Financial Services Bill

Let me begin by thanking my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) for his kind comments at the beginning of his speech. His new clauses 1 to 7 would give the Office of Fair Trading the power to set a statutory limit on the total cost chargeable for credit in a particular credit market where it is satisfied that consumers are, or may be, suffering detriment through insufficient price competition. He outlined the purposes of the new clauses very well, as he always does. I want to say at the outset that the Government share his concerns about low-income and financially vulnerable consumers, who can struggle to obtain cheaper credit from high street banks and building societies. That is why we welcome the review that the OFT is conducting into the high-cost consumer credit sector, which has a particular focus on whether competition in the high-cost credit market is effective in current conditions. The review will examine, among other things, the experience of other countries that have introduced a cap on the cost of credit, which should help to establish the effectiveness of such tools as a form of consumer protection. My hon. Friend will be aware that this issue has been previously considered, and it has been concluded that such measures could be detrimental to consumers—a view shared by leading consumer groups, as the hon. Member for Fareham (Mr. Hoban) said. My hon. Friend is of independent mind on these matters, and it is always right to take a fresh look at them. I stress to him the independence of the consultants who were commissioned by those at the then Department of Trade and Industry who considered these issues. I would not want there to be any confusion about the role of Elaine Kempson, to whom my hon. Friend referred several times. She is very much an independent person, as Professor of Personal Finance and Social Policy Research at the university of Bristol, and she is a member of the Government's financial inclusion taskforce. She is an expert on these matters, and it is right that her views are carefully considered. Government intervention in pricing clearly has the potential to create distortions such as cross-subsidy in related sectors. It could constrain supply and ultimately lead to higher prices for consumers, and damage industry by distorting markets. That is why venturing into this area requires very careful consideration. It is certainly our view that the review will provide important information that we will all want to look at—Government, consumer groups and others. My hon. Friend has elegantly framed his new clauses so that the price control measures would take effect only when the OFT is satisfied that there is insufficient price competition in the market—perhaps when one supplier is dominant in a number of localities or when all lenders offer much the same product and do not compete on price. However, in such circumstances, the proper solution would usually be to look for measures to increase competition rather than to substitute the judgment of the OFT as to a reasonable price for that of the market. New clause 2 would require the OFT to assess at annual intervals the adequacy of price competition in defined markets. In competition law, it is notoriously difficult to identify where the boundary lies between competitive and non-competitive pricing, as my hon. Friend well knows, so that would be a complex judgment requiring something akin to an economic market study every year in order to withstand challenge from lenders and other interested parties. New clause 3 would require the OFT to set limits on the total cost chargeable for credit, which must reasonably reflect the cost of providing credit in a properly functioning market. Again, however, that would be an extremely difficult task given the differing terms on which consumer credit is offered—some lenders offer much more flexibility than others—and the different risk profiles of each lender's customer base. There is also a real risk that those proposed powers for the OFT could stifle the competition in the credit market and the diversity of products that my hon. Friend wants to see. There is evidence from countries that have adopted some form of ceiling on the cost of credit that such restrictions can be circumvented through the charging of fees or insurance costs not covered by the regulated amount, and that they can force vulnerable consumers to take up less flexible, less transparent, more expensive or unregulated forms of credit with high charges for missed payments, including from illegal money lenders. I recognise that new clause 4 is intended to reduce the scope for such circumvention, but there are practical difficulties with the approach proposed as it would potentially involve the OFT continuously monitoring the price of thousands of products offered by a number of individual companies. Doubts about the workability of regulating the price of credit and concerns about the consequences for consumers are the main reasons why the Government have been very cautious about any measures such as those proposed by my hon. Friend. However, I appreciate that he is motivated by the desire to protect vulnerable consumers, and members of all parties recognise the importance of that. Such consumers face restricted choices in accessing credit and sometimes borrow more than they can afford to repay. We have to consider whether there are sensible steps that we can take, which is why we have considered his new clauses carefully. We share my hon. Friend's concern, which is why we have already taken a number of measures to give consumers a more informed choice and encourage responsible lending, including greater OFT oversight of high-cost credit lenders and new mandatory OFT guidance on responsible