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Mr. Tom Harris (Glasgow, South) (Lab): I am grateful to have secured this debate, as it provides me with the opportunity to address an important issue: the regulation of consumer credit business. The issue was recently brought to my attention by my constituents, Robert and Irene Masterton, who sought my help in rectifying an ongoing problem with HBOS, formerly the Bank of Scotland. It is a complicated case and you will be relieved to know, Sir John, that I do not have time to go into every single detail, although I will try to highlight the main points.
In 1991, Mr. Masterton secured a £30,000 overdraft facility from the Bank of Scotland to help fund his new business venture as sole Scottish agent for Ginetta and Scimitar cars. The bank sought a bond and floating charge and guarantee over the business. Unfortunately, in 1993, following Black Wednesday, Ginetta and Scimitar went into receivership, which made Mr. Masterton's company redundant, so to speak. In different circumstances, the solution would have been for Mr. Masterton's company to go into receivership. However, at this stage he was made aware that the impact of the personal guarantees attached to the bonding and floating charge would have meant bankruptcy for him and for his wife, a company director, in the event of the company failing. Shortly after that, his overdraft was increased to £35,000.
In January 1994, Mr. Masterton met his bank manager to request a five-year term loan to pay off the outstanding overdraft. His request was turned down, as the bank claimed that he had no security to offer. Obviously, Mr. Masterton was disappointed by that response, as three years earlier, in 1991, the bank, knowing that he had put all his assets into the business, had accepted that he was good for the money. However, that seemingly was not the case in 1994.
In 1996, a new manager took over Mr. and Mrs. Masterton's account. Mr. Masterton approached the new manager and again requested a term loan, which would allow him to pay off both capital and interest. Again, his request was refused, trapping Mr. Masterton into paying back interest only on the sum outstanding. It would be difficult to overstate the distress that the situation caused my constituents. Their lives have been utterly blighted by the stress resulting from those circumstances.
In 1999, Mr. Masterton went to see his bank manager in desperation, and virtually begged him for a term loan to pay off the borrowings and release him and his wife from the pressure placed on them. A 10-year loan was agreed, but a fixed interest rate was refused. Instead, the loan arrangement was so structured that Mr. Masterton would have to pay for any subsequent rises in interest rates. However, it was hardly a fair deal as he would not benefit from any drop in interest rates.
In 2003, it became clear that the level of debt was escalating, despite the fact that the couple had paid off in excess of £70,000 in interest, penalties and charges. Even then, the original debt of £35,000 was undiminished. Following a meeting at the bank between Mr. Masterton and the then customer services manager and regional director, the bank conceded that as the rate on the term loan could not fall, the terms initially agreed
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were harsh. The bank removed that clause and refunded Mr. Masterton £1000 in interest. The bank also confirmed that it would not look to Mrs. Masterton for settlement of borrowings.
In February 2003, the Mastertons decided to move their mortgage away from HBOS following receipt of a letter warning them of a probable shortfall on their endowment policy. When the settlement paperwork was sent to their solicitor, they discovered that the bank had decided to combine the outstanding balance of the term loan with the outstanding balance on the mortgage. That was news to them. They were aghast, as their home had not been put up as security against the borrowings. Additionally, the bank was going back on its assurance that it would not pursue Mrs. Masterton for any part of the loan settlement. The bank eventually backed off, but made no apology.
In March that year, Mr. Masterton wrote to Colin Matthew, divisional chief executive of banking at the Bank of Scotland, to express his concern that their case had not been properly considered. A brief reply was received, stating that no further action could be taken on their complaint, as in his view they had "no legal redress". They were told that they should write to the Financial Ombudsman Service, which they did in August that year. In September 2004, they received the ombudsman's final decision. The FOS felt that there was no evidence to move against the bank, but stated that it had no supervisory or regulatory function and did not set the rules regarding how banks profits were attained.
I stress that HBOS has not broken the law, or even bent itI suggest that it is far too clever and experienced for that. The question is: has it behaved fairly? To summarise, an initial bond and floating charge and personal guarantee for £30,000 will result in Mr. Masterton having to pay back a minimum of £150,000, and perhaps as much as £170,000. There are five years left to run on this debt. By the end of that period alone, Mr. Masterton will have paid off £37,000 more than the original debt.
