My Lords, I turn to the Government’s amendments on high-cost, short-term—or payday—lending. The Government are committed to action to protect borrowers from the harm that these lenders cause. We have already taken decisive action to overhaul regulation of the payday lending sector, with the Financial Conduct Authority taking on its broad new powers in relation to consumer credit from April.
The FCA has already set out tough proposals to clamp down on the key causes of consumer detriment, including capping the number of rollovers and curbing the misuse of continuous payment authorities. However, the Government have agreed to do more. We want to put an end to the unfair and extortionate cost of borrowing from payday lenders and to prevent the spiralling costs faced by those struggling to repay their loans.
There is a growing evidence base, including lessons from other countries, that a cap on the costs is the right way forward for consumers. Of course, we are not just talking about an interest rate cap, which evidence shows is likely to be far less effective. A cap should include all fees and charges which may be incurred in relation to a payday loan, including default charges and rollover fees.
FCA powers are already sufficiently broad to ensure that charges of all kinds can be covered in the cap. This Bill presents the ideal opportunity to ensure swift
action to protect consumers from unfair and spiralling costs and to give the FCA a definitive parliamentary mandate to act now. That is why the Government are introducing this amendment to require the FCA to impose a cap on the cost of payday loans. Under this new duty, the FCA must use the powers given to it by the Government in the Financial Services Act 2012 in relation to such loans.
In Committee, noble Lords asked about the framework within which the cap will be designed, and I will explain a little how this amendment delivers that framework. Designing a cap on the cost of credit is not a job for government; nor is it right that the detail of a cap should be enshrined in primary legislation, given that the industry it is intended to bind is so fast-moving and innovative. That is why the cap must be set by the independent and expert regulator, which has flexible powers to ensure that the cap remains effective. The FCA must be allowed to design a cap that works in UK consumers’ interests and fits the UK market.
However, the amendment makes clear the FCA’s overarching objective in this endeavour: it must make rules to impose a cap to protect consumers from excessive charges imposed by high-cost, short-term lenders. This language echoes the FCA’s consumer protection objective. The FCA must make rules to advance one or more of its operational objectives—consumer protection, market integrity and competition. This applies to the rules to implement the cap, just as it does to all FCA rule-making. The FCA’s competition duty also applies. It must consider how the rules affect the ability of the market to serve consumers’ interests.
Introducing a cap is not without risks or potential adverse consequences, including reducing access to credit for some individuals who are in financial difficulty. The FCA will not be able to eliminate those risks but it will seek to manage them. It will be important that the FCA strikes the right balance in designing and setting the cap. That is why it must publish a cost-benefit analysis on the impact of its proposals and undertake a consultation. The amendment specifically requires that the FCA must consult the Treasury before it publishes and consults on any draft rules. To reflect the importance of keeping the rules current and effective, the FCA must report on any rules it makes under Section 137C, including rules imposing a cap on loan costs, in its annual report.
Finally, I should point out why it is not worth defining payday lending in great detail in primary legislation. Putting a narrow definition in primary legislation could lead to unintended consequences. Lenders may just try to circumvent the definition. The amendment therefore allows the FCA to specify precisely which types of high-cost, short-term loans are captured when it makes its rules to effect the cap.
I now turn to the matter of timing, which is the subject of the amendment proposed by the noble Lords, Lords Eatwell and Mitchell, and the noble Baroness, Lady Grey-Thompson, which proposes to bring the timetable for implementing a cap forward to 1 October next year. I fully support the intention to bring the cap into force as soon as possible in order to protect consumers. That is precisely why the Government
are taking this opportunity to bring forward legislation to require the FCA to impose a cap, so that the FCA can get on with implementation as quickly as possible. Introducing this new duty on the regulator ensures its efforts are focused on implementing the cap rather than on having to spend time and resources making the case for using its cost-capping powers in the first place.
The amendment provides a backstop date for implementation. The cap must be in place by at least 2 January 2015. Noble Lords should be in no doubt that, if the FCA can deliver sooner, it will. But there are a number of steps that must be taken before the cap is to be implemented. All of these are important. If rushed, they could put consumer protection at risk for the sake of speed. As I have already said, the risks of getting the cap wrong are also high—reducing credits for individuals or potentially pushing them into the arms of less regulated lenders.
Perhaps it would be helpful if I set out the FCA’s proposed timetable. The FCA’s current timetable for implementing a cap is ambitious but deliverable, and crucially allows the FCA to draw on the Competition Commission’s rigorous investigation of the market, which is currently underway. The FCA has already made good progress on background research on capping the cost of credit. It will start its detailed analysis phase in the new year, including drawing on the evidence the Competition Commission has already collected, through existing statutory information gateways between the two organisations, and where necessary, seeking information from firms.
