Consumer Credit Bill

The amendments tabled by the noble Lord, Lord Razzall, seek to alter the requirements that exist in relation to the manner in which the exemptions for high net worth debtors and hirers are obtained. It may assist the Committee if I set out the background to Clause 3 and the manner in which it is intended to work. As Members of the Committee are aware, Clause 2 will remove the financial limit above which credit and hire agreements are currently not regulated by the Consumer Credit Act. That means that, generally speaking, credit available to consumers will always be subject to regulation under the Act, whatever the amount. One exception to that rule is in respect of what the Bill calls high net worth borrowers. A considerable number of wealthy people receive very particular services from banks and other financial institutions, sometimes called private banking. Those services can include the provision of credit services and the leasing or hiring of expensive items. Faced with constraints on instant access to those services that regulation imposes, many such people—they are generally financially savvy, well advised and well able to pay for the credit or hire—may choose to take their business offshore. We are well aware of that fact, which is why we have introduced the concept. It is a concern that has been voiced by the credit industry, which pressed for such individuals to have the freedom to opt out of regulation. The clause therefore adds a new Section 16A to the Consumer Credit Act, allowing the Secretary of State to make an order that would give high net worth borrowers and hirers the option of exempting themselves from regulation. To do so, they must satisfy specific criteria. New subsection (1) requires a borrower to do two things to obtain the exemption. The first is to obtain and hold a statement from a specified person certifying that during the entirety of the previous financial year the borrower met the criteria for a high net worth individual. At this stage, we propose that such statements will be made by professionals whose status is independently verifiable, such as solicitors, accountants and FSA-recognised independent financial advisers. However, we will consult on the issue. After the Act’s passage and a period of consultation, the Secretary of State will lay a statutory instrument setting out who may give the statements. Secondly, the potential borrower must also make a declaration in the agreement on their own account that they agree to forgo the protections otherwise available to them under the Consumer Credit Act. The exemption is available only to individuals—it will not apply to partnerships or unincorporated associations, which are not legal persons. New subsection (2) sets out the two criteria for a person to be a high net worth individual, which are income or net asset value. One of those criteria must be met. New subsection (3) requires that a statement of high net worth must be current—specifically, that it must be given in the year ending with the day on which the agreement was made. So, it will not be necessary to obtain a separate statement for each agreement made within the period of the currency of the statement. The new Subsection (5) makes it clear that where there are joint borrowers or hirers, each of them must fulfil the high net worth criteria. Amendments Nos. 1, 2 and 3 would mean that the signed declaration to be made by the debtor or hirer at the time the credit is obtained could be separate from the agreement. The Government’s concern is that the person should make the declaration of high net worth at the time the agreement is made. The best evidence for this is that the declaration is made as part of the agreement, so that it is perfectly clear that the person wants to take advantage of the exemption when he or she obtains the credit. Agreements made with high net worth individuals need not comply with the formal requirements of the Act and the regulations—this is part of the reason why the exemption exists. Clause 3 simply provides that agreements with those wanting the exemption should include the declaration. The form of this will be specified in regulations. The Government believe that the solution proposed in Clause 3 provides the best means of clearly verifying that the person seeking the exemption wants the benefit of that exemption. The noble Lord’s Amendment No. 4 is directed to permitting the debtor to self-certify as to their high net worth, but only in circumstances where the statement is made on the basis of ““independently verifiable documentation””. The Government have considerable concerns about self-certification and the possibilities for abuse. The exemption is a general one, open to any consumer meeting the criteria. Equally, it applies to any lender—whether a private bank or a small lender. Our concern about abuse is that unscrupulous lenders—who want to avoid their obligations to consumers under the Act and the regulations to provide information and comply with the standards imposed in regulations—will pressure consumers into self-certifying that they are high net worth individuals. Our concern is not primarily about those lenders who deal with genuinely high net worth individuals but those who lend to the vulnerable and who, seeing an opportunity to take advantage, will do so. For this reason we have required that the certification be made by a third party. The verification of the debtor’s position is a matter for the person making the statement. It is that person who will consider the debtor’s position and make the statement. They will provide the ““independent verification””. Amendment No. 5 in the name of the noble Lord, Lord Razzall, would allow a statement of high net worth to be treated as current if made up to two years prior to the making of the agreement, rather than up to one year as is provided in Clause 3(3)(c) of the Bill. Some have argued that the requirement that the statement be made within one year prior to the agreement would be unduly onerous, so it should be extended to a period of two years. Noble Lords will appreciate that a lot can change in two years. By requiring a one-year period of currency, we are simply ensuring that the statement reasonably reflects the customer’s current circumstances. By extending this period of currency we undermine the applicability of the statement to agreements made some distance in time from the time that it was made. It is also claimed that in relation to some agreements that are reviewed annually, for example, overdrafts, the requirement for current statements no more than a year old would be burdensome. Given that credit arrangements may be reviewed annually, the Government’s view is that it is appropriate for the currency of the statement to reflect the interval imposed by the lender itself, and