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House of Commons
Session 2006 - 07
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European Standing Committee Debates

Consumer Credit

The Committee consisted of the following Members:

Chairman: Mr. Martyn Jones
Benyon, Mr. Richard (Newbury) (Con)
Burgon, Colin (Elmet) (Lab)
Burrowes, Mr. David (Enfield, Southgate) (Con)
Chapman, Ben (Wirral, South) (Lab)
Cunningham, Tony (Workington) (Lab)
Ellwood, Mr. Tobias (Bournemouth, East) (Con)
Howarth, David (Cambridge) (LD)
Kramer, Susan (Richmond Park) (LD)
McCartney, Mr. Ian (Minister for Trade)
Mackinlay, Andrew (Thurrock) (Lab)
Prisk, Mr. Mark (Hertford and Stortford) (Con)
Stringer, Graham (Manchester, Blackley) (Lab)
Turner, Mr. Neil (Wigan) (Lab)
James Davies, Glenn McKee, Committee Clerks
† attended the Committee

European Standing Committee

Tuesday 23 January 2007

[Mr. Martyn Jones in the Chair]

Consumer Credit

4.30 pm
The Minister for Trade (Mr. Ian McCartney): My portfolio has so far today meant speeches or briefings on the seal trade, city strategy, carbon emissions trading, northern Uganda and the great lakes and the cat and dog fur trade, and I now welcome a debate on the European draft directive on consumer credit. The subject is technical but, as hon. Members know, I tend to approach such Committees in a non-partisan way and try to engage and involve people who have an interest in the subject and accommodate the worries of those who oppose the motion, clarify matters for them or even suggest negotiating strategies. That works well because of our colleagues in the European Parliament with whom we work closely on a bipartisan-British basis on issues, particularly when we have reached a common agreement on the approach to be taken to the negotiations that must take place.
It will help the Committee if I describe the main objectives of the Commission’s proposal for a new consumer credit directive. They are to establish the conditions for a genuine internal market and to ensure a high level of consumer protection. The Government share those objectives, but our attitude to the proposal must depend on the extent to which we think that it will meet them.
As for whether the current proposal could establish the conditions for a genuine internal market in consumer credit, I must say that we have some doubts about the fundamental approach taken to overcoming barriers to trade. The differences between national consumer protection regimes are not necessarily the key barrier to cross-border trade. There are other barriers, including language, cultural differences, consumer preferences, local knowledge, and administrative and legal practice.
To establish the barriers to a single market, several key questions need to be answered and taken into account in discussions with the Parliament, the Commission and those who negotiate on behalf of countries. Are credit providers willing to lend cross-border? Are consumers willing to borrow cross-border? What types of credit are offered or used cross-border and which are of a domestic nature? What conditions are needed to encourage lenders to set up operations in other member states?
It is doubtful that lenders would be willing to run the risk of lending to consumers in other member states across borders. The industry itself, the British Banking Association, has said in consultations that a better approach might be to focus on how to encourage scale entry because, as I have already set out, it makes little difference to the consumer whether lenders supply their product credit cross-border or from within the state itself. Therefore, the lenders’ ability to establish themselves in different member states is also a key factor in opening up the market to greater competition and the directive should take account of that.
Although some harmonisation of consumer protection legislation might be helpful in a single market, that would not in itself create a single market by encouraging lenders to lend across borders. That is because a range of factors other than differences in consumer protection levels are far more significant in determining whether a lender enters another market. For example, the extent to which the lender could access relevant credit data about consumers that would enable him or her to take risk-based decisions is an issue that is not solved by the proposed directive. A better approach might therefore be to look at what the barriers to lenders establishing themselves in the member states really are.
The second objective of the proposed directive is to ensure a high level of consumer protection. Like most member states, we already have a high level of consumer protection and we do not believe that the directive would add significantly to it. For the United Kingdom, as for a number of other member states, the matter is more about ensuring that existing levels of protection are not reduced as a result of harmonisation rather than about improving the level of protection in the United Kingdom. In some respects, we are worried that the proposal might actually lower standards unless we can secure necessary improvements.
For example, we are still particularly worried about the provisions on advertising. We would no longer be able to require a typical APR for credit adverts making implied claims such as cheap loans available, without triggering the full information requirements under the directive that we believe could be disproportionate. The provisions on pre-contractual and contractual information would prevent the United Kingdom from maintaining certain existing consumer protection requirements while, at the same time, requiring additional information that would not be beneficial to consumers and might even lead to information overload, thus obscuring key facts, and could impose a disproportionate burden on lenders.
The requirement that tables setting out how the capital borrowed reduces during the life of a loan should be included for some agreements is excessive, as there is evidence that consumers do not find such tables particularly helpful. However, there is a doubt about the ability to require lenders to include wealth warnings as part of the information provided with a credit agreement. We believe that that is a useful consumer protection provision as it encourages consumers to think carefully before taking out credit. We in Britain are at the leading edge on wealth warnings and on the potential for increasing that type of information.
The provisions on early repayment would also cause difficulties because the current text would lead to a disproportionate charge for early repayment which would be unfair to consumers and beat the objective of seeking early repayment. However, it is important to look at the progress that we have made to date, which showsthe benefits to UK consumers of engaging in this issue. The current proposals are an improvement on the previous 2004 version because they would have a less disruptive effect on our domestic regime and would leave us more freedom to introduce or maintain provisions concerning those credit agreements that fall outside the directive's scope.
