Consumer Credit Bill

My Lords, I have listened with great attention to the many expert contributions that have been made in this interesting and constructive debate. The contributions came fast, but not furious, and I shall respond in that spirit. I want to associate myself with the tributes paid to the noble Lord, Lord Mawhinney, for his most useful analysis and comments in his maiden speech. Noble Lords tell me that my speech has been much anticipated—it may have been much anticipated by Members but it has not been much anticipated by me. I understand now why it has been so anticipated: some Members think it is the Lord Advocate who is to reply and we know from the days when the noble and learned Lord, Lord Mackay of Clashfern, was Lord Advocate, that that would indeed be something worth waiting for. Since 1999, the Lord Advocate and the Solicitor-General for Scotland have not been UK law officers, as they have gone to lend their expertise to the Scottish Executive. They are Members of the Scottish Executive and the Lord Advocate was replaced by the Advocate-General for Scotland. So it is as Advocate-General for Scotland that I appear today. Some 30 years have passed since I first studied the Consumer Credit Act 1974, prior to my Bar examinations in the Faculty of Advocates. To my great relief at the time, I found that I did not have to answer any questions on that legislation. I hope this, my maiden speech, will not turn into a long-postponed oral examination as I attempt to deal with some of the general issues raised by noble Lords arising out of the provisions in this Bill. As it is my maiden speech, I hope noble Lords will grant me some indulgence. I am encouraged in that hope by the warmth of the welcome and the generous help that I have received not only from noble Lords but also from so many officials and staff. I am also very grateful for the kind words that have been said about me by so many noble Lords and I hope that my speech does not disappoint their high expectations. I have appeared in front of some of my noble and learned Lords on previous occasions, both on the Judicial Committee of this House and the Select Committee on Privileges, but on these occasions I was clad in wig and gown, which provided some measure of protection and disguise. I did not realise that I would feel so unprotected and exposed as I stand at this Dispatch Box. I think it is not noble Lords’ indulgence that I crave, but invisibility and, preferably, escape. Unfortunately, I can find no procedural device in the Companion to the Standing Orders to achieve that, and so, I regret, I must continue. The office of Advocate General for Scotland, which I established in 1999 and for which I was, until recently, held responsible in the other place, was described by a noble Lord, in the course of the Scotland Act debates as a ““bed of nails””. One of my legal colleagues described the office as a ““poisoned chalice””. It is true that I have had some sleepless nights and I have certainly avoided drinking from chalices. Overall, the duties and work of the office have been fascinating and intellectually stimulating. I am sure that will continue to be the case in this House. Turning to the Bill, I can offer some relevant experience. The need for improved consumer protection became obvious during my work, many years ago, as a law lecturer in a Dundee law centre, and more recently, in trying to help my former constituents in Edinburgh Pentlands. I consider it a privilege to be able to assist with this Bill, which covers reserved issues under the Scotland Act. The Bill therefore extends to Scotland and is intended to apply throughout the United Kingdom. The Government are very grateful for the support the Bill has received from all parts of the House today, and that support will make my task easier. I know that the Bill will receive a high level of detailed and expert scrutiny in Committee, but I would like to respond briefly, in this winding-up, to a number of important general issues that have been raised by noble Lords today. First, I would like to deal with the unfairness test. This was raised by a number of noble Lords: the noble Baroness, Lady Miller of Hendon, the Opposition spokesperson; the noble Lord, Lord Mawhinney; and the noble Lord, Lord Razzall. We in Government have considered the new unfair relationship test very carefully and have explored its implications. It is important that the test does not constrain or impede the courts’ ability to make a fair and unbiased judgement in each case. That is why we have taken the decision not to define an ““unfair relationship””. Lenders are already familiar with the concept of fairness. It is a standard used by the Financial Services Authority industry codes and the rules on unfair contract terms. I am grateful, in particular, for the support of the right reverend Prelate in this matter, and the general support of the noble Lord, Lord Borrie, on the main points. The test will not exist in a vacuum: it will operate in the context of existing laws and case law. The Government want a test with a lower threshold for challenge, a test which makes it clear that the court can consider all relevant circumstances. The danger in trying to define, or provide examples of, an unfair relationship is that it risks limiting the scope of the new test. There is also a defect in the current test, which requires the credit bargain to be ““extortionate””, as defined, quite specifically, in the 1974 Act. That test is a hurdle which is far too high. Few consumers