Public Accounts - Minutes of EvidenceHC 165

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Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 23 January 2013

Members present:

Margaret Hodge (Chair)

Stephen Barclay

Jackie Doyle-Price

Stewart Jackson

Fiona Mactaggart

Austin Mitchell

Nick Smith

Ian Swales

Justin Tomlinson


Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, Alex Scharaschkin, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, were in attendance.


Regulating consumer credit (HC 685)

Examination of Witnesses

Witnesses: Clive Maxwell, Chief Executive, Office of Fair Trading, David Fisher, Director of Consumer Credit, OFT, and Lesley Titcomb, Acting Chief Operating Officer, Financial Services Authority, gave evidence.

Q254 Chair: Welcome. I apologise for adjourning the hearing last week. I think we were all exhausted, so you have my sincere apologies. I am sorry that it has inconvenienced you and that you have had to rejig diaries and things, so we are immensely grateful to you for doing that.

We will start with the OFT, because you have responsibilities for this at present. Do you see it as your job, Mr Maxwell, to protect consumers? Is it part of your role to protect consumers from borrowing money from companies, such as payday loan companies, in a way that, as we saw last week, can cause financial harm if they pay too much? Of course, we did not touch last week on the untold harm to the health and wellbeing of their families and themselves. Do you see it as your job to protect consumers from doing things that don’t serve their best interests?

Clive Maxwell: We certainly see it as part of our job to protect consumers from detriment in markets and, yes, that can include the sorts of things that you mention.

Q255 Chair: Do you think you should distinguish between the needs of different sets of consumers?

Clive Maxwell: I think we are very keen to ensure that, when firms are lending money to people, they take into account the circumstances of those people, particularly their creditworthiness and their ability to repay.

Q256 Chair: Do you think it is your job-

Clive Maxwell: Yes. Sorry, to be clear, our rules and guidance and things should therefore require those firms to behave in that sort of way, yes.

Q257 Chair: Right. So if it is your job, why do you spend so little on both the regulation of this sector and on enforcement action?

Clive Maxwell: When we look at what we do around credit licensing, first we collect fees, which pay for the actions we undertake around our credit licensing work. We carry out work in three broad areas. The first of those is setting the standards that we expect providers to meet, and we do that chiefly through the guidance that we produce. Indeed, most providers follow that guidance most of the time, so it sets standards of behaviour. The second is running what we describe as the gateway process, and that is the basic requirement that people operating in the sector and lending money need to obtain a licence from us, and we carry out certain checks on them. The third is making sure that compliance is taking place, and we do that through a mixture of formal and informal means, through direct enforcement of the law or, where we think it will be more effective, working with businesses and business organisations in a cost-effective way if we can.

Chair: You have not answered the question.

Clive Maxwell: I was just going to come to the money involved. The NAO Report looked at the money we were spending on enforcement. The reason I wanted to go through those three things is that it looked in particular at the enforcement work that we carry out and not some of those other functions.

Q258 Chair: I still wonder, overall, why you spend so little. You have a particularly vulnerable point here-we will come to it-but the NAO had to do its own work to establish this broad figure of £450 million detriment to individuals. That is a heck of a lot of detriment to individuals from payday loans: why do you spend so little?

Clive Maxwell: The resources we collect match the amount we spend, broadly. Should we spend more money on it? Yes.

Q259 Chair: If you look at yourselves-I hope I have got this right: you will help me if I have got it wrong-you spend £1 on regulation for every £15,304 in the market. If you look at Ofgem, they spend £1 on regulation for every £1,459 in the market. Ofcom spends £1 on regulation for every £517 in the market, and for the MHRA it is £1 for every £108 in the market. Yours is completely out of sync. I accept that is a bit apples and pears, but it is completely out of sync with the regulatory effort of all these other regulators in different markets.

Clive Maxwell: I think we should be spending more money-

Q260 Chair: Then why in the hell didn’t you raise more? Because everybody looks at your fees, and it is absurd that Mastercard or whoever has to pay £1,000 to get its licence for ever, and you then end up with only £11.5 million to regulate a market that desperately needs regulating because there is so much detriment.

Clive Maxwell: The form of regulation we apply, set out in the Consumer Credit Act, will be changing. When you have new powers under that regulation, you will need to spend more money and a lot more resource on making it happen and to use those new powers.