We achieved significant improvements to the text during negotiations conducted under the Finnish presidency, although I stress that the negotiations are not complete, and those changes have not yet been formally endorsed by the Council or the European Parliament, so colleagues’ comments on the matter are important.
A number of the improvements that we have provisionally secured are UK-specific, for example those on credit unions, Islamic home-purchase plans, overdrafts, the ordering and form of key consumer information, the right of withdrawal, and the definition of credit intermediaries. In the final event, the Finnish presidency did not seek political agreement at the December Competitiveness Council but the proposal is still very much alive and negotiations will continue under the German presidency.
Looking to the future, the role of the European Parliament will be very important. The Internal Market and Consumer Protection Committee of the European Parliament recently made it clear that it was not happy with the state of the proposal and the fact that it has not been subject to proper impact assessment, a point that the UK made a number of times during the discussion.
The Parliament has therefore commissioned its own study of the impact of the draft directive due in April 2007. I will inform Conservative and Liberal Democrat Front-Bench spokespersons and other interested colleagues about the outcome of that study. Nevertheless, at this stage there is a strong possibility that the proposal will be put for political agreement at the Council scheduled for 21 to 22 May. Should that be the case, we may find ourselves facing the same decision as the one that we faced recently in respect of our position on the proposal.
I said in my letter of 21 November to the Chairman of the European Scrutiny Committee, my hon. Friend the Member for Linlithgow and East Falkirk (Michael Connarty), that despite our concerns about the value of the directive, the proposal had improved and was moving in the right direction. I sought the Committee's agreement that the United Kingdom should be free to support the proposal at the Competitiveness Council if it took into account our key concerns. The Committee suggested that we come back to debate the issue, which we are doing today.
Of course, if and when the proposal is put for political agreement we would need to consider whether the final package was in our interests, but as we have made significant headway I remain of the view that we need to be prepared to agree to the final text as long as it takes into account our key concerns.
In the meantime, we are actively engaging with the presidency as the negotiations proceed in order to build on our success in improving the proposal to meet the needs of UK consumers and lenders, and I hope that today’s debate will inform that process.
If there are any technical questions that I cannot answer I will write to hon. Members and place a copy of the correspondence in the Library. In any event, I will write to hon. Members who take an interest in this matter to keep them abreast of events and discussions as I did in respect of other directives.
I gave a commitment to Members of the European Parliament who represent the political parties in the Room that I will also keep them abreast of the discussions and negotiations so that they can take account of the UK interest when the matter comes before the European Parliament.
The Chairman: We now have until half-past 5 for questions to the Minister. I ask hon. Members to be brief, and to ask one question at a time. I am sure that there will be plenty of time for all hon. Members who want to ask questions to do so.
Mr. Mark Prisk (Hertford and Stortford) (Con): Does the Minister believe that as they stand the Commission’s proposals for maximum harmonisation are achievable?
Mr. McCartney: As I said, with a caveat, other member states have the same concerns as we have. In view of the assessment being made by the European Parliament, some hard negotiations and discussions will take place in the next few days and weeks. One thing is certain: we will be doing a great deal to ensure that there are amendments to take account of our concerns.
I have already set out the difficult areas in which we have already made progress and I hope that we can make progress in other areas, but if that is not feasible we will of course transmit it to the elected Members of the European Parliament and to hon. Members of this House. I am happy to keep the hon. Gentleman informed about those discussions.
Colin Burgon (Elmet) (Lab): Obviously, my right hon. Friend the Minister is aware of the tremendous interest in and anguish over the Farepak issue. Will he expand on the Commission’s proposals? In what way would they or could they have affected the plight of those people who experienced that—how shall we say?—horrendous treatment at the hands of the naked forces of capitalism?
Mr. McCartney: Well, I do not know about naked.
Colin Burgon: Clothed.
Mr. McCartney: Pin-striped, maybe. [Laughter.] I can never lose it, can I?
As I have said on numerous occasions, I have kept the House and, personally, Opposition spokespeople abreast of events. We had a significant administrative statement from the creditors on Friday, which I placed in the Library with an accompanying short statement. The administrators in their interim statement say:
“Farepak did not adequately protect money from customers ... At the date of the administrators appointment, intercompany debtors totalled £37.05 million”.
They then set out who those debtors are.
The administrators also explain our work with them through the Farepak response fund, and that they themselves have spent £100,000 helping us set up and administer the fund. I welcome that. It was a tremendous gesture from the administrators, and they have written the money off.
The administrators set out our proposal for liquidator powers:
“A liquidator has wider powers of investigation than an administrator. In addition, a liquidator has wider powers than an administrator to take legal action against third parties where appropriate. Such legal action could lead to fuller funds being realised for the benefit of the creditors.
A liquidator can also investigate when Farepak should have ceased trading and take legal action for wrongful trading against any third party or individual where appropriate.
These are some of the reasons why the joint administrators would recommend that Farepak be placed in liquidation.”
I assume that the administrators will soon take the legal steps to make that happen. A creditors committee will also be set up, comprising customers, employees, trade suppliers and HM Revenue and Customs. The committee will advise on future action.
The engagement of those who have suffered most from the situation is a beguiling proposal. I cannot comment on anything other than that which is in the public domain, because we await the administrators’ report to the Department of Trade and Industry. In addition, we are putting alongside the administrator our investigations branch, which normally does not enter a situation until the administrators have reported.
We have just received a scoping paper from the regulators for our consideration, and when I have had further discussions, I shall make available as much information as possible to the Front-Bench spokesmen concerned and to the House. I hope that that helps my hon. Friend.
