Mr.
Hoban: As my hon. Friend says, the cheques came just in
time for Christmas—clearly a time to encourage my wife to spend
money. It was right to shred the cheques and to keep a firm grip on
domestic finances. There are limits to my powers, however. That
demonstrates just how wedded the credit card industry is to the idea;
it knows that credit card cheques are about to be banned, but it still
continues to use
them. There
were expectations outside the House that the Government would go
further than they have done in the Bill when it comes to credit card
cheques. My hon. Friend the Member for Tatton (Mr. Osborne)
said on Second Reading that he agreed with Which?, which has
said: “we
are disappointed that the Government has not taken further measures
against irresponsible lending in the Bill. There is a clear need to
avoid a return to the pre-credit crunch days and the wide-ranging
consultation recently published identifies important
issues.” Such
details were highlighted in the consultation published by BIS on
consumer credit. Which? stated further
that “The
delay in publication has resulted in a missed opportunity and we are
concerned, given the stage in the Parliamentary cycle, that the chance
to act will be
missed.” The
Prime Minister is aware of the issue of consumer credit; he
said:
“we are
determined to do our bit...when we see hard-working, hard-pressed
people being buffeted about by a storm not of their
making”. We
were under the impression, as I think Citizens Advice and Which? were,
that the Government and the Prime Minister had pledged, at a meeting on
the culture of credit earlier in the summer, to take the earliest
opportunity to ban unsolicited credit card limit increases. There is
some surprise that that is not covered in the Bill, and that all we see
is a minimum payment, as it were, towards redeeming that
pledge.
Other issues
to do with tackling the growth of credit include points relating to
minimum payments, unsolicited credit increases, the re-pricing of
existing debts and the
order of payment. Unfortunately, the consultation that the Department
for Business, Innovation and Skills has proposed will close on 19
January, the week after we finish our work in Committee. If only the
usual channels had been more generous, in terms of the amount of time
allowed for scrutiny, we in this place would have had some time to
scrutinise the outcome of the consultation, and the Government would
have been able to table additional amendments to reflect the outcome of
the consultation. Will the Minister clarify the Government’s
intention on redeeming their pledge to legislate against unsolicited
credit limit increases, and on the other areas subject to consultation
in the BIS White
Paper? Ian
Pearson: The hon. Gentleman is probably right that there
are a number of individuals who have been sent unsolicited credit card
cheques in the post and do not recognise what they are. They are, in
effect, the same as current account cheques, but with some important
differences. There is a danger that people do not take them seriously
enough to ensure that they dispose of them in a safe and effective way.
There is certainly some anecdotal evidence that unsolicited credit card
cheques have been used by individuals who obtained them
fraudulently. Credit
card cheques are provided by many credit card issuers. They have a
similar appearance to ordinary bank account cheques, and once used,
they appear on a credit card statement in the same way that an item
purchased with the card, or a cash withdrawal made using the card,
does. However, they attract a higher rate of interest than card
purchases, do not have an interest-free period, tend to attract a
handling fee—usually at 2.5 or 3 per cent. of the amount of the
cheque—and do not offer protection under section 75 of the
Consumer Credit Act 1974, whereas a purchase made with a card does.
Under that section, as hon. Members will know, the creditor is jointly
liable with the supplier in the event of a problem with the goods and
services.
Every year,
huge numbers of credit card cheques are sent to customers. Some 292
million credit card cheques were distributed in 2008, of which around
95 per cent. were unsolicited. Less than 1 per cent. of the cheques
sent out were used, but there are signs that they are being used by
customers in financial distress. Survey evidence from uSwitch in
November 2008 suggests that 23 per cent. of the people who use credit
card cheques use them to transfer cash into their current accounts; 16
per cent. paid utility bills with them and 7 per cent. used them to
consolidate debts. One credit card issuer actually suggests in the
information that accompanies its cheques that consumers can use them to
pay utility bills.
