Consumer Credit Bill

My Lords, I beg to move that this Bill be now read a second time. The UK has one of the strongest and most efficient consumer credit markets in the world. We represent a quarter of the EU credit market generally, and 50 per cent of the EU credit card market. For 30 years, the consumer credit market has helped to build what is now a thriving economy, with low interest rates and record employment. It is this credit market and this economy that has not only enabled our consumers to achieve high standards of living, but has also ensured that our businesses can flourish. We want to ensure that this market remains competitive. But the consumer credit market has changed immeasurably since 1974, when the current legislative framework was established. Then, only one credit card was available; now there are 1,300. Then, £32 million was owed on credit cards; now it is over £49 billion. There is clear evidence that some consumers are suffering significant harm. We cannot deny that irresponsible or unscrupulous lenders can destroy lives. Borrowers can find themselves with credit agreements that they either do not need or do not understand. Often, the most vulnerable in society are disproportionately affected. More than half of the over-indebted households have incomes of less than £7,500 per year. Noble Lords may be aware of the case which the Under-Secretary of State described to the other place. The case concerned a couple, both of whom suffered from mental illness, whose initial loan of £500 spiralled to debts of more than £5,000. But in addition to this, the couple also owed another £19,000 to other lenders, and had no means to repay it. We need to drive out irresponsible lending, not only to protect consumers, but also to ensure that credible businesses can operate with confidence in a competitive market. We also want to empower consumers to make informed borrowing decisions. This relies on transparency and clarity of agreements with lenders, and on consumer confidence in appropriate levels of rights and redress. In this context, the Government are committed to full-scale consumer credit reform with one over-riding aim: to create a fair, clear and competitive consumer credit market for the 21st century. Noble Lords will no doubt be aware of the important work already completed by the Government in this area. Our consumer credit White Paper of 2003 set out the Government’s agenda. Since then we have introduced secondary legislation, developed initiatives for tackling over-indebtedness, and run pilot projects to tackle illegal money lending. Our secondary legislation has standardised the method by which APR is calculated for running account credit, so that consumers can compare credit advertisements with confidence. We have required lenders to provide, at the outset, key information clearly on the product, and we have made early settlement charges fairer and more transparent for consumers. The Bill builds on the good progress we have already made. We have consulted carefully and widely, with business, consumer groups and regulators. I am confident that this input has helped to get this legislation right. The Bill itself is built around three key themes: enhancing consumer rights and redress; improving the regulation of consumer credit businesses; and ensuring that regulation is appropriate. Our first key objective is to enhance consumer rights and redress. We believe that consumers should have the right to challenge unfairness where it exists and obtain redress where appropriate. The current tools available to consumers for obtaining redress or solving credit disputes are, at best, limited. Where disputes with lenders arise, consumers are often restricted to court action. This can be costly and time-consuming, for both consumers and lenders. As such, consumers are dissuaded from making what would be legitimate complaints. Furthermore, even where complaints are taken to court, examples of success for the consumer under the existing extortionate credit test are rare. The Consumer Credit Bill addresses these problems in two key ways. First, the Bill will introduce an alternative dispute resolution (ADR) scheme for consumer credit disputes. ADR will empower consumers with a fast and effective means of resolving disputes, without having to resort to court action. The ADR scheme will be free for consumers, meaning that all consumers will have access to redress, and not just those who can afford to pay for it. The system will be run by the Financial Ombudsman Service (FOS), an independent and credible ADR provider. In developing this ADR system, we have worked hard to ensure fairness on both sides of the dispute. Therefore, the FOS will be able to consider disputes only once a lender’s internal complaints handling procedures have been exhausted. In addition, the FOS will be able to refuse any frivolous or vexatious claims, if appropriate. Secondly, the Bill improves means of redress for consumers by replacing the out-of-date extortionate credit test. Too many real cases have shown that the old test sets the bar for what is ““extortionate”” too high to be of use. Equally, the test has been confined to the cost of credit or terms of agreement at the time the agreement was made. Noble Lords will appreciate that having a credit card or personal loan is not just about price. Many other factors can impact on an agreement, such as the lender’s conduct in administering the loan. That is why the Consumer Credit Bill introduces a new test based on the principle of unfairness. Consumers will be entitled to apply to court to challenge agreements where there is an ““unfair credit relationship””. Under the new test, courts will be able to consider all aspects of the transaction, including the lender’s conduct before and after making the agreement, the administration of the loan, and the overall terms and conditions of the agreement. The new unfair relationships test ensures that the courts will have wide discretion to assist those who face unfairness from lenders. On top of those improvements to rights and redress, consumers must also be confident that they are borrowing money from responsible lenders. Our second key objective is therefore to improve the regulation of consumer credit businesses. The Office of Fair Trading runs the consumer credit licensing regime and polices licence holders. But the OFT is currently hampered in its work by the bureaucracy associated with licence renewals, limited information-gathering powers and a lack of intermediate sanctions. The Bill will therefore streamline the licensing system. It will create more focused categories of licence and introduce standard indefinite licences, removing the need for renewal. That will make the regime easier for the OFT to administer and more proportionate for licensees. The Bill will give the OFT powers to obtain