Consumer Credit Bill

My Lords, I begin by thanking all those noble Lords who have spoken so eloquently today. In particular, I welcome and congratulate my noble friend Lord Mawhinney on his excellent maiden speech and I much look forward to the maiden speech of the noble and learned Baroness, Lady Clark of Calton. I join my noble friend in congratulating her in advance, not only on her maiden speech but also on her arrival on the Government Front Bench and on her position as Advocate General for Scotland. Both the noble Lord and the noble and learned Baroness will make knowledgeable contributions to the House that will add to the quality of debate generally, and in particular on this Bill. I also humbly suggest that the relatively small number of speakers in the debate is more than compensated by the high quality of their contributions. That is what one would expect of such high-calibre speakers. Following them is enough to fill the inexperienced speaker with trepidation. As my noble friend Lady Miller has made clear, we on these Benches recognise the need for the Bill and its commendable updating of the legislation in the consumer credit sector. There is a commonality of interests between borrowers and lenders, because without the one the other cannot exist. Whatever amendments we do propose in due course will be balanced between those interests. Before going further, I must declare interests both as a director and controlling shareholder of a small business which holds a consumer credit licence, and as a former director of two merchant banks—and, in those days, an adviser to their clearing bank parents which engaged in the consumer credit business. I turn to our concerns with the Bill. Our over-riding concern is perhaps with the lack of detail in the Bill. We feel that too many significant policy areas have been left to secondary legislation and guidance from the OFT—an agency over which the Government have no ministerial control, in an area where it is also the regulator. As a result, there is a danger that it may become both judge and jury. That will create uncertainty for business and consumers. Like several organisations on the lending side, Credit Action—a national charity committed to helping people manage their money better—has told us that it too envisages problems arising through this lack of clear definition. As my noble friend Lady Miller of Hendon said, at the very least we need to see the secondary legislation being subject to the affirmative procedure, and the OFT’s guidance being subject to oversight by the Secretary of State. While a major criticism of the Consumer Credit Act is that it fails to provide the OFT with sufficient powers to tackle improper or unfair conduct by consumer credit businesses, we are concerned that the Bill, by contrast, goes too far. It expects the OFT effectively both to make law and to enforce it, yet there is no right of appeal. The Joint Committee on Human Rights specifically expressed concerns about the OFT’s proposed powers to impose requirements on licence holders where it is ““dissatisfied”” and concluded that,"““the unfettered scope of this power fails to satisfy the requirements of reasonable legal certainty and risks the disproportionate use of the power in practice””." The noble Lord, Lord Borrie, referred to the Hampton report and its suggestions for alternative regulators to the OFT. We think that the interests of all sides are best protected if the OFT is given a set of ground rules. The noble Lord, Lord Razzall, referred to a legislative framework within which it can carry out those functions. We look forward to hearing how the Government plan to deal with that. I now move to the concept of unfair relationships, with the general idea of which we concur, as my noble friend Lady Miller said. Our concern, like that of the noble Lord, Lord Razzall, is that the provisions fail to provide legal certainty about whether a relationship is unfair. We feel that both lenders and borrowers would benefit from greater certainty. Furthermore, as the burden of proof is placed on the lender, it appears that every relationship will be deemed unfair until the contrary is proved. The DTI originally suggested that where the contract was clear and the consumer had not been misled, the burden of proof would switch in favour of the lender. We need to understand why that was dropped. As a separate but related matter, retrospective application of the new unfair relationship provisions after a one-year transitional period is potentially detrimental to lenders who have securitised credit agreements, who may find them adversely affected. The intended targets of retrospective application are, we understand, loan sharks, who will tend to operate outside the regulatory framework anyway and tend to take advantage of vulnerable customers. We therefore need to know the justification for retrospective application. We have concerns about the use of what are known as typical rates. Loans, in particular, are often advertised at such typical rates, where it is permitted that up to one-third of customers may receive a different rate from that advertised. There is concern that customers do not realise that they may not receive the advertised loan rate when they apply. We want provisions in the Bill to require lenders who advertise typical rates to obtain the explicit agreement of the consumer to the rate that they are actually being offered before proceeding with the application. Many UK card providers currently allocate payments to outstanding balances at the lowest rate of interest, leaving items such as purchases and cash advances to continue to accrue interest at significantly higher rates. Customers who cannot pay off the full balance on their cards may run up bigger debts than they expected because any money that they pay towards their debt will go towards lower-interest balances. We suggest that the Bill would be an appropriate place to right that wrong. We join other noble Lords who have said that they feel that the Bill offers an opportunity as yet not taken to take the heat out of the ballooning levels of personal debt by outlawing unsolicited offers of credit cards, unsolicited increases in credit limits and unsolicited credit card convenience cheques. Those mechanisms are often aimed at a poorer, less financially experienced and more vulnerable people and can lead to them unwittingly running up debt that they did not intend to. In the area of data sharing, a critical issue, as the Minister mentioned, is that of older, longer-running credit agreements put in place prior to the enactment of the Data Protection Act, which therefore did not include authorisation by the borrower to the lender to share data as required. We look forward to hearing the Government’s explanation of how it is proposed that that problem be resolved. Perhaps the noble Baroness will be able to shed light on the timing of the publication of the results of the work to which the noble Lord referred earlier. We welcome in principle the application of the financial services ombudsman scheme to the consumer credit regime. That is, however, subject to certain reservations. Those include that the ombudsman scheme must be fully and appropriately resourced to enable it effectively to take on what may be a large number of complaints relating to much smaller transactions than it currently covers. Noble Lords will be well aware of the proposed EU directive on the matter of consumer credit. We ask how the Government plan to deal with conflicts between it and the Bill, such as the fact that the directive is intended to reintroduce a ceiling for borrowing that the Bill will have just removed for personal borrowing; and for their assurance that there will be no gold-plating. We also specifically ask the Government to demonstrate how they have verified that the move under Article 30 of the directive from minimum to maximum harmonisation is not breached by the Bill or the Act. It is perhaps disappointing that the Bill does not reform the outdated and inflexible law on hire purchase and, in particular, the half rule. That seems illogical as the 1974 Act, which this Bill specifically sets out to update, encompasses hire purchase. The half rule allows the customer to hand back a vehicle and be liable for only half the amount otherwise payable. Inevitably, there is a stage during each contract when, if the customer were to exercise its right, that would result in a certain loss to the provider of the finance. That will be made worse under the Bill because it abolishes the lending ceiling for personal borrowers. However, the real loser will be the customer, who will find hire purchase facilities more difficult to come by. As regards the timetable for implementation, the majority of the detailed provisions of the Bill are to be made by order, or through the OFT by guidance, notice or clarification. That creates uncertainty for lenders who require sufficient notice for implementation given the scale of the changes that will be required to their processes and IT systems. Therefore, we seek the Government’s assurance that commencement dates will allow for sufficient consultation of the outstanding detail of the Bill and adequate lead time for implementation. In conclusion, law of this type is often examined only in terms of its impact on lenders. It is usually assumed that the effect for consumers will be without exception beneficial. That is not necessarily the case. If legitimate lenders find that more and more claims are being made against them, or that the OFT’s new bureaucratic requirements end up costing them far more than the current system, there will be a knock-on adverse effect for consumers. The most likely outcome is that certain groups of consumers—those on the lowest incomes—will find it far harder to get credit and could even end up going to illegal lenders and, in addition, the cost of credit could rise. We look forward to hearing how the Government plan to tackle these complex issues.