Examination of Witness (Quesitons 489-511)
Q489 <Chair:
Thank you very much for coming along today. We recognise there
is a limit to what can come before us. We are very happy to take
further written evidence. Could you begin by giving your view
about how consumer credit should be regulated?
Mr Sklaroff: We
have a well-developed system already in the UK for regulating
consumer credit and it is, as we speak, undergoing a radical revision.
We have a new European directive that is due to be implemented;
the deadline is next February. That follows very quickly on the
heels of a revision to the UK's own Consumer Credit Act. The regime
as we currently have it has introduced, just in the last two to
three years, a very large number of new features, in particular
with regard to conduct of business, and the way that companies
providing credit should communicate with their customers—explain
prices to their customers, and set out information and the new
rights for customers to change their minds if they do not wish
to take up the credit that has been offered, and so on.
That regime at the moment is run in the UK by the
Office of Fair Trading, and the Government has, of course, indicated
that it wishes to consult on the question of whether in future
the regime for retail consumer credit should be transferred from
the OFT to the new CPMA. Up until several weeks ago, it was saying
that its mind was not yet made up on that matter, and that that
it would wish to be persuaded that there were very clear and well-defined
benefits to be had from making that change before it would wish
to do it. It recognised, very fairly, that there were issues of
disruption and so on with any kind of regulatory change. However,
it seems to me that the announcements made just a few weeks ago
concerning the future of the OFT itself—both as a competition
authority and in terms of its various responsibilities for consumer
protection in the UK—to some extent pre-empt that debate
about what should happen to consumer credit. It would seem very
odd, if the OFT was losing its other consumer protection responsibilities,
for something different to somehow be done with consumer credit.
So, as a working hypothesis, we are assuming that consumer credit
is at some stage going to be transferred to the new CPMA.
That gives rise to a number of concerns. I should
perhaps say, first of all, that we have no ideological or principled
objection to that change taking place. Our concerns are very much
to do with the practicalities, both of the transition and of the
nature of any new regime. Despite the fact that there has been
a very great deal of change, as I've just said, in the existing
UK regime, nothing is perfect and, of course, it is possible to
come up with a list of things that one would like to see changed
in any new regime. My slight concern is that the regulation of
retail consumer credit may be seen—and this is certainly
not what anyone has said on the record—by the Government
as, in some sense, a residual issue to be dealt with once the
rest of the regulatory architecture dealing with prudential issues,
and so on, has been set up. I think my strong plea to those concerned
is that it not be treated as a residual, and that it be dealt
with, as it should be, as a very major task and a very important
economic task in its own right. Therefore, the design of any new
system needs to begin right now and quite a lot of resource is
going to be required to ensure that the transition is successful.
Q490 <Chair:
What is your preference for that design?
Mr Sklaroff: We
think that any new system should be, above all else, clear and
predictable, and we would say that one of the problems with the
existing system is that it isn't always clear and predictable.
By that I mean that because of the way in which the existing regulators
interact in the consumer credit market, it is not always possible
for companies or customers to predict exactly how the regulatory
system will apply in any given case. So I think my top-line plea
would be for a system that was clear and predictable.
I think we would also suggest that a new system has
to focus very clearly on the important aspects of the market.
At the moment, the Office of Fair Trading licenses something like
100,000 entities for credit purposes. Most of those are not providing
credit in any normally accepted sense of the expression "credit".
Perhaps 4,000 of them are, to some extent or other, in the actual
credit business, and even of the 4,000, most of them are not full-scale
credit companies. So I think if one is looking at a new regime
one would wish to look at that number and say: is there not an
argument for focusing more directly on what I think we would all
recognise as the provision of credit to the end customer?
Q491 <Chair:
Before I pass the questioning over to John Thurso, could I ask
you one very general question, since you have an interesting and
unusual perspective on what is going on in the economy? Could
you give us a view about what the market is like for your industry
at the moment, because it is a very good barometer of the recovery?
Mr Sklaroff: Yes.
