Business, Innovation & SkillsWritten evidence submitted by the Finance and Leasing Association (FLA)
Executive Summary
UK borrowers have benefited from extensive recent changes to consumer credit regulation (including the new Consumer Credit Directive, implemented only this year). There are nonetheless some sensible amendments which could improve the functioning of the current regime, based on the Consumer Credit Act (CCA).
But to avoid considerable market disruption, the Government’s proposed transfer of consumer credit regulation from the Office of Fair Trading (OFT) to the new Financial Conduct Authority (FCA) should take place on the basis of the current legislation.
Any new regime should then be designed and implemented on a realistic timetable. Simply applying the Financial Services and Markets Act (FSMA) will not work. A proportionate approach is needed, reflecting the structure of the credit markets (including, for example, the large number of non-banks and the thousands of intermediaries).
The evidence presented to the Department for Business, Innovation and Skill’s (BIS’s) Consumer Credit and Personal Insolvency Review (CCPIR) showed that interest rate caps in the credit markets (including credit and store cards) would have unintended adverse consequences, distort competition and increase financial exclusion, particularly for low-income households.
The Government should consider commissioning research to understand better which debt management tools are most effective for the various different categories of debtor.
Introduction
1. The Finance and Leasing Association (FLA) is the UK’s leading trade association for the consumer credit, motor finance, and asset finance sectors. Our members include banks and building societies and their subsidiaries, the finance arms of leading retailers and manufacturing companies, and a range of independent firms.
2. In 2010, FLA members provided £72 billion of new finance to UK businesses and households. £52 billion of this was in the form of consumer credit, including 30% of all unsecured lending in the UK, made available via credit and store cards, unsecured loans, store credit, second charge mortgages, and funding for half of all private new car sales.
3. Credit supports the social and financial well-being of millions of consumers, who enjoy a higher standard of living through the access responsibly-provided credit gives them to essential goods such as furniture, electrical equipment, clothing and motor vehicles. The UK economy needs a healthy, vibrant credit market to support growth.
4. We are pleased to contribute to the Business, Innovation and Skills Committee’s inquiry into the recent CCPIR by BIS. The FLA submitted detailed evidence to BIS in December 2010. The issues we raised remain valid:
The Government should consider amending those provisions of the CCA which are no longer fit for purpose, or which gold-plate the CCD—in particular those clauses relating to Voluntary Terminations, Multiple Agreements and Modifying Agreements.
Price caps on credit and store cards should not be introduced. All the available evidence shows that such caps are ineffective and do not work well either for borrowers or lenders.
A robust case has not been made for introducing a cooling-off period for store cards, which would damage the markets and increase financial exclusion, as well as further gold-plate the CCD. Other ways can be found of addressing concerns about these markets.
Work is needed to help customers navigate the huge variety of available debt management mechanisms, and make informed decisions about which would help them most.
5. We would be happy to give further evidence regarding any of the issues raised in this paper.
The Future of Consumer Credit Regulation
6. Our response to the BIS consultation made the case for a period of regulatory stability in the credit markets, following the very considerable changes of the last few years. Lenders implemented the Consumer Credit Directive (CCD)—containing a wide range of new consumer rights—earlier this year. This was accompanied by the OFT’s detailed new Irresponsible Lending Guidance and followed the radical revision of the Consumer Credit Act, which took effect in 2008. In addition, the industry has recently implemented a range of new market-specific measures, including new OFT Guidance for Secured Lenders, an extensive package of changes to credit and store card regulation, and a range of new ways of helping customers in difficulty, including a 30-day breathing space.