Mr. David Burrowes (Enfield, Southgate) (Con): Does the Minister share the Financial Services Consumer Panel’s view that exemptions in the directive for loans under €300 are unacceptable, particularly given their attraction to many of the most vulnerable people who seek to obtain such loans? Will he renegotiate that part of the directive and continue to call for a lower threshold in the interests of the most vulnerable?
Mr. McCartney: The hon. Gentleman makes a valid point. More than that, however, we must ensure that the proposal and the directive assess the vulnerable. That must fit in neatly with other proposals about advice services and assistance to vulnerable consumers. The hon. Gentleman’s point was well made, and it will form part of our discussions to try to improve the directive.
Susan Kramer (Richmond Park) (LD): May I pick up on a previous question? Which of the directive’s measures that dilute existing UK consumer protection would the Minister be prepared to accept? In that light, would the directive have had any impact one way or the other on the Farepak issue?
Mr. McCartney: I do not believe that the directive would have had any impact one way or the other. That is why I have asked the regulators to provide us with a scoping report, and why we must take into account the administrators’ eventual proposals and any proposals from the investigation by the investigations branch.
We also have the Pomeroy inquiry from the Treasury, which is to report before the Budget on financial exclusion and related matters. I suggest to the hon. Lady that Brian Pomeroy would welcome any contributions, suggestions and ideas to a bipartisan inquiry. At some point, the Government will have to come to the House with proposals. Both what is left of that particular aspect of the retail industry and the banks are very much interested in coming forward with workable proposals that protect both the legitimate rights of consumers and the legitimate companies that continue to operate in that marketplace.
Mr. Prisk: On that note, in the Minister’s opinion, what are the implications of the current text concerning credit unions? He has spoken about those particular organisations with good passion, which we very much support. What are the implications?
Mr. McCartney: We have seen improvements in this area of the text, which was terrifically important. There is now a common approach across the House that credit unions are an effective base for securing both savings and potentially low charges for people seeking loans. We have a multi-million pound development plan now operating for the extension of credit unions. I am hoping that in the development of social inclusion policy the interrelationship between credit unions and the wider banking system can be improved. Indeed, I had such discussions recently with the deputy chair of Barclays bank, because Barclays is one of those investing in the development of credit unions.
I went to see the then Commissioner about the original proposal—recently the Commissioner changed and I have not yet met the new one. I stressed improvements for credit unions, which we have agreed to do. I will write to my hon. Friend—if I can call him that—both about the proposal as it stands and, if helpful, about the relationship between that and general policies for promoting credit unions.
Mr. Burrowes: Given that the UK personal debt is escalating and exceeds £1.25 trillion, has the Minister had any discussions with his European counterparts about preventing lenders increasing overdraft and credit facilities without borrowers’ requests, which again affects the most vulnerable?
Mr. McCartney: Again, I have not personally been part of the negotiations, which have taken place at official level. When negotiations go to the Competitiveness Council, either the Secretary of State for Trade and Industry, my right hon. Friend the Member for Edinburgh, South-West (Mr. Darling), or I will participate. Rest assured, the general thrust of the hon. Gentleman’s question will be part of our discussions.
What is critically important is that, first, any proposal in the directive protects the vulnerable consumer. Secondly, in opening up the marketplace we must recognise that there are vulnerable consumers not only in the UK but across the market. Many of the nations that have come into the Community recently have potentially significant vulnerable consumers. We are not just negotiating on UK interests and vulnerable consumers. We must ensure that the directive can, on the one hand, give the capacity to extend the ability for appropriate credit across the Union in certain circumstances. However, at the same time, we must ensure that, first, there is no diminution of the current legislation—as I set out in my opening statement and which is critically important—and, secondly, alongside that, there are practical measures in each country to ensure that vulnerable consumers are not put at a disadvantage.
Mr. Richard Benyon (Newbury) (Con): I see that the directive includes an exemption for pawnbroking. Can the Minister explain the reason? Does he believe that we need EU-wide consumer protection in this area as well?
Mr. McCartney: I will write to the hon. Gentleman—I am not up on the issue of pawnbroking. I think that the last time I visited a pawnbroker’s was during the miners’ strike in 1972. In general terms, the directive attempts to ensure that wherever credit is made available there should be protection for those who seek it and legal certainty about the credit arrangement. Whether organisations are based in France or the UK, or whether they are cross-border organisations, the rules that regulate them should be broadly similar.
On promoting different forms of relationships, one of the reasons for doubts among the banking organisations is that they do not believe that the current proposals meet the needs of consumers in cross-border activity. That is another issue that we will discuss in trying to improve the proposal. However, I apologise to the hon. Gentleman, but I will have to write to him about his general point.
Mr. Prisk: Alongside pawnbroking, hire purchase has been excluded. Given that that is an important financial product and service in the UK—more so perhaps than in any other market—does the Minister recognise the imbalance that the exclusion would cause, and will he therefore negotiate against it?
Mr. McCartney: I must add one point to what I said to the hon. Member for Newbury. Whatever happens in pawnbroking, it will still be covered by the Consumer Credit Act 2006—so if he has something to flog, he will be okay.
Leaving aside our concern about whether the proposal will achieve what it sets out to achieve, the general view is that mainstream credit products should be covered. The uneven scope of the application of the directive is something that the industry has pointed to a number of times—I am assuming, given the question, that the industry has rightly briefed the hon. Member for Hertford and Stortford, in the same way that it has expressed its concerns to us. It is therefore important that credit products can compete on a non-discriminatory basis, in order to prevent the market from becoming distorted. An exemption from the directive’s requirements could include a degree of unfair discrimination.
