Financial Services Bill

Lord Borrie Excerpts

Wednesday 18th July 2012 Lords Chamber

Moved by

[Lord Borrie]

108: Clause 5, page 17, line 7, at end insert—
“(h) where credit is granted to a consumer, a clear statement, in cash terms, of the total cost of such credit”

[Lord Borrie]

My Lords, this amendment stands in my name and that of the noble Baroness, Lady Oppenheim-Barnes, whom I am delighted to have supporting it. She was Minister for Consumer Affairs in the early years of the Thatcher Government and is a lady of tremendous knowledge and ability in this field. I will also speak on Amendment 197ZA which, rather surprisingly, is grouped with these other amendments. I will come to that in a moment.

The Financial Conduct Authority is taking over the responsibilities that are currently with the OFT in dealing with consumer credit. It is important that the Bill maintains and ensures long-term protection for consumers in future consumer credit transactions. One problem is that it is often very difficult for consumers to compare one loan, for example a pay-day loan, with another on a like-for-like basis. Indeed, it is quite difficult for people to know what the costs are of a particular loan that is granted to them. The amendment proposes that the total cost of credit “in cash terms”—I emphasise that—is quoted to the consumer whenever credit terms are granted.

As I understand it, in pay-day loans there are two elements to charges. One is the core charge or interest charges. The other comprises any other mandatory charges, such as transfer or set-up fees, that may be exacted by the creditor. It is vital to my mind that the cost of credit described includes all unavoidable charges. Those which are not discretionary but mandatory should all be disclosed, and the disclosure should be in cash terms because even the most disadvantaged debtor—even someone with less financial knowledge than others—understands cash terms. The pound sign means something, whereas the percentage sign does not. I know that the noble Baroness, Lady Oppenheim-Barnes, wishes to refer to this matter in a moment.

As I indicated, I shall speak also to Amendment 197ZA in this group. To my mind, this is almost a separate topic because it deals with plans involving arrangements managed by a debt management company that is negotiating with creditors to reschedule a debtor’s repayment of debts. As we know, there are some charitable schemes; for example, that run by the Consumer Credit Counselling Service, whose chairman, my noble friend Lord Stevenson, sits on the Opposition Front Bench. It does a tremendous amount of work and does not exact fees from the debtor, as it is a charitable organisation. Other schemes are financed sometimes by contributions from creditors but, as we have already heard in earlier debates, there are unfortunately huge numbers of debtors owing huge amounts of debt. There is a great need for them to have properly approved and fair debt management schemes and plans to enable them to start afresh, having had their debts rescheduled and paid off.

There is a practical need for commercially operated schemes to work as well as the Consumer Credit Counselling Service and other schemes to which I have referred do. The need for commercially operated schemes to exist requires that the debtor pays fees. Unfortunately, as has also come out in today’s discussions, the OFT has found, in a fairly recent review of 2010, that there have been a great many abuses in the system, including misleading advertising and excessive fees exacted by debt management companies. The OFT has used formal powers to revoke the consumer credit licences of various debt management companies but, to my mind, debt management companies that are run properly and fairly on a commercial basis are needed for debtors and in the consumers’ interests.

The nub of my amendment is that in 2007, under the previous Government, the Tribunals, Courts and Enforcement Act provided for debt management plans to be put in place, as approved by the Lord Chancellor, while in 2009—again, before the change of government—Ministry of Justice lawyers said that any implementation of such powers to approve schemes would require the provision of some form of profit element for this to be effective. These Ministry of Justice lawyers, whose opinion I have seen, thought that the present wording of Section 124 of the 2007 Act was defective because it allowed debt management scheme operators to recover only costs actually incurred; for example, staff and accommodation costs—out-of-pocket expenses, as it were. The 2007 Act does not allow for any specific profit element to be charged, yet surely, as long as the profit element is reasonable and there is nothing unfair in it to the debtor, it ought to be allowed. My amendment allows such a profit element, provided it satisfies the Lord Chancellor before he approves any debt management plan.

This is a practical and useful amendment to bring the relevant provision into line with what had been intended, as I understand it. Fair debt management plans are needed for the large numbers that, sadly, exist of multiple debtors. Given the level of need for such plans, it is not only not-for-profit organisations that should be allowed to offer debt management solutions. As Ministry of Justice lawyers have said, the problem of the defective drafting of the current law in Section 124 of the 2007 Act can be addressed only by way of an amendment to Section 124 to provide for a profit element. That is what my amendment seeks to do and I trust it will find acceptance with the present Government.

[Baroness Oppenheim-Barnes]

My Lords, I was very grateful to the noble Lord, Lord Borrie, for tabling this amendment. It is something that I have been passionately concerned about for many years. I am possibly the most innumerate person in your Lordships’ House. I say so on an occasion when we had speaking in our earlier debate the noble Lord, Lord May, who is one of the premier mathematicians in the world. I am very glad that he is not here at this moment.

I have been desperately concerned about the presentation of the costs of credit for any consumer at any level. When the first regulations came out, following the two Consumer Credit Acts, they were a long time coming and were very detailed. They were drafted by someone in a little office at the top of the Department of Trade and Industry and they came down very slowly. Just as I was leaving, down came the regulations for AER and APR. I took one look and said, “No—not possible. I cannot make head nor tail of this.” They were too polite to say to me, “Well, most people could, and you can’t”, so I put it to the test. This afternoon, before coming into the Chamber, I asked 20 different Members of your Lordships’ House if they knew what AER or APR stood for. None of them knew—and one of them, who is not here at present, actually moved an amendment.

