Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I thank the Minister for his helpful introductory remarks, and the Bill team for letting us have information about this rather complex group of amendments early last week. I declare my interest as the Chair of StepChange, the debt charity.

My first point is that although I accept this is a relatively complex area, these amendments are rather late and, as a result, they have not been considered in the other place, and were not available for our discussions in Committee over the past few months. You have to wonder why that is—apart from the wholly frivolous idea that it was set up to coincide with the news today that the OFT has completed its progress report on payday lending and announced that it has opened a formal investigation into several such lenders over aggressive debt collection practices, as well as taking steps to write to all 240 payday lenders highlighting its emerging concerns over poor practices in the sector.

The OFT's progress report confirms what a lot of us knew already. Thanks to the sterling efforts of my noble friends Lord Kennedy, Lord Mitchell and Lady Sherlock, and indeed many others all around your Lordships’ House, we have been made well aware that there are concerns about the adequacy of checks made by lenders on whether loans will be affordable for borrowers; the proportion of loans that are not repaid on time; the frequency with which some lenders roll over or refinance loans; the lack of forbearance shown by some lenders when borrowers get into financial difficulty; and, in general, debt collection practices.

We welcome in particular the revised debt collection guidance, focusing on continuous payment authorities, which have been causing problems to our clients and also contributing to the workload of the Financial Ombudsman. I look forward to the full OFT report in the New Year, and in particular to learning whether wider action is needed to tackle problems in the sector. My personal view is that such wider action will definitely be required.

We do not dissent from the principle being expressed here: that it is necessary to make further provision related to the transfer of Consumer Credit regulation from the OFT to the FCA. However, in the short time available to us, we have been receiving representations on several issues; some of which I will pose as questions to the Minister; others may have to be raised later. In the event that he is not able to respond to them all today, perhaps the Minister might, when he winds up, agree with me that it may be necessary to return to this issue at Third Reading.

Turning to the amendments, the main concern being addressed is that without the amendments the transfer of responsibility from the OFT to the FCA should create a loophole for illegal money-lenders and debt collectors to evade the risk of criminal sanction by becoming authorised by the FCA for a low-risk activity and then crossing over to some other activities. As we have been arguing for some time, these concerns are exacerbated because the credit market deals with many financially and otherwise vulnerable consumers who may be subject to exploitation by unscrupulous operators, particularly when the individual enters into a spiral of debt and becomes reliant on the lender for further credit. So we welcome the Government’s decision to ensure that the transfer of regulation to the FCA does not lead to a reduction in consumer protection, and we accept that criminal offences should be retained in relation to illegal lending and debt collection so as to serve as deterrent to those who seek to exploit the FiSMA regime to avoid prosecution. In particular, we welcome the fact that the Government are bringing forward an amendment creating a new criminal offence of carrying out a credit-related activity without permission.

My questions are as follows. There are concerns that the appointed representative regime does not provide sufficient protection for consumers. I can see the point of a dentist allowing patients to pay in instalments through a credit agreement not having to be directly licensed, for example, and, under an AR regime, the firm providing the credit could assume regulatory responsibility for what the dentist does in respect of the credit. But what happens in a high-risk sector, such as second-hand car sales, when a risk-based approach might suggest that the sales people brokering the HP agreements et cetera should also be directly authorised? Could the Minister comment on that issue, and can he say—as I think he tried to explain about the new clause in Amendment 73A—whether it is the Government’s intention that a person can be an AR but can also be directly authorised? If so, how exactly is that dual system going to be introduced?

As we have heard, FiSMA makes it an offence to carry out a regulated activity without authorisation, but it is not an offence to do something without the right permission if you are authorised under the CCA. These amendments allow the Government to make it an offence to offer credit activities without the right permissions. However, the categories of credit activity that the amendment covers seem to include lending, administering credit agreements and debt collection— but debt management is not explicitly included. Can the Minister explain why debt management has been excluded? Surely, for all the same reasons that we were given in the introduction, it should be an offence to offer debt management services without proper authorisation.

Can I press the Minister for an explanation of why the claims management sector is not being included within this group of amendments? We heard at the meeting that the noble Lord, Lord Newby, kindly convened a couple of weeks ago why the original decision was to leave the regulation of CMCs within the MoJ, but on a temporary basis. We also heard, at the same meeting, a very good account of the discussions that accompanied a recent review of that decision but which opted for the status quo. Clearly, there will be some operational difficulties wherever the responsibility lies, but we on this side of the House are convinced that it would serve consumers much better if regulatory authority for this sector was transferred to the FCA. As I am sure my noble friends Lord Kennedy and Lady Sherlock would also confirm, having also attended that meeting, the arguments used to justify the amendments today could just as easily have been deployed to include CMCs. It is, after all, at heart a credit-related sector. I would be grateful if the Minister could respond to that point.

