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Mr. Sutcliffe: We must be careful about the principle involved. The first sign of people having debt problems is that they miss payments. That is why we tabled amendment No. 7. It is a dangerous to allow people to miss payments. I feel strongly about that and I hope the hon. Gentleman will withdraw his amendment. It is dangerous and risky.
There is some confusion about whether amendment No. 4 relates to clause 9. It relates to clause 10, which deals with running-account credit. There is no difference between default and arrears. They are both breaches of the agreement. I hope the hon. Member for Wealden will reflect on what I and the hon. Member for North Norfolk have said. The amendment may relieve the bureaucratic burden on business but it is dangerous. I hope the hon. Member for Wealden will not press it.
Amendment agreed to.
Charles Hendry: I beg to move amendment No. 5, in page 14, line 11, at end insert—
'(2A) In making a determination under this section, a court shall have regard to guidance published periodically by the OFT.
(2B) Guidance produced by the OFT under subsection (2A) shall be approved by the Secretary of State before publication.'.
Madam Deputy Speaker: With this it will be convenient to discuss the following amendments:
No. 3, in page 54, line 33, at end insert—
'(2A) The Secretary of State shall not make an order under subsection (2) bringing into force sections 19 to 21 of this Act until advice and information has been published by the OFT in accordance with section 140D of the 1974 Act.'.
No. 6, in page 64, line 35, at end insert—
'(6) This paragraph shall only apply to credit agreements which will continue for two years or more beyond the end of the transitional period set out in subsection (4).'.
Charles Hendry:
Clause 19 is undoubtedly one of the central components of the Bill. As I have said, it determines the thrust of what we are all trying to achieve—a better, fairer and more responsive system for consumers. Opposition and Government Members have discussed the new unfair relationships test during
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the Bill's progress through the House, and we all favour that provision, because it replaces the out-of-date "extortionate test", which has failed to offer consumers adequate protection in a market that has changed beyond all recognition in the past 30 years.
The current imbalance, which does not serve consumers' interests, must be addressed, and the new unfairness test is central to achieving that objective. Extensive debate took place in Committee about the nature of the test, and we continue to have serious reservations about the concept of "guilty until proven innocent", which is alien to British law.
We received representations from both sides of the issue in Committee. Lloyds TSB stated:
"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."
From the other side of the debate, a charity, Credit Action, stated:
"The presumption that all relations are 'unfair' unless proved otherwise is in itself unfair, excessive and contrary to normal British law."
We also received representations from the Finance and Leasing Association:
"We reiterate our support for the principles behind the Consumer Credit Bill. However, the combination of the lack of information regarding the unfairness test and the retrospective nature of the test hugely increases uncertainty within industry and could impact critically on the UK's £235 billion per year securitisation market. This market has to date been a very important source of capital for many lenders. Industry is concerned that the Government have not taken account of the potential for the market to be disrupted by retrospective application of the unfairness test. Market risks may ultimately have to be revised, thereby having an adverse impact on the credit ratings of securitisation transactions. This could increase securitisation costs and ultimately have a negative impact on competition and cost in the consumer credit market."
Both borrowers and lenders the support the idea that the situation should be clarified, but we will watch the shift to the unfairness test with the greatest care. That concept already exists in employment law—an employer is assumed to have acted in a discriminatory manner unless he can prove that he has not—but we are wary of spreading it elsewhere.
The focus of amendment No. 5 is that the unfairness test cannot achieve its desired effect unless the present lack of definition about what would be considered "fair" or "unfair" is cleared up. The Bill offers no guidance to consumers or the credit industry on the practices that will fall within or outside the boundaries of that test. Indeed, we do not know where those boundaries lie, which is why both the consumer organisations and the credit companies have asked for greater clarity.
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The lack of clarity presents problems on both sides. Consumers, without a thorough understanding of their chances of success through the courts, will be deterred from pursuing cases that, if unsuccessful, could only add to their financial difficulties, stress and problems. On Second Reading and in Committee, we heard about how concerned people are about taking such matters to court. They are often people of very limited financial means and, even if they are supported by outside organisations or on legal aid, they are terrified about taking on a multi-billion-pound corporation in the courts.
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The credit industry, without a thorough understanding of what lending practices will be considered inappropriate, will remain unaware of the changes that it might need to make to ensure that its consumers are protected. As a consequence, lenders will be forced to become more cautious in their lending, achieving exactly the result that the Government least want. Those at the margins will be driven to the least scrupulous lenders, to the loan sharks or to the lenders charging the higher rates of interest.
