Financial Services Bill

Lord Borrie Excerpts

Wednesday 24th October 2012 Lords Chamber

[Lord Sassoon]

My Lords, Amendment 196A inserts into the Bill a new clause which gives the OFT a new power to suspend a consumer credit licence with immediate effect if the OFT considers it urgently necessary to do so to protect consumers. Amendment 202 makes a consequential change to commencement provisions to accommodate this power.

This new licence suspension power is the first step on the road to greater consumer protection in the consumer credit market. It will make sure that bad practice is tackled and that consumers are protected even before the move of consumer credit regulation from the OFT to the powerful new FCA in April 2014.

Noble Lords may ask why the Government are bothering with this change now, given the move to the FCA in 2014. We think it is worth ensuring that the OFT can act as a strong and credible regulator in the interim, particularly to protect vulnerable consumers.

The power has been very well received by those working closely with consumers. For example, the consumer organisation Which? stated:

“Our research has found that people taking out payday loans are often caught in a downward spiral of debt so it is important that the Office of Fair Trading will have the power to instantly suspend the credit licences of unscrupulous lenders caught breaking the existing rules.

This is a good step towards ensuring the regulator has the powers it needs to be a more proactive consumer watchdog. The Government must now … make sure the regulator has the resources it needs, and ensure there is no gap in supervision as these powers transfer to the Financial Conduct Authority”.

The current regime does not allow the OFT to do its job properly in this area. At present, where the OFT calls into question a licence holder’s fitness to hold a credit licence it can take various measures, including suspending, varying or revoking the credit licence. However, under the current regime a licence holder’s credit licence remains in effect until all rights of appeal have been exhausted, and the licence holder can continue to trade during this period. The appeal process may take up to two years to be completed; we saw that in the case of Yes Loans. The potential for detriment during that time is immense, particularly as rogue operators who are aware that they may soon lose their licence are incentivised to operate even more unscrupulously to maximise profits.

Amendment 196A amends the Consumer Credit Act 1974 to provide for an enhanced licence suspension power which will enable the OFT to suspend a licence with immediate effect or at a specified date, and the test is that the OFT considers it urgently necessary to protect consumers. It would be used in cases where there was an urgent need to take action in order to stop actual, or prevent further, consumer detriment.

The sorts of factors that the OFT might take into account when deciding whether or not to use the power would include evidence that the business has engaged in violence or threats of violence, fraud or dishonesty, or is targeting particularly vulnerable consumers with harmful practices. In fact the OFT issued a consultation document yesterday that sets out a number of examples of when and how they might apply the new tool.

It is important to note that the new power will have no adverse impact on businesses that comply with existing law and do not cause serious actual or potential consumer detriment. However, the Government expect it to have an important deterrent effect.

In addition, the power includes a number of safeguards. First and foremost, any suspension can only be in effect for 12 months from the date it is issued, unless during that time the OFT issues a notice that it is “minded to revoke” a licence. If no “minded to revoke” notice is issued, the suspension expires, and it cannot simply be made again.

There are also a number of procedural safeguards included in the power, setting out what notices must be given and what representations the licence holder must be permitted to make. Finally, the licence holder has the usual appeal routes open to them, although crucially a licence remains suspended while appeals are being heard.

In conclusion, this is a crucial step towards affording consumers in the credit market greater protection, a matter that we have discussed in a number of contexts during Committee. It strengthens the OFT in the interim period before the FCA takes over. During that period, it will allow the OFT to take firm action against those who may be mistreating their customers. I beg to move.

[Lord Borrie]

My Lords, I find the Minister’s explanation exceedingly clear and well justified. The case that he has put for being able to suspend a licence instantly is something that will only be rarely exercised. However, most importantly, as the Minister said, this power if exercised even once or twice will have a deterrent effect on others. Its value in the exceptional case is undoubted. I am so glad that the Minister has not been persuaded by those who say, “Oh, well, it’s all disappearing into the FCA shortly so why bother at this stage?”. I am glad that this has been done. It will send a message and it is very helpful for this to be put into law now.

