Consumer Credit Bill

My Lords, the noble Baroness, Lady Miller, has tabled three amendments, Amendments Nos. 2 to 4, on the unfair relationships test in Clause 19 of the Bill. They are in the same form as those considered in Grand Committee. I am afraid that I shall be dealing with them at length because they are central to the whole approach to the Bill but I shall certainly try not to speak at such length later in the evening. The noble Baroness, Lady Miller, said in Grand Committee that the purpose of the amendments was to ““put some clothes”” on the provisions,"““without interfering with the concept of generally leaving matters to the court in all cases””.—[Official Report, 8/11/05; col. GC 157.]" Having considered the arguments put by noble Lords on the opposition Benches and by other interested groups, we remain of the view that amendments such as these will interfere with the ““general concept””, as the noble Baroness described it, in a way that we consider to be unduly restrictive and which ultimately could be harmful to consumers. At this point, perhaps I may say that my noble friend Lord Borrie stated our position very clearly and I should probably just sit down and leave it to him. Of course, it is proper for me to put the government view clearly but I think that he stated it extremely well. This matter gave rise to some debate in Grand Committee, but, on the basis of their remarks in Grand Committee, I note that noble Lords on the opposition Benches appear to accept the underlying principle of the provisions—that there should be a new test based around the concept of unfair credit relationships. Much of what noble Lords on the opposition Benches have said about the new test is concerned with issues of business uncertainty and risk. The Government believe—for the reasons that my honourable friend the Minister in the other place and I have made clear—that business has a considerable amount of guidance about the specific types of conduct that are generally regarded as unfair, given the existence of current and forthcoming legislation on unfair contract terms and unfair commercial practices. Furthermore, business would not benefit from government intervention to protect it from risk. Lenders have to look beyond simply complying with procedural rules to ensuring that the substance of the relationship is not unfair, and it is clearly in their business interests to do so. 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. That is an assessment that a lender is best placed to make, not government. By way of general remarks, perhaps I may remind noble Lords what Citizens Advice—one of the most respected organisations in this field—said before Second Reading:"““Citizens Advice would be very concerned if the Bill were to be amended to seek to define the word ‘unfair’ in a manner that restricts its ordinary and popular sense. We consider that this is the main benefit of the new test””." I shall now address the noble Baroness’s amendments in turn. As I made clear in Grand Committee, the Government do not think that the approach set out in Amendment No. 2 is practicable and believe that it would seriously undermine the effectiveness of the unfair relationships provisions. We believe that a list that attempted to indicate or identify unfair relationships would, in practice, encourage lenders to think that, provided something was listed, everything else was all right. Encouraging this sort of ““tick-box”” mentality among lenders would allow some to go on thinking that, so long as they complied with formal procedural rules, they could ignore the substance of credit relationships. This test is about the substance, and not simply the form, of credit relationships. We believe that the amendment misses the point that the test is about making business acknowledge and manage its own risk and not sub-contracting that job to government. The role of this legislation is to reduce the risks for consumers in obtaining credit, not to eliminate it for business. We believe that the amendment proceeds on the erroneous view that, simply because some specific practice occurs or a circumstance exists, there will be an unfair relationship in all cases. All credit relationships are different. The test is designed to allow the court the necessary degree of flexibility to consider all relevant circumstances and then to make a decision about the nature of the relationship in an individual case. As soon as one embarks on the process of attempting to put together an exhaustive list of unfair practices, one must recognise the impossibility of completing such a process and, indeed, its futility. We believe that such an approach would have the consequence of unjustifiably stigmatising conduct that may be perfectly fair and reasonable in some cases but not in others. That would limit business’s ability to deal with customers in ways that are suitable for the specific customer’s situation and the court’s ability to ensure fairness in all cases that come before it. Moreover, we believe that the noble Baroness’s amendment is largely redundant. There are several relevant lists of things telling lenders what not to do when dealing with consumers. Lenders need only look at the Consumer Credit Act itself, the regulations on unfair terms in consumer contracts, the new Unfair Commercial Practices Directive and the domestic legislation that will flow from that, on which the department is currently consulting, and other laws and regulations which regulate the interaction of businesses with consumers, such as those dealing with trade descriptions or fair trading, to know what sorts of specific practices they should avoid. Business does not need another list of specific things. But, as I said, such lists cannot define ““unfair relationships””. For those reasons, the Government do not believe that Amendment No. 2 will work. The next amendment in this group—Amendment No. 3—would allow the courts to have regard to whether the agreement was in plain and intelligible language. We remain unconvinced of a need to amend the clause in this way. I have already explained the Government’s position on elevating some particular issue or factor to significance. The amendment seeks to do that in relation to the ““plainness”” or ““intelligibility”” of agreements. I shall not set out again why we believe that this is unnecessary and cannot work. We have already introduced requirements