Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Wednesday 24th October 2012 Lords Chamber

[Lord Newby]

My Lords, the Government are bringing forward amendments to Clause 91 in response to concerns raised by the Delegated Powers and Regulatory Reform Committee. I am very grateful to that committee, chaired by my noble friend Lady Thomas of Winchester, for its close and rigorous scrutiny of the powers that Clause 91 will confer and for the committee’s useful suggestions, which have informed the government amendments that I am now bringing forward.

Clause 91 enables the Treasury to make further provision about consumer credit following the transfer of regulation from the OFT to the FCA. It is necessary to take a power in this instance because the precise amendments that we will need to make to FiSMA and the Consumer Credit Act to effect the transfer will depend on the detailed proposals for the new FCA consumer credit regime, on which we will consult next year. These amendments clarify and put certain limits on how the power may be exercised.

Amendment 194A responds to the committee’s concern about the risk of double jeopardy. The amendment provides that, where criminal sanctions under the Consumer Credit Act and regulatory sanctions under FiSMA are available to the FCA in relation to the same act or omission, a person may not be convicted if he has been the subject of regulatory sanctions under FiSMA. This approach reflects that taken in Section 41 of the Regulatory Enforcement and Sanctions Act 2008, which the Delegated Powers Committee helpfully highlighted in its report as a useful precedent.

The second set of amendments in this group responds to the committee’s concern about the need to introduce certain constraints on the power in Clause 91 to ensure that it continues to be exercised in accordance with current government policy. Government Amendments 196ZA to 196ZC require the Treasury to have regard to the importance of securing an appropriate degree of protection for consumers and the principle that a burden imposed should be proportionate to its benefits.

These new duties to have regard reflect the two values underpinning the Clause 91 power. First, the Government remain very conscious of the fact that the primary rationale for the transfer of credit regulation to the FCA is to strengthen consumer protection. Thus, the requirements in the Consumer Credit Act should be repealed only where their effect can be replicated in an FCA rulebook under a FiSMA-based regime or where they are no longer appropriate. Secondly, this duty to have regard confirms that the Government remain committed to ensuring that regulatory burdens on small businesses are proportionate to the benefits.

I hope that these amendments adequately address the committee’s concerns. I beg to move.

[Lord Stevenson of Balmacara]

My Lords, in keeping with our previous remarks, I think that we have very little of substance to make in the way of comment on these proposals, as set out by the noble Lord. As he said, they are largely technical and clarificatory, and they focus on the good work done in the committee, which we all welcome.

Amendment 194A agreed.

--- Later in debate ---

[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.

[Lord Sassoon]

My Lords, I am very grateful to the noble Lord, Lord Borrie, for giving his clear welcome to this provision. It is always gratifying to have his agreement on such things, as he has immense background experience in this area.

I turn to the two points made by the noble Lord, Lord Stevenson of Balmacara. I believe that there is no way of partly suspending a licence; it is an all-or-nothing situation. I note his suggestion to reflect on this, and I will check that it has been taken fully into account, as I suspect it has. It reinforces the point made by the noble Lord, Lord Borrie, that it is hoped that this power is not used very often and that it will be used in what are clearly extremely egregious cases.

On the second point, I can certainly assure the noble Lord that the planning relates to the transfer being seamless and appropriate—not only that the appropriate powers are taken into account but also the appropriate resources. My understanding is that people are clearly working to ensure that we achieve the objective that he and I share in this area.