In June, after Mr. and Mrs. Masterton visited me at my advice surgery, I wrote to James Crosby, chief executive of the Bank of Scotland, to ask him for his comments on the actions of the bank in this case, and specifically whether he felt that it is ethical to expect one's customers to have to pay back more than £150,000 on an original loan of £30,000. I shall read Mr. Crosby's letter of reply in full. He states:
"The issues raised by your constituent were the subject of a complaint first made by him to the Bank in July 2002. As we were unable to resolve matters to his satisfaction a final response was sent to he and his wife"
FOS issued an assessment on 29th March 2004 which did not uphold the complaint brought by Mr Masterton. He did not agree with the findings of their assessment and asked for a review of the complaint to be carried out by an Ombudsman. The final decision by the Ombudsman was issued on 1st September 2004 and again did not uphold his complaint. A copy of the assessment and final review is enclosed for your information.
Mr Crosby was careful and did not even attempt to answer my question about whether it is ethical for a customer to pay back at least £150,000 on an original loan of £30,000. No comment was made about the impact of the bank's actions on the lives of Mr. and Mrs. Masterton.
Such breathtaking arrogance by HBOS is truly discouraging, particularly from one of the UK's biggest companies. In an age of corporate social responsibility should we not expect more from companies such as HBOS? I fully acknowledge that their primary purpose is to make money and to keep their shareholders happy; however, they also have a responsibility to respect their customers and to treat them fairly.
Although we expect moneylenders to act responsibly and fairly, we have little ability legally to compel them to do so. That problem is caused not only by the rogue lenders we hear so much about, but, as Mr. and Mrs. Masterton's case highlights, by high street banks. Such behaviour might be expected of some of the more disreputable firms, but I was genuinely shocked to learn of HBOS's behaviour. The bank may wish to consider what sort of reputation it wants to nurture among the wider business community and the general public.
Such problems occur primarily because consumer credit law, which dates back to 1974, is outdated and unable effectively to protect consumers from unfair lending practices. It is important to note that Mr. and Mrs. Masterton are not alone. Last year, Citizen's Advice Scotland handled cases of debt totalling £130 million, and citizens advice bureaux in England and Wales handled more than 1.1 million debt cases. They have seen an increase of 74 per cent. in the number of consumer credit debt problems that they have dealt with in the past seven years.
Citizen's Advice highlights the case of a Warwickshire man who took out a £7,000 secured loan in 1990 to pay for a new kitchen at an interest rate of 33 per cent., which would take him 18 years to repay. Although he missed a few payments, he was able to catch up with them. When he contacted the loan company in September 2004 about re-mortgaging, he was astounded to learn that with four years left on the loan, the amount he owed was still £62,000. That was the first time he had been made aware of the default interest charges accruing on the loan as a result of the missed payments.
However, for the Mastertons and others in similar situations there is hope that things may soon radically improve. Following the publication of the Government's White Paper, "Fair, Clear and Competitive: The Consumer Credit Market in the 21st Century"a snappy titlethe Government introduced the Consumer Credit Bill in the last Parliament. Unfortunately, the Bill fell due to a lack of parliamentary time when the general election was called; however, it was re-introduced in this Parliament. It has progressed through the Commons and is awaiting Second Reading in the other place.
The Bill will reform the Consumer Credit Act 1974, and it will specifically enhance consumer rights and redress by replacing the extortionate credit test with a wider "unfair credit relationship" test. It will also introduce an alternative dispute resolution scheme,
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which will be run by the Financial Ombudsman Service. It aims to strengthen the credit licensing system and to equip the Office of Fair Trading with new powers to take action against rogue lenders. Finally, it will extend regulation to all consumer credit and hire transactions, with a few limited exceptions.
The changes are vital, and have been welcomed by a consortium of key charities and consumer groups, including the National Consumer Council, Which?, the Money Advice Association, and Centrepoint. In the context of Mr. and Mrs. Masterton's case, I particularly welcome the introduction of a new unfairness test, which will have a retrospective effect and will extend protection to all consumer credit by abolishing the financial limit that caps protection at loans of £25,000. These developments have the potential to affect Mr. and Mrs. Masterton's lives positively and to bring to a close a hugely stressful and costly affair. For that to happen, however, the Government need to ensure that the Bill is enacted and implemented as quickly as possible.
People have suffered enough. Any further delays to the implementation of the Bill will continue the unnecessary suffering of many honest and hard-working families. Consumer credit businesses, including HBOS, have had long enough to set their house in order. If they are not willing to operate fairly and responsibly, it is the duty of Government to force them to do so. I hope that HBOS will re-evaluate its treatment of Mr. and Mrs. Masterton.
