Financial Services Bill (Twelfth sitting)

Stella Creasy Excerpts

Committee stage & Committee Debate: 12th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[Abena Oppong-Asare]

I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 16

Consumer credit: extension of FCA rule-making duty

“(1) Section 137C of the Financial Services and Markets Act 2000 shall be amended as follows.

(2) In subsection (1A), substitute

‘one or more specified descriptions of regulated’

for ‘all forms of consumer’.”—(Stella Creasy.)

This new clause would extend the responsibility of the FCA to make rules with a view to securing an appropriate degree of protection for borrowers against excessive charges to all forms of consumer credit.

Brought up, and read the First time.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

I beg to move, That the clause be read a Second time.

[The Chair]

With this it will be convenient to discuss the following:

New clause 17—Regulation of buy-now-pay-later firms—

“The Treasury must by regulations make provision for—

(a) buy-now-pay-later credit services, and

(b) other lending services that have non interest-bearing elements

to be regulated by the FCA.”

This new clause would bring the non interest-bearing elements of bring buy-now-pay-later lending and similar services under the regulatory ambit of the FCA.

New clause 22—Cost of credit: FCA assessment—

“In Schedule 6 of the Financial Services and Markets Act 2000 after paragraph 2F(3) insert—

‘(4) When considering the business model, the Financial Conduct Authority must have regard to the interests of consumers, in particular—

(a) the proportion of a firm’s revenues that are to be derived from re-lending, and

(b) whether customers are likely to be charged a total cost of credit in excess of one hundred percent of the amount borrowed both on the basis of the initial credit terms or following relending activities.

(5) Where the Financial Conduct Authority’s assessment concludes that a business model poses a significant risk that customers will be charged a total cost of credit in excess of one hundred percent of the amount borrowed, then the threshold condition will not be met.’”

This new clause would ensure that the Financial Conduct Authority assesses the business models of firms and does not allow excessive relending activity to take place, or for firms to be granted permission if there is a significant risk of customers paying more in interest, fees and charges, than the amount they have borrowed.

[Stella Creasy]

It is a pleasure to serve under your chairmanship this afternoon, Dr Huq—all of us who have one of those titles but never really use it probably ought to, not least with our bank managers on issues such as this.

The new clauses we discussed this morning were about when the FCA, having been involved with a company, has let down our constituents, and that is why we pushed new clause 21 to a vote: fundamentally, there are thousands of people in this country, many of them our constituents, who will be denied compensation because the companies that owe them compensation have gone into administration on the FCA’s watch.

These new clauses are about how we can get proper consumer protection so that we do not get into those positions at all, as well as taking on board what we have learned in the past seven years about what actually works to protect consumers, and the reality is that it is capping. Capping the costs of credit has been a very effective, cheap and clear form of regulation, which has benefited industry and consumer alike. These new clauses are about giving the FCA the power to use that evidence to help to protect our consumers, because, sadly, the detriment that made capping payday lending such an effective thing to do is now appearing in many other industries. That speaks to the whack-a-mole challenge that we have with credit in this country.

As I said this morning, the challenge is that the FCA moves very slowly, but this industry—credit in its broadest sense, not just high-cost credit—moves very quickly. We know that what has stopped consumer detriment is being able to cap what these companies can charge, and we know that most of all from the payday lending industry. The payday lending industry still exists in this country, but the reason we have not had people turning up to our surgeries, or seen these companies on our high streets or indeed in our inboxes, is that regulation has meant that people are not being exploited by them in the way that they were. The companies can still operate—those that want to lend to people in a short-term and effective way without exploiting them. However, the point at which people get into debt and cannot get out of it—that business model that was about hooking people in and keeping them paying—has ended, because of the cap.

In this country, if someone takes out a payday loan, they will never pay back more than double what they borrowed, including the interest fees and the charges. That is a really important point in these new clauses, because the whole point was capping not just interest rates, but the whole cost of a loan. As I said earlier, exploitation in the credit industry is like water: it finds the loopholes. These new clauses speak to other forms of loopholes.

--- Later in debate ---

[Alison Thewliss (Glasgow Central) (SNP)]

The hon. Lady is making a very good point. Is she aware that the Young Women’s Trust has suggested that 1.5 million young women have lost income during the pandemic?