--- Later in debate ---

Moved by

[Lord Stevenson of Balmacara]

196C: After Clause 91, insert the following new Clause—
“Phasing out commercial debt management
In Part 2 of FSMA 2000, after section 30 insert—“30A Prohibition of specified fees for debt management
(1) The FCA will make rules under this section to prohibit any person whether authorised or not from charging a consumer fees of a specified description in respect of debt management services or debt solutions.
(2) For the purpose of subsection (1), rules may specify fees to be prohibited in terms that include, but are not limited to—
(a) the total amount of fees charged in respect of one or more debt solutions,(b) the size of any particular fee payment,(c) the timing and manner that fees fall due,(d) the type and nature of debt management services or debt solutions, and(e) any other matter that the FCA deems necessary to meet its objectives.(3) The rules may define debt management services and debt solutions for the purpose of this section and this may include both regulated and unregulated activities.
(4) Subsection (5) will take effect no later than three years after rules under this section come into effect and not later than 6 years after the passing of this Act.
(5) At the expiry of the period set out in subsection (4) the FCA shall make rules prohibiting any person, whether authorised or not, from charging a consumer fees or charges of any amount in respect of an agreement for debt management services or debt solutions made after these rules come into effect.
(6) The FCA may extend the period set out in subsection (4) where it is satisfied that the prohibition in subsection (5) would result in significant detriment for consumers.
(7) Any agreement made in contravention of a prohibition in this section will be unenforceable against the consumer or consumers it relates to.
(8) A consumer who has entered into an agreement that contravenes a prohibition under this section will be entitled to recover—
(a) any money or other property paid or transferred by him under the agreement, and(b) compensation for any loss sustained by him as a result of having parted with it.(9) The FCA may specify persons, or classes of persons who may be exempted from the prohibitions set out in this section in respect of more or more specified debt management services or debt solutions.””

[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.

--- Later in debate ---

However, for the reasons I have given, we do not feel that we can agree to the amendment and hope that the noble Lord will be able to withdraw it.

[Lord Stevenson of Balmacara]

My Lords, I thank my noble friend Lord Borrie and the Minister for their comments. My noble friend Lord Borrie puts me in a difficult position. He is warm in his praise for the work that the not-for-profit charitable sector can offer in this area but is sceptical about the ability of the sector as a whole to rise to the challenge. I would like to reassure him about that but it would take too long, so will speak to him privately.

One thing that comes up time and time again in this area is that we sometimes pray in aid competition, as if it is the answer to many problems. In many cases it is, although there is one sense of “competition” that is used by those who benefit from it, which one has to be careful about.

There are some good debt management companies in this sector. Indeed, I was at a meeting held in Parliament only last week, where a number of MPs and Peers listened to a presentation from one of the leading firms, which was extraordinarily similar to the sort of things that I would have said, had I been in a position to make the presentation. We agreed on so many points that it was almost embarrassing to bill it as some sort of contest. In particular, this company was also very concerned about the bad practices, including advertising, up front fees and the way in which some of the marketing is carried out, and would be prepared to move much further towards the good practice that exists in the charitable sector and which I am trying to advocate through this probing amendment.

I was not, in that sense therefore, trying to phase out commercial debt management companies. Perhaps, on reflection, I could have phrased that better as phasing out bad practice within commercial debt management firms. You are often dealing with vulnerable customers who are at pains to pay off their debts, many of whom are there not because they have been feckless or in any way irresponsible but because of unfortunate circumstances, and have a commitment to work with a body such as StepChange in order to get themselves to a point where their debts are extinguished. It clearly cannot be helpful if, as a result of signing up with a commercial provider, perhaps on the basis of false information, they spend a far longer time—perhaps two or three years longer—paying off their debts and end up paying perhaps £2,000 to £3,000 more in total, when we would argue that they could get the same service by working with the not-for-profit sector.

It is in that sense that simply arguing for competition is wrong. However, I understand the point that there should be opportunities for people to choose where they take their debt management plans and to be able to sign up with the one that suits them best. I am not against that, provided certain thresholds about which we talked are met. In that sense I thank the Minister for his comments, and I particularly welcome what he said about signposting towards the free services. We are aware of the protocols and work being done by both the OFT and BIS. It is not only that there are so many but also the final transition that causes difficulties. The more we can do to move in a coherent way towards an agreed set of rules, an agreed process and an agreed target of trying to get this area working well, the better it will be, because the numbers are quite frightening.

Finally I thank him for his offer to meet with MoJ to talk about CMCs and I look forward to that meeting. I beg leave to withdraw the amendment.

Amendment 196C withdrawn.