We do represent a very wide range of markets—everything
from leasing railway rolling stock at one end, to the provision
of consumer credit at the other, so I think we are just such a
barometer. Certainly in the consumer credit markets, just starting
there, we have seen a considerable reduction in the amount of
business being written over the last three years in the context
of the credit crunch and the recession.
Q492 <Chair:
Can you put a percentage on it?
Mr Sklaroff: A
25% reduction in new business in our markets—that isn't
the whole of the UK credit market, obviously—in consumer
credit over that period.
Q493 <Chair:
And some recovery?
Mr Sklaroff: We
have seen some recovery in some areas. In particular, the motor
credit market has done relatively rather well over the last year
or so, although there are concerns, looking at the state of the
economy going forward. But it's also true that in the asset finance
markets we have seen a considerable reduction in the amount of
new business being written over the last few years, and in that
space—and I know it isn't really the focus of the Committee's
inquiry today—our concern is that, particularly in the small
business sector, businesses are less able to reinvest in new equipment
coming out of the economy than was the case in either of the last
two recessions. So we do have a concern there.
Chair:> It's
a small aspect of a very big picture that we're getting from a
lot of people.
Mr Sklaroff: Indeed.
Chair:> John
Thurso.
Q494 <John
Thurso: I want to follow up on some of the points
you have just made, but first can I ask you about the Financial
Ombudsman Service, which currently provides redress for both OFT-regulated
and FSA-regulated firms? Do you think the Ombudsman Service role
should be reviewed as part of the restructuring and, if you do,
what would you like to see?
Mr Sklaroff: I
think it should be reviewed as part of the restructuring. I should
say I have been encouraged by what the new Chief Ombudsman has
been saying, in terms of her approach to the role of the ombudsman,
in recent weeks and months. Our view is that the ombudsman needs
to focus on being a genuinely impartial complaint-handling organisation,
where people can go and get redress if they feel they have a complaint,
without straying into the territory of consumer advocacy. The
difficulty with straying into that territory, however tempting
it may be, is that it begins to undermine impartiality, and I
think it's very important for the ombudsman that it is seen as
impartial by all parties to any given complaint.
Our concerns with the existing ombudsman regime also
relate to the efficiency with which they process cases—and
I know, again, this is something the Chief Ombudsman is taking
very seriously, and we have had discussions with her about it—and
the length of time it takes to process a complaint once it goes
to the ombudsman. There are also some issues, certainly historically,
concerning the consistency or otherwise with which similar kinds
of cases are adjudicated by the ombudsman. All these things are
well-known issues, and we are in discussion with the ombudsman
about them, but I do think, going back to your question, that
it is important, as part of this really quite radical change to
the consumer credit regulatory scene that is being talked about,
that the role of the ombudsman be looked at in the context I've
been describing.
Q495 <John
Thurso: Thanks. You have touched on this a bit
already but I'd like to flesh it out a bit. On the changes—the
moves from the OFT to the CPMA—virtually all the written
and oral evidence that we have received from organisations has
pretty strong support for the move. As you've said, to a certain
extent, it is becoming academic because it's a bit difficult to
leave something when you've demolished it, kind of thing.
Mr Sklaroff: It's
a bit difficult to see how, yes.
John Thurso:>
You voiced concerns, and you have fleshed those out a little bit,
around the practicalities and the nature, and so on. But can I
ask you to look at the other side? What do you think could be
the benefits of such a move, particularly in your sphere?
Mr Sklaroff: I
think the benefits fall in two broad categories. I think the first
and perhaps most obvious is that—as has already been said—there
are many regulated companies that at the moment are regulated,
both by the OFT and by the FSA in the conduct of business space
for different aspects of their business. For those companies there
is obviously an efficiency gain to be had or to be aimed at from
bringing the regulatory regimes together. So I think there is
a clear argument there; many others have made that argument. I
think the second set of potential benefits are the ones I was
talking about earlier, which are to do with: how can we improve
the current system? How can we take the opportunity of designing
a new system to see whether we can't design out some of the dysfunctions
in the existing system? I've mentioned one or two of them already
to do with predictability, clarity and focus. Also I think there
is an issue about resourcing. I think it is to the credit of the
OFT at the moment, it is a relatively—
Chair:> Order,
order. It is 11.00 o'clock.
