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Michael Jabez Foster: Is it not the case that very high interest rates usually reflect the fact that the loan should not have been made? That is the issue. If lenders were barred from charging a high interest rate, they would be out of the market. I acknowledge, of course, the problem of illegal lending.
Charles Hendry: It is also the case that the APR is not necessarily a good way to make that judgment. If I borrowed £50 from the hon. Gentleman and paid it back in 20 instalments of £3 a weeka total of £60that would be a reasonable way of repaying the debt, but it would have an APR of 153 per cent. We need to look carefully at the problem. What seems like a high APR is sometimes a reasonable approach because of the sums involved.
The picture of indebtedness in the UK makes clear the need for an effective legislative framework to ensure that consumers are given adequate protection and that the credit industry is sufficiently transparent and works fairly and efficiently for all persons involved. The Bill presents us with a valuable opportunity to create that framework. Its objectives to enhance consumer rights and redress, to strengthen the regulation of consumer credit businesses and to provide debtors with clear, accurate and regular information about their credit agreements are the right way forward. That is why the Conservative party offers its broad support for the Bill, but as it currently stands, it is far from perfect. Indeed, some significant issues must be addressed if it is to reach its potential and ensure that the interests of the consumer are not inadvertently damaged.
By far the most pressing issue is the lack of detail, particularly in relation to a number of the key proposals. That is disappointing to say the least. The same criticisms were made by the Conservative party, the industry and consumer groups when the Bill was first debated in January, but in five months nothing has been done to provide that detail. That must make us question the Minister's comments on Second Reading in the last Session, when he said:
"The reason that the Bill has taken so long is that it is important that all stakeholdersthe industry, consumer groups and the voluntary sectormove forward together."[Official Report, 13 January 2005; Vol. 429, c. 471.]
Clause 19 replaces current provisions on extortionate credit terms with a new unfair relationship test. It widens the scope of circumstances that the courts may take into account in deciding whether a credit agreement is unfair to a debtor. That is a welcome move, but the
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Bill fails to offer any definition or examples of what constitutes an unfair relationship. Without such definition, neither creditors nor debtors will ever fully understand their responsibilities and rights. For a Bill that intends to increase consumer protection, that is a fundamental flaw. As Lloyds TSB explains:
"The Bill introduces a new unfair credit relationship test, which means consumers can challenge unfair practices and terms in court. However, the meaning of 'unfair relationship' is vague and the scope of the provision is generally too wide for both consumers and creditors".
"The Bill contains no guidance for consumers as to what constitutes 'fair' or 'unfair' to enable them to identify when they have a valid claim. Similarly, there is no guidance for creditors on how they should conduct themselves to ensure that their actions are not 'unfair'. Unlike comparable legislation in respect of unfair contract terms or financial regulation, there is not even a non-exhaustive list of relevant factors."
The Minister talked today of his desire to change the system of redress and to remove that from the courts, but the lack of detail means that people will have to go to court, with the years of waiting and the stress that that involves, to find out whether they have been treated unfairly.
Both the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 demonstrate that it is possible to give significant guidance to consumers and creditors by means of a non-exhaustive list of the factors that are relevant to an assessment of fairness. There is, therefore, no reason why a clear standard could not also be applied for this Bill. The Government know full well that that was a major issue when it was introduced in the last Session. They have had five months to pad out the detail, yet they have done nothing. That is far from trivial. A legal opinion from Michael Beloff QC finds that the test as currently drafted breaches the requirement in the Human Rights Act 1998 of legal certainty in article 1 of the first protocol. I should be grateful if the Minister would clarify the situation.
Mr. Austin Mitchell (Great Grimsby) (Lab): The hon. Gentleman will be well aware that most of the argument on whether terms were unfair concentrated not on terms of enforcement on the poor, but on things such as late payment fees for credit cards and the mis-selling of payment protection insurance and gap insurance. Those are major sources of revenue for big firmscredit card firms in particularand cause enormous annoyance to consumers. Why should the courts not be able to interpret what is unfair or fair in such circumstances? Has he no faith in the competence of the courts?