[Stella Creasy]

Absolutely. We know who such companies are targeting, and they are doing so deliberately. I hate to say this, as I do want to win over the Committee, but we might not be their target audience at this point in our lives, because we might not be actively reading the social influencer media posts. I might be completely wrong—I am sure some Government Members are regularly on their Instagram accounts looking at posts by ASOS.

Some 20% of those young people say they have missed a payment in the last year—the figure has doubled in the last year—because they thought that a purchase would cost a certain amount and that they had an income, but that income has gone. The companies will say that they are very good to their customers because they do not lend more than people need and they do not charge interest—the companies’ interest is in people paying back the money—but those companies go silent on what they do when people do not pay back. What happens to people’s credit references? How do they chase money? Do they use debt collection agencies?

Those companies are growing rapidly, just as the payday lending industry did. We watched that happen and, in that Cassandra-like way, all tried to warn of it, but it took too long for us to act. In 2019 Klarna was boasting that it had signed a partnership with a new merchant every eight minutes in this country. By the end of 2019, 6 million people had used its product, and it said that 55,000 were using it weekly. Imagine what it is like now, with people having been stuck at home and stuck on their phones.

The Money and Mental Health Policy Institute found that more than 3 million people with mental health problems have found it harder during the pandemic to control their online spending, and two in five said the BNPL industry has been “harder to resist”. Because it is not regulated, it does not have to follow any of the rules we might want to point to that protect consumers. That is why we see all those adverts saying, “No interest, no fees—don’t worry about it.” The industry does not have to provide the normal financial information we see in other forms of credit because it is not regulated in that way.

Just as with the payday loan industry, as soon as we started talking about these companies, along came the offers of dinners and discussions and talks, where the industry says it is in fact a misunderstood new technology. Those of us who are not regularly on the internet have obviously missed them.

[Mr McFadden]

rose—

[Stella Creasy]

I am sure the shadow Minister is about to tell us about his Instagram account.

[Mr McFadden]

No, I am not, but I am interested to hear that my hon. Friend got an offer of dinner. All I got was an email.

[Stella Creasy]

Sadly, during the pandemic, none of us has been able to take up any of those offers to explain our concerns to these companies directly, as opposed to on Zoom. It is a simple concern: the way in which these products are marketed encourages people to spend money as a way of dealing with the emotional and social impacts of the pandemic. The adverts, using those social influencers, say, “When you’re feeling low, sat at home by yourself with nowhere to go, there is something to make you feel better.” Essentially, the message is, “Get into debt. Don’t worry about it. You can spread the payments. Don’t worry about whether you can afford it.” They get away with saying and doing that because they are not covered by the regulations.

I know the Minister is looking at this issue—he said so—and that the FCA is doing so. I have made a series of complaints to organisations such as the Advertising Standards Authority about these issues, because, just as with payday lending, we have seen the rapid expansion of these companies. My worry is that if we take 18 months it could be too late in terms of consumer detriment. I do not doubt these companies when they say they want to have a sustainable business model, but it is for us in this place, in crafting the Bill, to decide what sustainability is and how they make their money. Otherwise, we are handing them our young consumers, in particular, on a plate to be exploited. The new clauses speak to those issues.

New clause 16 would ensure that all forms of consumer credit are covered by regulation, because the gap that Klarna and company have fallen into is arguing that they are not a form of consumer credit so they do not need to be regulated. We should always apply a sniff test: if somebody is giving us money to buy things on tick, that is a form of credit. If it walks like a duck and talks like a duck, it should be regulated like ducks should—see, we have moved on from the dinosaurs to ducks.

New clause 17 would make rules explicitly about the buy now, pay later industry. I do not believe we can wait another year or so before we do something. It makes sense to bring the industry under the FCA’s umbrella so that the FCA can act. The new clause would ensure that Ministers could act based on the industry’s actions, given the risks that come from them. Unlike customers of Amigo Loans or indeed the remaining payday loan industry—or even the credit card industry—nobody who uses buy now, pay later can go to the ombudsman for redress, so what do they do if they get into difficulty? I pay tribute to Alice Tapper from Go Fund Yourself, who has been collecting the evidence about young people getting into debt from unaffordable forms of spending with such companies and not knowing how to get out of it.

--- Later in debate ---

[The Chair]

I call Stella Creasy PhD.