have commenced actions under the existing test, and even fewer have been successful. The new unfairness test is general, in order that it can catch all unfair relationships. The new test is designed to encourage credit providers to adhere to the spirit of the Act, and not merely comply with technical requirements. This is not a checklist. All lenders should ask whether what they are doing is unfair. If the court finds that there is an unfair relationship, it has the discretion to impose a remedy, for example, altering the terms of the agreement, or setting aside all or part of the agreement. I regret to say that I must disagree with the noble Lord on the Opposition Front Bench about when the agreements should be caught by the new test. Some of the agreements are extremely long—15 or 20 years—and we cannot wait that long to protect consumers. My noble friend Lord Borrie made an interesting contribution on human rights. The Government were provided with a copy of the opinion of Mr Beloff QC on the compliance of the unfair relationship provisions with the ECHR. The Government believe that the provisions are compliant with the ECHR, and the Minister has made a statement to that effect. I am pleased that the Joint Committee on Human Rights, which reported today, appears to support the Government’s position. According to its report, the committee also considered the legal opinion of Michael Beloff QC and Andrew Hunter before reaching its view. It concludes:"““In our view, therefore, although further guidance as to the meaning of ‘unfair’ in this context might be desirable, the absence of such guidance does not render the unfair credit relationship provisions in the Bill incompatible with Article 1 Protocol 1 ECHR””." It is plain from the debate that all Members of the House share the concern about vulnerable consumers. We may have different ways of dealing with it, but it is a big concern. The Government are certainly concerned about it. Obviously, the vulnerability can arise in many different ways. We have heard examples today. Those most at risk may suffer particularly from inadequate information, leading to inappropriate financial decisions. They may also be more at risk of exclusion from services. The Government have taken many initiatives, apart from the Bill, that will help to support vulnerable people—for example, the over-indebtedness action plan. Various statutory instruments were made in summer 2004 to increase the transparency of credit agreements and help consumers to make better financial decisions. Several noble Lords commented on that. The Bill will add to those initiatives and provide much greater protection for consumers. It will be of particular help to the most vulnerable. The Government are also grateful for support in the debate on interest rate ceilings. I think that the right reverend Prelate raised that matter, and the noble Lord, Lord Beaumont of Whitley, I think, gave support for which we are grateful. The Government are following the general trend of the debate and are of the view that the research indicates that it is not appropriate to introduce an interest rate ceiling in the UK. Noble Lords may be aware that detailed research into such matters has been carried out by Policis, including comparative work in other countries. The Government are not convinced that introducing interest rate ceilings will help the consumers that they are supposed to protect. For example, Policis found that, where there are interest rate ceilings, lenders either do not provide small loans repayable over a short period or they offer products that have extra charges not included in the interest rate calculation. As a result, interest rate ceilings could exclude some vulnerable low-income consumers from the market, forcing them to use inappropriate products, take out larger loans than they need or even go outside the regulated market. There is an issue about the burden on business. There must be a balance between protecting consumers and putting extra work on businesses. However, the Government have worked hard to ensure that the Bill balances those interests. Those interests are not always in competition; it is also in the interests of business to have fair competition. As a Government, we have consulted all interested parties extensively, including representatives of those active in the consumer credit business. We have endeavoured to balance the requirements of consumer protection with the need for business flexibility. On post-contract information, we have tried to ensure that the required information is necessary and can be combined with other information where appropriate. We are setting a minimum standard for information provision, and business is free to do that in the most cost-effective way. Many credit providers already provide such information to their customers. We are also endeavouring to deal with the issue of irresponsible lending and we are doing so in a number of ways. One way is the introduction of the new fitness test. This will help the OFT to identify and clamp down on irresponsible lenders. It will be able to look at any evidence of irresponsible lending when assessing a lender’s fitness to hold a consumer credit licence. In order to ensure that this is clear to businesses, the OFT will issue guidance on the kind of issues that it will look at when considering fitness. It is perhaps worth remembering that the OFT was established as an independent body by an Act of Parliament and its powers were largely defined by the Enterprise Act 2002. The