Exemptions and special treatments can be justified in two sets of circumstances. The first is where the product is not subject to competition in the usual sense, such as with credit unions and student loans, because it is a niche product and serves a specialised segment of domestic consumers, in support of public policy objectives. The second is where the nature of the product is such that different rules are needed, as with overdrafts. We believe that the current text of the proposal excludes hire purchase-type agreements. Logically, that might be wrong, as they are legitimate products in the wider marketplace. The issue is therefore one of the areas in which discussions will continue. Again, I will keep the hon. Gentleman informed of progress on that.
Susan Kramer: The Minister has explained to us clearly that the directive is a consumer credit directive, but what consultation with consumers is he aware of in Europe? We have a sense that consumers have not been broadly asked about the issues, which has added to the difficulties in coming to a final conclusion.
Mr. McCartney: From our perspective, it is important that consumer organisations are engaged in consultation. Indeed, things sometimes go wider than that in the Department of Trade and Industry. We put in place proposals such that those groups can influence the outcome of any proposal, because they are the experts at the coal-face, as it were. There are European-based consumer organisations that have relationships with the European Commission, although I cannot comment on whether they have, appropriately or otherwise, been consulted. I would hope that they have been, because they should be. From our perspective, not only are we relaxed but, more than that, we are positive towards that.
With any changes that take place or any eventual agreement that is reached, it is also important that consumer bodies and elected Members are widely consulted about how any proposal is implemented. As important as any negotiation about a directive being agreed is the implementation strategy. Without a proper strategy, involving the industry and consumer groups, a good idea can go wrong in its implementation. I give the hon. Lady that assurance.
As for what has happened in Europe so far, if the hon. Lady is asking about the general nature of the directive, because that has been put to her by consumer bodies, I will check with the Commission exactly what we have been doing with regard to consultation and let her know.
Mr. Burrowes: Article 8 does not mention data sharing between organisations in member states. An important issue for UK consumer credit protection is allowing lenders access to student loan data. Do the Minister and the Government have plans to protect people from spiralling levels of debt and to allow UK lenders access to student loan databases?
Mr. McCartney: That question has been raised outside the context of the directive, although it is a reasonable question to ask.
Appropriate levels of data sharing was one of the issues raised in the discussions and consultations over the directive, and rightly so. It is critically important that someone based in the UK who wants to offer their services in another part of the European Union is able to make and appropriately utilise a risk assessment, as I said earlier. The hon. Gentleman’s question goes further than the directive, to an area of general public policy. There has been a significant debate with banking and other lending institutions about working with the Government to ensure better data sharing as a way of protecting not only the lender, but those who are getting into debt and are being offered easy lending proposals. If appropriate information was available, some of those arrangements would not be offered, given the subsequent problems that they cause. The issue is important in general, as well as specifically to the Committee. It is a subject that the BBA and others have flagged up.
On the data sharing consultation on student loans, the Department for Education and Skills is looking at the issue and hon. Members from across the House have raised it. In DTI questions or perhaps an Adjournment debate, I gave a commitment that we would move to try to ensure that the thrust of what the hon. Member for Enfield, Southgate said would become policy. I apologise if that is not the case. I do not wish to mislead people, but I believe that I gave a commitment on the issue in the House and my Department is consulting on making good on that commitment.
Mr. Prisk: The Minister rightly referred to the barriers to cross-border credit provisions. Of particular concern to the industry is the fact that many of the proposals being offered by the Commission are not practical. The industry view is that scale entry offers a useful alternative. What is the Minister’s opinion?
Mr. McCartney: I am a little worried about being so much in agreement with the hon. Gentleman. He is absolutely right and in my opening statement, I put great emphasis on the issue. Not only are the industry’s proposals legitimate, but they may well be the way to proceed to ensure that any directive that is approved is effective in opening the single market in the sector.
Susan Kramer: On a minor matter of clarification, is it fair to say that the present draft directive does not fully recognise the relative merits or otherwise of an effective APR measure? For example, applying an APR to an overdraft would give an extremely misleading indication of the cost and interest rates involved. Does the directive handle such a case at present?
Mr. McCartney: Again, that is a fair and legitimate point, and goes to the major issue of wealth warnings on APRs. The Competition Commission requires a specific warning for store cards with an APR of more than 25 per cent. The warning states:
“The rate of interest charged on your account may be higher than on other sources of credit available to you. It may be costly for you to leave balances owing on your account after the interest free period.”
We are expecting to put into force a new wealth warning through the Consumer Act 2006. It will state:
“If you make only a minimum payment each month, it will take you longer and cost you more to clear your balance”,
and will also warn of the dangers of missed payments.
We are concerned that the directive does not generally reach that threshold. It is one of those areas of consumer protection where we would like to expand the health warnings, not reduce them.
Mr. Prisk: The Minister referred in his opening remarks to the absence of a Commission-sponsored impact assessment. Given the importance of the industry in the United Kingdom, have the Government commissioned their own study of the impact in the UK? This is a significant part of UK industry and I would assume that the Government would not proceed with negotiations without firm evidence on which to base them.
Mr. McCartney: My understanding is that prior to my coming to this post there was a consultation, and I will ensure that the hon. Gentleman receives a copy of that. We will work closely with regard to the European Parliament’s proposal because, as I said in my opening statement, we agree entirely with what the European Parliament has said on the matter. We will work closely within that and will ensure that the UK interests and those who promote those interests can have an input into the assessment.