[Stella Creasy]

As well as winner of a Titmuss prize, I think you will find, Dr Huq. My father got excited that I meant Abi, and my mother thought I meant Fred—it was neither.

I listened to the Minister, and was all eerily familiar. It was like the conversations that we had on payday lending, when everyone mentioned the then Office of Fair Trading. I appreciate that that conversation was not with the Minister, but the outcome for our constituents will be the same. It is Christmas; does he think that Klarna, Clearpay and Laybuy will not be heavily pressing their product on our constituents?

We could vote to send a message that change will come in the next couple of months. We could sound the alarm that we did not sound on payday lending until millions of people were in debt. The Minister knows that the FCA has been, and will continue to be, timid about using capping, because it is looking for political leadership to say that capping is the right to do.

I am happy to withdraw new clause 16, but I will press new clause 17 to a vote because I think we should send a message that we are listening to the consumers who are already in debt with those buy-now-pay-later companies. It is an incredibly reasonable clause that says that we will regulate and not leave people hanging. The Minister has not given any succour to that idea. He has talked about a review and the possibility of some consideration later, but that is just too late. Too many people are already in debt with those companies. I hope, if the Minister will not listen to me, that he will at least listen to Martin Lewis and Alice Tapper, who have been trying to help people in financial difficulty because they cannot go to the ombudsman. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 17

Regulation of buy-now-pay-later firms

“The Treasury must by regulations make provision for—

(a) buy-now-pay-later credit services, and

(b) other lending services that have non interest-bearing elements

to be regulated by the FCA.”—(Stella Creasy.)

This new clause would bring the non interest-bearing elements of bring buy-now-pay-later lending and similar services under the regulatory ambit of the FCA.

Brought up, and read the First time.

Question proposed, That the clause be read a Second time.

--- Later in debate ---

Brought up, and read the First time.

[Stella Creasy]

I beg to move, That the clause be read a Second time.

I do not intend to speak to this new clause for very long because my case has already been made. This is a simple clause about the powers of the FCA to do investigations and about who has the power to require it to do them—currently, that is the Treasury. The new clause suggests that a Select Committee should be able to do that. It would most likely be the Treasury Committee, but the clause says “a relevant Select Committee”, because the issues may concern the Business, Energy and Industrial Strategy Committee.

The Minister will understand my disappointment and frustration that he has not offered any opportunity to look at whether amendments or investigations are needed. Change is likely to come to our credit industry in the time that this Bill is before Parliament. If the Treasury will not act, it falls to all of us in Parliament to ask where else we can scrutinise how our constituents are being lent to and whether they are being ripped off.

--- Later in debate ---

[John Glen]

The change proposed under this new clause to allow Select Committees to require the FCA to launch investigations in situations where there is suspected regulatory failure would mirror powers that are already available to the Treasury. As I set out earlier, section 77 of the Financial Services Act 2012 enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so under, for example, the regulators’ power in section 73 of that Act.

The Treasury has used those powers to require the PRA and FCA to launch investigations where it considers that appropriate. As Members are aware, the Treasury Committee had the opportunity to scrutinise the investigation that was carried out into the Co-operative Bank in 2018, and it made a number of recommendations that were accepted by the PRA.

I am therefore confident that investigations under existing section 77 powers are useful in holding regulators to account, ensuring proper scrutiny of them and conducting investigators in the public interest. In determining whether an investigation is in the public interest, the Treasury will also consider the views of the relevant Select Committee in reaching its decision.

The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services. The Treasury is confident that proper mechanisms exist to allow the Treasury Committee to scrutinise and comment on investigations, as is right and proper. Ultimately, there is nothing to stop a relevant Select Committee launching its own investigation into an issue, calling witnesses, gathering evidence and making recommendations. That is a decision for the Committee.

[Stella Creasy]

Earlier today, we talked about the fact that the Treasury instructed the FCA to get involved in the debate around payday lending. Indeed, it went into companies such as Wonga and QuickQuid and set out redress schemes. We know that they were ineffective because it ended up with the ombudsman getting involved, and it was only then that those companies went into administration because it was revealed how much they owed to our constituents. In circumstances such as that, where no doubt there would be difficult conversations about what role the Treasury and the FCA played in the process, who watches the watchmen? Who would instruct that inquiry? At the moment, that inquiry has not happened, so we do not know why that redress scheme did not work. There is no sign that the FCA wants that. Is the Minister saying that he would instruct that so that we can get to the bottom of why the redress scheme did not work? If it did not, it seems rather apposite to have an independent third party that could look at issues such as that on behalf of consumers.