7. However well-intentioned, the large volume of new regulation has contributed to the recent contraction in the UK consumer credit market. New lending via credit cards in 2010 was 14% lower than in 2007. Other parts of the market have been hit harder. Particular problems have been seen in lending markets served by non-deposit-taking institutions, including the second-charge mortgage, store card and store instalment markets. Second charge mortgage new business dropped from £5.6 billion in 2007 to £294 million in 2010. Finance provided through store cards fell from almost £3 billion in 2007 to £2 billion in 2010. Several lenders have left the store instalment credit market altogether. These trends continue: store instalment credit has fallen by a further 11% in 2011, and store card finance by 15% over the same period. Only the motor consumer finance market has seen recent growth (3% since the beginning of 2011).
8. Against this background, the Government should allow time for the new consumer credit regulation to bed in, before considering any radical further changes. We have already mentioned the kind of evolutionary changes which could nonetheless be undertaken in the shorter term.
9. The Government has, nonetheless, separately proposed to transfer consumer credit regulation from the OFT to the new FCA, and at the same time to replace the existing CCA/CCD regime with an entirely new one based on the Financial Services and Markets Act (FSMA) which currently governs the deposit and savings markets. We have no particular problem with the transfer of regulatory responsibility per se. But we believe that credit regulation modelled on the current FSMA regime would risk a serious contraction of the consumer and small business credit markets, which are served by many non-bank lenders and are often highly intermediated. It is worth remembering that nearly 100,000 entities are currently licensed to provide credit in the UK, 40% of which are sole traders.
10. The FSMA regime is designed for markets where the primary risk lies with the depositor or saver. The opposite applies in the consumer and small business credit markets, where the risk lies with the lender. Features of an FSMA-style regime likely to cause problems include an Appointed Representative regime for the intermediary markets (around a third of consumer and small business lending is intermediated), regulation via Approved Persons, and new capital adequacy requirements, including for the non-banking sector. A considerable proportion of this market would be at significant risk from the unintended consequences of a FSMA-style regime of the kind currently proposed.
11. We have therefore suggested to the Government that it should make the transfer of regulatory responsibility under the current legislation, and then take the time needed for a proper assessment of the size and shape of any new regime. A careful and proportionate approach is needed to ensure that the market remains competitive and that consumers and small businesses can continue to access affordable credit. A sensible implementation period will also be essential, taking account (for example) of the European Commission’s review of the CCD in 2013.
12. We have also argued that responsible self-regulation should continue to have an important part to play. The FLA is currently reviewing its Lending Code (established over 20 years ago) for re-launch early in 2012 to reflect recent regulatory and market changes. The Code allows FLA members in the lending markets to introduce new standards more quickly and efficiently than is usually possible via legislation.
Interest Rate Caps
13. We share the opposition to interest rate caps in the credit and store card markets expressed by most respondents to the BIS consultation. This was on the basis of the available evidence from overseas markets—and from the OFT’s review in 2010—which showed that caps would restrict lenders’ ability to price for risk and so increase the cost of credit to other consumers in the wider market. It would also increase financial exclusion, forcing borrowers on low incomes into the unregulated sector. The Government is undertaking some new research on the likely impact of a cap on the total cost of credit in the short-term lending markets. Whilst we have few members in these markets, we are concerned about the likely impact more generally of the introduction of caps on the price of credit, for the reasons outlined above.
Debt Management
14. Borrowers finding themselves in financial difficulty need to find the right sources of help. The FLA’s members treat all cases of financial difficulty sympathetically and positively (one of the key commitments under our Lending Code), and we work closely with the free debt advice agencies to ensure customers in difficulty get quick and effective help. The industry provides most of the funding for the Consumer Credit Counselling Service. But the responses to the CCPIR showed that consumers often do not know whether or not they have been given the “right” advice, and are sometimes confused by the plethora of different debt management tools now available. The review also found that debtors in similar financial circumstances were sometimes given different advice depending on which organisation they approached.
15. It is clearly important to ensure that debtors receive the best advice for their individual circumstances. We have therefore suggested that the Government should undertake some further research into which debt management tools are most effective for different categories of debtor, and in which circumstances. This would provide a base of hard evidence for further policy decisions in this area.
14 November 2011