Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Lord Tunnicliffe (Lab) [V]]

My Lords, many colleagues will recognise Amendment 79 as a response to the recent publication of the Woolard Review into change and innovation in the unsecured credit market.

The Government have been on something of a journey on buy now, pay later products. In December 2020, the Economic Secretary resisted a similar amendment tabled by long-standing personal debt campaigner and MP for Walthamstow Stella Creasy. He said that while the Government were aware of potential risks resulting from a boom in the use of buy now, pay later products,

“we are yet to see substantive evidence of widespread consumer harm”,—[Official Report, Commons, Financial Services Bill Committee, 3/12/20; col. 398.]

and it would therefore be inappropriate to act.

To be fair to the Government, they did not want to pre-empt the findings of the Woolard Review, which was published a month ago and is a very strong piece of work. It warned of “significant potential customer harm” if there was not a role for the FCA. By bringing certain unregulated credit products under the FCA’s watchful eye, we could see requirements around affordability checks, as well as the introduction of proper protocols for individuals who find themselves struggling to repay the loans they have taken out.

The review also stressed the importance of ensuring a well-functioning debt advice sector, and the need for both government and regulators to take a more holistic approach to a range of issues around personal finance and debt. I know that this piqued the interest of my noble friend Lord Stevenson of Balmacara, who has already dealt with the concept of financial well-being and will turn his attention to Victorian log-book loans shortly. We support his endeavours and hope that at the very least the Government will commit to a review of the antiquated legislation whose repeal was recommended by the Law Commission several years ago.

We strongly welcome the Government’s acceptance of the Woolard Review’s recommendations, as well as their commitment to implement the necessary changes as soon as practicable. It is in some ways a curious change of position, as the review’s discussion of theoretical risks does not appear to meet the evidence test set by the Treasury just three months ago. However, this is a policy change that we can support and, luckily for the Minister, this legislation provides a means of delivering on the Government’s promises.

No doubt we will hear later that this is a very complicated matter and the Treasury needs time to think through the consequences—intended and unintended. Mr Glen hinted at this back in December, talking about the need for the Government to “assess the options” and to weigh up whether they “would be proportionate” in responding to potential harm.

One worry previously cited by the Government related to the potential restricting of flexible payment options for such things as gym memberships or sport season tickets. Nobody would wish to restrict access to such options, in part because they have shown themselves over many years to be low risk. We therefore welcome the distinction made in the review, which talks of “certain new credit products” being brought under the FCA. Our Amendment 79 is more wide-ranging but is, as so often in Committee, a vehicle for debate.

Another worry of those who oppose regulation relates to the potential stifling of innovation in the sector. Of course we welcome new entrants and new services, but on the basis that they operate in a responsible manner. These products are booming in part because of Covid-19 and changes to peoples’ shopping habits. Buy now, pay later grew exponentially during 2020, with an estimated 5 million people using products from firms such as Klarna and Clearpay. The value of these transactions is in the billions, and that figure is likely to grow.

We do not oppose Klarna, Clearpay or other providers of these services. They offer a product which many shoppers wish to avail themselves of, and I am confident that such companies will continue to grow once subject to FCA regulation. All we are asking is that these players, as with others across the financial services sector, are subject to the correct balance of rights and responsibilities, including duties to those who may have problems with debt.

I have no doubt that the brilliant minds at the Treasury and the FCA can come up with a solution, and do so while the Bill remains under consideration. Our amendment mentions the 2022-23 tax year, and if we are to learn lessons from the past, including the failure to properly regulate payday lenders, surely we must keep this target at the forefront of our minds.

I know from previous discussions with the Minister and officials that they are working very hard on this. Therefore, I am hopeful of seeing a government text on Report, if not establishing the detail then committing to the principle and providing the powers that will be needed to implement changes in the coming months.

Other noble Lords with amendments in this group will be very keen to make their speeches, so I will not detain the Committee for too much longer. However, I want to voice support for the other amendments, including that from my noble friend Lord Stevenson referred to earlier in my remarks. I also look forward to the Minister’s response to the amendment on access to bank accounts and cash. Sadly, we continue to see the withdrawal of bank branches and cash machines from towns and villages across the country, suggesting that previous initiatives have not had the desired effects. I beg to move.