lending. We will introduce a new requirement this year for lenders to provide adequate explanations to borrowers and assess their creditworthiness, and we are also conducting a review of credit and store cards. The consultation on so-called risk-based re-pricing of existing debt, the level of minimum payments, the allocation of payments, the need for further information and unsolicited credit limit increases closed last Tuesday, 19 January. I have referred to the review that the OFT is currently undertaking of the market for high-cost credit, which is specifically considering competition issues and the effects of introducing restrictions on the cost of credit. We do not believe that it would be appropriate to anticipate the OFT's conclusions on the working of the market or any recommendations that it may make for further protections for consumers. However, I assure my hon. Friend that we are of course taking a close interest in the review and will want to respond quickly following its completion. I turn to new clause 14, which also deals with interest rate caps but is focused on store cards and similar retail credit tokens. I appreciate the distinction that the hon. Member for Fareham made between store cards and loans from retailers, about which he made some very interesting points. The power suggested in the new clause is very broad and does not define the circumstances in which an interest rate may be thought to prejudice the interest of debtors. Many of the concerns that I have described about new clauses 1 to 7 also attach to new clause 14. Constraining interest rates on store cards in this way carries a strong risk that pricing structures will simply be re-engineered to circumvent a cap, meaning that the costs of borrowing become less transparent for consumers, often hidden in contingent charges, which disproportionately fall on the least capable and most vulnerable. As I have said, caps can distort proper competition in the market. The hon. Member for Fareham made many of those points when he referred to new clauses 1 to 7. Similar concerns apply to new clause 14. That said, the Government recognise that, in the past, competition has not always been effective in the store-card market. That was the conclusion of the Competition Commission's market investigation, which ended in 2006 and resulted in the introduction of several measures to stimulate competition and ensure transparency for consumers about the costs of store-card borrowing and ancillary products, such as payment protection insurance. As the hon. Member for Fareham knows, those measures came into force in May 2007. New clause 14 also proposes a seven-day cooling off period for new store-card agreements, whereby consumers could not spend on their card for a week after taking it out. The hon. Member for South-East Cornwall (Mr. Breed) referred to that and said that it ought to be a 14-day period, which Consumer Focus recommends in its response to the consultation that has just closed. The Government recognise the sentiment behind the proposal. We are clear that responsible consumers should make a purchase on credit only after careful consideration, rather than focusing on a promotional offer, which might seem attractive when someone is in the store and not really thinking about the debt that will have to be repaid in future. However, a cooling-off period could have far-reaching consequences for both store-card providers and retailers, as it risks reducing the utility of the product and increasing point-of-sale costs to such a point that it might render it unviable. That may result in the withdrawal of a valued source of credit for some consumers and damaging consequences for retailers. Arguments need to be carefully weighed in the balance before a judgment is made. We conducted a consultation exercise, which ended only last Tuesday. Let us look at the evidence and make a judgment on that basis. If it points to the need for a cooling-off period, we would want to introduce it. We are concerned for consumers to take out store cards—or any credit—with their eyes open, and we need to ensure that we are taking appropriate action in all the circumstances. Through the implementation of the consumer credit directive and the OFT's irresponsible lending guidance, we are introducing new responsible lending requirements to ensure that all regulated credit agreements are responsibly promoted, lending decisions are taken on an informed basis, and consumers are given a proper explanation of the key features of the product and the risks associated with it. Those provisions will bite particularly on store-card providers, who will need to ensure that, when they promote their products at point of sale, their staff are sufficiently well trained and the environment is properly conducive to meeting the new standards. The directive will also provide a new right to withdraw from any regulated credit agreement in the first 14 days. The Government have received several responses to our consultation on credit and store cards. As I said, the closing date was only last Tuesday. I therefore think it right that we consider all the evidence carefully, issue our response and examine the case for legislation on the basis of it. It would be precipitate to rush to legislate now before we have considered all the submissions that have been made to us. Although the hon. Member for Fareham suggested, before he heard my response, that he would press new clause 14, I urge him to think again. That seems sensible, given where we are. Given what I have said—my sympathy for the new clauses that my hon. Friend the Member for Wolverhampton, South-West tabled, but our genuine concerns and the fact that a review is currently under way into competition in the market—I invite him to withdraw the motion.