specifying the form and content of agreements in regulations made in 2004. Failure to comply with those renders the agreement potentially unenforceable. So credit agreements must comply with specific criteria before they can be used. It is therefore difficult to understand what the amendment adds to the test as the court can have regard to the form and content of the agreement in any event and it can impose remedies if the agreement fails to comply. Furthermore, in addition to its redundancy, the amendment gives rise to a wider issue as to what significance ““plain”” and ““intelligible”” are to have. Simply having an agreement in plain and intelligible language does not make a credit relationship fair; nor does it necessarily indicate fairness. Lenders can rip off consumers with the plainest and most intelligible of agreements. This amendment does not acknowledge, or do anything about, that simple fact. The Government believe that transparency is important and consumers should be able to understand credit products easily. Lenders are required under the 1974 Act to have agreements that comply with the specific transparency requirements in all circumstances. Indeed, it is these requirements that are designed to make agreements ““plain”” and ““intelligible”” to consumers by making them transparent. So the problem of drafting complexity is one of the many that the Government are already tackling in their reforms to the United Kingdom’s consumer credit laws. Therefore, we believe that Amendment No. 3 is not helpful. It does not add anything to the test or the requirements imposed in relation to the form and content of agreements. The Government’s concerns about Amendment No. 3 apply equally to Amendment No. 4, which is the next amendment in this group. The noble Baroness’s 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 that the agreement was in ““clear and intelligible language””. Clause 20(10) of the Bill provides that the debtor must allege that an unfair relationship exists, before the creditor must show that it does not. This reflects the approach of the current legislation. 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 this approach. But we are not simply copying the existing legislation for its own sake. We consider that the position on the burden of proof set out here is essential. It will serve to ensure that debtors are not prevented, through the weight of procedural and evidential burdens inherent in litigation, from bringing a case under the unfair relationships test. Amendment No. 4 would impose a new hurdle for debtors that has little to do with the substance of the relationship, but it is the substance of the relationship that we wish the court to consider. The amendment also seems to be based on a concern, which in the Government’s view is misplaced, that a debtor who simply alleges an unfair relationship, with no evidence, can succeed in his claim. The debtor will need to base his claim on some evidence; he will need to provide information as part of the procedural steps to support his claim. A court is highly unlikely to entertain cases where allegations made by a debtor are not backed by evidence of any substance but only by assertions. We do not believe that this amendment will work and it will actually be very unhelpful. Amendments Nos. 2 to 4 highlight important issues in relation to the unfair relationships test. It is right that noble Lords should seek to debate the test and how it will work. The Government are confident that the test is right. In saying that, I reiterate the point that I have made throughout this debate, that the new test must be looked at in its context. For that reason, the Government are not convinced of the need to change these provisions. However, the Government have listened to the arguments made by noble Lords. In Grand Committee, noble Lords will recall that the noble Lord, Lord Razzall, raised the possibility that the Government could ensure that the unfair relationships provisions do not commence until such time as the Office of Fair Trading publishes the guidance required by Clause 22 of the Bill. Indeed, the noble Lord suggested that this was a necessary consequence of the Government’s rejection of other proposals to amend the provisions. So as to be clear, the guidance required by Clause 22 would not define unfair relationships and given the office’s role as a regulator, nor can it. It will provide guidance on circumstances and the manner in which the Office of Fair Trading would exercise its powers to take action against one or more lenders for entering into unfair relationships which harm the collective interests of consumers in the UK under its powers in Part 8 of the Enterprise Act 2002. As I have said, this guidance will not define unfair relationships, but it would include an indication of the things that it considers may give rise to OFT enforcement action under Part 8. As such, it could serve industry as a broad marker of conduct that gives rise to a general risk of challenge. To assuage the concerns of some noble Lords on this issue—most notably as articulated by the noble Lord, Lord Razzall, in Grand Committee—I am prepared to make a commitment not to commence the provisions until such time as the OFT guidance, as required by Clause 22(1) of the Bill, is published. This will not require any amendment to the Bill, and it is in keeping with the approach adopted in relation to the Enterprise Act 2002. Indeed it would be inappropriate to make such a linkage between the guidance and the test in the legislation, as this could serve to give the guidance significance in relation to the general application of the unfair relationships test that it should not have. The Enterprise Bill passed through your Lordships’ House in 2002, and noble Lords may recall that I led for the Government in those debates. This did not require any change to the Bill in that case and I gave a commitment to the House that this would occur, which noble Lords accepted. The provisions were then commenced at a time immediately after the publication of the relevant guidance. Therefore, the Government are prepared to commit to not commencing the provisions until such time as the OFT guidance, as required by Clause 22(1) of the Bill, is published, but it is not necessary to amend the Bill to achieve this. On this basis, I ask the noble Baroness not to press Amendments Nos. 2 to 4.