation, including a requirement for a cap on credit. I can give the noble Lord at least some of the assurances that he seeks in terms of the FCA considering the Florida approach to regulating payday lenders very closely, as it decides how to design a cap on the total cost of payday loans for the UK market and make sure that it works effectively here. It will consider rollovers and look, for example, at the experience of Florida with a real-time database.

While I completely support the noble Lord’s desire to learn lessons from other countries’ experience, I have some doubts as to whether it is as straightforward as he thinks to simply import almost an entire regulatory framework from another jurisdiction. The UK has a very different market from other countries, and it is right that the rules governing regulation of payday loans in the UK reflect our own unique national characteristics. The FCA will be charged with doing that, building on the international evidence and examination of the UK market, and drawing on the Competition Commission’s analysis among other things. Therefore, while I share the noble Lord’s commitment to ensuring the UK consumers are protected when they borrow from high-cost lenders, I hope that he will agree that the best way to achieve that is through development of evidence-based rules that are tailored to protect UK consumers. We have a clear action plan to deliver this objective.

The noble Lord, Lord Eatwell, raised the question of the content of the amendments and the relationship between the Government, in setting policy in this area, and the FCA—where the Government stop and the FCA begins. I heard very clearly what he said. The exact nature of the amendment that we will debate at Third Reading is currently being formulated, and I shall make sure that his point is very much in the minds not only of Ministers but of officials as they set about that task.

With those assurances about the amendment that we will introduce, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Sharkey]

I was struck by the point made by the noble Lord, Lord Eatwell, that the Government must at some point surely say how the FCA is to arrive at a rate or an amount for a cap and by what criteria the cap should be determined. I am sure that they will want to revisit that whole notion again at Third Reading.

As to Florida, I am encouraged by what the Minister says. I make the overriding point that the Florida system has been operating for 11 years; it is simple, it is easy to understand and it works. What we have here now does not work, is not simple and is not easy to understand—and it costs three times as much as Florida. That is a powerful reason for looking carefully at Florida and assuming that there is something that we can really learn here, no matter the differences between the two jurisdictions. However, I am very grateful for the Government’s decision to cap the total cost of payday loans, and I look forward to a further discussion of the issues at Third Reading under Committee stage rules. In the mean time, I beg leave to withdraw the amendment.

Amendment 121 withdrawn.