Q261 Chair: We will definitely come to Lesley Titcomb, because we are very interested in how she and the FSA and its successor organisations are going to do it. What I want to understand is why you have not done it to date. Why? What stopped you? Why couldn’t you just raise the fees for licences, have a differential fee and give yourselves more money to do more to protect consumers.

Clive Maxwell: There are a couple of things. First, the licence fees have been increased, although I take your point that they are still low relative to other sectors in the way that you have described. This year we are increasing them by roughly 20% or 22%. We could change the fee base-we could go to something that is more differentiated in the way that you suggest-

Q262 Chair: Why haven’t you?

Clive Maxwell: For two reasons, over the last couple of years at least. The first reason is that we are required by fees and charges rules set by Government to make sure that the actual fees and charges that we are levying are broadly proportionate and relevant to what we are doing and to the different costs imposed by different sorts of businesses. I think we try to do that. We could be more proportionate, but we have been running this regime for the last couple of years with the expectation that it will be moving to the FCA, the financial regulator, so making a very large change to the licensing system when that move will happen in a matter of months does not seem to me to be a very cost-effective thing to do.

Q263 Nick Smith: Surely, taking that argument, if you did more you could put the fees up?

Clive Maxwell: Yes, we could. I don’t disagree with that.

Q264 Justin Tomlinson: I absolutely get the point about the proportionate cost, but you could argue that the bigger players in the market are held to account by market forces because they are known and they need to do that. The more shady operators may well have a business plan. They enter the market as quickly as possible, pay a £1,000 licence fee, and operate in a truly awful way. You clamp down on them. They appeal that, and drag it out for two years, by which time they have ripped off a load of vulnerable consumers. Possibly, the proportionate licensing might help them, because, as they are a much smaller company, it would presumably be cheaper. What things can be done on the licensing to stop that sort of practice?

Clive Maxwell: One relevant factor there is to be able to take action faster against businesses and to withdraw licences on the most urgent and serious occasions. That is a power that the OFT has not had until very recently, and we will start to be able to do that in February.

Q265 Chair: How will that change the world? You won’t have this two-year gap?

Clive Maxwell: We will, in certain types of urgent situations, be able to withdraw the licence immediately, so the firm can go through the appeal process. In the meantime, it won’t be able to trade.

David Fisher: At present, any decision we take, for example to revoke a company’s licence, the company has the right to appeal, as it should. While the appeal process continues, it has the right to continue in business. Appeals can last anywhere from six to nine months for simple cases to 18 months and beyond for more complex cases. The power to suspend will not remove that right to appeal. I imagine that we will be using the power to suspend sparingly.

Q266 Justin Tomlinson: Can we put it in context? If I am right, about 200 licences have been taken away. If you’d had those quicker powers, what difference would that have made in hindsight?

David Fisher: In absolute terms, I don’t imagine that it would make a huge amount of difference to the absolute number of cases. The thing about the power to suspend, which is a power that we have asked for and a power that we plan to use, is that it is quite narrowly defined, and it is defined in terms of urgent necessity to act. It is not there, for example, to stop the appeal process. In the majority of cases where we have revoked a company’s consumer credit licence, I imagine that, if we look back historically, it would not have been appropriate.

Q267 Chair: What does that mean-urgent necessity to act? If it had not been appropriate, it looks to me like you do not have the right powers.

David Fisher: If a lender or a debt collector-let us take a debt collector because there is a lot of interest at the moment in the practice of debt collectors. If we had evidence that the debt collector was using here and now threats of violence against people, that would be an urgent necessity for us to intervene to suspend the licence and to get that debt collector out of the market immediately. We would not allow them the luxury of the appeal process-

Q268 Chair: Okay. Give me an example of what would not be allowed-where you would have to go through the old regime with them carrying on. Give me an example of the sort of practice where you would be taking action to revoke the licence, but you would not be able to use this urgent and necessary action, or whatever it is.

David Fisher: If we had, for example, some doubts about whether a company was conducting appropriate affordability assessments, or if we had doubts about whether a company was giving borrowers the necessary information about the loans that they were going to take, both the Consumer Credit Act and the associated regulations in our guidance are reasonably specific in many respects about what is required of you. For example, it might be about whether or not you are showing the APR in your advertisements. There are a number of practices that people can engage in that might call into question whether they remain fit to have a consumer credit licence, but there is not the urgent need to remove that licence.