Susan Kramer: Again on a point of clarification, the directive has clearly changed significantly from the original draft and the Minister expects to see yet further changes before it is fit for signing. I am somewhat confused about the timing of the planned impact assessment or cost-benefit analysis that is to be carried out by the Commission and whether it will be widely available for people to see before the final decision has to be made or whether it will come afterwards as a sort of post-event analysis.
Mr. McCartney: Again, that is a fair point. Let us understand that there has been no formal European Union assessment, and that that has been a bone of contention between us and the European Commission, as it has been for a number of other organisations. Of course, as I said earlier, the European Parliament has not taken that into its own hands but has agreed to do an assessment.
On the subject of that impact assessment, a consultant has been appointed to carry the task forward and they are looking to have that assessment due in April 2007. We are working with UK stakeholders to engage with the consultant to help to ensure that the right conclusions are reached. We are working and ensuring that resources are available to ensure that we can influence that.
It is a pity that the European Commission has not carried out the assessment itself, although as I understand it when the original proposal was submitted to the Council in 2002 there was no requirement to carry out a technical assessment. The Commission has stuck rigidly by the decision since 2002, despite the changing nature of the proposals. I give an absolute assurance that the impact assessments that are now being carried out will go alongside the consultation that we carried out before I came to this post. Resources will be put in to try to influence the outcome of the assessment by the European Parliament.
Mr. Prisk: May I clarify the question? Although it is the primary responsibility of the Commission, the Council of Ministers has also had many opportunities under various presidencies to commission an impact assessment. Why, in the Minister’s opinion, have the presidencies of the Council of Ministers not done so?
Mr. McCartney: I have not a clue, to be honest. I was not around at the time. I am not opting out, but the truth is that whatever discussions took place the Commission was given carte blanche in 2002 and that did not include a requirement to conduct an assessment. Ever since then, as I have made clear, we have been attempting to get them to do an assessment. Now the other institution, the Parliament, has the capacity to do that and it will do that. It is engaged in that and we are using our resources to influence the outcome. I am sorry, but that is not a cop-out; it is a truthful statement. As to why it did not happen at various Council meetings, I do not have a clue. It has gone on since 2002, but now that we have the process of an assessment, we should use it to its fullest extent to influence the outcome of the review.
Mr. Prisk: I think that on 17 January the German presidency held the latest Council working group. Can the Minister tell the Committee what the outcome was of that meeting and what papers can we see that would enable us to debate the matter?
Mr. McCartney: I apologise, but I did not catch the question. Would the hon. Gentleman repeat it?
Mr. Prisk: On 17 January, the German presidency held what I understand was the latest Council working group. What was the outcome of that meeting, and what papers can we see?
Mr. McCartney: I have been told from the gods that there are no papers available, but in the interests of transparency I will get a note on what the discussions were. I am making a general assumption here and if I am wrong, I apologise in advance: the new presidency is having a range of those working meetings, and they are about all of the ongoing work from previous presidencies. They would be about working out the current position of negotiations with each country, the likelihood of agreement, what work needs to take place, what issues remain outstanding for each of the countries concerned and whether those are absolute red lines or are negotiable—are there any show-stoppers?
Out of that, I assume that the presidency will consider what it is going to do with the European Commission in relation to the impact assessment being carried out by the Parliament. I assume that discussions will take place in those areas and, as always, at an official level. There will be a series of meetings of that type across the new presidency, in which it takes the opportunity to become fully aware of how the ground lies in issues that might have to be resolved during the presidency. However, as I say, rather than just giving a guesstimate, I will give both the hon. Member for Richmond Park and the hon. Gentleman a note on that.
Mr. Prisk: Further to that, the question of added value is critical here. I understand that the German presidency has invited the Government to consider what added value could be achieved. That is about the potential for a radical reshaping. In the absence of papers from the meeting last week, is the Minister able to tell us his view on where the added value could be radically changed in order to deal with many of the issues raised earlier today?
Mr. McCartney: The areas of added value in my statement—which included credit unions and credit Islamic finance among other areas—were those thatwe consider incredibly important. Why? They are important because we have sophisticated consumer credit protection legislation and whatever happens in terms of a broad-based directive, it should not impinge on the standards of that legislation.
What are the barriers, perceived or otherwise, to getting a single market? Does the directive tackle those barriers sufficiently well? My answer to that was no and my statement set out reasons why—technical reasons that we need to work on. Even if we do work on those, get improvements in some of the areas that I referred to and ensure that there is no diminution of our capacity to operate effectively in our own marketplace in terms of consumer protection, at some point a proposal will be put to the Competitiveness Council which will hopefully be acceptable to us.
In terms of the industry itself, as I said in my opening statement to the British bankers—and I was asked a second question by the hon. Gentleman’s colleague and I confirm for him—these are areas in which there is a common interest and approach and we will try to implement them. However, let us remember that in doing that we will have to take a number of countries with us. Not all countries are on board for all the things that we want to do. For example, Islamic finance and mortgages is not an issue in all countries—it is for many of them, but not for all. Not all of them have the same issues around credit unions or consumer protection because they operate in different ways.
Therefore it is important that while negotiations are taking place, we maximise overall benefit for the UK and then make an assessment. That is why the discussions are to take place; and as I said to the hon. Gentleman and repeat now, I will relate any change in circumstances not only to hon. Members but to our European Members of Parliament on an all-party basis.