not rely on some older view of the customer’s state of affairs. So if it is appropriate to review the credit arrangements annually, it is appropriate also to have a statement of high net worth on an annual basis. The Government understand the concerns of noble Lords about the potential for burdens on both debtors and creditors. We have tried to balance those things with the need for proper consumer protection. The Government believe that they have this balance right. The noble Lord’s Amendment No. 6 would permit the statement, in circumstances where there are two or more debtors or hirers seeking the exemption, to be made in respect of one of them rather than both. No doubt some noble Lords may think this sensible in the case of a husband and wife. A perhaps unintended consequence of the amendment would be to permit debtors to club together and, provided that one of them meets the requirements, they will all be exempt. However, the Government do not agree that one statement should suffice in such cases. No joint debtor should be deprived of the protections of the Consumer Credit Act unless that debtor is a high net worth individual on his own account. To do otherwise could potentially leave consumers vulnerable to harm. To that end the Government’s position is that each and every debtor involved in a transaction should have a statement made in respect of them, regardless of their relationship with the other joint debtors. The effect of Amendment No. 7, tabled by the noble Lord, Lord Razzall, would be to remove the ability of those persons using the high net worth exemption to seek redress where appropriate under the unfair relationships provisions of the Bill, which are set out in Clauses 19 to 22. The unfair relationships test will apply to all consumer credit agreements except for mortgages regulated by the FSA. This maintains the scope of the existing extortionate credit test, which applies to all credit transactions including pre-FSA mortgages. The Government’s position is that no lender should be exempted from the ability to be challenged on the basis of an unfair relationship. A credit relationship is capable of being unfair regardless of whether it has been entered into by a high net worth individual or a person on state benefits. And, as the test applies in the context of the individual circumstances of each case, it can take account of the different issues at play in different types of credit transaction, including the degree of regulation applied to the transaction. The exemptions in the Bill are to reduce the impact of regulation in some cases, and to enable lenders to conclude agreements quickly. For this reason business has been generally supportive of the exemptions. Noble Lords will appreciate that the right for a consumer to challenge a credit relationship because it is unfair does not impose a burden that does not otherwise exist on lenders. Lenders should not enter into unfair relationships, whatever the consumer’s net worth or purpose. While I understand that the noble Lord seeks to reduce the burden of regulation on lenders, I hope that he and other noble Lords recognise that the exemptions for both high net worth and business lending are designed to do that. The disapplication of the unfair relationships test would not reduce the burden of regulation, but it would reduce consumer protection significantly. And consumers, of whatever status, are entitled to enjoy the same basic level of protection. I hope that this explanation of the Government’s position on this clause will satisfy the noble Lord. On that basis, I ask him not to press Amendment No. 7. I shall deal with two other questions. The noble Lord raised the question of the territorial application of the Consumer Credit Act. The question of what national regulatory regime applies is not covered by the Act; it is covered by the Rome convention and other international instruments governing the applicable law for consumer transactions. The noble Lord also spoke to Amendment No. 8. The new clause proposed by the noble Lord, Lord Razzall, raises the issue of the level of protection provided to unincorporated associations, partnerships and trusts. The Government have opted to retain the position in the 1974 Act regarding those bodies. The proposal for an exemption of high net worth individuals was set out in the DTI’s consumer White Paper, which was published in December 2003. That built on previous consultations, including a consultation undertaken in November 2002 concerning financial limits and exemptions under the Act. The only expression of interest or concern that the Government received on this issue was in connection with the noble Lord’s amendment. That was received only last Friday afternoon, so I think we are unsure about the need for the change. Furthermore, the Government’s view is that the new clause may have limited effect in practice for two reasons. First, borrowing by these bodies for business purposes is protected only for transactions up to £25,000. So the protection they receive is limited. Secondly, an unincorporated association or partnership has no legal identity—except from its individual members—and cannot borrow money or hold property unless its purposes are charitable, in which case any property is usually held in trust. Thus, there may be practical difficulties in calculating the value of the net assets in such a body. With regard to trustees of the high value trust, the Government believe that this category of person is conceptually distinct from high net worth individuals. Trustees ultimately act in the interests of beneficiaries under a trust instrument. The new clause may impact on the protection afforded under the Act to such beneficiaries. Furthermore, given that the proposed clause removes consumer protection from a class of bodies currently protected under the Act, the Government, before making any decision, would need to understand the issue fully, including any potential benefits from such a course. For example, it could impact on associations that might be asset-rich in terms of land and buildings, but otherwise have small cash reserves. It could have implications in situations where, in the event of some call on the association’s assets, the members become personally liable for any liabilities arising from the credit transaction. Given the absence of any pressure for such a change—except, perhaps, the new clause tabled by the noble Lord, Lord Razzall—the Government do not believe that the amendment is currently justified on the basis of the evidence of the need for change. Should such pressure arise—we do not consider that it exists at present—and the results of a formal consultation support the need for change, the Government might reconsider their position. On that basis, I ask the noble Lord not to press Amendment No. 8.