There is a
risk and, as I said, some evidence that vulnerable consumers are using
the unsolicited cheques to get themselves into higher debt. The high
costs often associated with such cheques, and the fact that those costs
may not be fully appreciated by many customers, can make the situation
worse. uSwitch found that 86 per cent. of consumers surveyed could not
identify the correct fee charged by their provider, and even the most
informed and sensible consumer can find it hard to master the complex
terms and conditions attached to credit card cheques. The purpose of
the clause is to ban a practice that can tempt consumers to increase
their borrowing when they may already be in financial distress. We are
not proposing to ban credit card cheques entirely.
Used wisely, they can provide useful flexibility for the consumer, but
we want to put consumers in the driving seat, which is what clause 27
does. 4.45
pm
Rob
Marris: I appreciate that proposed new section
51A, as inserted by clause 27, would impose pretty severe restrictions
on credit card cheques for consumers, but why does proposed new section
51B provide a total exemption for businesses? Businesses, particularly
small businesses, could also get into the very difficulties to which
the Minister referred with regard to consumers. In a sense, they could
be running on a credit card, which is not a great way to run a
business.
Ian
Pearson: Although unsolicited credit card cheques have
been identified as a problem for consumers, we do not believe that
there is a similar consumer protection justification for restricting
their use by businesses. That is why proposed new section 51B exempts
credit card cheques for business use from the prohibition. If my hon.
Friend has evidence that there is detriment to businesses as a result
of the practice, obviously the Government would want to consider it at
a future
date. I
do not propose to go through all the details of the different
subsections of the clauses. The general principle of restricting the
use of credit card cheques is welcomed in all parts of the House, and
that is
important. On
the points made about unsolicited credit limit increases, we are
looking at the issue as part of the review of the regulation of credit
and store cards. We are considering a number of options, including a
ban on the practice, or requiring customers to opt into credit limit
increases. The review is still out to consultation—until 19
January 2010—and final recommendations will be published in
spring
2010.
Mr.
Walker: Does the Minister share my view that it is rather
depressing that so many financial institutions are so opposed to the
concept of responsible lending and to providing a sensible level of
service to their customers? I am deeply concerned that we are having to
bring forward such legislation. It seems to me that many of the banks
might have picked up the messages, coming out of Government and the
Opposition parties over the past couple of years, that such practices
are unacceptable. The banks should not need to have to comply with
legislation to do away with
them.
Ian
Pearson: I have some sympathy with what the hon. Gentleman
says. The situation is patchy. Some lenders take a more enlightened
approach to their activities than others when it comes to this area. We
always need to make sure that we have effective regulation and that
throughout primary legislation we take powers, when we believe them
necessary, to ensure that the consumer is properly protected. That is
why we are taking action on credit card cheques in the
Bill. As
I indicated, we are consulting on unsolicited credit limit increases
and on minimum payments. In many ways, we would have hoped that action
in such areas was not necessary, but there has been significant
evidence that consumers are getting themselves into difficulty as a
result of some of the enticing offers that seem to be there from those
that want to lend them money. We need to make a judgment as to whether
we need to act in the future to prevent some of the
practices.
Mr.
Andrew Love (Edmonton) (Lab/Co-op): All the written and
spoken evidence that we received from consumer organisations was that
while credit card cheques affect a small number of incredibly
vulnerable consumers, unsolicited credit increases affect a much wider
range of consumers. According to the evidence put before us, such
increases have been important in the explosion of credit in recent
years, which we are now trying to deal with.
I take the
Minister’s point about the survey currently being carried out,
but will he give the Committee an assurance that if the evidence that
comes into BIS suggests that something should be done in any of those
areas, he will, at an appropriate time—the timing will be
critical—bring forward amendments at a later stage of the Bill
to incorporate such measures into the legislation?
Ian
Pearson: I have always believed in evidence-based policy,
with one or two caveats. It is important that we recognise that the
evidence needs to be
there.
