Financial Services Bill

Lord Borrie Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Borrie]

My Lords, a short while ago the noble Baroness, Lady Valentine, quoted the excellent chairman of the House of Commons Treasury Committee, Mr Andrew Tyrie, who described the Bill as,

“the most important overhaul of financial regulation ever undertaken in this country”.

She will know that, at the conclusion of the Bill’s discussion in the other place, the committee considered that it left there still defective in a number of significant respects.

I will concentrate my remarks this evening on the consumer protection aspects of the Bill, and on the role it gives to the Financial Conduct Authority. I appreciate the valuable role of the other regulatory body created by the Bill, the Prudential Regulatory Authority. It will be just as important to consumers as to big and small businesses, and to the economy generally. We all benefit from financial stability; we all need a firmer base for avoiding financial crises in future.

The Bill makes it clear that a key objective of the Financial Conduct Authority is to promote effective—I emphasise “effective”—competition. At present it is evident from a number of matters, including the existence and persistence of many expensive short-term, quick-fix payday loans, that competition is not working. If it were working properly, the detriments that these loans often have of imposing not only high charges but high default charges would disappear from the marketplace.

Among the essential requirements for effective competition is clear information that is understood by the people who see it. It has been commonly thought by the intelligentsia, consumer groups, the Civil Service and successive Governments that the annual percentage rate is the best way of enabling consumers to compare different offers of credit. If we were all sophisticated, the APR would have a lot to recommend it. However, a percentage sign with whatever number is in front of it is not as readily understood by the great mass of people as a pound sign: how much they will have to pay in interest. What is often needed—not as a substitute for APR, which is perfectly good for all sorts of obvious reasons, but in addition—is a clear statement in cash terms of the total cost of credit. If that were explained to people, many loans that were objectively undesirable would not be taken out.

I am happy to note that among the supporters of this proposition is the Trading Standards Institute, of which I have the honour to be a vice-president. However, it also wants a legal cap on charges. I have never been sure about the case for a legal cap, on the grounds that other noble Lords expressed today: namely, that many borrowers would be worse off if they were pushed into the arms of unregulated and unlicensed moneylenders whose debt collection methods would be likely to involve threatened or actual violence. I am sorry that the right reverend Prelate the Bishop of Durham is not in his place. He said many important things about the value of mutuals and credit unions, and about the serious disadvantage of unlicensed moneylenders purveying credit to members of the public.

The relevant trade associations have agreed to improve their codes of practice. I agree with the noble Lord, Lord Hunt of Wirral, that improving codes of practice may be a substantial help. However, it would be a pity not to take up the opportunity of putting into the Bill certain legal requirements to make it clear that we are not just urging people—codes of practice usually “urge” people—to think carefully before taking out a short-term loan, but are making it much clearer that these loans are expensive.

I referred to the need for the consumer to get clear information in order for effective competition to take place. There is also room for discussion of improvements to the Bill proposed by Which? to require the Financial Conduct Authority to ensure that information provided to consumers is “accurate and intelligible”. This wording would be more helpful than that in Clause 5, which uses the currently popular phrase “fit for purpose”, which is far vaguer. I am fond of the phrase “fit for purpose”—as is anyone who has studied the Sale of Goods Act in its original form. However, people have borrowed it to refer to all sorts of unrelated matters and it is not terribly clear.

One of the most useful and imaginative consumer protection provisions of consumer credit legislation was the creation of joint liability in law of finance companies and traders who provide goods or services. Section 75 of the old Consumer Credit Act 1974 indicates that when goods are bought with credit provided by a finance company or card company, the finance company is deemed to be engaged in a joint enterprise, and usually it is the finance company which has the greater resources to meet any claim for breach of contract the consumer may want to bring.

In the course of the Bill’s progress in another place, the Government stated their wish to replicate that provision in the Financial Conduct Authority consumer rule book. However, they seem to have found that that would not be strong enough and that it may be necessary instead to keep the provision in the Consumer Credit Act, to which I have already referred. The noble Baroness, Lady Noakes, referred to this problem and the Finance and Leasing Association, in its briefing to noble Lords, also referred to the matter.

It is not very clear from government statements in the other place what is to happen. We know that the licensing powers of the Office of Fair Trading are to be transferred to the new body by secondary legislation but, as the FLA fairly asked the question, what about the transitional arrangements? What will happen in between time? We know that other legislation is being brought forward by the Government to merge the Office of Fair Trading and the Competition Commission, so what will happen to the current licensing powers that the Office of Fair Trading has under the Consumer Credit Act? It is important to have clarity on these matters, otherwise things will not go clearly and smoothly. At the moment, the Government seem to have left us all—not only people such as myself but also the FLA—uncertain as to what the outcome will be.