When this amendment was coming up I started to look a little more deeply at what had happened since those regulations were passed, after my time there. I came across the information that we have in fact had two draft directives from the EU, which are very precise. The 2008 directive, in order to inform consumers, gives us a basic equation in numerical form. It has a big E, a big C, a little k, a bracket, 1 plus a cross, minus a little 4, equals another big E, with an M over it, and a little l equals 1, then a D1, a bracket, another 1 plus a cross, squared. That is the formula in the EU directive of 2008. There is an explanation. It says it is,

“where … X is the APR … m is the number of the last drawdown, k is the number of a drawdown”—

thus LSXM—

“Ck is the amount of drawdown k”—

I will not go on. There are at least four more lines like that.

We have been observing that particular formula in this country since that directive but there was a new directive in 2011, which is presumed to help with what has been decided, since 2008, was too difficult a problem for most consumers. It says:

“The experience gathered by Member States with the implementation of”,

that directive,

“has shown that the assumptions set out in … that Directive do not suffice”,

et cetera. They have watered it down somewhat but it is not going to come into force until January 2013, so at the moment we still have the formula that I quoted to your Lordships.

I really think that my noble friend Lord Sassoon will welcome the opportunity to accept this amendment. It is so simple and prescriptive. It is not general, like any of the other amendments. When you think of all the difficulties that people have with credit these days, even if they are more numerate than I am, then to give them the information in simple figures about how much it will cost them if they pay on time—that must always be made clear—and how much if they do not must be very attractive to any Government, or to anybody concerned with the problems facing consumers in this area today. It is simple and it is cheap. I beg my noble friend to give me some encouragement.

--- Later in debate ---

I very much agree with the sentiment of Amendment 108 but, as I have explained, in making this new agreement with the industry, we are going as far as we can to add the cash cost as far as it is permitted by the European directive.

[Lord Borrie]

The people who will subscribe to the new code are those who are more likely to conform to the requirements of the Government, the ministry or whatever. It is the other companies, which may not subscribe to these requirements, that one is bound to be more worried about. Those are the ones that will not provide the cost of credit in cash terms.

[Lord Sassoon]

My Lords, I believe that a step that takes us from no agreement in this area to a situation where over 90% of the industry has agreed through the code of practice to reflect the cash cost, and for that agreement to be in effect from 25 July, is a huge step forward. Of course, because it is done via a code of practice and a voluntary agreement, BIS has been able to do it relatively quickly. I would suggest that having it 90% done, and done quickly—which one hopes will drive fringe players out of the market if they do not buy into the codes of practice—is the right way, and an energetic and effective way, for my colleagues to address the situation. We should wait and see how that operates, but I believe that it will be effective. It is a major advance and is compatible with the difficult constraints of the European directive.

[Lord Sassoon]

I am not going to question the motives of the directive, except to note that in this area, as in others, we are not free agents.

I turn to Amendment 118E, which seeks to insert into the list of “regulated financial services”, referred to in the FCA’s objectives,

“debt management companies or debt adjustment services companies”.

There is no explicit reference to debt management or debt adjusting on the face of the Bill. However, I would like to reassure—I am grasping for whose name is attached to this amendment—the noble Lord, Lord Eatwell, but also the noble Lord, Lord Stevenson of Balmacara, that Clause 6 enables all consumer credit activities currently regulated by the Office of Fair Trading to be transferred to the FCA, including debt management. So I hope the noble Lord will accept my assurance that no further provision in this area is necessary, because it is indeed picked up by the definition of Clause 6.

I should turn next to Amendment 197ZA, before I address some government amendments in the group. It concerns the question of the statutory debt management scheme and is also in the name of the noble Lord, Lord Borrie. It would amend enabling powers in the Tribunals, Courts and Enforcement Act 2007 for a statutory debt management scheme, if implemented, to apply to commercial as well as not-for-profit organisations.

As I said, the Government are currently working to deliver non-legislative alternatives with the debt management industry, as we have with the fee-charging pay-day loan industry. We want to give sufficient time and focus to that work to develop a voluntary code and to take account of the wider changes to the regulation of the debt management sector enabled by the Bill, which will lead to more proactive and intrusive regulation for the sector, before we look to a statutory scheme. If the Government were to resort to a statutory scheme, that would be the appropriate point to revisit the provisions in the Tribunals, Courts and Enforcement Act 2007 to ensure that they meet the policy needs, rather than addressing it at this stage through the Bill before we have bottomed out the ability of a non-legislative solution to have effect.

I shall speak briefly to the government amendments in the group, Amendments 142 and 194 to 196. Noble Lords may be aware that the Government brought forward a number of amendments at Report in another place to support the transfer of consumer credit regulation from the OFT to the FCA. Among those amendments was provision enabling local weights and measures authorities—trading standards—to continue to provide services to the national consumer credit regulator and to take action against those who provide credit on an unregulated basis following the transfer to the FCA. The amendments complete the group by creating parallel provisions for the Department of Enterprise, Trade and Investment in Northern Ireland, which plays the same role in Northern Ireland as does trading standards in England and Wales.

With those various assurances abut this rather disparate group of amendments, I ask the noble Lord, Lord Borrie, to consider withdrawing his amendment.

[Lord Borrie]

Yes, of course I will withdraw my amendment, but I must express disappointment with the disinclination of the Minister to take the one further step that would enable a change to be 100%, rather than whatever percentage of good boys will conform to a code of practice.

[Lord Bilimoria]

My Lords, I accept that there is an element of contradiction in advocating, on the one hand, that we go carefully on transferring consumer credit but, on the other, that we transfer CMCs. I just make two points on consumer credit. I argued strongly for its transfer at the time of the FSMA; I am pleased to see it happening; I think that that is correct. CMCs are basically a financial service. They are lodging claims for people, whatever the cause. I hope that, in due course, it may be transferred to the FCA.