Q269 Chair: Let me just take Provident. We all know that the "Provies" hang around on your doorstep. It is the longest established company. I was shocked to find that 15%-I think it was 15%-of their clients were on benefits. I was absolutely appalled to find that 13% of their clients benefit from the social fund, because that is the poorest of the poor. I was appalled to hear from our officials that when they had gone round with a guy from the Provy, he was encouraging new loans by saying, "Isn’t it your daughter’s birthday next week-wouldn’t you like to take out a bit more money?"-I think that was the example that you gave me, Alex. That seems shocking practice to me. I don’t understand why you have not revoked their licence and I don’t understand how that practice is seen as acceptable. Where are the boundaries between the two? Okay, it is not urgent, but how on earth have they continued? I don’t believe that their clients understand the extent of the interest they are charged; I don’t believe their clients understand the impact of borrowing more money. I don’t believe their clients understand the affordability, or understand APR.

Justin Tomlinson: Can I add to that? The point I tried to get across last week is that, if I am right, you are reactive. So if we were all customers and felt that they had done suggestive selling and we all complained, you would investigate it, but because we have befriended them-because they come round to our house every week and we have a cup of tea with them-we kind of trust them, therefore we don’t realise what is going on. Do you do proactive investigations-i.e. those mystery shoppers-so that you are sitting in that set-up house, waiting to see what happens?

Chair: You have two questions. One: are you proactive? Two: why haven’t you revoked their licences?

Nick Smith: And, related to this wider issue, but more specifically, you talked about taking action against companies that don’t advertise APR on their marketing materials. But isn’t there a much wider issue, which is that APR isn’t understood by many people? There must be better ways of showing what the true value of a loan is, which would be more meaningful for the people who take them out?

Clive Maxwell: I will try to answer in that order. I will start off with the question about being proactive. You are right to the extent that this is a licensing regime, where people apply for licences. It is not a supervisory regime.

Chair: It is.

Clive Maxwell: It is not the same sort of regime that the FSA runs for banks, where it looks at their behaviour-the prudential supervision of banks on a day to day basis.

Q270 Chair: I am sorry to interrupt you before you have even started replying, and I don’t want to stop you from replying, but the report itself says you have "a duty to monitor" licensed firms. That is a duty. Page 19, 2.3. So you have got a supervisory rule-you just choose not to implement it.

Alex Scharaschkin: Maybe you are making a point about the definition of "supervisory"-about whether we are using it in a technical sense, in the way we might use it in relation to bank supervision. We actually say that in the current regime they have a duty to monitor firms. The current regime is not designed to operate a supervisory approach of the sort that the FSA operates at the moment.

Q271 Chair: I do not understand what a "duty to monitor" is. I am only a simple person. A duty to monitor is a duty to monitor.

Clive Maxwell: We collect a lot of information about businesses ourselves. We receive that through our own call centre, from Citizens Advice, the FSA and the Financial Ombudsman Service. We pull that together to identify problems in the market. Those problems can be either developing themes about certain types of practices, or about individual firms. That informs where we choose to focus our enforcement efforts. We can use particular types of enforcement techniques if we find that that is appropriate in that sort of case. We will also work with trading standards officials if there are particular types of evidence we want to collect about the behaviour of firms at a local level-we will do that where necessary. So we have that mixture of collecting information and then trying to be proactive in looking ahead at the developing themes and the sort of response we need to make.

An example of that would be the work we have done recently on continuous payment authorities. These are the arrangements that people have to pay off debts using a debit card connected to their personal account. We have not actually received vast numbers of complaints on that, but it was a developing theme. We therefore took it on ourselves to set out in guidance, because the industry was not willing to agree to those new terms and arrangements, how we expect them to behave in future. So it was about being proactive around a theme or type of behaviour that we wanted to tackle.

Q272 Chair: When did you establish that? The guidance is out there, is it?

Clive Maxwell: Yes.

Q273 Chair: Is it statutory guidance?

David Fisher: No, it is not statutory guidance; it is the guidance that the OFT issues.

Q274 Chair: So they can ignore it?

David Fisher: In theory, yes, they could ignore it, but, as Clive said, experience tends to suggest that the majority of firms will comply with the guidance.

Q275 Chair: Have they?

David Fisher: It varies according to the sector.

