Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Wednesday 28th November 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I support the excellent amendment moved by my noble friend Lord McFall of Alcluith. He ended with a rhetorical flourish about the way in which debt imprisons many people. I want to support him in that, because he made the point very well. He also explained in some detail the recent OFT guidance note which, as he says, is all very well and then he made some important points about timing and language and about the fact that the basic relationship between those who have debts and those who take out a CPA in order to resolve them is, in fact, wrong.

I would like to add a couple of points. It is interesting that the last Financial Ombudsman Service annual review picked up on this issue. It says:

“During the year, we also began to see a rise in the number of complaints involving short-term finance—often called ‘payday loans’. We had previously received relatively few complaints about this type of lending—59 cases in 2010/211, rising to 296 in 2011/2012. In many of the cases we saw during the year, the complaints involved the way in which the lender had operated the payment authority given to them by the consumer”.

I checked back with the FOS earlier today and I gather there has been a considerable rise in the number of payday lending complaints brought to the ombudsman so far this year; they are now running at about 50 new cases a month. This amendment ensures that debtors are informed about their rights; that only the debtor may cancel or vary a CPA and, furthermore, that the debtor’s bank is obliged to comply with the debtor’s instructions. We support the amendment.

[Lord Newby]

My Lords, this amendment puts on the face of the Bill a number of requirements on firms and consumers in relation to the use of the continuous payment authority. I am grateful to the noble Lord, Lord McFall, for raising the issue. It brings us back, of course, to the very important issue of payday loans, which we were discussing earlier this afternoon. Abuse of the CPA is one of the most concerning practices of payday lenders. It does not mean that the CPA is universally the wrong method to use; it can help consumers administer their financial affairs with the minimum of fuss. However, there is clearly a problem.

As the noble Lord, Lord McFall, said, CPA is a recurring payment mechanism involving a debit or credit card; it allows a firm to take regular payments from a customer’s bank account without having to seek express authorisation for each payment. The OFT, as he set out in some detail, has highlighted its concerns in this area, particularly concerns that payday lenders are not explaining CPAs to consumers adequately and are using them in ways which do not take account of the possibility that the borrower is in financial difficulty and unable to repay. It is also concerned that lenders are, in effect, using CPA to securitise the loan and so may not make adequate checks on affordability. There is also evidence that some lenders mislead consumers about their right to cancel a CPA or put obstacles in the way of cancelling.

As the noble Lord explained, last week the OFT published revised guidance with the aim of ensuring that firms with a consumer credit licence do not misuse CPAs. The guidance makes it clear that the OFT expects lenders’ use of CPAs to be reasonable and proportionate, and that lenders must have regard to a borrower’s financial position when exercising a CPA. If a firm breaches this guidance and the OFT believes that this compromises the firm’s fitness to hold a credit licence, it can take enforcement action. The Bill gives the OFT the power to suspend consumer credit licences with immediate effect. Therefore, to that extent, there is a new power here which can be used to address the problem. We believe it is right that the OFT is taking action on this now and the Government welcome the new guidance.

However, like the noble Lord, I think that regulatory powers to address the abuse of CPAs and to ensure that consumers are protected need to be strengthened. The FSA has already made binding rules covering the use of CPAs by firms that it regulates. Once the regulation of consumer credit moves to the FCA in 2014, it will be able to extend those rules to payday lenders, which will be a major step-change in regulation of the payday loans market. I am pleased to inform the noble Lord that the FSA has confirmed its intention to carry across OFT standards on the use of CPAs when the transfer takes place to ensure that these consumer protections remain.

However, I do not agree that these requirements should be set out in statute, as the noble Lord’s amendment proposes, rather than in FCA rules. Overreliance on statute is exactly the problem that we have faced in the current regulatory regime, which relies on powers set out in the Consumer Credit Act and has resulted in an inflexible regulatory regime which cannot respond quickly to all the developments in the market and risks leaving consumers exposed to detrimental practices. Addressing this through rules will allow the FCA to impose requirements to address issues relating to the misuse of CPAs that might emerge in the future.

I hope that the noble Lord is able to take some comfort from the commitments made by the Government earlier in this debate on introducing new explicit powers for the FCA and giving the FCA a strong mandate to step in to tackle detriment caused by firms in the payday loans sector. I hope he is also assured that the FCA will have a strong and flexible toolkit at its disposal to ensure that CPAs are not abused by payday lenders. In the light of those comments, I hope that the noble Lord feels able to withdraw his amendment.