OFT is subject to parliamentary scrutiny and judicial review in the normal way. The Bill as drafted reflects an extensive period of consultation with both consumers and industry about the powers to be granted to the OFT to ensure that they are appropriate and proportionate. We have balanced these additional powers with important safeguards to ensure that the OFT exercises its powers reasonably. For example, it will have to give reasons for requesting information; give reasons and notice before accessing premises; warrants may be obtained only from magistrates; and the court process contains built-in safeguards against abuse. In addition the OFT must issue guidance and it must consult. We have built in many safeguards. A number of separate issues have been raised. I shall not be able to deal with all of them in detail but I hope to deal with the majority. The noble Lord, Lord Borrie, asked for an explanation about Part 8 of the Enterprise Act. I share some of his difficulties. Paragraph 51 of the Explanatory Notes gives some explanation but, in general terms, under the powers of Part 8 of the Enterprise Act 2002, the OFT will be able to take enforcement action, including taking lenders to court, where unfair relationships affect consumers generally. This could be, for example, where a lender uses standard terms or operates in a common manner in respect of borrowers generally so as to make each relationship unfair. The OFT will be required to issue guidance, following consultation, on how it expects to use its powers. The noble Baroness, Lady Miller, raised the question of secondary legislation. I understand that the Delegated Powers and Regulatory Reform Committee has considered the Bill and published a report on 13 October this year. The committee has agreed with the Government’s proposals for consideration of secondary legislation by Parliament in all but one respect in relation to consequential amendments. We are considering the committee’s suggestion in that regard. The noble Lord, Lord Mawhinney, raised some very interesting issues. He asked about plastic card fraud, which is a very complicated subject. In general terms, the Government work closely with the finance and retail sectors as well as with the police to combat fraud and take an active role in improving public awareness. From April 2004, the Home Office, with the Corporation of London, has provided significant additional funds to enable the City of London Police to expand its fraud squad. The Home Office has also set up the dedicated cheque and plastic crime unit, which works closely with the banking industry to help prevent organised card fraud. There are also other similar initiatives. As to the unsolicited provision of credit cards, limit increases and credit card cheques, the answer to some of these issues is that the Bill is very much concerned with transparency. We do not want to prevent business from marketing its products but we want it to do so responsibly. We want consumers to have clear information about what the credit deal entails. The Government have introduced regulations which impose new standards of transparency in advertising, pre-contract disclosure and agreements. Credit card limits are currently covered by the banking code, which was revised in March this year. The Parliamentary Under-Secretary of State committed to keeping the effectiveness of the code. A question was raised by the noble Lords, Lord Borrie and Lord Freeman, about the Hampton report. The Government have accepted Hampton’s recommendation to create a Consumer and Trading Standards Agency. We are considering how to implement this recommendation in consultation with business and other stakeholders. A consultation period on the roles and functions of the Consumer and Trading Standards Agency opened in July and closed on 12 October. Stakeholders and other interested parties will now be considering these matters. Members will know that the EU Consumer Credit Directive has had a long and difficult passage. Substantial negotiations are to take place, and it is not at all certain what a final proposal may look like. The provisions in the Bill are important responses to the problem that we encounter in the UK. We cannot afford to wait for a directive that may not be agreed for many years, and we do not know what form it will take, but we are certainly considering the latest draft of the directive. The consumer credit market has changed a great deal during the past 30 years. Far more consumers are using credit and far more businesses are providing it, but the legislation designed to support this important sector and protect its consumers has not been adapted accordingly. Parts of the 1974 Act are no longer appropriate to the current environment and the potential dangers of credit for consumers have become more acute. Reform is long overdue: I think we agree about that. The Government have made significant progress in this area, but there is still more to do. The Bill will take further, important steps towards a fair, clear and competitive consumer credit market for the 21st century. It will give regulators the powers they need to monitor the licensing of consumer credit businesses more effectively and proportionately; it will give consumers the protections they need by providing them with rights to comprehensive and effective means of redress; and it will give consumer credit businesses the confidence they need to operate fairly in a competitive market. On Question, Bill read a second time, and committed to a Grand Committee.