Clive Maxwell: Typically, if firms are not complying with the guidance, they will not be following the rules or doing what we expect them to be doing.

Q276 Chair: So you could revoke their licences.

David Fisher: Exactly.

Clive Maxwell: We could consider revoking their licences, yes.

Q277 Chair: So go back to the previous question. Why haven’t you revoked the licence of the Provident?

Clive Maxwell: We would need evidence that that business was behaving in a way that was contrary to our guidance and to legislation.

David Fisher: Frankly, we haven’t.

Q278 Chair: Wonga, for example, said that they do use bank whatever it’s called.

Witnesses: Continuous payment authority.

Chair: So will you revoke Wonga’s licence?

Clive Maxwell: We have not prevented firms from using that. We have set some rules about how they should use it to ensure that it is fair for the consumers who use it. There is some evidence that consumers like paying through that mechanism, which can have some benefits for people, such as remembering to pay, for example, but there are also some risks, so the important thing is getting it right.

Q279 Chair: Okay, so they can do it, and you are hoping they do it better; you are not really monitoring. You are seeing how many complaints you get, because you don’t do proactive monitoring.

David Fisher: We are proactive in the sense that we now do what we call the sectoral reviews. The report refers to two: the first was on the activities of commercial debt management companies, and the one we are doing currently is on the payday sector. In both cases, yes, it is true that, as one of your colleagues said, we were actively monitoring the complaints and the growth of complaints in each sector. That led us to decide that, rather than taking a series of individual actions against individual companies, we would look at the sector as a whole to establish whether the companies are complying with the Consumer Credit Act, the associated regulations and the guidance.

Q280 Jackie Doyle-Price: It is not very fleet of foot, because you are waiting until you have enough evidence to justify going out and doing a market study. That is why we have ended up looking very heavily at payday lending, because that is becoming a major risk.

David Fisher: You are right. We have to have the evidence to justify putting the resource into looking at any particular sector. The point I am trying to make is that there are two examples, one current, where it is not purely reactive on the part of the OFT; the OFT is proactively trying to understand what the issues are and act against them.

Jackie Doyle-Price: If we park payday for a moment, I will give you the opportunity to give an example of another area of credit regulation where you have made a difference: you have tackled detriment.

Q281 Nick Smith: Chair, before we get to those questions, I would like an answer to my concern about the value of putting APR on marketing materials and whether there is a better way to improve the debt management industry.

Clive Maxwell: Shall I address APR before giving another example?

Q282 Chair: I still did not get an answer to my Provident question.

Clive Maxwell: I think the answer is that, if there is evidence that that firm is breaking our guidelines and the rules on a systematic basis, we would consider revoking their licence.

Q283 Chair: I think they gave it to us in Committee.

David Fisher: If, for example, we had evidence that the Provident, or any other company, was lending irresponsibly-let us say the company was targeting particular groups of people in a highly irresponsible way-that would be directly relevant to the question.

Q284 Chair: I just don’t understand how you interpret all those words, because it looks to me as if they go onto the estates and target C2DE, about which they were absolutely clear. After we pressed them three or four times, they said: "We do ask the girls first." I am sorry to keep coming to that example, but it is only an example. They were pretty clear that nobody understood the APR. They were lending to really poor people. I don’t understand how you interpret your own rules.

David Fisher: It would depend on the individual’s circumstances. So the fact that a person might be in any particular demographic group does not of itself make it a-

Chair: I think you are really weak. Everything you do and the way you interpret your own words is to the lowest common denominator. That is the feel I am getting. Sorry to say that. Nick wants an answer; Jackie wants an answer, then I am going to Stephen and Ian.

Austin Mitchell: And at some stage, Austin.

Chair: Steve, Ian, Justin, Austin.

Q285 Nick Smith: As for APR and financial literacy, what is a better way of letting people know how much they are really going to have to pay back?

Clive Maxwell: A better way of letting people know is to tell them how much their instalments are going to be and the total amount they will pay in cash to repay the loan. Typically, that is what we require providers to give to people. APR, in theory, is a mechanism for comparing different types of loans, for example, and different types of lending products over time, because it captures that time element. You are right, very few people understand APR properly. That is one of the reasons why we make sure that credit providers are giving cash amounts, when you are turning to instalments and total cost.

Q286 Nick Smith: So you talk about taking action if APR information is not provided. Do you take action if the amounts of real money repaid are not provided?

