Consumer Credit Bill

The noble Lord, Lord Razzall, proposes that the new unfair relationship test should have some form of sunset clause. The Government have some difficulty in understanding the benefits of such a provision, which seeks to impose a sunset clause on a right given or extended to citizens. That is different from a situation where the rights of citizens are removed or limited. I do not think Magna Carta would have got very far if people had said, ““We extend these rights to you, but there is a sunset clause in two years, after which they will be withdrawn””. So having a sunset clause for a right is not appropriate. I have explained why a new test is necessary and why the existing law is flawed and requires reform in relation to the amendments to the unfair relationship test proposed by the noble Baroness, Lady Miller, and the noble Lord, Lord De Mauley. The Government do not see this necessary reform to the ability of consumers to access redress as a temporary measure. The new unfair relationship test is a right enabling consumers to seek redress. Consumers are entitled to seek redress where they have suffered harm. That is not something that can be offered as a temporary measure and then taken away. An important discipline on lenders is the prospect of consumer action in response to harmful behaviour. An important lesson arising from the history of the existing extortionate credit test is that where the possibility of consumer action is extremely remote it only encourages lenders to behave in ways that exploit the impotence of consumers to challenge their behaviour. The noble Lord’s amendment also has another perhaps unintended consequence. By imposing a sunset clause of this type the amendment does not say what would replace the new test. The old test in respect of all new agreements and any agreements in existence at the time the new test came into force would not apply. The Bill abolishes it. Consumers would be left only with the very limited protections afforded by the common law. The Government do not believe that we can take away the new test simply because at some future point in time the market has been ““fixed””. The history of the old test shows that when consumers are unable to obtain effective redress, this situation can be exploited by the unscrupulous. The noble Lord’s amendment would make the situation worse than it is now, leaving consumers only with the rudimentary protections afforded by the common law. I understand that the noble Lord is concerned to ensure that the effectiveness of the new test and the entirety of the reforms contained in this Bill are reviewed. As my honourable friend the Parliamentary Under-Secretary of State said in the other place, and as is set out in the 2003 White Paper, the department will review the effectiveness of the reforms and part of that review will necessarily include a review of the effectiveness of the unfair relationship provisions. I hope that the noble Lord understands the Government’s reasons for opposing this amendment and will withdraw it. It would serve to remove the balance between the interests of consumers and lenders which is contrary to the spirit of the Bill and what the Government are trying to achieve. I turn to Amendment No. 38. It seems to provide that the unfair relationships provisions should not apply to agreements that are made before the unfair relationships provisions are brought into force but end within a period of two years from the end of the transitional period. It seems to be a further transitional period in addition to the transitional period already provided for in the Bill. This seems to misconceive the way in which the transitional provisions work. The unfair relationships provisions will apply to all new agreements entered into on the day on which those provisions commence. There is no transitional period in relation to these agreements and there is no need for one. The unfair relationship provisions will apply only to existing agreements made before the day on which these provisions commence that are ongoing after the completion of a transitional period. The provisions will not apply to any such agreements that end prior to the completion of the transitional period. The transitional period will be a minimum period of 12 months. The Secretary of State may extend it by order and different transitional periods may apply to different classes of agreement. So there does not need to be one transitional period. There may be several, each applying to different classes of agreements, and these may be for different lengths of time. The department will consult with industry to determine whether there are particular types of agreements that should be treated differently and also to consider the circumstances in which the period should be extended. Indeed, it has held some preliminary discussions with industry groups on this issue. As I understand it, this amendment would have the effect of adding a further transitional period in addition to the transitional period now provided for in the Bill. The transitional period is intended to provide creditors with time to adjust. We have set the minimum period at 12 months but, as I said, this can be extended by different periods for different types of loans. The provisions are flexible and we built in the ability to change the requirements if necessary. Therefore, the provision is both unnecessary and unjustified. I understand the concern that some noble Lords have about ensuring time for industry to adjust but the Bill provides flexibility to allow for that. On that basis I ask the noble Lord to withdraw the amendment. I turn to Amendment No. 39 of the noble Lord, Lord Razzall. This would seek to limit the financial exposure of creditors who