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Ms Sally Keeble (Northampton, North) (Lab): As my hon. Friend knows, I have been concerned about unfair relationships, both from the consumer's point of view and from that of the reputable bits of the industry—for example, Nationwide and Barclaycard, which both have offices in Northampton. How does he intend to set out or negotiate the terms of the unfair relationship provisions? How would they be established? What lengths would the consumer and the industry have to go to in establishing whether a relationship was fair or unfair?

Mr. Sutcliffe: I shall address that issue in a few moments, so I hope that my hon. Friend will bear with me.

Consumers should have the right to challenge unfairness where it exists and obtain redress where appropriate. That is why the Bill will introduce a mandatory alternative dispute resolution system—an ADR scheme—for consumer credit matters, thus giving consumers a fast and effective means to challenge unfair practices without the need to resort to court action. Importantly, all consumers will have access to redress using the ADR scheme, not just those who can afford to pay for it, because it will be free and no lawyers are necessary—not that I have got anything against lawyers.

Decisions taken under the ADR scheme will also be binding on the consumer credit business, so that consumers can be confident that redress is achievable. The system will be run by the Financial Ombudsman Service—an independent and credible ADR scheme that already provides ADR under the Financial Services and Markets Act 2000. Thus the FOS already deals with approximately 75 per cent. of all consumer credit business by value.

Disputes that arise under the Consumer Credit Act 1974 will enter the ombudsman's jurisdiction on a phased basis, thus giving business time to prepare for the
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new regime and ensuring that the FOS is not overwhelmed by consumer credit disputes. However, ensuring fairness on both sides of such disputes has been a key part of the Government's work on developing the system, so complaints will be considered by the FOS only when a lender's internal complaints-handling procedures have been exhausted. The FOS will be able to refuse any frivolous or vexatious claim.

The Bill will also empower consumers by replacing the out-of-date extortionate credit test. Too many people have found out the hard way that, 30 years after its introduction, the test does not provide effective redress. Not only does the current test set the bar too high to be of real use for consumers, but its application is usually confined to the cost of credit or terms of the credit bargain at the time it was made.

Hon. Members will appreciate that taking out a credit card or personal loan is not just about how much the agreement says that it will cost; there are many other factors to take into account. The Bill will introduce a new test based on the principle of unfairness, which was mentioned by my hon. Friend the Member for Northampton, North (Ms Keeble). Consumers will be able to apply to the courts to challenge agreements where an unfair credit relationship exists. That will allow the consideration of all aspects of the transaction, including the lender's conduct before and after making the agreement, its administration of the loan and the terms and conditions of the agreement. It will also ensure that the courts will have a wide discretion to assist those who face unfairness from lenders.

We have given careful consideration to the nature of the new unfair relationships test and have explored its implications thoroughly. If we are to give consumers the rights and redress mechanisms that they deserve, it is imperative that the test works effectively. It is also important that the test does not constrain or impede the courts' ability to do justice in every case. That is why I will not try to define an unfair relationship. It is for the courts to determine such things according to the relevant facts of each case. Unfairness is not a new concept for the industry, and fair lenders have nothing to fear from its introduction.

Norman Lamb : The Minister has said that he will not seek to define unfairness. Will the Department issue any guidance on the application of that test?

Mr. Sutcliffe: In anticipation of other challenges on that issue, hon. Members will know of the Pepper v. Hart judgment, whereby should Ministers try to give indications of constraints on certain issues when speaking at the Dispatch Box, their comments can be used by the courts and by others to stifle debate.

I do not want to do that. As I have said, the unfairness test is not a new concept for the industry. The contributions that Members will make in Committee will give us an opportunity to develop wider parameters that will be very clear when it comes to court cases. However, if we are too restrictive at this stage, there may be loopholes.

John Battle (Leeds, West) (Lab): I also offer my hon. Friend a word of congratulation. We have struggled to get this Bill; we got far with it in the last Parliament and
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we are back again. We are trying to improve the law after 30 years of the 1974 Act, which was crippled by the use of the word "extortionate". Nobody could define the term, so there were no extortionate lenders and only 31 cases were brought in all that time. What worries some of us is that the unfairness test will remain as vague and will not result in cases being brought forward. Does he anticipate a test case setting the ground rules, or will individuals have to try to get to court to test the provision every time?

Mr. Sutcliffe: I hope that that will not be the case and that the alternative dispute resolution process will operate first and resolve the issues. When issues go to court, clearly the court will test the position. However, there will be advice, and the Office of Fair Trading will offer guidance on the issue. The unfairness test is already within the sector and parameters already exist, but I do not want the terms of the Bill to be restrictive. My right hon. Friend is right to suggest that the unfairness test is a lot lower bar than the extortionate credit test, which hardly anyone ever got over. We are now in a better position.

Michael Jabez Foster (Hastings and Rye) (Lab): My hon. Friend obviously does not want to make the case law today even though many of us wish that he would. Is not the issue that if the matter is left to the courts, the man on the Clapham omnibus will provide the test—an objective test? Credit, however, is very much a subjective problem, and poor people lose out. Does he not agree that the test should at the very least include the personal circumstances of the individual when determining whether a bargain is fair or unfair?

Mr. Sutcliffe: I hear what my hon. Friend says, and I do not entirely disagree with him. It is one of those issues that will become clearer as we discuss it further in Committee. Like the industry and consumer groups, I am prepared to listen to what hon. Members on both sides have to say. The last change to the law was 30 years ago, so this may be our only attempt to get things right. I want to get them right and make sure that vulnerable people are not exploited. Clearly a large percentage of the industry operate in a proper manner, but there are those who do not. We have to make sure that people are protected. We will have a thorough debate about the concept of unfairness. I resisted that temptation on numerous occasions during the previous process on the Bill. We shall see how we go on in the future.

Adam Price (Carmarthen, East and Dinefwr) (PC): Is not the fact that it has taken 30 years to introduce new consumer credit legislation a good argument for at least introducing an enabling clause that would allow Ministers to introduce an interest ceiling if the evidence comes forward to convince them of the case for that; otherwise we might have to wait another 30 years before such a ceiling is introduced?

Mr. Sutcliffe: I am confident that we will not have to wait 30 years, because consumer credit and the use of consumer credit have grown rapidly for the reasons that we have described. I know that the hon. Gentleman has raised the issue of the test and the cap before, and I gave him an undertaking last time. I shall make it clear that
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there will be a review of the position if what we introduce does not work. I am very confident that the unfairness test and the ADR will work and that there will be no need for interest rate caps, but we will always keep that option open.

The Bill is about consumers being confident that they are borrowing from responsible lenders, and that is why our second objective is to improve the regulation of consumer credit businesses. The bureaucracy associated with licence renewals, together with limited information-gathering powers and lack of intermediate sanctions, hampers the Office of Fair Trading in running the licensing regime and in policing licence holders. Overhauling the licensing regime will produce a more streamlined system that is easier for the OFT to regulate and more proportionate for business. The OFT will be able to focus attention on problem lenders and problem sectors, and to impose sanctions on traders who misbehave. Consumers sometimes suffer as a result of a lack of information during the life of the loan.

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