Two minutes' silence observed for Armistice
Day.
<
Chair:> Thank
you, everybody. Do continue.
Mr Sklaroff: I
think I was just about to make a comparison of running costs between
the OFT and the FSA. At the moment, the OFT's annual running costs
are about £50 million per annum. The FSA is about nine times
that; it's about £450 million. That is perhaps a misleading
comparison to some extent, because they are running different
kinds of regimes, but there is an issue about having the right
kind of resource in the new regulator in order to deal with the
very particular issues arising in the credit markets. While it
is a financial service, credit is a fundamentally different kind
of financial service from most of the others that the FSA is used
to dealing with at the moment in the retail space. We would wish
to be reassured that the CPMA, if that is the destination for
this regulatory function, is properly equipped with people who
will understand the needs of the market, and will be able to interact
with the market and take sufficient information from it to regulate
it effectively.
Q496 <John
Thurso: Given when you put your evidence to us,
and given that, as you say, over the last couple of years there
have been quite a lot of changes, and in light of the fact that
we probably already have a decision—we just haven't recognised
it yet—if there is anything that you would like to add in
writing, then I think that would be very useful.
Mr Sklaroff: I
would be very happy to do that.
Q497 <John
Thurso: Can I move on from that to the question
of cost, which you have mentioned already and clearly signalled?
The particular question is about compliance costs and whether
you think, first of all, there is a danger that these will rise
as a result of a move—they never seem to go down when they
move. Secondly, do you think there are one-off costs involved
in the changes? Perhaps you could talk a little bit about the
costs.
Mr Sklaroff: I'm
very happy to. We have an estimate of the cost of introducing
the consumer credit directive, which is what we're doing at the
moment. That is within the existing structure, and that estimate
is somewhere up to £500 million as a one-off cost for the
introduction of that new set of rules around the sale of credit.
Q498 <Chair:
That is pretty large.
Mr Sklaroff: That
is a very large sum of money. It is a worryingly large sum of
money, but I think it's not a misleading sum of money, because
it does show the pre-existing complexity of the regime that sits
around consumer credit in the UK. So, for any further change,
I would be surprised if the transitional costs were of an order
of magnitude different from that, shall we say. So, there is a
big concern about transitional costs, plus all the usual problems
about regulatory uncertainty. The UK is already seen internationally
as a very expensive market in which to do retail credit business,
and I think this further change is unlikely to make that a better
picture.
In terms of the regulator, and the compliance costs
with the new system, as I think the Chairman has discovered in
asking this question of previous speakers, there is rather a patchy
amount of evidence available for how much things cost at the moment.
In recent years, the FSA has done some analysis itself of how
much its existing regulatory system costs, and from time to time
aspects of the OFT's regime have been looked at. None of them
are exactly additive, so it's difficult to say. But picking up
your question, my concern is that it has been inevitably the case
each time the FSA, as presently constituted, has produced a new
rulebook that the regulatory and compliance costs associated with
that part of the market have risen. I think one of our other pleas,
which we're certainly discussing with the Government, is that
it is not assumed that if consumer credit moves into the CPMA,
all it will need is its own rulebook. One has seen versions of
that statement from time to time.
That would be wrong on two grounds: one is the cost
ground, because I think that would be the wrong way to go; the
other is that it isn't like the other financial services currently
regulated by the FSA and it needs some proper attention. Given
that we have—whatever it is—37 years now of statute
law governing this in the UK, and given the fact that that statute
law is heavily embedded with other statutes dealing with other
aspects of consumer protection, I'm afraid that simply writing
a new rulebook is not going to turn the trick.
Chair:> Mark
Garnier.
Q499 <Mark
Garnier: Thank you, Chairman. A little earlier,
in response to the Chairman's question, you talked about the fact
that the current economic cycle has resulted in a downturn in
consumer credit. But you also said in your written evidence that
"the sheer volume of this new regulation has contributed
to the shrinkage of the UK consumer credit market". Can you
rationalise how much of the shrinkage has been down to regulation
and how much has been down just to an economic downturn?