Surely it is self-evident that banks have a moral duty to their customers as well as a financial obligation to their shareholders. It is simply not good enough for banks to seek to operate within the letter of the law when that law currently allows them to impose extortionate terms on their customers. They have had more than their pound of flesh from Robert and Irene Masterton. It is time to say that enough is enough.
The Financial Secretary to the Treasury (John Healey) : I congratulate my hon. Friend the Member for Glasgow, South (Mr. Harris) on securing the debate, and on a powerful and passionate, if understated, exposition of the experience of his constituents, Mr. and Mrs. Masterton. He rightly pulls no punches on their behalf.
All MPs deal with constituents' cases in which we share their sense of injustice and their frustration that the system has somehow failed them. We also have cases in which we share the sense that they do not want anyone else to go through the experience through which they have been. That was clear from the way in which my hon. Friend put his case this afternoon. Rather than simply highlighting what he believes to be flaws in the system, given the experience of Mr. and Mrs. Masterton, he also pointed out the further changes in consumer protection planned by the Government, especially in the Consumer Credit Bill. He knows the Bill well, because he was Parliamentary Private Secretary to the former Secretary of State responsible for that piece of legislation in the previous Parliament.
I should also add that I share my hon. Friend's sympathy for the financial and emotional pressures that the Masterton family have been under, particularly given the special circumstances that have added to their
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difficulties. I personally assure him that the official record of this debate will be brought to the attention of the HBOS chief executive, James Crosby. My hon. Friend the Economic Secretary to the Treasury is due to meet Mr. Crosby next month, and I shall also ensure that I speak to the Economic Secretary before that meeting.
I should point out to my hon. Friend the Member for Glasgow, South, however, that HBOS is regulated by the Financial Services Authority and subject to the banking code, and that it is not for the Financial Ombudsman Service to play the role of regulator. The service has been set up, as he would recognise, to do a rather different job. The Mastertons' complaint has been through the bank's internal procedures and has been considered by the adjudicator as part of the Financial Ombudsman Service process. It has also been considered by the ombudsman, and that happens in a relatively small number of cases; last year, the ombudsman took a look at about one in 14 of the 110,000 or so cases referred to the FOS. So the case has been thoroughly considered, but not, as my hon. Friend recognises, upheld.
My hon. Friend touched on our recent provisions and the more general question of the Government's approach to regulating financial services. That approach is premised principally on the conviction that consumers should be able to secure a fair deal. Since 1997, the Government have made reforms on that principle and the new provisions posed to Parliament through the Consumer Credit Bill are based on it. The setting up of the Financial Services Authority was an important stage in that process and in the creation of a single Financial Ombudsman Service and the compensation scheme. Those reformsradical in their nature and resisted by some at the timehave clarified the landscape for the consumer. They have certainly made it much easier for consumers to negotiate what can be complicated decisions about complex products, and consumers know that if something goes wrong, they have a right to seek to have the matter put right.
The Financial Ombudsman Service replaced eight separate schemes that previously covered financial services disputes. Those schemes differed in a number of substantive ways. Some were compulsory and set up under statute by the regulators and others were voluntary and set up by the industry. There were significant differences in the eligibility criteria, the limits on awards, the availability of compensation for distress and inconvenience, the time limits, the terms of reference, the basis for awards, the procedures, the funding and the governance arrangements. Some described that system as a patchwork quilt and argued that it was confusing for consumersthat was a huge understatement. The one-stop shop that the Financial Ombudsman Service now provides for consumers with disputes about financial services is independent and informal, and, as an alternative to the courts, it is a huge step forward.
In each case, the ombudsman considers what would be fair and reasonable by taking account of all the circumstances of a case. Just as an asymmetry of information between provider and consumer is the main rationale for regulation, an asymmetry of resources is a
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major reason for having an ombudsman and the Financial Ombudsman Service. First, the system is simpler for the consumer. Secondly, the banks and other financial institutions carry the costs of the cases and investigations. Thirdly, the procedure is binding on the banks but not the consumer. The consumer can, if they choose, take their case to the courts.
Having said that, I should stress something that my hon. Friend would recognise: the Financial Ombudsman Service is not a consumer champion. Its role is more that of an arbiter; its task is to find what is fair and reasonable and take into account any advice issued by the regulator and the likely decision a court would make. In some instancesmy hon. Friend might argue that the case of Mr. and Mrs. Masterton is onethe ombudsman might, by following the clear principles laid down by law, make decisions that some consumers and commentators feel from their perspective is neither fair nor reasonable. If consumers are dissatisfied with the process, they remain free to take their cases to the courts at any time.