The discussions will need to proceed in the ways that I have set out and then hopefully we will get fuller amendments made. We need to be prepared for the matter to go to Council, but it may not because, for example, the impact assessment may be done by the European Parliament in a way that is helpful; or it may well be that further extended discussions need to take place. I cannot pre-judge that. All I can say to the hon. Gentleman is that I welcome the fact that the European Parliament has agreed to do this work. I had hoped that the Commission would do it; it has not. But that may affect whether it goes to the Council. I do not want to second-guess that and give the hon. Gentleman a clever-dick answer. I will come back to the hon. Member for Richmond Park and the hon. Gentleman with a report on the point reached in discussions.
Mr. Prisk: I understand what the Minister is saying.
Mr. McCartney: I am glad that you do. [Interruption.]
Mr. McCartney: As a health warning strategy, it is very important. All the protections that we put into the Consumer Credit Act 2006, to refurbish the previous Act, were inserted in general terms with all-party support, which is critical. We have done a lot of work to get the high-quality protections that we have in the general framework, and the intention in harmonising the proposals should be not to undermine any aspects of that. So it is critical that in our discussions we ensure that that does not happen. I set out our areas of concern in my opening statement. Hon. Members should rest assured that in our discussions and in the direction that we have taken so far, we have been successful in ensuring that the harmonisation proposal will not undermine our work, which would not be acceptable.
We are not isolated. Many of our colleagues in member states with a threshold of consumer protection that is just as high as ours are also concerned to ensure that that remains the case. We are not in the wilderness or shouting in the dark hoping that something will happen. We want to maintain the current level of protection, not to undermine existing or refurbished legislation or legislation that we have still to enact by regulation, which will increase, not reduce, health warnings.
The Chairman: It seems that no more hon. Members want to ask questions, so we move to the subject of the debate.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 13193/05, modified draft Directive on credit agreements for consumers amending Council Directive 93/13/EC; further notes the Government’s current negotiating line; and supports the Government’s actions in this area.—[Mr. McCartney.]
5.12 pm
Mr. Prisk: The Conservatives welcome the opportunity to discuss the vital issue of consumer credit and, obviously, the proposed directive. In doing so, it is important to remember that the UK consumer credit market is by far the largest single national market within the European Union, equating to 30 per cent. of the entire market. Any regulatory changes will not only be of concern to consumers, but matter to a significant number of financial and retail businesses that are important employers.
The directive, which dates back to 1987, deliberately tried to set out minimum standards for consumer protection. It also helped various Governments of both political persuasions to make changes and improvements to consumer law in subsequent years. It is fair to say, however, that the market has changed considerably in the interim. After consultations in June 2001, the Commission set out several key aims, of which the Minister mentioned two. Perhaps I should set out what I understand the three aims to be. The first is, as he said, to create a genuine internal market. The second is to ensure a high level of consumer protection across that market. The last is to clarify EU-wide legislation on consumer credit.
At the heart of the Commission’s approach is the concept of maximum harmonisation, in sharp contrast to the current law, but that concept is undesirable in principle and, I suspect, completely infeasible. It will damage the diverse and fast-changing consumer credit markets, because it will not allow them to change and adapt to different circumstances. A one-size-fits-all approach will reduce the industry’s ability to respond and will not reflect the sharply different national market conditions, so maximising harmonisation will be bad for the consumer.
Ironically, the idea of maximising harmonisation contradicts the EU’s principles of subsidiarity. In being unduly bureaucratic, it will also run counter to the Commission’s agenda of better regulation. On a practical note, the Commission’s approach to maximising harmonisation fails to realise that cross-border lending will not proceed unless lenders can assess the risks on the borrower and be sure that they can collect the debt. The latter problem is particularly complex. How do court recoveries work in different countries? What do they cost, how do they operate and how are they enforced?
On all those issues the directive is silent. In the absence of proposals to tackle different debt collection rules and practices, cross-border lending will therefore not increase. Having listened to the industry’s view, it is clear to me that the majority view among those active in the marketplace is that the directive as it stands will lead to lower credit volumes, not higher, less cross-border credit and weaker consumer protection, particularly in countries such as the UK, where we already have a reasonably sophisticated and developed set of credit regulations.
Consumer protection is of special importance. The Consumer Credit Act 2006, the most recent such Act, was considered on a cross-party basis; as the Minister knows well, I am keen to see us work together to encourage the best standards in the industry. The danger is, however, that in that quest for the same rules across the European Union, the Commission will—I am using the Government’s own words—“significantly dilute” consumer protection. That cannot be in anyone’s interests. When the Minister replies to the debate, perhaps he will tell us how he intends to keep our standards and what reassurances can he give, beyond those that he gave us in respect of earlier questions, about the position of the UK in future negotiations? In short, will he guarantee to us that any agreement reached in May will not substantially reduce the protection of British consumers?
As to the legislative process, the Council of Ministers must share with the Commission the fact that it has not taken any action, as we have heard in the question session, in preparing a proper impact assessment. In other words, it promoted a measure without having any verifiable evidence on which to do so. The process has gone forward without that evidence over several years and many presidencies of the Council. I suspect that many of our constituents would find it extraordinary that a measure of such significance could be discussed, deliberated, adjusted and proceeded with, without being based on any verifiable and independent information.
