Consumer Credit Bill

The Government do not think that the approach set out in Amendment No. 21 is appropriate. We believe that it would undermine the effectiveness of the unfair relationship provisions. I believe it would assist noble Lords if I briefly explained the Government’s position in relation to the test and the need to define unfair relationships. The new test is general so that it can catch all unfair relationships. It does not exist in a vacuum—Parliament and Ministers have already specified in other legislation those terms and practices that are unfair when considered alone. The new test is broader and is directed at looking at the substance of the relationship between the debtor and the creditor. This consideration will depend on the circumstances of the particular case. The court can consider anything that is relevant in deciding that there is an unfair relationship. Therefore, we do not want to give undue emphasis to some things by spelling them out, as this could mean that in practice the range of issues that the court considers is limited. It is not possible to define an unfair relationship as being certain things, or combinations of specific types of conduct, without limiting it in some way. That would serve to reduce the effectiveness of the test and the ability of the court to tackle unfair relationships—whatever form they take. This type of approach meant the old test did not work for consumers. The test means that lenders have to look beyond simply complying with procedural rules, to ensuring that the substance of the relationship is not unfair. The Government believe that it is possible to lend fairly to anyone; it simply requires the lender to ensure that the relationship with the consumer in the particular case is not unfair when considered as a whole. Amendment No. 21 proposes that the Minister can specify those things that would indicate that a practice is unfair. It does not say what regard the court should have to such an indication. In addition to questioning the underlying approach, the amendment does not address all that the noble Baroness wants. It is important to draw the attention of noble Lords to a court decision in relation to the extortionate credit test that highlights the dangers of the approach suggested by the noble Baroness in the amendment. In Broadwick Securities v Spencer, the Court of Appeal was asked to consider an ““extortionate”” practice by the lender. The practice complained about did not fall within the list of factors set out in the existing Section 138 of the Act. The debtor asked the court whether the practice could come under Section 138(2)(c) on ““any other relevant considerations””. The lender—in this case offering a ““variable rate””—had as its policy not to reduce the rate of interest if market rates fell. It did not tell that to the debtor when making the agreement. The court was not prepared to look at ““any other relevant considerations”” broadly. It considered that it should read this catch-all category in the light of the other factors listed in the Act, so it gave ““other relevant considerations”” a narrow meaning. It is a good example of the dangers of thinking that ““grey lists”” or ““factors”” can address all cases. The case was not appealed to the House of Lords and so remains conclusive on this issue. The approach suggested in this amendment has serious limitations. It would encourage a tick-box mentality among lenders, who can go on thinking that as long as they comply with formal rules they can ignore the substance of credit relationships. The test is about the substance, and not simply the form, of credit relationships. It could also mean that those debtors whose circumstances are not specifically identified receive reduced protection because the Secretary of State has not at some previous time decided that the innovative methods used by a lender to exploit consumers are indicative of an unfair relationship. Most importantly, the proposal ignores the fundamental principle underlying the Government’s approach. Lenders already have lots of lists telling them what not to do when dealing with consumers. They need only look at: the Consumer Credit Act; the unfair contract terms regulations; the new Unfair Commercial Practices Directive and the domestic legislation that will flow from that; and other laws and regulations which regulate the interaction of businesses with consumers, such as those dealing with trade descriptions or fair trading. Lenders do not need another list of specific practices as those are already made clear in other legislation, although complying with all of them will not necessarily mean that a relationship is fair. On Amendment No. 22, lenders are subject to specific requirements under the Consumer Credit (Agreements)(Amendment) Regulations 2004 concerning both the form and the content of agreements. As noble Lords will appreciate, what a lender considers plain and intelligible can be very different to what a consumer, no matter how sophisticated, can understand. The Government have sought to address that, as lenders are required under the Act to have agreements that comply with the specific transparency requirements in all circumstances. Those requirements are designed to make agreements plain and intelligible to consumers by making them transparent. This is one of the many problems that the Government are