have been found to have entered into unfair relationships. The amendment would prevent the court ordering the repayment of sums paid prior to the end of the transitional period. Schedule 3, at paragraphs 14 to 16, provides that there may be different transitional periods for different purposes, and, at a minimum, the period for all agreements should be set at 12 months. To assist noble Lords in their consideration of Amendments Nos. 38 and 39 I will explain the transitional arrangements in relation to the new test. The way that the transitional provisions apply in relation to unfair relationships is quite straightforward. There are three key dates to keep in mind: the date of Royal Assent; the commencement date, which is when the unfair relationships provisions are brought into force, and which we expect would occur about 12 months after Royal Assent; and the date of the end of the transitional period, which will be no less than one year after the commencement date. The new unfair relationships test will apply to all new agreements made after the commencement date. The new test will apply to all agreements made before the commencement date that continue after the end of the transitional period. Any agreement that ends before the transitional period ends will continue to be covered by the old test in Sections 137 and 140 of the Act. These provisions will continue to apply for these purposes only. The transitional period is designed to allow businesses time to adjust. There is a minimum transitional period set at 12 months in the Bill. Schedule 3 allows the Secretary of State to extend the transitional period, if necessary, and to extend it for different periods for different purposes. The department will consult on the length of the transitional period and whether particular categories of agreement need different transitional periods. The new provisions will apply to ongoing existing agreements from the end of the transitional period. In deciding which agreements the new test ought to apply to we have considered carefully the interests of all sides of this issue. As I have explained, the new provisions will not apply to agreements that end prior to the completion of the transitional period. This gives some certainty for lenders that agreements ending before the end of the transitional period cannot be challenged. But there must be a point at which the new test will apply. And the new test will apply to all agreements existing and carrying on after the date that the transitional process ends. It will apply to them without any limitation. All consumers should be entitled to the same treatment on an ongoing basis. Obligations under existing agreements are ongoing; they do not relate only to issues occurring in the past. This means including agreements that exist at the time the new laws came into force—subject to the transitional period. If we did not apply the new test to ongoing agreements, some debtors could have been left unprotected for a very long time. Noble Lords will appreciate that some loan agreements last for 15, 20 or even 25 years. This would mean that some lenders could go on treating consumers unfairly safe in the knowledge that those consumers—because of the current restrictions on their ability to challenge harmful or exploitative conduct—cannot seek redress. We would, by excluding those agreements, effectively sanction the continuance of unfair relationships, which many in your Lordships’ House and the other place have said must stop. The noble Lord, Lord Razzall, raised the question of the potential impact on the securitisation market. For some considerable time the Government have been very mindful of the potential for an impact on the securitisation market. They have taken account of the views of those involved in that market in formulating their position. The Government’s position is straightforward. No funding arrangements should be based, even in part, on the inability of consumers effectively to seek redress for behaviour by lenders that cause them harm. This applies as much to past securitised arrangements as it does to future ones. Some claim that the law as it stood permitted lenders to behave in a more robust manner than is provided for in the Bill. It did not. It did, however, prevent consumers effectively taking action to prevent or seek redress in respect of that behaviour. The Bill is designed to change that. Concerns have been raised about certainty. We believe that the industry has certainty. That belief is confirmed in the views expressed on this issue by the Joint Committee on Human Rights. As I have explained, and as the Parliamentary Under-Secretary of State explained in the other place, ““unfair”” is not a new or unfamiliar standard for the industry to deal with. The Government have taken account of the concerns of those involved in the market. We have provided for a transitional period and we have provided that the transitional period may be extended for different periods for different purposes. The department has had some preliminary discussions with industry representatives on the issue. The Government have not concluded the circumstances in which such extensions will be made, nor have they expressed any definitive view as to the way in which they could apply in relation to the particular sectors. As I have said, these are issues for consultation. The noble Lord also suggested that the Government had changed their position on this matter. The provisions in Schedule 3 have in fact been present since the Bill was introduced in November 2004. I hope therefore that the noble Lord will withdraw the amendment. It would not achieve the objective that he desires. The Government do not accept that its result would be practically workable or desirable.