Mr.
Hoban: Will the Minister give
way?
Ian
Pearson: In a moment. My hon. Friend the Member for
Edmonton is right to point out that there has been a tendency for many
people who have had their credit limit increased to spend up to that
limit. Many people now want to reassess their financial circumstances
and perhaps take different actions. In the past, the practice enticed
them to get into higher levels of debt than they now feel comfortable
with. That needs to be
addressed. To
explain my caveat, I should say that sometimes in Government we have to
act immediately, on a limited or non-existent evidence base. There are
some situations when the evidence is there and we are too late. The
danger is that we are always running to catch up. As a real aside, on
the basis of the strict evidence the Government would not have
introduced the car scrappage scheme; indeed, Treasury officials advised
us not to. Our decision to do so was based on our belief that it would
have a galvanising effect on confidence in the market. That has proved
to be the case. In terms of the evidence of past schemes, it would not
be something that we would do.
I had better
not dilate any further on those points, Mr. Gale, other than
to say that there is cross-party support for what we doing in the
clause. We are looking at going further in other areas of consumer
protection. As hon. Members will be aware, there are other consumer
measures as part of the Bill and we will discuss them in the new
year.
Question
put and agreed
to. Clause
27 ordered to stand part of the
Bill.
Clause
28Contribution
to costs of special resolution
regime
Mr.
Hoban: I beg to move amendment 9, in clause 28, page 37,
line 14, at end
insert— ‘(5A) The scheme
manager may request the Treasury to appoint an auditor in accordance
with the regulations set out in 214D(6) to confirm that the expenses
have been incurred as a consequence of the exercise of a stabilisation
power.’.
I am pleased
that the Minister gave an example of a policy he supported without any
evidence to back it up. That was going to be my intervention, but we
have one on the record now. Veterans of the Banking Act 2009, such as
the hon. Member for South Derbyshire, the Minister and the hon. Member
for South-East Cornwall will remember the details of the financial
services compensation scheme, but I should like to put my amendment in
context for those who missed out on the great opportunity to serve on
that Committee.
Professor
Buiter, who gave evidence for the Treasury Select Committee’s
report on Northern Rock and who did not get round to teaching me when I
was at the LSE, argued that the financial services compensation scheme
had nothing to do with financial stability and was purely
“social policy”. As we know from the 2009 Act, the FSCS
has become a fundamental part of the special resolution regime and it
serves as a way to maintain financial stability when a bank or a
building society is put into the special resolution regime. It has been
used quite often now, with Bradford & Bingley and the Dunfermline
building society, and it is an established part of that architecture.
The 2009 Act put in place the legislative framework for the FSCS to act
in this role.
We have
today, a mere number of months since the Banking Act 2009 received
Royal Assent, an opportunity to rewrite part of that Act as it applies
to the FSCS and to introduce new section 214B into FSMA as well as some
further safeguards. Proposed new section 214B confers a power on the
Treasury to require the FSCS to contribute to the costs incurred in
applying the stabilisation regime. The amount is limited to that which
would have been payable in the counterfactual scenario—that is,
if the bank in question had become insolvent and an independent valuer
was appointed to calculate the likely amount of recovery.
