My Lords, in moving Amendment 3 I shall speak also to Amendments 5, 10 and 56. Few people will not be aware of the considerable influence that your Lordships’ House has had on curbing the explosion of high-cost credit, which has so disadvantaged consumers in recent years. Perhaps this is not the place to rehearse the broader arguments as to why high-cost credit became such a scandal in the first place, but it may be worth recalling that it was mainly spawned out of a need for access to credit when the banks stopped lending and it was certainly compounded, in my view, by the Government’s initial indifference to the issue, reflected in their oft-repeated mantra that the market would
sort itself out, and then their grudging admission that there was an issue and an acceptance that regulatory intervention was required, and finally the issuing of instructions to the regulator to sort things out by January of next year. In mentioning this we should acknowledge the all-party support for this démarche on high-cost credit, a roll of honour which has been led by my noble friend Lord Mitchell and the then right reverend Prelate the Bishop of Durham, now the most reverend Primate the Archbishop of Canterbury—and of course there are others.
However, the job is not complete and much still needs to be done to deal with personal debt, and as I declare my interest as the retiring chair of StepChange, the debt charity, I want to point out that its report published last week indicates that while unmanageable debt is a devastating problem for every family which has problems in this area, it is also an £8 billion problem for the economy in terms of its impact on services, reductions in GDP, and as a break on the aspirations we all share of the country returning to something better than trend growth. We need to do all we can to help consumers in the area of credit, and that means looking at other examples of high-cost credit which continue to evade the regulatory structures that are now in place.
A logbook loan is a bill of sale securing a loan on an asset, often a vehicle, and it gets its name as the lender retains the vehicle’s logbook—now the vehicle registration certificate; I think it is the V5C—until the loan or any outstanding interest is repaid. But unlike all other consumer credit areas, the use of the archaic bill of sale legislation which was passed in 1878 for this particular form of loan means that the lender can repossess the debtor’s vehicle without having a court order. Logbook loans are another form of very high interest credit and share with payday loans potentially unfair terms and conditions. Logbook loans tend to be used for people who have had bad credit and need cash quickly. A check on the internet shows that logbook loans can be completed in as little as 15 minutes with very few credit checks and certainly no checks on affordability or the ability to repay. Recent research by Citizens Advice shows that logbook loans secured by a bill of sale are generally in the range of £500 to £2,000 and average at just over £1,000. They are typically over a 16-month to 18-month period with APRs in the range of 200% to 500%. It is true that a logbook loan can be issued only by a company that holds a consumer credit licence, but the pernicious aspect of this type of loan lies in the use of the bill of sale mechanism because that is not regulated and, as I have said already, companies can seize the asset—for example, if the loan is not repaid.
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In December 2009, the previous Government announced a consultation on whether to outlaw logbook loans. In 2010, they proposed to ban the use of bills of sale for consumer lending. This is already the case in Scotland. However, after the election the current Government decided not to go ahead but to call for greater industry self-regulation with a voluntary code of practice. At the same time, they committed to look again at reforming logbook lending if problems continued.
I would be grateful if the noble Baroness would confirm whether that is still their position, because recent research confirms that this is still a very problematic area, with considerable evidence of consumer harm. For example, there has been a 35% increase in bills of sale registered from 2011 to 2013 and within these a number of issues are emerging. Under this bill of sale arrangement, ownership of the car, when the borrower receives a loan, moves directly from the consumer to the lender, which is why no court order is needed before a lender can repossess the car. This encourages irresponsible lending and debt collection practices as there is no onus on the lender to negotiate when the consumer gets into payment difficulties, because they can just seize the asset. It also means that consumers feel forced to put logbook lenders at the top of their list of creditors, often above priority debts such as mortgages or utility bills, because they are very concerned about losing their car. According to Citizens Advice, there is evidence that significant numbers of consumers in financial difficulties are not being dealt with in a fair and appropriate manner despite the fact that the code of practice says that consumers should be treated “sympathetically and positively”. However, the evidence shows that that is not the case.
Under the bill of sale arrangements there is an imbalance of power between the lender and the consumer given that there is no court order or other statutory intervention. The code of practice states that lenders should review the debt collection procedures annually, and those of any third parties that they employ, to ensure that they conform to “high ethical standards”. However, a report from a citizens advice bureau in west Sussex states that a 34 year-old woman had her car repossessed by a bill of sale lender while on her way to work. Apparently, a tow-truck driver blocked her car, reached through the car window and took the keys and the car without allowing her to remove her possessions. She was left on the roadside in the rain. This caused severe problems, one of which was that she lost some £200 in earnings and faced difficulties taking her disabled son out of the house.
Logbook loans are a very expensive form of credit with high interest rates and can involve punitive fees and charges. This means that if you miss one payment you can quickly spiral into significant debt. There are also reports of creditors charging fees which bear little, if any, relation to the reasonable costs of the lender. In one case, a man was twice charged £300 for repossession costs even though his car was not actually repossessed.
As the Bill of Sale Acts originate from the Victorian period, the language used in the credit documentation is often outdated and unclear. This can lead to consumers not understanding the terms and conditions of the loan. For example, they do not always realise that they no longer own the property on which the loan is secured. Clearly, understanding risk is an essential part of making an informed choice about taking out loans. The code of practice states that credit documentation should be in “plain and intelligible language” and that the lenders should,
“provide adequate explanations of the credit on offer”.
However, the evidence proves that the opposite is the case. This industry exploits the vulnerable and the lack of proper credit checks is a feature of it. Citizens Advice has evidence that in many cases limited or no credit checks are carried out by lenders, and there is very little evidence that reasonable assessments of affordability had been undertaken. If Wonga has had to write off loans to vulnerable consumers, which they clearly would not be able to pay back in time, should not this approach apply also to logbook loans?
Another feature of logbook lending is that there is no protection for third-party purchasers. Where a person buys a second-hand car without knowing that it is subject to an outstanding logbook loan, they have few options other than paying back somebody else’s debt, losing their car or going to court, which can be very expensive. Therefore, our argument in this amendment is that the present regulatory and legislative framework governing logbook lending is untenable as it creates a significant imbalance between the consumer and lender. Consumers have considerably fewer rights and protections under logbook loans than under other secured lending agreements and they cause severe consumer detriment to consumers who are often struggling to make informed choices about how they should borrow. Previous government policy was to ban bills of sale. We think that is now the right solution, as is the case in Scotland. I beg to move.