My Lords, on Report I committed to bring forward a government amendment to give the FCA an effective power to make rules capping the cost and the duration of a regulated credit agreement. I am grateful to the noble Lord, Lord Mitchell, for raising this on Report and to noble Lords on all sides of the House who spoke in support of the need for action against sharp practices in the payday lending industry. The Government warmly welcome the cross-party consensus that emerged on this important issue.
As I said on Report last week, the Government were fully in agreement with the intent behind the noble Lord’s amendment but felt that there were weaknesses in the way it was framed. We have made use of the time between Report and tabling this amendment at Third Reading to get this power right and ensure that it is watertight. Moreover, I also committed to going further than the noble Lord, Lord Mitchell, proposed, by making additional consumer protections integral to the power.
The Government’s amendment spells out in detail the kind of rules that the FCA may make to prevent lenders from imposing excessive interest rates or associated charges on borrowers, and clarifies that the FCA would be able to specify the level of the cap in rules and also to define which charges, in addition to interest, should be captured. The amendment also allows the FCA to impose limits on the duration of the agreement, and to specify the detail of the cap and other restrictions in its rules.
Those who have compared the Government’s amendment tabled yesterday with the amendment of the noble Lord, Lord Mitchell, will have noted that the Government’s version is significantly longer and more comprehensive in its detail. I said last week that we would take care to frame the power to prevent unscrupulous firms exploiting loopholes and to ensure that consumers were properly protected. The Government specifically ensured that this power covers associated charges to avoid unscrupulous firms “gaming” the restrictions by, for example, reducing the interest rate but introducing exorbitant fees for related services such as setting up the loan. It also specifically captures the practice of rollovers, which we have seen abused by some players in the payday loans industry. Under the amendment the FCA will have a specific power to impose a limit on the overall duration of the rolled-over agreement and a limit on the number of rollovers that are permitted.
The government amendment has also built in robust protections for consumers who fall victim to lenders’ excessive charges. First, the FCA can provide that the lender cannot enforce the agreement and the borrower is not obliged to repay the loan. Secondly, it can provide that any money or property transferred under the agreement—an item that has been pawned, say—must be returned. Thirdly, it can provide that compensation must be paid to the consumer.
Before moving on I will address briefly one provision in the amendment of the noble Lord, Lord Mitchell, that we omitted in tabling the Government’s version: namely, a specific reference to consumer detriment or consumer protection. That is because the FCA will already be prompted to respond when it detects consumer detriment. Under Section 137A of FiSMA the FCA may make general rules only for the purposes of advancing one or more of its operational objectives. These are: securing protection for consumers, protecting and enhancing the integrity of the financial system, and promoting effective competition. As such the consumer protection objective will provide the strong underpinning mandate for the FCA to make rules under the new power that we are discussing. It is not therefore necessary to spell it out further in the Bill.
While I am confident that our amendment clarifies the FCA’s role in this important area, we must be careful not to regard this power as a silver bullet that will fix all the problems in the payday lending sector. As the OFT’s recent report into the high-cost credit market showed, it is clear that regulation of the payday lending market as a whole needs to improve. Compared to the current regulatory regime under the OFT, the FCA will have a broader and more effective toolkit to monitor and tackle developments in the market and supervise practice among firms.
Capping the cost of credit and the number of times that the loan can be rolled over is a major market intervention, and I expect the FCA to contemplate the use of this power in a responsible and measured way. I discussed the mixed picture from international evidence on Report. We must avoid at all costs any such cap resulting in catastrophically unintended consequences, such as driving vulnerable consumers to illegal loan sharks. However, as I said on Report, we need to ensure that the FCA grasps the nettle when it comes to payday lending. This amendment grants the FCA the powers to deliver effectively on its consumer-protection objective and tackle consumer detriment. It is a power that I hope all sides of the House will wish to support. I beg to move.