The Government are bringing forward secondary legislation to allow the FCA to gather information from the industry as soon as possible to help it design the cap. The FCA will consult in the spring on its draft proposals, at around the same time as the Competition Commission is due to publish its provisional findings. It will have to publish the cost-benefit analysis when it consults. Consultation will take place over the summer, and the FCA plans to make the rules in the autumn. Again, this is likely to be around the same time as the Competition Commission’s final report. Lenders will have the rest of the year to update their systems and processes to ensure they comply with the new requirements, and the cap will come into effect at the beginning of January.
Were a 1 October implementation date adopted, the FCA would be so far out of sync with the Competition Commission’s work that it would not get the full value from the Competition Commission’s insight into the market to ensure the cap helps to secure the best outcomes for consumers. Such an early date would mean that important components of the FCA’s rule-making processes would need to be jettisoned, be that evidence-gathering in preparation of a cost-benefit analysis, consultation with interested parties on the proposals, or preparation time for the lenders to get their systems and processes in order to meet the new requirements and become responsible, compliant lenders. Noble Lords opposite may laugh at this, but if we were not proposing to do this, they would be the first to criticise the Government for not properly doing every single phase of what I have just described.
These processes are vital to ensuring that the cap works in the best interests of consumers and avoids the risks and unintended consequences I described earlier. Difficult though this choice is, the Government are not prepared to compromise the process, and I hope that noble Lords will agree. I am grateful to noble Lords for putting the spotlight on the timetable, but I hope that I have been able to persuade them that the risk to borrowers of rushing the design and implementation of a cost cap is simply too great and that the FCA is committed to implementing the cap as quickly as is reasonably possible. This, I trust, provides sufficient reassurance to convince them not to move the amendment.
I turn now to the amendment of the noble Lord, Lord Sharkey, who has spoken so passionately during the Bill about the lessons we can learn from the way in which the state of Florida has approached regulation of payday lenders. His amendment aims to ensure that the FCA must impose restrictions on the number of loans an individual may have and the times a loan may be rolled over at the same time as it makes rules imposing a cap on the cost of payday loans. The Government fully agree that regulatory action is necessary to tackle both of these issues. The FCA has already proposed to curb rollovers. The noble Lord is, I know, convinced of the need for an outright ban, as in Florida. I have considerable sympathy with that conviction, but I have not seen robust evidence to show that a ban is the right approach for UK consumers. The ability to roll over a loan—for instance, if an unexpected expense crops up one month—offers a flexibility which is valued by some consumers.
In its consultation published on 3 October, the FCA has suggested a limit of two rollovers but has specifically also sought views on permitting one rollover only. This is a significant advance on the industry’s own codes of practice—which limit rollovers to three—with which, sadly, far too few lenders comply. The consultation period has just closed and the FCA is currently considering responses. Legislating to ban rollovers now could prejudge that consultation and evidence-gathering exercise. I am sure the noble Lord will agree that the outcome should be guided by the evidence.
Of course, a cap on the cost of payday loans, which will include rollover charges, will be a key factor in undercutting lenders’ reliance on rollovers as a generator of profits. I am confident that a cap on the cost of the loan and a cap on the number of rollovers, as the FCA has proposed, should help stop the cost of rolled over loans spiralling while still meeting borrowers’ needs.
The noble Lord also proposes that the FCA must curb multiply sourced simultaneous loans. I again have great sympathy with his intention here but in this case, too, the FCA is committed to taking action. The FCA is approaching the solution differently from the noble Lord but the effect is the same. Rather than limiting irresponsible borrowing, as the noble Lord proposes—particularly as this could have the side-effect of restricting choice and flexibility for consumers who are able to repay—the FCA has focused on restrictions to tackle irresponsible lending. It has proposed to put strict new requirements on firms to undertake affordability
assessments to ensure that a borrower can afford to make sustainable repayments. This will include looking at other loans a borrower has outstanding.
However, the FCA is not stopping there. The quality and value of lenders’ affordability assessments clearly relies to a significant degree on the nature of the data available on an individual’s borrowing. The Government and the FCA have real concerns that data sharing is not working to support responsible lending and consumers’ interests. The FCA has already warned the industry that it must improve and that, if it fails to improve, the regulator will take action. The FCA has committed to exploring the best way to improve data sharing and thereby lending decisions. I will ask the FCA to keep noble Lords updated on this work.
I hope the noble Lord has been reassured that the FCA is committed to taking decisive action to curb rollovers and multiply sourced simultaneous loans. It will take action as soon as it assumes its regulatory responsibilities for this sector in April, so it is not necessary to expand the FCA’s cost-capping responsibilities to include these areas. I am very grateful to him, however, for drawing these issues to the House’s attention and highlighting the lessons we, and in particular the FCA, can learn from Florida. I trust that he will feel able not to move his amendment.