tackling in their reforms to the United Kingdom’s consumer credit laws. I can explain what the Government think that the effect of the amendment will be. No other factors like this are identified on the face of the new unfair relationships test. If this factor were included, it would elevate it to a significance that it did not deserve, and could suggest that if an agreement were in plain and intelligible language it was not an unfair relationship. That could not be right. It is perfectly possible for a lender to treat a debtor unfairly despite the plainest and most intelligible of agreements. Given the breadth of the unfairness test, it would be open to the court to take that factor into account in any event. I have already explained the Government’s concerns about Amendment No. 22, and those concerns apply equally to Amendment No. 23. If I may summarise, the use of clear and intelligible language cannot be said to indicate categorically the fairness of a relationship, even if only on a prima facie basis. Lenders can and do exploit consumers using the plainest of language. That is not to say that the form of the agreement—which noble Lords will recall must be in compliance with the regulations governing the form and content of agreements—may not be a relevant factor, but that is all that it can be. The amendment seeks to put the burden of proof on the debtor who has raised the issue of an unfair relationship, in relation to those agreements where the court concludes the agreement was in clear and intelligible language. Proposed new Section 140B(10) provides that the debtor must allege that an unfair relationship exists before the creditor must show that it is not. Under the existing extortionate credit test, the burden of proving that the credit bargain is not extortionate lies with the creditor, and we are not changing that approach. We consider that this is essential. It ensures that consumers do not find it prohibitively difficult to bring a case under the new test. We acknowledge that access to justice can be an issue, and to a very great extent that should be ameliorated by the existence of the alternative dispute resolution scheme in the Bill. But we want the new test to be accessible and to be an effective redress for consumers. The amendment would impose a new hurdle for debtors that had little to do with the substance of the relationship, and would mean that many debtors who might have clear and intelligible agreements—but unfair relationships—were faced with a huge job in proving that the lender behaved badly, no matter how clear and intelligible the terms of the agreement might be. Lenders are better placed to show that their conduct is not unfair. Furthermore, consumers have practical problems in accessing relevant information. The issue of the burden of proof is important, and I hope that the explanation provides noble Lords with a clearer understanding of the Government’s proposals. Amendment No. 24 seeks in effect to introduce a duty to lend responsibly. It then goes further, and sets out various exemptions from that duty. I shall first deal with the Government’s position on the responsible lending duty and then with the proposal put forward by the noble Baroness that some lenders may be exempted from that duty. Previously, in relation to the Government’s position on proposals to specify what constitutes an unfair relationship, I have explained our objections to such an approach. Our position on a responsible lending duty is not dissimilar. All lenders should behave responsibly when lending. The amendment could have the effect that, if certain things are done, it will be difficult to argue that that does not in all cases amount to responsible lending. Whether lending is responsible will depend on the debtor’s personal circumstances and on the type of transaction involved. Any duty to loan responsibly would mean specifying what is and is not responsible lending. However, if we were to take the route of specifying what is and is not responsible lending, which the Government do not believe is appropriate, we would need to do so with some degree of detail. The amendment does not do that and so highlights the problem of such an approach. A list of things that lenders must do is not enough. It would encourage a tick-box mentality, with lenders assuming that because a number of specified procedural steps have been undertaken they are somehow responsible lenders. A lender may undertake those steps, but that does not mean that the underlying relationship is fair or that the lender has lent responsibly in a particular case. The next component of the amendment is the proposed exemption of whole categories of lending from the noble Baroness’s suggested duty to lend responsibly. I propose to address this matter, not because the Government accept that an explicit duty to lend responsibly is in any way appropriate, but because it seems necessary to make clear the Government’s position on the suggestion that we can impose differing standards of conduct on different categories of lender. The Government do not accept that we can attempt to impose general duties that apply only to lenders who are regarded as having a tendency to harmful behaviour. The point of regulation in this sector is that all lenders have at least the potential to enter into credit relationships that are unfair and that harm consumers.