Proposed new
sections 214B and 214D bring some corrections and clarifications to the
2000 Act. Most significantly, in subsection 2 of the clause we have
amended the provision so that it applies from 19 November 2009, which
allows interest to be taken into account in calculating the FSCS
contributions from that day onwards, when a special resolution regime
power is used. The Bill gives the FSCS the ability to charge interest
on the Dunfermline loan, a provision that was omitted from the previous
Bill. When we passed the 2009 Act, the expectation was that the FSCS
would bear the full cost, but because of the costs that the FSCS is
likely to bear the Government decided to charge the interest rather
than the resolution costs to the
FSCS. I
will turn to my amendment in a moment, but I wish to ask the Minister a
question about an issue that we touched on during the passage of the
2009 Act. I had hoped that the Minister would use this Bill to fill in
a gap, and give the FSCS and all the levy payers a greater insight into
what happens in the wind-up of the affairs of banks that are being
bailed out. At the moment, the FSCS does not have a formal role in
looking at the activities of institutions that are being wound up, and
it does not know whether those activities will be wound up in a way
that will minimise the costs to itself. It is difficult for it to
understand just what the likelihood of recovery is, and the problem
arises, therefore, of how much levy payers are likely to have to pay in
the future. Greater transparency in that process would help, as would
improving the governance arrangements. I wonder
whether since our debate on the 2009 Act the Minister has given any
further thought to the improvement of governance
arrangements. My
amendment inserts a new subsection (5A) into proposed new subsection
214B, under which the scheme
manager—FSCS—may “request
the Treasury to appoint an auditor in accordance with the regulations
set out in section 214D(6) to confirm that the expenses have been
incurred as a consequence of the exercise of a stabilisation
power.” A
question might be, “Why do we need that, given that section
214D(6) provides for the independent verification of expenses incurred?
This must be for the verification of other matters, and the regulations
will be introduced about the appointment and payment of an
auditor”. The hon. Member for Wolverhampton, South-West will
probably suggest that I should have tabled a further amendment to take
out the powers under section 214D(6), but the point of my amendment is
to focus more precisely on ensuring that the costs that the
FSCS—ultimately its levy payers—will incur are strictly
related to the exercise of stabilisation powers. The levy payers can
therefore take some comfort in the fact that the costs being incurred
are the right costs and they are not picking up a bill for anything
else, and they can know that they are getting value for money for what
they are paying out. The wording in my amendment makes the provision
slightly tighter, and ensures that the levy payers get comfort in the
absence of any other improved governance arrangements. That acts as a
safeguard for those who ultimately have to pick up the
bill. 5
pm Mr.
Colin Breed (South-East Cornwall) (LD): I support the
amendment and the hon. Member for Fareham has said all the right things
as to why it should be accepted. I want to add that, while the costs of
the special resolution fall on the levy payers, it is actually members
of the public who will ultimately have to pay for it. The costs will go
back to the building societies, and you and I, Mr. Gale, and
other members of the public, will be forced to pay the levies in one
way or another. It is therefore important that the costs are contained
and looked at. We also need to ensure that they are reasonable and that
the reasons for them are
addressed. It
was mentioned during today’s Treasury questions that the
Dunfermline building society has lost £26 million in
costs, auditors’ fees, consultants and so on. That seems an
extremely large sum of money for a medium-sized building society;
£26 million is a lot of money. If that is to be covered by the
levy payers, they will have to recoup the money—they will do
that in various ways—but it is ultimately the taxpayer, the
depositor, the borrower and the customers of all those involved in the
levy who will one day have to pay it. The issue is of genuine public
interest. John
Howell (Henley) (Con): When I first read the clause, I was
reminded of the words of Andrew Whittaker of the FSA during the
evidence sitting. He warned us that costs will be sensitive and that at
this stage we need to provide as much evidence as possible to ensure
that we are reactive to that sensitivity. I am struck by how little
there is in the clause about the auditor’s role compared with
that of the valuer.
The two
activities are actually quite similar, which raises an ancillary
question. The cap on the limited expenses is set against a hypothetical
scenario of insolvency. I have never been an insolvency practitioner,
but I have worked alongside them and my impression is that, whatever
the ground rules, what makes one practitioner better than another in
what they can get out of an insolvency is their skill, their context
and the way they use those
principles. The
clause, however, offers a hypothetical scenario that is supposed
somehow to set an average. It would be useful to know what
principles—which, it is alluded, will be implemented in
regulations—will apply to ensure that we can see in detail and
have a good understanding of what is going on behind the hypothetical
scenario.
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