The problem is that with the lack of clarity, lenders will withdraw from lending to certain categories of people. They will pull back in a way that is unhelpful to consumers. They know that it will take yearsperhaps three, four or fiveto bring a case to court. There will then be appeals and it will take time to prove whether something was unfair or not. Throughout that time, they will exercise much greater caution than would have been necessary had there been greater clarity.
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John Battle: I share the hon. Gentleman's concern about the lack of clarity, but I come to it from a completely different angle. The people I represent who get into debt go nowhere near the court because the lender reschedules the debt and gives them even more moneythat is how it worksso they are not given the opportunity to go to court to get redress in the first place. We will have a vague definition of unfairness and the court will be there in the background, but the people I represent will not be able to make use of it to get justice and fairness. We need clear guidelines on unfairness to send out a signal so that people do not go to court because everybody knows what they are dealing with.
Charles Hendry: I agree with the right hon. Gentleman that for many people, particularly those on low incomes, the prospect of going to court and taking on a major financial institution must be terrifying, so they will try to use any means to avoid that. One reason why the existing legislation on extortion has not been used more is that many settlements have been made on the steps of the courtroom, where people decide to settle before the matter gets to court. If we can get the detail into the Bill, we can avoid many of those problems.
Most importantly, this is not just an issue of concern to lenders; it is, as we have said, the consumers whom we seek to protect who will suffer most from the lack of detail. If the parameters are not clear, lenders will become more cautious in their lending to ensure that, some years down the line, they do not find that they have inadvertently operated in an unacceptable way. That extra caution is exactly what will drive people to more unscrupulous lenders. Moreover, that is not just a concern of lenders. As the charity Credit Action points out, on behalf of consumers:
We are also concerned by the way that the Bill will apply the unfair relationship test retrospectively, to those existing agreements that will continue beyond a transitional time frame. As yet, that time frame has not been decided, which leaves both consumers and the industry wholly uncertain about the extent to which the test may apply to their agreements. Without detail over what constitutes an unfair relationship test, neither creditors nor consumers are in a position to know whether their existing agreements could be open to reinvestigation.
We also have concerns about the extended scope of the financial ombudsman service. One of the Bill's fundamental aims is to improve redress for consumers, and that is right, but on the "Money Box" programme recently, the ombudsman himself said that he had real concerns about his office's capacity to cope with the volume of work. There is no question that the provisions in the Bill will add to that work, so we must question whether it has the capacity to achieve what it sets out to do.
The Bill, in its efforts to improve regulation of the credit industry, also proposes an expanded role for the Office of Fair Trading to regulate the conduct of licensees. Clause 38 provides for the imposition of requirements on licensees if the OFT feels unsatisfied with the licensee's work; clause 46 allows the OFT access to premises and documentation; and, ultimately,
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clause 52 allows the OFT to impose civil penalties, comprising fines of up to £50,000, on those who do not comply with its requirements.
My colleagues and I will support measures to improve the regulation of the credit industrythat is an important step towards protecting consumers' rightsbut we will be able to protect their rights only if that regulation is transparent. Clause 30 states:
As yet, despite repeated calls, that guidance has not been published. How then, is Parliament supposed to agree that this measure is the right one to take, if it does not know how the measure will be carried out in practice?
Indeed, the Joint Committee on Human Rights, in its fifteenth report of the last Session, expressed its concerns regarding the power to impose requirements on licence holders. The Committee concluded that the
"unfettered scope of this power fails to satisfy the requirements of reasonable legal certainty and also gives rise to a risk of disproportionate use of the power in practice. We are therefore concerned that this provision as currently drafted, without greater specificity, gives rise to a significant risk of incompatibility with Article 1 of Protocol 1."
Whether or not that is the case, and I would be grateful if the Minister clarified the situation when he sums up, the fact remains that the accountability of the regulator is inevitably limited. If we hand more powers to a regulator, accountability must be decreased, and if we decrease accountability, we cannot be improving transparency. Without transparency, how can the Government ever claim to be increasing protection for the consumer?