[Lord Stevenson of Balmacara]

My Lords, as we have heard, this amendment would ensure that a decision by the OFT to suspend a consumer credit licence could take effect before an appeal process ends. This follows widespread concerns that appeals from consumer credit licence holders can take up to two years, as the noble Lord said, and the current law allows the trader to continue with any bad practice while the appeal is pending. We warmly welcome these amendments and are very grateful for them. The consultation paper that came out only yesterday is a very useful contribution to the debate.

However, perhaps the Minister could answer two questions—one small point and a larger one. The amendment sets up the legislation so that the OFT would suspend the whole licence; in other words, all activity covered by the licence. That generally makes sense. However, there may be circumstances where the OFT has concerns with a particular feature of a credit licence holder’s business activities—say, a lender whose lending practices are all right but who perhaps has problems with debt collection practices—and the right decision might be to close down one part of the business. The noble Lord may be able to point me to where these powers already exist or, if necessary, perhaps he would reflect on this point. There may be a slight issue here, but it is not a major one. If in doubt, the right thing is to withdraw the licence.

The second point is slightly broader. To date, the OFT has done a very good job in this area, and perhaps does not receive as much thanks as it should for that. It seems to us that the main problem is that it has never had the resources that it needs to do the job it wants to do. There is little point in providing powers to a body, as in this amendment, if the resources to do the job are not also provided. So my second question is about the transition: the OFT will probably have jurisdiction on credit in this relationship for only another 18 months or so. What will happen over the transition? I would be grateful if the Minister can give us a reassurance that the transfer arrangements will be such that this amendment will survive the transfer, and that the FCA will be willing and able to provide the necessary resources so that there is a seamless handover.

--- Later in debate ---

[Lord Stevenson of Balmacara]

My Lords, I declare my interest as chair of CCCS—soon to be re-named StepChange—the debt charity. We are the UK’s leading free, independent debt advice charity and the only charitable provider of debt management plans, administering around a third of the total number in place today.

This is a probing amendment. We have considered the question of regulating debt management companies already in this Committee, but I make no apology for returning to this issue. We estimate that some 6.2 million families in this country are in financial jeopardy, and all the signs are that increasing numbers will need help, advice and solutions to their unmanageable debts over the next period. At present, there are a variety of providers, and a number of companies operating on a strictly commercial basis compete for business with the free services provided by the charitable sector.

To complicate matters, the Department for Business, Innovation and Skills is attempting to establish a voluntary protocol in this area, but we do not believe that it will be comprehensive. Nor will it be sufficient to eliminate the poor practice that has been found to exist or ease the detriment often caused to vulnerable, indebted people who sign up with fee-charging commercial debt management companies and, as a result, end up paying more, for longer, before they are debt free.

Debt management companies, along with payday loans—about which we have just heard—and claims management companies, are a new type of financial company which have come to the public notice in recent years. We must ensure that our regulatory structures look forward as well as back and that we do not miss the opportunity to protect consumers from the new problems that are coming down the track as well as learning lessons from the past.

Of course, it would be folly to believe that simply regulating debt management companies better, and including CMCs and payday lenders in the scope of the FCA more explicitly than at present, is the answer. However, it seems perverse that, while we are restructuring the conduct and prudential aspects of our present regulatory system, we are missing the opportunity to include other areas such as payday loans and claims management and debt management companies, which are currently regulated to different standards and for different purposes, and with very different resources, by other government departments. This results in a piecemeal approach and is surely a suboptimal way to proceed.

It has been argued that these areas are not “pure” financial services and therefore should not be regulated by the FCA, but I put it to the Minister that most people would regard the operations of CMCs, payday lenders and debt management companies as having a common thread of operating to earn money from helping people with their debts or future credits and, as such, they are in common parlance “financial companies”. When you tell people that there is no financial regulation in these areas, and that such as there is is to be found in the Ministry of Justice or BIS, they are very confused. Surely we need to think again about this.

The proposed transfer of consumer credit regulation from the OFT to the FCA is to be welcomed. Despite the excellent work done by the OFT, the current licensing regime has arguably not provided consumers with enough protection, not least because the OFT has not been given the resources properly to police the industry. However, as I said earlier, there is a persuasive case for debt management companies, claims management companies and payday lenders to be subject to the same regulatory regime governing other financial service providers. The worst of all worlds is to be subject to different regulatory authorities, which is what we are condoning if we do nothing here.