[John Glen]

I am very happy to look at that particular case. The point I am making is that there is a mechanism to compel the FCA to investigate, and the Treasury does not do that in isolation from the its wider accountability to Parliament, individual Members of Parliament and the Treasury Committee. I am very happy to examine the point that the hon. Lady has made and I will look at it carefully, but that provision exists. Frankly, I cannot and would never expect to act in isolation and without accountability to Parliament. Given the powers available to the Treasury, which can be used in that context, and the opportunity for scrutiny by Select Committees, I ask that this new clause be withdrawn.

[Stella Creasy]

If the Minister is saying that he is going to instruct a redress investigation, I will happily withdraw the new clause. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 21

Assessment of risks of consumer detriment

“(1) Schedule 6 of the Financial Services and Markets Act (2000) is amended as follows.

(2) After paragraph 2D(2)(c) insert—

‘(d) the risks of consumer detriment associated with the firm’s business model and the likelihood for compensation claims from consumers.’

(3) After paragraph 2D(3), insert—

‘(3ZA) When assessing whether the firm has appropriate financial resources to meet the risks of consumer detriment and the likelihood of compensation claims from consumers, the Financial Conduct Authority must ensure that, at all times, firms hold sufficient financial resources to meet any likely compensation claims from customers in full.’”—(Stella Creasy.)

This new clause would ensure that the FCA considers the likelihood of consumer detriment arising from the firm’s business model prior to, and following, authorisation, and that firm’s hold sufficient financial resources to meet potential compensation claims from customers in full.

Brought up, and read the First time.

Question put, That the clause be read a Second time.

--- Later in debate ---

Brought up, and read the First time.

[Stella Creasy]

I beg to move, That the clause be read a Second time.

This is the final new clause for the final bit of the Bill, so I am hoping that this time round, given the season, the Minister will withdraw his Scrooge-like refusal to amend the Bill, not least because I genuinely think that on this new clause and this area of policy he probably agrees and recognises that there has been an oversight in its consideration. I also hope that Government Members will support the new clause, because it is surely what they came into office to do—to remove the red tape and bureaucracy that holds back enterprising, entrepreneurial people in our local communities.

I speak as a proud Co-op as well as Labour MP, and this new clause is about co-operative banking—perhaps not what people might first think of when they talk about co-operative banking, but it is about how mutual banks are set up. Local mission-led mutual banks are common in other parts of the world, but not so much here in the UK. They are, however, something that people are increasingly looking at and trying to support, particularly around Greater Manchester and elsewhere, and local leaders in Liverpool and Preston have plans to establish such institutions as well.

As people would understand, is quite difficult to start a bank: there are often requirements, even for a standard for-profit shareholder-controlled model. Much of the difficulty boils down to the challenges involved in raising the amount of equity capital that regulators require for institutions before they will issue an operating licence. That is what we are talking about today. Frankly, someone would need to raise millions in equity to get a banking licence.

The problem for mutual banks is that many investors struggle to understand what a mutual is. Ultimately, the mutual might offer good long-term returns, but there are no opportunities for those bumper dividends or speculative gains that people might traditionally associate with banking. That is part of a model that invests in communities, supports people and has people as part of the process. People think about credit unions; this is about what the 21st century co-operative banking models might be.

One of the challenges holding back the co-op movement is an antiquated piece of legislation. Let me be clear: the passage of the Co-operative and Community Benefit Societies Act 2014 was very welcome and helped to level the playing field. The capital requirements regulations are a hangover from Disraeli’s time. Those provisions can be traced back to the Industrial and Provident Societies Act 1876. I am talking about simply removing them from the legislation, because the requirements that they make are already covered for co-operative banks by other forms of prudential regulation in the Bill. Their existence creates an artificial level of complexity for the setting up of co-operative banks.

I do not want to go into too much detail, but the law currently prevents co-operative societies from being banks if they have what is called withdrawable share capital. That restriction was imposed in 1876; things have moved on. First, we now separate and have strong regulation of banks’ capital adequacies, as we discussed earlier in the Bill process. Furthermore, we have clear and specific regulation setting out how co-operative withdrawable share capital can safely be used to help to capitalise banks. It is firmly established today that societies retain the absolute right to suspend share withdrawals, giving their capital the essential features of equity under international and UK accounting standards.

