House of Commons - Debt Management - Business, Innovation and Skills Committee

Debt Management - Business, Innovation and Skills Committee Contents

2 Regulation of the Market and Government Policy

Consumer Credit Regulation

6. Both payday loans and commercial debt management companies come under the Consumer Credit Act 1974, the Consumer Credit Act 2006 and the Consumer Credit Directive. The Government states that the purpose of consumer credit regulation is to:

The Consumer Credit Act 2006 updated and amended the 1974 Act to make it more relevant to today's consumers. It was fully implemented in October 2008.[8] The Consumer Credit Directive was adopted by the European Council in May 2008, and legislation implementing its provisions came fully into force on 1 February 2011.[9]

Government Policy and Consultations

7. The Coalition Agreement set out the Government's commitment to the reform of financial services regulation, to curbing unsustainable lending and to the strengthening of consumer protections, particularly for the most vulnerable in society.[10] To deliver on that commitment, the Government has undertaken a number of consultation exercises designed to frame policy developments in this area.

8. A new approach to financial regulation: consultation on reforming the consumer credit regime, was a joint consultation run by the Department for Business Innovation and Skills and HM Treasury. The consultation, which ran from 21 December 2010 to 21 March 2011 considered the merits of transferring responsibility for consumer credit regulation from the Office of Fair Trading (OFT) to the proposed new Financial Conduct Authority (FCA)[11]. The Government said in opening the consultation it believed that:

Transferring consumer credit regulation from the OFT to the FCA provides an opportunity to significantly improve the way consumer credit is regulated and to create a simpler, more responsive regime. [12]

We asked the Minister for an update on the consultation and he told us:

We are still analysing all the responses to the consultation and working closely with the Treasury, and we will be announcing our response early in the new year. I am afraid I cannot pre-empt that here today, Chair.[13] [...] one of the issues we will be looking at is the power and resources for the consumer credit regulator.[14]

Equally, when discussing the future of consumer credit regulation the Treasury Minister Mark Hoban MP told the Treasury Committee that "the Financial Services Bill is an opportunity to legislate for that."[15]

9. The Draft Financial Services Bill was introduced to the House of Commons on 26 January 2012. It "provides powers to effect a transfer of consumer credit regulation from the Office of Fair Trading to the FCA".[16] The Treasury website explains that

The Government will exercise these powers if and when it has identified a model of FCA regulation that is proportionate for the different segments of the consumer credit market.[17]

10. The consultation closed on 21 March 2011. The Treasury Committee said in January 2012 "[we] are disappointed that 7 months after the consultation closed, the Government has yet to make up its mind". We are concerned that the introduction of the Financial Services Bill has changed nothing by announcing the need for further consideration. In the meantime consumers and the industry are left without clarity on how the consumer credit market is to be regulated in future. We expect the Government—within six months—to outline a timetable and methodology for how and when a decision will be made on whether the power to transfer consumer credit from the OFT to the FCA is to be exercised.

11. In October 2010, the Department issued its consultation paper, Managing Borrowing and Dealing with Debt. In July 2011, the Government published a summary of responses on consumer credit along with its formal response on personal insolvency. In November 2011, the Government published its formal response on consumer credit. Both of the Government's responses put a strong focus on a 'voluntary approach', which it argued avoided burdening business with new regulations and also meant that "consumers do not have to wait for regulations to come into force before increased protections are introduced".[18]

12. The Government summarised its vision for the consumer credit market as being two-fold:

i. First, we want all consumers to be empowered to make better choices for themselves. Consumers should be free to borrow if that is what they decide is in their best interest. It is not for the Government to pass judgement on whether a particular product is good or bad but, in line with the Coalition principles of freedom, fairness and responsibility, we want to provide consumers with the tools they need to make informed decisions.

ii. Second, we want to ensure there is a safe and fair regulatory framework for both credit and personal insolvency. These frameworks must protect vulnerable consumers, particularly those at risk of falling into or those already in financial difficulty, and drive rogue companies out of the market.[19]

It has proposed further work on:

a) Consumer Credit - improve protections in the high cost credit market; and

b) Debt Advice - the importance of free and independent debt advice and concerns regarding the debt management industry.[20]

The regulator: Office of Fair Trading (OFT)

13. The OFT describes its mission as ensuring there are:

competitive, efficient and innovative markets where standards of consumer care are high, consumers are empowered and confident about making choices, and where businesses comply with consumer and competition laws but are not overburdened by regulation.[21]

LICENSING

14. Under the 1974 Consumer Credit Act the OFT is responsible for licensing firms engaging in consumer credit activities. It assesses businesses' fitness to engage in licensable credit activities before they are granted a licence and then monitors the firms' continued fitness. The Consumer Credit Act 2006 gave the OFT extended powers including the right to judge a firm's "competence" to engage in regulated credit activities—before that the OFT could only consider whether the individuals who ran or controlled the business had any convictions for fraud, dishonesty or violence or whether they had engaged in unfair business practices in the past.[22]