[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, I start by expressing support for Amendment 79, introduced by my noble friend Lord Tunnicliffe. As the Woolard Review pointed out, the buy now, pay later issue is a hotspot at the moment and in need of urgent action. My noble friend’s amendment would require that the non-interest-bearing elements of lending under that regime should be regulated by the FCA, and we support that. I thank the Economic Secretary for the time given to us recently on this issue and I appreciate that this is not easy to regulate for. However, as my noble friend pointed out, there is time to get this right by the next financial year.

At heart, this looks like a consumer-friendly initiative—something we could all support. Credit-financed purchases have been with us for a long time, and there are some examples of activity in this field that could be damaged if the regulations to be brought forward are too aggressive. My noble friend mentioned employees, advances of salary and season tickets, and similar arrangements. However, the real profit motive which drives these schemes lies in the small print. Like so many similar schemes, these buy now, pay later schemes put pressure on customers to make unnecessary purchases, do not make effective credit checks, and there is evidence that they can cause mental health difficulties for those who sign up. I am sure that it would be possible to get this side of things properly regulated. However, what is less easy to regulate—although in fact it is far more damaging to hard-pressed consumers—are the penalties that get applied to missed payments and the excess interest that is loaded when payments are missed. In addition, compulsory insurance is often levied against default, links to loyalty follow-up purchases are imposed, and no real comparator APRs are somewhere available for those who wish to shop around before purchasing.

The focus placed on the FCA’s duty to promote competition rather than on a duty of care is an issue in play here. When the FCA was asked to regulate payday lenders, this House made it clear that its concern was the usurious rates of interest being charged, often many thousands of percentage points measured by APR. The solution favoured by the House was banning the products, which was why many of us were mystified by the FCA’s proposed solution of reducing the number of players in this market to a smaller number of well-capitalised companies—which indeed got the interest rates down, but only to around 1,000% APR, so consumers were left facing usurious rates. I hope the Minister will be able to reassure us that the approach that the Government are thinking of taking to buy now, pay later will not fall into the same trap as the payday lender regulations. The aim is consumer care and stamping out egregious behaviour, and not just promoting competition by allowing companies to rip off vulnerable consumers.

My Amendment 101, which I am grateful to the noble Lord, Lord Holmes of Richmond, for signing, is also about high-cost credit. As I said at Second Reading, it is high time we repealed the Victorian bills of sale legislation, which permits an egregious area of high-cost credit to continue and flourish outwith current consumer protection rules. Harm is being done.

Bills of sale are an early form of mortgage, aimed at goods and chattels and not property, which allow individuals to use goods they already own as security for loans while retaining possession of them. The use of bills of sale grew from fewer than 3,000 cases in 2001 to more than 30,000 in 2016. The number has dropped recently, but it is probably still in the order of 15,000 a year and it is going up. Ironically, bills of sale were legislated for before cars were invented, but they are used today mainly for what are called log-book loans, where a borrower raises cash on the security of his or her vehicle. Borrowers may continue to use their vehicle while they keep up the repayments, but if they default, the vehicle can be repossessed, sometimes from outside their front door, without the protections that apply to hire-purchase transactions or other consumer credit. It is also difficult to discover, when a car is being sold, whether it has a log-book loan attached. The register is kept by the High Court and it is not easily searchable. The new owner has no protection against losing the car if that loan has been defaulted on by the previous owner. This is just not fair.

Bills of sale are currently governed by two Victorian statutes, the Bills of Sale Act 1878 and the amendment Act of 1882—the statute was apparently so obscure in 1878 that it had to be re-regulated for in 1882. The legislation is described by the Law Commission as “archaic” and “wholly unsuited” to the 21st century. The current law creates hardship for borrowers and for private purchasers. The Law Commission argues that it imposes unnecessary burdens on lenders, and the lack of a proper chattels mortgage system restricts access to finance for unincorporated businesses and high-net worth individuals.

The great majority of bills of sale are taken out by borrowers who have difficulty in accessing other forms of credit. The current APR in a recent advert that I saw was 450%. The Law Commission says that the statutory form of a bill of sale as set out in the 1882 Act, which has to be followed absolutely to the letter, confuses borrowers rather than helps them to understand the consequences. It is clearly an area that should be cleaned up. A simple way, which is what I propose in my amendment, would be to repeal the Acts. While I accept that some people currently using log-book loans would be adversely affected by such a radical change, the greater harm lies in continuing the status quo.

