Consumer Credit Bill

moved Amendment No. 7:"After Clause 22, insert the following new clause—"    ““APPROPRIATION OF PAYMENTS (1)   Any payment made by a credit card or store account debtor in respect of the sum due from him may be appropriated by him at the time of making the payment to any part of that debt, and in the absence of any such appropriation it shall be deemed to be appropriated to the debt in the chronological order in which it was incurred. (2)   Every statement of account sent to the debtor shall prominently and in simple language draw the attention of the debtor to the effect of this section.”” The noble Baroness said: My Lords, the purpose of this amendment is to bring into line a segment of the law relating to banks and credit card companies which are in many cases banks or owned by banks. If I sign a cheque, my bank pays the bill on my behalf and debits my account with the appropriate sum. If I pay a bill by credit card, the credit card company pays the bill on my behalf and debits my account with the appropriate sum. What is the practical difference between these two transactions? The answer, in practical terms, is absolutely none. And yet, at the moment, there is a difference in the way that banks and credit card companies treat running accounts. I would like to explain, with some diffidence in the presence of so many learned lawyers and learned people on the subject, such as the noble Lord, Lord Borrie, the same simplified version of the law that I gave in Committee. In a running account, partial payments are made by the debtor which do not clear the account, while further debits are still incurred. The debtor has the right to specify which part of the account he is paying—which specific invoice perhaps. If he does not specify which part of the running account he is paying at the time of payment, then the creditor can do so at any time, including a bill that is now statute barred and no longer legally enforceable. However, in the case of banks, this rule is modified. There is a rebuttable presumption that the payments are automatically attributable to the earliest chronological debits. That was decided as long ago as 1816 by what every first-year law student knows as the rule in Clayton’s case. The noble Lord, Lord McKenzie of Luton, remembered that from when he was a law student, and, I have to confess, it is one of the only cases I can still remember from when I was a law student. This rule has operated with no problems throughout the banking system ever since. There were, of course, no credit cards 150 years ago when Clayton’s case was decided, but the principles are exactly the same. There is a chronological sequence of debits and credits, although in the case of banks there is sometimes a pre-existing cash balance in hand from which the payment may be taken. There is, however, one inappropriate practice operated by some—I stress, only by some—credit card companies which this amendment seeks to redress. They cherry-pick which part of a customer’s account they are going to credit with a payment. The part that they choose to pay first is the part on which they earn the lowest interest. Often it is the opening balance transferred to them as a result of an offer of zero per cent interest on credit transfers for the first X months. There may be significant differences in interest charges between ordinary purchases and cash advances taken from a cash machine. But the purpose of this amendment is to bring banks and credit card companies, which as I have said are essentially the same, into line—that the normal rule which applies to banks should apply identically to credit card and store card debts; namely, first payments automatically clear first debits unless the customer says otherwise. When we debated this amendment in Grand Committee, the Minister took comfort from the contents of the actual agreements between the customer and the credit card company and cited the    Consumer Credit (Agreements) Regulations. Assuming that I am addressing an above averagely sophisticated audience, I wonder how many of your Lordships have actually read the agreements attached to your credit cards. Indeed, I wonder how many of your Lordships’ eyesight is even good enough to enable you to read the fine print without the aid of a very powerful magnifying glass. Furthermore, the purpose of this amendment is to protect card holders from a grossly unfair practice even if it is enshrined in an obscure clause in an agreement which the card holder cannot amend. If you do not accept the agreement, lock, stock and barrel, you do not get the card. The Minister also said that my amendment,"““potentially imposes considerable administrative burdens for lenders””." I clearly received exactly the same brief against my amendment as the Minister. I should point out that the banks and credit card companies do not seem to be beset by administrative burdens when they ensure that payments are appropriated in the way that is most beneficial to them. The fact that compliance with a necessary law may be inconvenient to somebody is no reason for Parliament not to pass it. That especially applies to the banking industry. The requirement to notify the customer of the right to elect, for which I provide in paragraph (2), can easily be complied with by a notice boldly printed on the monthly bill. Coping with a request to appropriate a particular credit to a particular debit can with equal ease be coped with by marking a box on the form, leading to the transaction being dealt with manually rather than by an automatic system. Not only do I suspect that such cases will be comparatively few in number, but the credit card companies cope with many such manual transactions every day when customers notify them of changes of address. Yes, it will impose an extra cost on the credit card companies, but we are talking about cases where the customer is not clearing his account immediately, but is incurring substantial interest charges—interest charges on which, whether he realises it or not, the customer is actually paying compound interest; and compounded monthly at that. The extra work will make a negligible dent in those interest charges. In any case, if the Minister’s argument is correct, is he proposing that the 150 year-old rule in Clayton’s case should be repealed for the convenience of the banks? In his reply, the Minister said that he knew of,"““no regulatory rule requiring the allocation of payments in a particular way to clearing banks””—[Official Report, 8/11/05; GC 168.]" He must have missed the early part of my speech to the Committee when I expounded the rule in Clayton’s case, which the noble Lord, Lord McKenzie, recognised even before I mentioned it. That is the regulatory rule that the Minister sought. It is called the common law of England. The amendment puts banks, credit card and store card companies on the same footing for the benefit of the customer who needs Parliament’s protection. I am most grateful to the noble Lord, Lord Razzall, for his having renewed the support that he gave to the amendment in Grand Committee, and I beg to move.