Consumer Credit Bill

My Lords, the noble Baroness’s amendment is directed to the practice of some lenders in the credit and store-card sector applying payments made in relation to the account to the part of the account incurring the least interest. Again, this amendment was tabled in Grand Committee, and the Government resisted it. It is a practice in products where different rates might apply for different services—for example, cash advances—to apply any payment made to the account to the element of the indebtedness incurring the least interest. The Government’s position is that that is an issue of product differentiation and transparency. Lenders are entitled to charge different interest rates on different parts of the account. Lenders are entitled to apply the payments to the account in accordance with the terms of the loan agreement. If the terms of the agreement permit the lender to apply the debtor’s repayment in a particular order, that will bind the debtor. I stress that the Government have already made regulations to improve the quality and clarity of information provided to consumers before an agreement is made and on the face of the agreement. Under the Consumer Credit (Agreements) Regulations, the agreement must contain a statement explaining to the debtor how sums are applied and appropriated under the agreement. The issue of Clayton’s case does not therefore arise. That statement must appear up front in the key financial information section of the agreement. That statement must also be included in the pre-contractual information provided to debtors before they enter into an agreement. That brings me to the issue of product differentiation. Lenders are free to inform consumers that they apply payments in a particular way, including that which is most advantageous to the debtor. Indeed, the department is aware that some lenders credit payments in respect of the total balance, or allocate payments in the way most favourable to the debtor. Others do not. The Bill is not designed to stifle product innovation or product differentiation. Along with the Government’s other reforms in this area, it is designed to enable consumers to understand their agreements and to receive regular information about them. If a consumer does not want the lender to allocate repayments in a certain way, they need not choose that product. If the noble Baroness’s concern is one of transparency, we believe that existing provisions already address that. As I said, the new regulations concerning the form and content of agreements require the inclusion of information about how payments are allocated. Furthermore, Clause 7 provides that, for statements issued in relation to running account credit agreements, the Secretary of State may provide for warnings about making payments of a prescribed description in prescribed circumstances. That could include payments made that are allocated in various ways. While some have lobbied for such a requirement, the department proposes to consult on the issue as part of its general consultation on the information requirements in the Bill to determine whether there is any consensus on that point. The noble Baroness’s amendment also raises an issue of proportionality. It permits a debtor to specify how a repayment is applied to the account. In accounts with several applicable rates, depending on the service provided, the allocation could be quite complex. That imposes potentially considerable administrative burdens for lenders. If noble Lords reflect on the prospect of a whole raft of debtors making different choices at the point of payment, for lenders to have systems to cater for them all is a real administrative burden. In those circumstances, I ask the noble Baroness to withdraw the amendment.