The Financial Ombudsman Service plays a valuable role in providing consumers with a swift and effective means of resolving any disputes that they have with FSA-authorised persons and providers. The alternative of going through the courts is more complex, more costly and more drawn-out, to the extent that many consumers may be discouraged and not pursue the redress that should be their right.
At the start of the debate, my hon. Friend dwelt on the new Consumer Credit Bill. That extends the scope of the Financial Ombudsman Service and its alternative dispute resolution to consumer credit complaints that are not at present within the FOS's mandate. It also makes a number of other important changes. Before the general election, the Consumer Credit Bill had passed all its Commons stages and was awaiting the scrutiny of the House of Lords. That is where the new Bill is now, and I can confirm that it is due for its Second Reading in the House of Lords next week. We hope that it will complete all its stages by the spring, and that implementation will follow in consultation with the industry, principally through regulations. I hope, as do my colleagues in the Department of Trade and Industry, that that will happen without undue delay.
My hon. Friend rightly argues that changes arising from the Bill might in future help to deal with circumstances such as those that Mr. and Mrs. Masterton faced. The alternative dispute resolution procedure that the Bill extends will be wider in scope, but will remain free for consumers. All consumers will have access to redress, not just those who can afford to pay for it, and the system will be run, as at present, by the Financial Ombudsman Service.
The FOS provides the alternative dispute resolution service for financial services disputes and for some consumer credit disputes with consumer credit licensees. The Bill widens the FOS's mandate, so that over time all standard consumer credit licensees will be subject to alternative dispute resolution. All individual consumers will have access to consumer credit ADR. In addition, sole traders, partnerships of three or fewer partners and unincorporated associations will be eligible, but larger businesses and companies will not.
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My hon. Friend rightly said that the Consumer Credit Bill updates the Consumer Credit Act 1974, which is outdated and unable to protect consumers effectively. He was also right, given the experience of his constituents, to home in on the proposals and provisions for the unfair relationships test. That will replace an out-of-date and extortionate credit test. The old test set the bar of what is extortionate far too high to be of much use to consumersit was confined to the cost of credit, or the terms of the agreement at the time when it was made. As a consequence, examples of consumers successfully pursuing cases under the extortionate credit test are relatively rare. The new test will be based on the principle of unfairness. Consumers will be entitled to apply to court to challenge agreements where there is an unfair credit relationship. In future, therefore, courts will be able to consider all aspects of the transaction, including the lender's conduct before and after making the agreement, the administration of the loan and the overall terms and conditions of the agreement. The new unfair relationships test ensures that the courts will have wide discretion to assist those who face unfairness from lenders.
Importantly, the new unfair relationships provisions will apply to all consumer credit agreements, including those that are not otherwise regulated under the Act, except for exempt land mortgages, which are regulated by the FSA. The scope of the extortionate credit test is therefore retained. So, for example, the new test will apply to business lending, including that over £25,000, which would otherwise be exempt from regulation.
The rationale for that wide scope is that lenders should not enter into unfair credit relationships in any circumstances. That is precisely the principle that I mentioned earlier. My hon. Friend may want to ensure that Mr. and Mrs. Masterton are aware that it will be possible for the provisions to be used for lending agreements that are already in place when the Bill comes
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into force, although there will be a transitional period to allow businesses time to adjust. As long as the loan relationship has not been completed when the measure comes into force, the new provisions will cover lending of that kind.
Another important aspect of the Consumer Credit Bill, which my hon. Friend did not mention, but which I know he is aware of, is the principle of transparencythe principle that keeping consumers informed is an essential part of being a responsible lender. Secondary legislation has already required lenders clearly to provide at the outset key information on the product, and has made early-settlement charges fairer and more transparent to consumers. Building on that, the Consumer Credit Bill will ensure that lenders give consumers regular information about the state of their credit account, including whether they are in arrears, whether they have incurred default sums, and whether they are incurring interest on judgment debts.
I know that my hon. Friend, like me, would argue that protection for people who have disputes or complaints about their lenders has been significantly strengthened since the 1990s. He, like me, also believes that there is still more to do to ensure that consumers have rights of redress when credit providers' actions are not fair and reasonable. He has eloquently made that case today. He made a cogent case for ensuring that implementation of the relevant provisions of the Consumer Credit Bill is not subject to undue delay. Like me, and like our hon. Friend the Minister for Employment Relations, Consumers and Fair Markets, he will not want any delay in the implementation of the new protections. We do not want undue delay in establishing the final part of the consumer protection that is so important to people such as the constituents whose case my hon. Friend has raised so powerfully today.