Developing a new regulatory regime for consumer credit, one that is firmly focused on consumers, raises a number of important questions for consideration by the new regulatory authority around the issue of how the FCA will need to adapt its operations, and indeed its whole approach, to be able to deal with the consumer credit market. Can the Minister share with us the likely consequences of that change in terms of structure, personnel and budget for that work? It will be a tragedy for consumers if the Government turn out to have willed the ends of the right policy but have at the same time failed to will the means.

Consumer credit is vital to the UK economy, but it is also one of the biggest causes of problems raised with the agencies operating in this field, including StepChange, the debt charity, and Citizens Advice. Over the last year, citizens advice bureaux in England and Wales have dealt with more than 2 million problems with debt, 41% of them consumer credit related. Debt problems overall represented 30% of all the matters that they dealt with. StepChange has helped more than 1.5 million clients with unmanageable debt in the past four years. There is great scope for consumer detriment where credit and debt are concerned, from a payday lender entering an individual’s bank account using CPA to a family losing their home because poor advice from a fee-charging debt management company meant that they paid non-priority debts instead of their mortgage. Problems with consumer credit can also have a significant impact on consumers’ family life and health, with increased stress causing both physical and mental health issues. In other words, these amendments presage important changes. They are sensibly focused on the regulatory aspects of consumer credit, but they have wide-ranging impacts and deserve to be considered with great care.

[Lord Sassoon]

My Lords, I thank the noble Lord for one or two focused questions on this. First, I repeat what I think I said before in answer to my noble friend Lord Flight and his concerns. I have nothing new to add in this area, but the question of the transition is an important one. I will say again what I have said before—that the Government will consult on their proposals for the transition in early 2013 and no final decisions have been taken. The Government are very much aware of the need to allow the FCA and firms time to manage a smooth transition. In that context, we are considering options for phasing the implementation of the new FCA rulebook as well as interim arrangements for existing licence holders. So I can only repeat that my noble friend’s concerns are perfectly fair and reasonable, and the Government are reflecting on them as we speak. Well, I am not—but wiser heads than mine are beavering away on this very topic this afternoon.

I come to the issues brought up by the noble Lord, Lord Stevenson of Balmacara. The reason why we are coming forward with these amendments now, having already dealt with the substantive matter of the transfer, is that, perfectly properly in the process of scrutinising legislation, the Opposition, Peers on the government Benches and all sorts of interested parties come up with points, reflected in many amendments, which are making this a better Bill as we carry on with our deliberations. These are issues that have been brought to the Government’s attention during the ongoing discussions with stakeholders, so I make no apology for bringing them forward now as an improvement to the legislation, giving better and more seamless protection to consumers but also treating firms in a proportionate way. I assure the noble Lord that the FCA will certainly have the means and resources at its disposal to carry out its new responsibilities in this area.

I do not wish to get too deeply into the general question of debt management and claims management companies, because we are talking about a narrow and specific but important area of the transition here. We could open up a debate that is not directly relevant to these amendments about debt and claims management companies. But I address the specific question about the new criminal offence applying to credit situations and not debt management, because it is right that the new criminal offence should be targeted proportionately at areas where there is the greatest risk of detriment caused by unscrupulous people selling dubious product. In that context, there is a great distinction between the provision of unsuitable credit and debt advice. In any cases where a firm engages in debt activity without the right permission, it would be a breach of FiSMA and the FCA will act.

On the appointed representative regime and the way it will work with the authorisation regime, I do not think that the noble Lord was challenging the basic premise behind the carve-out, but he is quite right that we need to get the way in which the two regimes mesh in together to work appropriately. To that end, as part of the 2013 consultation early next year, we will address that point and specifically ask who those firms should be. However, we will be putting forward a presumption that the firms to which this applies will be low-risk firms and all those whose primary business activity does not relate to consumer credit. The Government think that it is important that legislative provision is made now so that this option is available in the future, and that will help design a proportionate and appropriate regime. Nevertheless, I recognise that we should and will consult to make sure that we draw the line in the right place. Of course, if concerns emerge in future, the Treasury can change the class of people to whom the carve-out applies by order, and may in fact decide not to make it available to any firms at all if it thought it appropriate. I hope that that has addressed the main issues.

[Lord Stevenson of Balmacara]

My Lords, may I press the Minister on the point that I made earlier in my remarks about receiving a number of representations on this issue? Indeed, some of the points that he made reflected the fact that thinking is still going on. He mentioned that people were working on things as he spoke. In the circumstances, will he accept that it might be appropriate to have a further debate on this at Third Reading?

[Lord Sassoon]

My Lords, I was referring to people working on the transitional arrangements that come out of this. I have not been made aware of any further concerns or issues that would merit a debate at Third Reading; if I had, I would have brought forward amendments at this stage. So I am not aware of any concerns, but, as the noble Lord was kind enough to say, the Treasury team and I will be open to him and to anybody else if further issues come up. However, I do not anticipate them and I can think of nothing of a Third Reading magnitude—if I may put it that way—that is likely to detain your Lordships.