Mr Sklaroff: The
honest answer is no. I can't actually say, "X% was this,
x% was that." What I do know, from conversations with many
companies in this market, is that the increasing regulatory costs
have become a more and more important factor. Indeed, comparisons
made between the UK market and other European markets by people
who are active in both rather reinforce that.
Q500 <Mark
Garnier: Maybe a way of looking at it that might
be more illustrative is: how many participants in the consumer
credit market have withdrawn from the market because the costs
have become too much for them to bear and they've closed down?
Mr Sklaroff: We
continue to see announcements—and there was another one
this week—of companies withdrawing from at least some of
the consumer credit markets. It is often the case that when you
ask them, "Why have you done this?" they will say that
of course there are economic circumstances here, and of course
there are issues about the nature of the market, but that regulatory
costs, of one sort or another, are a major part in their decision
and they just cannot operate profitably in some of those markets.
My personal concern about this is that some of those markets are
precisely those sections of the population most in need of help
and support during a difficult economic time, and those markets
are becoming thinner and thinner and thinner. Hence my concern—and
we have aired this with the Government and publicly—about
ideas such as interest rate caps and so on in some of those markets;
they risk having precisely the opposite effect from that intended.
Q501 <Mark
Garnier: I wanted to go on to that, in fact. At
the end of the day, the interest rate you charge to customers
is ultimately the most determining factor as to whether people
take out credit. One of the problems that we see is that the poorer
you are, the lower your credit rating, and therefore the higher
the interest rate you tend to be charged. I've always had a problem
trying to rationalise that in one respect, although my background
is in investment banking so I completely understand why it is
done. Do you not think that lenders do have a social and moral
obligation to make sure that consumers are charged an affordable
rate of interest?
Mr Sklaroff: I
think there is a moral obligation to ensure that consumers are
charged an appropriate rate of interest, and I think the question
then becomes: what does one mean by appropriate? "Appropriate",
for a company that wishes to remain in business, has to mean,
apart from other things, a rate for the risk. The company has
to take a prudent view of what the risks are of default in a particular
market, and it has to price the products accordingly. Of course,
it is physically possible for a Government or a regulator to intervene
in markets—and this happens in many overseas markets—and
set caps and control those costs, but what tends to happen is
that either other costs in the credit market rise to compensate
for the fact that you can't actually price for the risk in the
market you're operating in, or people withdraw altogether. It
was interesting that that was one of the conclusions drawn by
the Office of Fair Trading when they recently looked at the UK
short-term credit market. They explored whether interest rate
capping in that market would be a socially useful thing to do,
and the conclusion they came to was that those markets are, first
of all, as an observation, already very thin, in the sense that
there are very few commercial participants in them. If you intervened
in those markets by capping rates, you might very well drive some
of the few companies left out of those markets, meaning that the
individuals who used to use the services of those companies would
have no recourse other than the illegal market.
Q502 <Mark
Garnier: It is clear that we were underpricing
risk, which led to part of the banking collapse. Do you think
we're possibly overpricing it now?
Mr Sklaroff: I
think not. I think what has happened is that, during the last
three years, companies and individuals have had to take a rational
look at what they can afford. From the point of view of a company,
as I'm saying, what they can afford means, "Is this market"—whatever
the market is—"something in which I can make a reasonable
return, while attracting a reasonable number of customers with
a reasonably low rate of default? If the answer to that is no,
then I may wish to look somewhere else". On the other hand,
consumers have clearly, and we see this in our own figures, been
rebalancing the extent to which they are using credit products
in, on the face of it, a rational way.
Q503 <Mark
Garnier: Part of the new regulatory regime is going
to be the Financial Policy Committee. Martin Lewis, when he gave
evidence to us earlier, already said that he sees that that could
be a problem for a certain core of people who need credit who
may find it more difficult to get to it, because, of course, as
soon as you get the FPC intervening in liquidity, that is where
it is going to hit first. Do you agree with those views?