Given the potential impact on businesses and consumers, that is a matter of the gravest concern. My Conservative colleagues in the European Parliament have consistently led the way in calling for an assessment. They have rightly asserted that under the inter-institutional agreement on better lawmaking,the council has a legal obligation. However, neither the Commission nor the Council have responded. As we heard in the question session, the Parliament itself commissioned a German firm to undertake the study. Parliamentarians in Europe were right to challenge the Commission, and even though it is fair to say that, as I understood from the Minister’s remarks, the text may have changed since the study was commissioned, I would still commend the work not only of my own colleagues, but of other Members of the European Parliament, to insist that such a study be undertaken.
It would be unfair to suggest that no useful progress had been made. The removal of mortgages, surety and guarantor agreements from the scope of the directive is welcome. I know from talking to people involved in the industry that the British Bankers Association, the Finance and Leasing Association and other industry leaders have all worked hard to secure that. However, as the House of Lords recently heard in evidence, there remain unclear legal definitions and needless demands for information that could prove damaging to many of the UK leaders in the sector.
I am therefore still concerned about the current Government’s stance. When first consulting on the directives, the Department of Trade and Industry referred to the proposals, stating that they
“place unnecessary burdens on business, reduce consumer protection and do little to create a competitive single market in consumer credit”.
From the Minister’s responses, it would seem that that may still be the Government’s view on the substance of the text before us today, but his message on the tactics, especially as set out in his letter of 9 January, seems mixed. On the one hand we are told that it is implied that the German presidency wants to progress matters, but not necessarily to reach a conclusion. On the other hand, we are told that there is a strong likelihood—the Minister said a strong possibility—that an agreement will be sought in May and that we therefore need to press on.
Will the Minister explain the basis for the expectation that such an agreement will be made in May? Most importantly, does he agree that the discussions should now focus on the added value of the directive, discussed a moment ago, rather than trying to tinker with the existing text?
There is much to be concerned about in the proposals; maximum harmonisation is undesirable in principle and will almost certainly prove unworkable in practice. The dismal failure of the Commission and the Council of Ministers to conduct a full impact assessment has left the proposals without any base of evidence. It seems increasingly likely not only that the directive will fail to fulfil the Commission’s original aims, but more importantly, that consumers here in the UK could lose out as a result of the proposals.
The preparatory papers for the Committee make it clear that one of the ongoing concerns has been the lack of up-to-date and accurate information for us to consider. For example, how do we really know that the text before us will be the same as the one that will emerge in March? In the absence of the impact assessment, due only in April, how can we ensure that the Government will not find themselves undermining British businesses, given that they do not know the outcome of the assessment now? Without clear commitments from the Minister about what he is not prepared to negotiate away, how can we approve the Government’s actions?
I shall set out our view. If the Government intend to accept maximum harmonisation, needless and damaging red tape or a significant reduction in consumer protection, we cannot and would not wish to approve that. However, if the Government intend to press vigorously for minimum harmonisation, the Minister tells us that he intends to demand a full impact assessment on the new text and the Government’s clear intention is not to commit us in the House to legislate without a full further debate, we can approve of the Government’s proceeding. I shall listen carefully to the Minister. I hope and trust that he will respond positively to our concerns.
5.27 pm
Susan Kramer: I appreciate the spirit in which the Minister has come to the debate. He has spoken in a bipartisan way and reinforced the sense of co-operation between Members of the European Parliament across the parties in coping with, responding to and improving this draft directive. I hope that this will be the final draft.
My party very much supports the single market of the European Union, which has been good for consumers and business. However, we have been wary of the directive from the beginning. We support the idea that credit should be simplified for consumers across the European Union, that competition should be stimulated, that the price of credit be reduced and that wider choices should be on offer—all the goals inherent in the notion of a single market. However, we see the removal of barriers to mergers and acquisitions as the most important instrument of achieving that in the consumer credit arena, so that banks and insurance companies are genuinely able to buy each other across boundaries and expand their businesses through such mechanisms. Barriers to the entry of the various different national banks, insurance companies and financial services institutions should be eliminated. We see that as the best way to ensure that the widest opportunities are available in the consumer credit industry.
As others have said—I shall not repeat this at length—the consumer credit market is dictated by custom and local law. There are issues of debt collection. To us it appears that subsidiarity should tend to reign, rather than a universal approach. Like our colleagues in the European Parliament, we supported the minimum harmonisation approach; we are wary of the approach of maximum harmonisation. However, in this text, the Government have achieved significant improvements; it now looks more like “minimum-plus” than maximum harmonisation. To the extent that we can manage that plus number so that it is not to the disadvantage of the British consumer, we would be supportive of that strategy.
I want to stress the importance to us of the impact study or cost-benefit analysis, as it might more usually be called, in understanding the implications of the directive, particularly since the text has been a moving feast. That constant change has been good news, because the change has seemed to us to be in the right direction. We want to see the cost-benefit analysis so that we can understand the impact both on the consumer and on British business. I look forward in hope to the Minister’s assurances that that will be available before the final steps to a decision are made. We will want to look at that analysis before making any final commitment.
Given the reassurances that the Government have given us today, and which I expect the Minister will repeat, we are supportive of the idea that the process should be allowed to move forward. Consumer protection remains of the highest importance, as does new opportunity for our consumers. We look forward to the Government carrying that mandate forward and reassuring us that they are doing so in a demonstrable and clear way.
5.28 pm
Mr. McCartney: I thank the hon. Members for Hertford and Stortford and for Richmond Park for the spirit in which today’s debate has been conducted. I have made a number of commitments across the piece on a range of issues, and I am sure that when we consult Hansard tomorrow, we will see that that has been done in a comprehensive way. I will send a note to hon. Members and put it in the Library, so that all the commitments are given in one place, either on additional information, consultation where appropriate or keeping in touch with all the stakeholders, including elected Members of the European Parliament. Hon. Members will be able to go back to their respective stakeholders and others, and tell them exactly what came out of the debate and how the Minister is proposing to take matters forward.