The approach to tackling unfairness in lending must be targeted and consistent. Lenders need certainty from the outset that their contracts are secure and customers with genuine cases need to be clear about where they stand. My amendment aims to reach that level of clarity. It would allow the Office of Fair Trading, under its extended remit as provided for under the Bill, to issue guidance on those circumstances and activities that would be deemed unfair, subject to approval by the Secretary of State. By issuing such guidance, the level playing field that we all want restored will be that much more achievable. The Minister may argue that such guidance is not necessary or that it will somehow act as a constraint, but that argument simply does not hold true, because there are already legislative precedents that show how feasible and effective such guidance can be. The Unfair Contract Terms Act 1997 and the Unfair Terms in Consumer Contract Regulations 1999 demonstrate that it is possible to give sufficient guidance to consumers and creditors by means of a non-exhaustive list of the factors that are relevant to an assessment of fairness.
I draw the House's attention to annexe 1 of the directive on unfair commercial practices, which contains an extensive list of commercial circumstances or practices that are considered unfair in all circumstances. It says that misleading commercial practices include:
"Claiming to be a signatory to a code of conduct when the trader is not . . . Claiming that a code of conduct has an endorsement from a public or other body which it does not have . . . Falsely stating that a product will only be available for a very limited time, or that it will only be available on particular terms for a very limited time, in order to elicit an immediate decision and deprive consumers of sufficient opportunity or time to make an informed choice . . . Establishing, operating or promoting a pyramid promotional scheme where a customer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products . . . Passing on materially inaccurate information on
- market conditions or on the possibility of finding the product with the intention of inducing the consumer to acquire the product at conditions less favourable than normal market conditions"
"Conducting personal visits to the consumer's home ignoring the consumer's request to leave or not to return except in circumstances and to the extent justified, under national law, to enforce a contractual obligation."
All hon. Members would endorse those as activities that would be unfair in all circumstances. There is therefore no good reason why a clear standard could not also have been applied to the Bill.
I also draw hon. Members' attention to the OFT guidance that was issued to all Standing Committee members by the Minister prior to the proceedings, in which the OFT was able to indicate examples illustrative of scenarios where it would consider imposition to be a requirement on licensees. If the OFT is capable of offering these examples, that clearly demonstrates that it is also capable of issuing guidance and examples relating to unfairness. That is a perfectly logical and sensible follow-on, and it is what the amendment calls for.
Unclear and ill-defined legal frameworks do not represent good law making and, in this case, do not represent positive steps towards offering better protection for consumers. We should realise from the precedents that the opportunity is there for us to give the Bill more authority and certainty. I firmly believe that we should seize that opportunity.
Amendment No. 3 aims to ensure greater certainty about what is meant by unfair relationships. Further to amendment No. 5, it requires the Office of Fair Trading to publish guidance on the scope of the unfairness test before the provisions on unfair relationships come into force. It would be unfair and inappropriate if the test were introduced before the advice and information was published.
The new provisions will clearly have a major impact on the way in which credit companies operate but they are not clear about the extent to which those companies may need to change their practices to conform with the Bill's requirements until they have the information. As we know from the Consumer Credit Act 1974, such changes can take a considerable time to implement. It is therefore right and proper that companies receive as much notice as possible. Any mistakes caused by unnecessary hurrying will impact negatively on the consumer.
Let me deal with amendment No. 6 on retrospection. Hon. Members know that the new unfairness test will apply retrospectively to any credit agreement that continues beyond the transitional period, which is set at one year from the date of the commencement of clause 20. Although I do not believe that applying law retrospectively is normally appropriate—indeed, it often represents bad law making—it is necessary in the circumstances that we are considering.
Many credit agreements run for a considerable length of time. Without a retrospective dimension to the Bill, too many people will be left uncovered by the protection that it offers. Given the extent to which the credit industry has changed in the 30 years since the 1974 Act, that would be unacceptable.
Nevertheless, I am worried that the Bill will create substantial unnecessary bureaucracy in relation to retrospection because of the number of shorter-term
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agreements that could be caught in its grasp. For example, an existing credit arrangement that is due to finish a few months beyond the transitional period will be subject to the provisions of the measure because of those few months. The cost, administration and time expended by lenders on adapting their processes to meet the changes will be significant. As we all know, those charges will be passed on to consumers in higher interest rates or additional charges. The amendment therefore excludes those agreements that will expire in two years after the transitional period. I am not wedded to the two-year period and would be willing to consider a shorter time if that would make it easier for the Under-Secretary to accept the principle of the amendment and if he undertook to table a Government amendment in another place. However, the principle is sound. The new rules and regulations would come into force, as currently planned, for agreements that last longer than two years after the one-year transitional period at the end of that transitional period. We should try to keep bureaucracy to a minimum for agreements with only a short time to run. It will ease the transition process for lenders and consequently help to alleviate the risks of consumers bearing extra costs.
The amendments therefore emphasise a desire for greater clarity in the Bill. The Under-Secretary has resisted accepting such proposals throughout our proceedings and I suspect that he will do so again, but I hope that, on reflection, having heard the argument once more, he will be prepared to budge.
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