I currently have a Private Member’s Bill on this issue, drafted by the Law Commission, which includes provision also for a goods mortgages scheme. Perhaps a way forward on this would be for the Government to agree to take on all or part of this Bill in the next Session using the special scheme for approving uncontentious Law Commission Bills. I would be happy to meet the Minister on this issue, if he could find the time, to see whether this would turn out to be a way forward.

[Lord Holmes of Richmond (Con) [V]]

My Lords, it is a pleasure to speak to this group of amendments. In doing so, I declare my interests as set out in the register. It is also a pleasure to follow the noble Lord, Lord Stevenson. Before I speak to Amendments 127, 131 and 136C in my name, I shall speak to Amendment 101, so eloquently introduced by the noble Lord, Lord Stevenson of Balmacara; Amendment 135, in the name of my noble friend Lord Leigh of Hurley, who is speaking after me so I shall not eat too much of his afternoon tea; and, briefly, Amendment 136F.

--- Later in debate ---

[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, I believe the House owes a great debt of gratitude to the noble Lord, Lord Sharkey, for the work he has been doing on this issue over the last nine years. I have been involved in part of the process, which is why I put my name down to speak: like him, I feel rather confused and not a little embarrassed that no action has been taken in recent years.

Like the noble Lord, Lord Sharkey, I first got involved in this when policy changed in the early part of the coalition Government and new arrangements were introduced for interest-bearing loans and, eventually, maintenance loans. I recall that in about 2014 there was the consultation process described by the noble Lord, Lord Sharkey. As I was then the Labour spokesperson on higher education in your Lordships’ House, I got a lot of correspondence, exactly as he described, from potential students and some existing students. Potential students wanted to know whether at the time they applied and went to higher education there would be a real chance of there being loans that they could take out that would not be a problem in terms of sharia compliance. More worryingly, students who were already at university in the middle of their course found that they could not continue without a guarantee in some form that finance would be available to allow them to see out their course.

In a sense, we were all trying to do the same thing. Indeed, I sat in on meetings with the Higher Education Minister at the time, Jo Johnson, and other colleagues in the House. We had meetings with representatives of Muslim students and the community at which a lot of these issues were explored. When the Government took powers in the 2018 Act, as described by the noble Lord, Lord Sharkey, to ensure that they could facilitate the production of loans of this type, we thought the matter was over. Indeed, I wrote to a number of people I had been working with saying that we thought that the process had reached its natural conclusion and that it was just a matter of time before the Government brought forward the necessary proposals.

As we have discovered, that has not happened, and although there have been promises and suggestions that it was coming, it has not. The Government have got themselves into a very bad position here. I cannot believe that it is impossible to go forward—as the noble Lord, Lord Naseby, said, just to do it—and I am looking forward to hearing the Minister’s response. If there is anything we can do to help, he should be sure that there is, as the noble Lord, Lord Sharkey, said, no politics in this. We simply want a good job done to make sure that all people who contribute and wish to contribute to higher education in this country can do so and are not in any sense disadvantaged simply because of their religion.

[Baroness Kramer (LD)]

My Lords, any one of us can go on to our smartphone and find an app for halal financing for someone who wants to buy a car or a house—they are called “halal mortgages”—or who needs money to support a small business. It is incredible and quite incomprehensible that we do not have a sharia-compliant version of student loans. It is not as though we do not know how to do it or the institutions do not exist in the UK. I suspect that many noble Lords have been, like I have, at general meetings of the financial services industry where, as well as talking about being world leading in terms of green finance, we have talked about London as a very important centre for sharia-compliant finance as we attempt to expand and have a much greater global reach. Six years is an incredible time to wait. It has been four years since enabling legislation was put in place.

I was looking at a Metro article on the web about students who were interviewed in 2019. Some had managed to put together a way to pay their student fees. One said:

“I was constantly broke as a student and never, ever did anything remotely fun. I always felt too guilty if I spent any money on myself.”


Students who started out and found that they just could not keep going left and went to work, but then found that, as this lady said,

“to progress further I need that degree so the plan is to go back.”

However, this young woman has no idea how to finance it. Another youngster talked about the stress of

“having to live scrupulously and scrape up enough to pay each instalment in time.”

We really should not be putting any student into this situation. I do not understand the delay. There does not seem to be an obstacle in terms of designing the appropriate facility or the appropriate legislation. I hope that the Ministers who are here, all of whom are people of understanding and sympathy, will go and put pressure on the Government to take this from the bottom of the in-tray and put it at the top. It could be a minor amendment that we make on Report.