All of us want to try to ensure that discussion and debate will take place, and that a conclusion is reached, whether it is at the Council, as suggested, or later, depending on circumstances, any outcome of the European Parliament’s discussion and other matters that are outside of my control. Nevertheless, it is right to indicate to Committees of the House and to political parties that an agreement could be reached. People would be extremely uptight—at me in particular, and quite rightly so, with the hands-on relationship I have to have with this legislation—if I said, “I did not really understand; there may well have been a debate and a vote, but I am sorry, I have had to do what I have had to do.”
I want to try to maximise the opportunity, even allowing for leftfield proposals and for other circumstances, to keep abreast of events. We managed to do that in the service directive. I know that that is more complex and that there is potentially less agreement, although not among ourselves, but with some of our European colleagues. I want to reassure hon. Members that whatever I need to do to ensure that they get maximum knowledge of what is going on will be done. I do not yet know whether there will be a final outcome at the Competitiveness Council, but as soon as I am certain about the processes, I will try to ensure within that certainty to maximise the opportunities for Members—including those from Opposition parties—to have an input in discussions with me.
Mr. Prisk: I am grateful to the Minister for those indications of wanting to ensure that Members across the House can follow the discussions. May I take it from those remarks that it would be his preference for the conclusion not to be reached in May?
Mr. McCartney: As someone who has spent his lifetime as a negotiator in various fields, I know that negotiators always feel that they want to come to an agreement where there is maximum agreement with their position. If such agreement is not on the side of the negotiator, there is a capacity to delay decisions, and they will try to find an alternative way forward. However, this is an issue on which there is a qualified majority voting, so such a process may not available to negotiators, good as they are. Indeed, in these areas we get negotiators with whom I am glad that I did not have to negotiate in a previous life. They are very skilled and experienced, so they will maximise the opportunity to negotiate.
There will come a point where we will need to have strategies. That is what the hon. Member for Richmond Park and other hon. Members have mentioned. They are right. As I said in my opening remarks and in my answers to questions, we are opposed to the maximum harmonisation and do not regard it as a way forward to get the benefits of a single market, which is what we want. In fact, the British Bankers Association and others, and the Government, are in the same place.
Part of the process has been to try to negotiate a position to maximise the potential of the directive and to be in the place that we want to be in. All of us involved in this discussion are in the same place. The issue is whether we can negotiate the maximum potential for that position. That is what we are trying to do in terms of the basis on which we have gained support.
So far, the negotiating strategy has given us major changes on Islamic home purchase plans, credit unions, overdrafts, the right of withdrawal, information requirements and the definition of credit intermediaries, which is important. It is also important to understand that, in engaging with this matter actively, we are engaging with our European colleagues who are of a similar mind to maximise support from them in respect of the discussions and negotiations that take place. It is therefore important that, as I said, we ensure that we do not have harmonisation that undermines all the hard work that has been put in over a long period to promote and enhance consumer rights.
We have already had this discussion and I do not want to repeat it. However, just to give hon. Members a commitment, that is precisely one of the areas in which it is critical that we get an outcome—despite the fact that we are having to deal with qualified majority voting—that maximises the potential for maintaining our rigorous approach to this matter. Indeed, I should like to harmonise across Europe so that people get the same rights that we have, particularly on the warnings. We are a leader in this area and it is important that we retain that lead. I give an assurance to Committee members that I will try my best to ensure that they feel that they are involved in the process.
Will there be added value? I am not convinced that the directive gives us added value, even if we get further improvements. As I said, the hon. Member for Hertford and Stortford and his colleagues, the hon. Member for Richmond Park and myself, in various guises during this debate, have considered ways of reducing other barriers to improve access to a single market in this regard. We must continue with that discussion and debate, not just in relation to the directive, but to ensure that the stakeholders in the industry in the UK have certainty and feel that we are on their side in respect of their gaining access to the wider market. I give the hon. Gentleman that assurance.
Discussing the impact assessment is like crying over spilled milk. What happened from 2002 has gone. What is important now is that we utilise our resources to try to ensure that the impact assessment carried out by the European Parliament is an effective tool, and not just in negotiating. An assessment that is required to ensure that any directive signed up to in a political council is transparent and should lead to understanding and a realisation about what the impact will be—not just for consumers, but in terms of the wider assessment of what the directive is attempting to do. The impact assessment is important. I think that I gave a commitment, which I repeat, that I am happy to share with colleagues the work that we have done on this matter and the responses that we have received. I hope that, when I return to the office, I will not get a kick in the shins for making that offer, because it seems reasonable in the circumstances.
I know that that stops short of an assurance on a debate or discussion, but I cannot give such an assurance because some of the timetabling, and the time scale, is outside my control. However, as soon as I have a sense of what that is I will come back to hon. Members, reassure them and maximise the time that I can provide for them to have some influence on the outcome of the proposals.
I hope that I have helped Committee members in this rather technical discussion and debate. I think that I now know more about the subject than when I started, which, as a negotiator, is quite useful. I thank Committee members for their involvement.
Question put and agreed to.
That the Committee takes note of European Union Document No. 13193/05, modified draft Directive on credit agreements for consumers amending Council Directive 93/13/EC; further notes the Government’s current negotiating line; and supports the Government’s actions in this area.
Committee rose at twenty-four minutes to Six o’clock.

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