If mutual banks were able to add withdrawable share capital to their mix, that would help to enable them to diversify their offer to investors and therefore broaden the range of investors to whom they could be marketed. It would open up significant opportunities for co-operative banks to get off the ground, because they would have the ability to raise the equity that they need to get a banking licence. Surely, Members from all parties can agree, in good Christmas cheer, that such competition in our banking sector would be a good thing, so it would also be a good thing to remove this archaic piece of legislation on capital equity from the legislation book.

The Bill is about financial services, and the co-operatives throughout the country want to offer financial services. The Minister may still be drawing on pot 3, on the Ghosts of Christmas past and present, but on the Ghost of Christmas future, in the Lords or on Report, might he give us a glimmer of hope, Tiny Tim-style, that he will listen to the co-operative banking sector? They have written to him in support of this amendment and I know he has met representatives from the sector to look at what more he can do to support them. I hope he will remove these pieces of red tape and take back control of the mutual sector this Christmas.

[John Glen]

I am grateful for the enticement to be generous, but I was quite generous on new clause 8. I gave some positive indications about the intentions of the Government, and I look carefully at everything that is said by Members from across the Committee. I am very engaged with the mutual banks and with the co-operative sector generally, which I will say more about in a moment.

This amendment aims to remove the restriction which prevents co-operative societies holding withdrawable share capital from carrying out the business of banking. I share the interest of the hon. Member for Walthamstow in how the mutual model of financial services can add much-needed diversity and competition to the sector. Treasury officials and I have had constructive conversations with individuals seeking to set up regional mutual banks, and I look forward to continuing those. I will not mention their names, because they are going through different regulatory processes, and I am told that that is sensitive and so I should not do so. I try to help them.

Ensuring that banks hold the appropriate capital is critical to a stable and functioning financial system. It is therefore important that we consider any legislative changes in this area. I have thought about the amendment, and there are several immediate concerns about the potential risks to financial stability and consumer protection, which the Government have a duty to consider.

I will set out our most pressing concerns. As the global financial crisis highlighted, sufficient regulatory capital is needed by financial institutions as a source of resilience and to ensure losses can be effectively absorbed. To ensure capital fulfils this function, capital held by banks must always be readily available to absorb losses, which cannot be the case where investors can withdraw capital. Enabling co-operative banks to hold withdrawable share capital, as this amendment intends, could place consumer deposits at risk, create an inconsistent regulatory regime between co-operative and non-co-operative banks, and cause risks to the stability of the financial system, if it led to banks being inadequately or inappropriately capitalised.

I have had representations from the prospective regional mutual banks sector that they would seek to use this amendment to issue additional tier 1 capital instruments, or contingent convertible bonds. These are complex instruments that would need further thought to ensure they fulfilled their purpose within the legislative framework for co-operatives. It is also unlikely that the ability to raise additional tier 1 capital would be very beneficial to regional mutual banks currently, given they are at the early stages of their development where raising core equity capital is the priority.

I also note that the activity of deposit taking, in the form of withdrawable share capital that co-operatives and community benefit societies carry out under the present legislation, is subject to certain exemptions from regulatory requirements, which are applicable to other institutions carrying out business activities. These may no longer be appropriate if they were generally allowed to carry out the business of banking.

In conclusion, the Government believe that the fundamental issue is that it is not appropriate for deposit takers to rely on withdrawable share capital. In any case, certainly a measure like this would need further consideration of the legislative and regulatory implications rather than being introduced by way of amendment. I will continue to look carefully at these matters with the sector, but in the context of what I have said I ask the hon. Member for Walthamstow to withdraw her amendment.

[Stella Creasy]

I am so sorry to hear that the Minister is still listening to Marley rather than Bob Cratchit about the true spirit of Christmas. This is legislation from the 1800s. It is about £400 worth of share capital. It is outdated and needs a little more Christmas cheer. The Minister said that he would commit to working with the sector to get this amendment right, and if amended this Bill could be great. I think I will push the new clause to a vote—if nothing else, to put on the record that there are those of us who understand that co-ops want to move into the 21st century—and wish everyone a merry Christmas at the same time.

Question put, That the clause be read a Second time.