15. The OFT regime is fully funded through licensing fees. Its budgeted income for 2011-12 is approximately £10 million which is raised by a fee of £435 for sole trader or £1,075 for other firms when applying for or renewing a licence. The fee is collected on a five-year cycle which is equivalent to an annual fee of £87 or £215 respectively. In addition, all firms pay a flat levy of £150 to fund the Financial Ombudsman Service, which the OFT collect on its behalf alongside the licensing fee.[23]

16. The level of scrutiny of any new entrant, even following the 2006 Act, has received criticism. Teresa Perchard from Citizens Advice said that "basically, if you are an out and out criminal with a record of violence or discrimination, which is one of the other areas of the law, you will not get a licence, but beyond that you do not have to prove any technical competence to get into the market".[24] She went on to state that any new entrant would not be tested on their knowledge of the market, their business capability, the law governing the sector or even "whether you have enough money to run a decent business".[25] Sarah Brooks, representing Consumer Focus agreed with that assessment and argued that given the "compliance problems" in this sector, the licensing fee "does not buy you an awful lot of supervision".[26]

17. Vivienne Dews, Executive Director, Credit Group, OFT, acknowledged that resources were a constraining factor on its work:

It is run on a self funding basis. It has so far been run on the basis that we keep resourcing levels quite low. This is a matter that we agreed with the Government. [...] I think there is a debate about whether those resourcing levels should be higher, which would be met through an increased licence fee, in order that we could do more enforcement work. That is something that I think is a debate to be had with Government in the near future.[27]

18. David Fisher, Director, Credit Group, OFT, accepted that the flat fee system was a fairly blunt tool and could benefit from refinements:

Would it be helpful to us to differentiate fees according to the nature of your business and market, and in particular the level of actual or potential risk that you pose to people taking out loans and other related services? The answer to that is yes.[28]

19. The Consumer Credit Counselling Service (CCCS) believed that an increase in the cost of the credit licence also had the potential benefit of driving out "some of the bad players in the market".[29] However the OFT pointed out to us that the cost of the credit licence could not be used as a barrier to entry.[30]

GUIDANCE

20. A key role of the OFT is to provide 'guidance' to those that it licenses. However as David Fisher, OFT told us:

I sometimes find that people perhaps think the name "guidance" is a bit of a misnomer. We call it guidance because that is what the Consumer Credit Act calls it. It is more than guidance. It is not soft law, as some people call it. It is not a rule, as the FSA are capable of doing, but it is effectively setting out to businesses the minimum standards that we expect of them, and we illustrate it with examples of business practices that we would regard as irresponsible and that go to the question of whether they are fit to hold a consumer credit licence.

So we make it very clear to industry that we expect them to comply both with the letter and the spirit of the guidance. If they do not, and we have good evidence that they do not, we will take that into consideration when we are considering asking ourselves the question, "Does this company remain fit to hold a consumer credit licence?" be it as a debt management company or any other in the sector.[31]

21. The OFT has recently carried out a Debt Management guidance compliance review. The results of which are discussed later in the report. Early this year the OFT will be reviewing compliance with the Irresponsible Lending Guidance in the payday lending market, the results of which we will read with interest.

POWERS

22. The future of regulatory responsibility for consumer credit was under review at the time of our inquiry and no firm decision has yet been taken on whether or not this role will move from the OFT to the Government's new Financial Conduct Authority (FCA). Wherever it is to be based the question of the powers of the future regulator was raised in evidence to us. Martin Lewis, of moneysavingexpert.com highlighted the fact that the OFT currently has fewer powers than the Financial Services Authority (FSA) and that the FSA was "a lot more stringent than the OFT'.[32] The OFT acknowledged that fact and pointed out that, for example, unlike the FSA it was unable to require companies to provide information on a regular basis because "the Consumer Credit Act regime does not operate on that basis".[33]

23. The OFT explained that if a business did engage in activities which it considered to be unfair or improper then it could issue a warning letter or impose requirements on the firm's licence. For example it could require firms to cease particular behaviours or to put in place processes to safeguard against future misconduct. If requirements were then not adhered to it could levy fines of up to £50,000. If the OFT considered that a firm's behaviour was so serious that it was not fit to trade it could take steps to revoke its licence - and this did not need a 'requirement' to be issued first.[34]

24. As we mentioned earlier, the OFT did get new powers in 2008. David Fisher from the OFT saw this as an improvement to the OFT's ability to act and had "made a difference in terms of our ability to test competence and investigate companies, once licensed". In addition, he also highlighted that those changes allowed the OFT to "more proactively and effectively investigate those people: to visit them on their premises, to require them to provide information".[35]