While it has been argued that powers already exist in primary legislation, at least in so far as debt management is concerned and perhaps for payday lenders, that does not mean that the FCA will be ready and willing to move into these areas with the speed that we think may be required.

The amendment seeks a firm commitment in the Bill that the FCA will regulate commercial debt management companies. The FCA should provide clear and directly enforceable standards for both business conduct and the design of products. This could, for example, enable the FCA to stop commercial debt management firms charging excessive and exploitative fees. Firms make around £250 million every year from already over-indebted borrowers, and three quarters of them frontload their charges, with customers paying hundreds of pounds before getting a reduction in their debts. On top of this, a further slice of repayments is swallowed up by “administration fees”, further extending the time taken to pay back debts.

We want threshold conditions that will keep rogue firms and harmful business models out of the market. We want tougher sanctions, including unlimited financial penalties, that enable the FCA to build a credible deterrent strategy against bad practice. We need more effective supervision and enforcement, and the power to order firms to directly compensate customers for losses arising from business conduct that falls below required standards. We also think there should be the power to ban misleading advertising. The Office of Fair Trading currently regards misleading advertising by fee-chargers as the most significant area of non-compliance with its guidance.

We think that the good commercial debt management firms would welcome such an approach, and StepChange is committed to working with them until such time as the FCA is ready to act. I beg to move.

[Lord Borrie]

My Lords, my noble friend Lord Stevenson has made some very powerful points with his criticism of the behaviour, over a period of time, of debt management companies—any company that eases, or purports to ease, the problems of debtors by making a plan for them to pay off their debts. What a debt management plan offers is, or may be, perfectly good and in the interests of the debtor. I would not like it to be the case that the only people in that business are not-for-profit organisations, even those such as the excellent one, StepChange, which my noble friend is involved with. He is quite right in criticising the commercial debt management companies that have been operating so far; but they have not operated without restraint, because, as he indicated, the Office of Fair Trading has been concerned with a number of their practices, including misleading advertising and exorbitant charges. A number of debt management companies have had their consumer credit licences removed after evidence was presented.

My concern about my noble friend’s amendment is not over the prohibition of specified fees for debt management or the other details of this clause that he would like to insert into the Bill. I am all in favour of those. However, I am not very keen—and my noble friend has not mentioned them—on the opening words of the proposed clause, which are:

“Phasing out commercial debt management”.

I do not want to see commercial debt management phased out so that it does not exist, as I do not believe that charitable organisations can provide for all the needs that debtors legitimately have and the services that they could legitimately seek and benefit from, assuming there were adequate controls over debt management companies, as there are for other firms who have to have a consumer credit licence.

The suspension of consumer credit licences, which we dealt with half an hour ago, and the increasing powers of the FCA compared with the Office of Fair Trading should do a great deal to help. It may be that an amendment of the kind that my noble friend is putting forward would be a helpful advance, but I hope he does not stick to the opening words about the “phasing out” of commercial debt management.

[Lord Newby]

My Lords, the Government obviously sympathise with the concerns about some of the practices in the fee-charging debt management sector, which this amendment seeks to restrict and ultimately close. Debt management firms by their very nature deal with some of the most financially vulnerable consumers in the country. It is therefore absolutely vital that there is an appropriate regulatory framework in place to make sure that these firms treat their customers fairly.

We also need to do more to make sure that there is effective signposting to free-to-customer debt advice options, such as the services provided by organisations like Citizens Advice and StepChange, of which the noble Lord is such a distinguished chair. The Government are therefore working with the debt management sector towards a protocol of best practice for the industry. The OFT has also recently updated its guidance for debt management firms, expanding on the practices that the regulator considers “unfair or improper” and could cause a business to lose its licence.

It is right that, from April 2014, the FCA’s more proactive and intrusive regulatory approach, and the stronger and more sophisticated regulatory powers available under FiSMA, will extend to the debt management sector. I can give the noble Lord that assurance. The rules that the FCA will be able to make could indeed cover many of the points in his amendments, but at this point, in advance of the powers being moved across and in advance of any consultation on the details of the rules, we think it would be inappropriate to set those out in the Bill.