the information it needs to ascertain and monitor the fitness of firms to hold a licence. The OFT will also be able to impose measured requirements on licensees, and financial penalties for failure to comply with such requirements in cases where it is not proportionate to withdraw the licence completely. Of course, we have put in place safeguards against disproportionate use of requirements. They include the obligation for the OFT to issue guidance, a procedure to seek representations from the affected person, and a right of appeal for licensees to the Consumer Credit Appeals Tribunal. The Bill also introduces a broader test that the OFT will use to decide whether someone is fit to hold a licence. The current test is too limited: it essentially relies on past behaviour as a guide to future conduct. The new fitness test will enable the OFT to assess positive evidence of credit competence on an ongoing basis. It will help the OFT to identify irresponsible lenders and drive them from the market. To industry’s benefit, the new test ensures that businesses will need to satisfy the OFT only that they are ““fit”” to hold a licence for the specific area or areas of consumer credit activity that they undertake. This system will be less onerous for business and more targeted for the OFT, which will be able to concentrate its attention on the areas of highest risk. Enhancing OFT powers and the licensing regime in these ways will improve the way that consumer credit businesses are regulated. Noble Lords will also appreciate that keeping consumers informed is an essential part of being a responsible lender. That is something that the Government have been particularly keen to promote. More informed and more confident consumers will reduce the risk of over-indebtedness and encourage competition in the market. The current regime means that consumers are too often surprised by arrears or default fees or are not even told when they are behind with their payments. The Bill will therefore ensure that lenders give consumers regular information about the state of their credit account, including whether they are in arrears, whether they have incurred default sums and whether they are incurring interest on judgment debts. These changes are essential, but their success also depends on the scope of regulation of consumer credit businesses. That is why our third and final aim is to ensure that regulation is appropriate. Regulation must be appropriate and measured, ensuring comprehensive protection for consumers, while allowing industry the flexibility to innovate. The consumer credit market, and the amounts consumers borrow, has grown considerably over the past 30 years. Nowadays, it is not uncommon for consumers to borrow more than £25,000, for example, for debt consolidation purposes and second charge mortgages. But the existing legislation does not cover consumer credit borrowing over that amount. The Bill therefore removes the £25,000 financial limit, extending the protections of the Act to cover all consumer borrowing. Extensive consultation also highlighted concerns about the impact of regulation on business lending and ““high net worth”” individuals. We listened to those concerns to ensure that the Bill provides protection where it is needed. We will therefore maintain the protections for business lending under £25,000 and exempt business lending above that limit. The Bill also enables the Secretary of State to make secondary legislation allowing ““high net worth”” borrowers to opt out of regulation, provided they meet specified criteria and undertake certain steps. This not only empowers those individuals, but also allows industry the flexibility to innovate. I have described in some detail the extended protections for consumers. However, lenders must also be confident that they are operating on a level playing field—they should also be protected. Under Section 127 of the existing legislation, lenders can be unfairly penalised for minor, insignificant or technical breaches of certain requirements of the consumer credit legislation. In such cases, the agreement becomes automatically unenforceable. There have been cases where consumers have benefited unfairly from this. The Bill therefore makes the Section 127 provisions more proportionate. It gives the courts full discretion to rule on the extent to which defective agreements may be enforced, or not, by the lender. This will not remove consumer protection, because agreements can still be found unenforceable. It will, however, be fairer for business. This more appropriate approach to unenforceability must be seen in the context of the wider reforms of this Bill, such as the new unfair relationships test and ADR provisions, which will provide more protection for consumers. I have outlined the content of the Bill in some detail. I now refer briefly to one particular issue concerning something that is not in the Bill; namely, data sharing. This was the subject of lively and interesting debate in the other place. Lenders are not able to share data on credit accounts that were opened before the late 1990s, when it became routine for lenders to ask borrowers for permission to share their credit data. There has recently been some pressure from industry to use the Consumer Credit Bill as a vehicle for addressing this issue. However, as the Under-Secretary of State explained during the Report stage in the other place, the issues around data sharing are wider than just those covered by the Consumer Credit Act . It is also important to ensure that the benefits gained from the sharing of these data are proportionate to the legislative measures involved. Noble Lords will appreciate that we do not want to rush out approach to this complex issue. Data sharing will therefore not feature in the Bill. However, the Government have listened to industry and believe that data sharing is a necessary and important means of ensuring responsible lending. So I am pleased to announce that we intend to consult on the issues raised by industry proposals, to investigate the case for relaxing restrictions on data sharing for the purposes of assessing ability to pay credit. This will ensure that we get the approach to data sharing right. In conclusion, the Bill is a comprehensive and long-awaited piece of legislation. It received a relatively smooth and quick passage through the other place. It provides a balanced set of provisions, which will benefit both consumers and industry. It builds on a significant amount of previous work, it enhances consumer rights and redress, it improves the regulation of consumer credit businesses, and it ensures appropriate regulation. The Bill sets the framework for a fair, clear and competitive consumer credit market for the 21st century. I commend it to the House. Moved, That the Bill be now read a second time.—(Lord Sainsbury of Turville.)