25. However, several of our witnesses thought more was still required. Consumer Focus argued that:

I think [OFT] have a very tough job to do. We wanted to have a competitive credit market; we thought that might bring down costs, etc., but it has not, actually—it has just made it more difficult to police. I think they are trying to do a very difficult job in difficult circumstances, and perhaps they are not always given the full tools they need to carry it out.[36]

Mark Lyonette from the Association of British Credit Unions (ABCUL) agreed:

One of our problems with the OFT [...] is that new bad practices spring up all the time and whether they have the resource and ability to always spot them is questionable. [...] It is very frustrating because these little things keep appearing. [...] I am not always sure there is enough resource and perhaps enthusiasm to deal with some of them quickly enough.[37]

26. This concern was not limited to consumer groups. The Debt Managers Standards Association (DEMSA), one of the debt management companies' trade bodies, also believed that the OFT could benefit from enhanced powers:

At the moment, if the Office of Fair Trading decide to put, are minded to revoke, notice on a consumer credit licence, it will take possibly 12 to 18 months for that to be finally sorted out with appeals, etc. And in that time the company can still trade. I think there perhaps should be a more immediate sanction that can be imposed.[38]

27. Vivienne Dews of OFT, highlighted which additional powers would be helpful:

The thing we would most like would be the power to suspend a licence. [...] If we were looking at how we could increase our powers, that would be top of our list. It has been discussed with Governments in the past. I do not think there is any debate about whether it would be a useful thing to do; there has not been an opportunity to give us that power, but there is no real debate about it.[39]

There are some other less clear things we would be interested in. For example, the power to ban a particularly harmful product would be one of those. Those and the point about resourcing would be the key points we would make.[40]

David Fisher of OFT, argued that a regulatory redress scheme could also benefit the OFT.[41]

28. The power to suspend or revoke licenses was discussed with the Minister. However, the Minister was unable to give us any clear indication of Government thinking on this issue because he did not wish to "prejudge the response" of the Government to the consultation on the consumer credit regulatory regime as it had not been "finally agreed" with HM Treasury.[42]

29. It is clear that improvements should be made to the regulation of the debt and credit industry. The Government's review of consumer credit regulation should be seen as an opportunity to address the many current shortcomings. In framing its new approach we recommend that the Government put in place the following reforms:

That higher licensing fees should be charged for higher-risk credit businesses to allow for greater levels of assessment of competence and fitness to operate.
That a fast-track procedure be developed to suspend credit licences; and
That the regulator be given the power to ban harmful products.

Public Information Campaigns

30. Given the fact that we took evidence in the run up to Christmas, we asked the Minister if the Department was considering any public information campaigns over the Christmas period to warn against the risks of high cost credit and debt. The Minister told us that there would be "a number of campaigns over this period", including specific campaigns targeted at young people to ensure that they understood the issues of managing debt as there had been a rise in the number of young people getting debt relief orders.[43] This would be in conjunction with Citizens Advice.[44] He also told us that the Government was running an Illegal Money Lending project and a Christmas borrowing campaign, to make people aware that they should not go to illegal money lenders.[45]

31. We welcome the Government's proposals for Christmas campaigns on debt amongst young people and illegal money lending. That said, we do not believe that the timing of these campaigns—which only started in December—gave sufficient time to gain traction with the public and we recommend that future campaigns start in October. We further recommend that the Government, in its response, sets out the measurable impact on consumers of last year's campaign.

7 BIS website Consumer Credit Regulation: www.bis.gov.uk/policies/consumer-issues/consumer-credit-and-debt/consumer-credit-regulation Back

8 http://webarchive.nationalarchives.gov.uk/+/http:/www.berr.gov.uk/whatwedo/consumers/consumer-finance/credit-act-2006/index.html Back

9 BIS website Consumer Credit Directive: http://www.bis.gov.uk/policies/consumer-issues/consumer-credit-and-debt/consumer-credit-regulation/ec-consumer-credit-directive Back

10 BIS Managing Borrowing and Dealing with Debt: Call for Evidence in support of the Consumer Credit and Personal Insolvency Review p2 Back

11 The FCA was previously referred to as the CPMA. Back

12 http://www.bis.gov.uk/policies/consumer-issues/consumer-credit-and-debt/consumer-credit-regulation Back

13 Q 217 Back

14 Q 232 Back

15 Oral evidence taken before the Treasury Select Committee: Financial Conduct Authority, 8 November 2011, HC 1574 Q 246 Back

16 Draft Financial Services Bill, Explanatory Note para 13 Back

17 http://hm-treasury.gov.uk/consult_consumer_credit.htm Back

18 Forward p 3- 'Consumer credit and personal insolvency review: summary of responses on consumer credit and formal response on personal insolvency' July 2011 Back