"The role given to the OFT is very strong. In many ways they will be acting as both prosecutor and judge and this could easily lead to an un-level playing field. The detail of on-going monitoring obligations are not included in the Bill and will be left fully in the hands of the OFT, with further guidance being issued at a later stage. It is the view of Credit Action that the powers given to the OFT which includes 'the right to monitor as it sees fit, businesses being carried on under licences' are excessive."
We must also make sure that any regulations made under this Bill can stand the test of time and do not undermine innovation and progress in the consumer credit industry. Just as the nature of credit has changed beyond recognition since the introduction of the Consumer Credit Act 1974, it will change just as much in the years to come, especially as new technology provides more and more opportunities to do things differently. Many new ideas are emerging in the field of lending and borrowing at present, such as the work being undertaken by companies such as Zopa, which is using the internet in a manner that totally changes the way in which people borrow and lend money.
These changes could be of great benefit to both lenders and consumers, particularly those on lower incomes, and we have to be certain that excessive regulation does not stifle this type of innovation. The OFT's role must afford flexibility. The vast majority of consumers deal with credit sensibly and they should be granted the choice and freedom to handle their financial affairs how they choose.
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Again, the issue stems from a lack of detail and a great deal of uncertainty about the consequences of the proposals in the Bill. Will the Minister ensure that the OFT guidance and publications are made available before the Bill goes into Committee? I simply do not see how otherwise we can fully address the issue of the OFT's extended role.
If the Bill is indeed about increasing transparency, then it should naturally also be about reducing unnecessary red tape. In certain places, however, I fear that it goes against that aim. In particular, the Bill will require lenders to send arrears notices to consumers when, in aggregate, a borrower, particularly one on weekly repaid credit, owes four weeks' worth of repayments. In principle, as the Minister said earlier, that sounds a logical measure, but in practice it may have some absurd implications for home credit borrowers. Some 3 million people borrow on a home credit basis, and on average each customer will miss four payments at certain points, in many cases at staggered points, in the course of a credit agreement. In doing so, however, they will not incur one extra pound of debt, as the repayment formula is designed to be flexible. The Bill could mean that all 3 million customers would have to be issued with formal, written arrears notices, when in reality they would not be in arrears at all. What a terrible waste of time, money and resources that would be. I hope that the Minister will comment on the fact that there could be no better way to frighten people, particular those on low incomes, than to tell them in writing that they are in arrears when they are not.
The final concern that I want to raise at this stage is that of the implementation timetable for the Billor rather the current lack of one. The 1974 Act took six years to implement fully, which is indicative of the substantial changes that regulatory measures represent for credit companies. Clearly, these measures are unlikely to take as long to implement, but there are nevertheless serious implications, particularly for IT systems, as a result of some of the proposals, especially those requiring regular information and statements to be sent to debtors.
Without a clearly defined timetable for commencement of the new rules, the credit industry is, at present, unaware of how long it will be given to implement the changes required. The lack of detail in the Bill only makes that worse. Without that detail, companies are unable to assess accurately and reliably what changes they will need to make to their processes and systems and how long they may take to introduce. There is little doubt that a short, unrealistic timetable will not be in the interests of the consumer. As Credit Action states:
In the interests of the consumer, the Minister must give us a clear timetable for the implementation of the Bill, before it reaches the statute book, and ensure that a realistic period is allowed for the industry to adapt.
I have set out why the Bill is so timely and important. The credit industry has changed dramatically over the past 30 years and continues to change at an equally fast pace now. To protect the many millions of consumers who have products and agreements with credit companies, it is essential that a new legislative
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framework is adopted that offers more rights and means of redress, better regulation of businesses and a fairer and more efficient industry for all.
The Conservative party therefore lends its broad support to the Bill, but, as I have explained, not without reservations. There is insufficient detail, and failure to provide that could have a series of unintended consequences for consumers which could end up doing more damage than good. That would be a perverse outcome for the Bill. No one wants to see that happen, and I look to the Minister and his colleagues to work with us, rather than against us, in Committeeand I welcome his commitment to do thatand beyond, to ensure that we deliver a Bill that truly helps the consumer, without undermining the businesses that provide the service.
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