Mr Sklaroff: I
think there are some concerns, not just on that score, but more
generally on possible regulatory interventions in the credit markets
having precisely that adverse effect. I think what one has to
be clear about is what problem one is trying to solve. For example,
if the problem—and it is a very big and difficult problem—is
poverty, defined in a certain way, it isn't necessarily the case
that the obvious lever to use to address that is a further piece
of regulation in the consumer credit markets. Sometimes I feel
that when one sees the debates round these issues, they are as
much to do with the very real problem of poverty as they are to
do with what an appropriate regulatory structure for consumer
credit would be. The risk is—and I think Martin Lewis was
drawing attention to this—that very well-intentioned regulatory
interventions in the consumer credit markets might make things
worse for the people that those markets currently serve.
Chair:> Stewart
Hosie, you wanted to come in quickly before we move to Andy Love.
Q504 <Stewart
Hosie: A quick question. Mark's first question
there was about the balance between the recession and the burden
of regulation. Looking at the growth around the fall in new credit,
it is going south in every category apart from car finance; that
is quite startling. Looking to the future, do you think that this
is going to pick up or stay flat, or do you think we'll see further
falls? Where do you think it is going?
Mr Sklaroff: I
think there has certainly been something of a medium-term resetting
of the market. I think that is undoubtedly the case. It depends
how far forward you look, obviously. I think there are some markets
that are showing no signs of recovery, and it is a matter of sheer
speculation as to whether they will. I think as things gradually
get better in the economy, it is possible to imagine that new
capital will come back into some of those markets. But I think
your question encapsulates very well one of our big concerns about
all the talk that is going on about a further change in consumer
credit regulation. It would be very easy, for very good and praiseworthy
reasons, to break the last straw on the camel's back here and
entrench a situation that is a much smaller market, a much more
highly polarised market, a market in which lower income people
find it next to impossible to get legal credit.
Q505 <Stewart
Hosie: The question I have is—assuming that's
not the most positive answer for the near future, I think we can
agree that—do you see the pressures on growth, or the suppression
of growth, primarily being led by unemployment, wage freezes,
tax allowance freezes, inflation and VAT rises, or do you see
the suppression primarily being led by new regulation?
Mr Sklaroff: It's
both.
Q506 <Stewart
Hosie: It is a combination of both?
Mr Sklaroff: It
is definitely both. It's a combination of both, because all the
factors you've listed are exactly the things that my members talk
to me about on a regular basis—all of the above. So, people
are concerned about what is the short to medium-term prospect
for the economy, for unemployment, for consumer spending—all
those things—because these are the markets that are very
important to my members. But they're also very worried about the
implications of these new regulatory plans, not because there
is any—as I said earlier—ideological objection to
the move from organisation A to organisation B as the lead regulator,
but because of what that might mean in terms of uncertainty and
costs.
Chair:> Andy
Love.
Q507 <Mr
Love: Can I return to the vexed subject you touched
upon earlier of interest rate caps? A lot of people think it's
a no-brainer, including quite a lot of Members of the House of
Commons. There are early-day motions relating to this topic. Indeed,
I think there is even a prospective ten-minute rule Bill relating
to this issue.
Mr Sklaroff: There
is, yes.
Q508 <Mr
Love: The OFT earlier on, as you mentioned, decided
in terms of short-term credit, where there are very high interest
rates, not to introduce that. They were looking at credit cards.
Is it a no-brainer that interest rate caps would help the consumer?
Mr Sklaroff: It
isn't a no-brainer because the evidence shows that there are unintended
consequences that arise in markets where these kinds of caps are
put in place. As indeed was said in the debate in Westminster
Hall earlier this week, there is quite a lot of evidence from
other parts of the world about what happens when you put in these
kinds of interest rate caps. Although that shows on the one hand
that it is physically possible to put them in place, you then
have to look at what the consequences are.
On the consequences, first of all, any cap is often
seen by the market as a kind of official rate, so you get a move
to the cap. So, perversely, you get the effect of an increase
in costs in the market that you're targeting. Secondly, going
back to what we were talking about earlier, you get an effect
where if a company is unable to cover its risks, if it knows that
default rates, for example, in a particular market are simply
not going to be covered by the interest rate that it's allowed
to charge, it then has two choices. It can either get out of that
market altogether, and there is evidence that that happens in
some cases.
