Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I declare an interest as chair of the Consumer Credit Counselling Service, a debt advice charity. We have been helping more than 1.3 million people in the past four years to deal with their unmanageable debts, and it is the impact of the Bill on consumers of credit on which I focus tonight. As my noble friend Lord Mitchell said recently, there should be no doubt that personal debt is still a serious problem today. Over one-third of the people counselled by the CCCS had contractual payments for unsecured consumer credit that totalled more than 50% of their income, and almost one-quarter had total outstanding debts that exceeded their monthly incomes by a factor of 20 or more.

Of course, this is not an issue new to your Lordships’ House. Enhanced consumer credit legislation was introduced in 2006 to deal with the irresponsible lending practices present then and gave the Office of Fair Trading strengthened powers to stamp out bad conduct and get rogue firms out of the market. That has been successful. It has helped to support an ongoing dialogue between government, industry and consumer groups that has got to grips with some of the problems of credit cards that have characterised personal debt through much of the previous decade, and has also allowed the OFT to tackle some of the worst conduct in the market, bringing to book many rogue firms which have badly mistreated far too many consumers.

For this, we should commend the hard work and diligence of the OFT consumer credit team. A key challenge in transferring responsibility for consumer credit to the Financial Conduct Authority when the proposed new framework is in place will be ensuring that that expertise and experience is not lost and that there is no hiatus as the FCA takes on that role.

However, we must also recognise, as pointed out by my noble friend Lady Drake, that the current consumer credit rating has proved to be insufficiently powerful or agile to guarantee the fair and responsible consumer credit markets that consumers need. Consumers are still being harmed by long-standing unfair practices. We have also seen problems emerging in consumer credit sectors that have grown up since the 2006 Act changes. Several noble Lords have expressed concerns about payday lending practices. We recently analysed our clients with payday loans and discovered that about one in 10 had five or more such loans at the same time and that the average amount owed on those loans was about 95% of the net monthly income of their borrowers. The 2006 Act was supposed to stop unaffordable and unsustainable use of multiple credit products as a driver of debt problems. Yet here it is, back again, albeit in a new guise.

It is not hard to see where the weaknesses in the current regime are. The process for licensing action under the Consumer Credit Act can be very slow. Even when the OFT determines that a firm is unfit to hold a consumer credit licence, the legislation allows the firm to continue to trade and to cause consumer detriment throughout an appeals process that can take up to two years to complete. The threshold for getting a consumer credit licence is very low, even after the reforms, so it is both too easy for rogues to get into the market and too difficult for the regulator to get them out. The current regime also provides only minimal deterrence against bad practice. While the OFT indeed has a power to fine firms in respect of misconduct, it is capped at £50,000—surely far too low to deter many firms. The current legislation also forbids the OFT ordering firms directly to compensate customers who have been wronged, so firms can profit from unfair practices with little fear of being held to account.

The credit regime is still at heart a licensing regime with neither the focus nor the reach actively to ensure that consumer credit markets work well for consumers. It needs to be refocused and reformed—and here I part company with the noble Lord, Lord Hunt of Wirral. Self-regulation undoubtedly has a part to play here but, to my mind, moving responsibility for consumer credit to the Financial Conduct Authority represents a huge opportunity to introduce greater statutory consumer protection, which is now urgently needed.

The Financial Services and Markets Act 2000, as it will be amended by the Bill, has the power to clean up existing problems and prevent new consumer problems occurring. However, we should take this opportunity to ensure that the FCA has a formal responsibility for tough but targeted threshold conditions, effective enforcement and redress, rule-making powers to set standards for practices as well as products and a regulatory approach based on prevention and market supervision. These tools, and a Financial Conduct Authority with the appetite and mandate to use them, should be able to introduce a step change for the benefit of consumers. However, that depends on getting the implementation right, and there are still several key questions to be resolved here which we need to come back to in Committee.

First, we need to ensure that the important substantive consumer protection measures in the Consumer Credit Act are retained, particularly those that cannot readily be replicated in an FCA rulebook. The intention is there but the detail needs to be fleshed out. Secondly, the FCA needs to develop both a rulebook and a regulatory strategy for consumer credit that are robust where they need to be but sufficiently flexible to take account of the wide variety of products and sectors in the consumer credit market. As the noble Lord, Lord O’Donnell, said in his excellent maiden speech, what we need is a robust architecture with a principled approach but with sufficient flexibility to allow for a judgmental approach to regulation.

Other issues come into play here, several of which have been mentioned by other noble Lords. There is the balance between a proportionate rulebook and a light-touch regulatory strategy, because proportionate must also mean effective. In the past the regulator has often failed to move quickly enough to deal with consumer detriment when it saw it, let alone prevent it happening in the first place, so it will be vital for the new structure to start with a clear mindset as to what outcomes the regime needs to deliver for consumers. If we are to have a proportionate regime—and we should—it must be based on a robust assessment of the risks that consumers actually face, based on accumulated past evidence of detriment arising from unfair practices and products.

Finally, there is a timing issue. Consumer detriment is happening now and financially vulnerable consumers cannot wait until 2014 for better protection against unfair practices and rogue firms, so I urge the Government to consider what can be done in the mean time to give the OFT, and then the FCA, more teeth to help consumers. There are some options here but I note that in the debate on this Bill in another place, the Government suggested the possibility of amending the current Consumer Credit Act to allow the OFT to prevent a firm trading new business while an appeal is pending against the regulator’s determination to revoke or suspend a consumer credit licence. This could make a real difference for consumers while we wait for the new regime to come into effect. I very much hope that this approach will commend itself to the Minister when we come to the Committee stage.