Q509 <Mr
Love: Let me just stop you there, because I think
that's where the public find it difficult. When you're charging
200%, 250%, 300%— I don't expect that will happen in terms
of credit cards, but it certainly happens in terms of home credit
and pay-day loans—when you're charging that level of interest,
people find it difficult to understand that companies will turn
round and say they're not making a profit. Is there evidence to
suggest that there is that withdrawal from the marketplace by
the companies who are offering these services?
Mr Sklaroff: There
is. In fact, there is a certain amount of evidence from some geographically
very close European markets about what happens when you put in
place these kinds of caps. For example, in the Netherlands, there
is now a very scanty market indeed for loans below the level of
about €2,500, simply because, under the regulatory structure
that exists there, it is very difficult for a company to operate
profitably, for the reasons we've just been discussing—that
you can't charge an appropriate level of interest for the risks
in the market. Of course, you have the choice of moving out of
the market, because you can't cover your costs properly. The other
choice is you cross-subsidise from somewhere else, which means
that prices somewhere else in your market will have to rise to
cover that. Obviously, where you come down with that choice will
depend upon the size of company you are, and how many different
markets you are operating in. But the net effect of all this is
often higher prices for a larger number of people and less credit
available in the target markets, which seem to us to be perverse
consequences from what would otherwise be a well-intentioned regulatory
intervention.
Q510 <Mr
Love: When they looked at this before, they came
up with a series of recommendations, the main one of which—and
certainly the one that I can remember—was to try and increase
competition, particularly in home credit, where there seems to
be a distinct lack of competition. There are a couple of companies
that dominate the marketplace. Will that help the consumer in
these circumstances, and how do your members, since it's mostly
your members that are in these marketplaces, look on—
Mr Sklaroff: Just
to clarify that, we have very few members in that marketplace.
I think we have one member who is in that short-term lending market;
most of our members are in other parts of the market. But to answer
your question, I think it goes back to the discussion we were
just having about the economy. To some extent, the number of people
who are willing to enter those markets will depend a little bit
upon the state of the economy, whether there is a perception of
a growing propensity for people to buy consumer goods using credit,
and so on and so forth, and also the issue we're discussing, regulation.
Unfortunately, the effect of some of the kinds of regulation currently
being debated would, almost inevitably, be that there would be
even fewer companies in those markets.
Q511 <Mr
Love: Finally, because I do think we can only take
this so far, I will give you the example of my own constituency.
I was invited by an American company, recently arrived in this
country, that provides primarily pay-day loans and their standard
product charges an interest rate, I think, of 350%. I have several
pawnbrokers; I have several people who will take goods in lieu
of cash and, again, charge. There doesn't seem to be a lack of
competition in the marketplace in my constituency for people who
need that short-term money, yet it doesn't seem to have done anything
to reduce the interest rate. How do we reduce the very high charges
that are currently being experienced by consumers?
Mr Sklaroff: Going
back to what I was saying before, we have very few members in
those markets. But on your general point, I think, to be honest,
there is a problem—and other people have said this too—in
using the APR as the way in which you compare credit products.
I think Martin Lewis himself made this point when he was giving
evidence to the Committee. If you are talking about a short-term
loan, the issue for the person taking out the loan is affordability.
If I'm borrowing a very small sum of money, £200, and I'm
going to pay it back with £20 in four weeks' time, that is
a very high APR but, of course, is the annual rate the way of
measuring the cost of that loan? So I think there is a problem
with the APR. In fact, it's one of the things that we and others
are talking to the OFT about at the moment—whether there
is some other way of giving an accurate view of how much this
is costing you. That is crucial; it must be open and honest, but
on the other hand, we should not get into this territory where
you are comparing apples and oranges.
Chair:> Thank
you very much for giving evidence today. Please feel that this
is part of a dialogue, and if there are further points you want
to make, please put them on paper, and we will be very interested
to take a look at them.
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