David Fisher: Yes, if any lender was not providing the information that we specify in the guidance, that would be relevant and we would take action.

Chair: Jackie, ask your question again, then we are going to Steve, Ian, Justin and Austin.

Q287 Jackie Doyle-Price: I should have also prefaced my questions to advise the Committee that I used to work for the FSA in this sector, so I come with some previous interest.

The whole issue of consumer credit regulation is very large. It goes from the second-hand car dealer to big banks. Bearing in mind you have acknowledged that you have not been able to be as prompt in dealing with emerging risks as perhaps we all would like you to be, can you give us an example of where you have made a difference and really tackled detriment in the credit industry?

Clive Maxwell: The best example is the debt management sector, where the OFT carried out a compliance report 18 months ago, looking at debt management. It is a particularly worrying area, given that the people who those businesses are dealing with are inevitably intrinsically people who are already facing financial problems. We care particularly about those sorts of activities. As a result of that work, we have taken enforcement action. We have worked with businesses to up their game and a large number of businesses have left that market, as a result of the actions we took.

David Fisher: We got to the point where we actually warned 129 commercial debt management companies about their practices. As Clive says, as a result of a combination of enforcement action the OFT has taken, refusing to grant licences to companies wishing to enter the market, and companies voluntarily exiting the market because of the pressure that we put on them, about 100 companies have either exited or not been allowed to enter the market since then.

Q288 Jackie Doyle-Price: What about overdraft fees, and unauthorised overdraft charges employed by banks? Obviously, you were really the lead to tackle that, but that again took an inordinate length of time and huge amounts of consumer detriment. Arguably, having dealt with it, we have created another market failure and another opportunity. How do you deal with that, and make sure that, in terms of taking action in one sector, you are not creating an emerging risk in another?

Clive Maxwell: The OFT took action on overdraft fees, using its consumer powers. It took action under the Unfair Terms in Consumer Contracts Regulations, not under the Consumer Credit Act. It took that action and worked closely with the FSA. It took what many people say was a bold decision and pursued a tough legal action. It lost that case in the Supreme Court, but in parallel it carried out a series of bits of work with the industry to encourage them to change their behaviour. We have seen quite a significant reduction in the cost of unauthorised overdrafts, for example, so we have seen some improvements in aspects of that market. You are right though in that if you start making changes in one bit of a market, there may well be consequential impacts and you need to try to think that through.

Q289 Jackie Doyle-Price: Because you did it in partnership with the FSA, did it make a difference that the FSA had a closer supervisory relationship with some of the perpetrators of those offences?

Clive Maxwell: It could have done. In some ways, this is one of the arguments for shifting responsibility for consumer credit to the FCA. We have a situation at the moment when the regulation of bank current accounts is complicated, that the basic regulation of banks and the prudential regulation is a matter for the FSA, that the regulation of bank accounts when they are in credit is also essentially a matter for the FSA, and the regulation of the payment mechanisms for them is for the FSA, but the credit arrangements around those current accounts are a matter for the OFT under our consumer credit powers. We also, therefore, apply our consumer powers. That is complicated. It seems to me that is one of the arguments for shifting responsibility to the financial regulator.

Q290 Stephen Barclay: I must declare also that I worked for the FSA, as did my wife.

Why does the OFT not have the information it needs to regulate effectively?

Clive Maxwell: I think if we had more information it would help us do some aspects of our job better. We collect information as part of our licensing arrangements. We also have other sources of information that I have talked about, such as complaints, and we also have access to market data and things like that, like other bodies. We do not have the sort of systematic data-gathering arrangements that, for example, a prudential regulator would have and would need to have on the balance sheets of individual firms. The licence population-as your colleagues have said, there are 70,000 or so licensed businesses out there-varies tremendously in the sorts of business that they are doing. Collecting large amounts of information from some of those small businesses could have cost implications for those firms.

Q291 Stephen Barclay: It is a bit worse than that, isn’t it? Your licence data is flawed; your enforcement records are not up to date; and you do not have the data to allow you to target your resources effectively. Why is that?

Clive Maxwell: As we have discussed, we do have means to target our enforcement work. We could be doing it better: I don’t disagree with that.

Q292 Stephen Barclay: That is not what the report says. Paragraph 13 says, "The OFT does not have an accurate picture of the proportion of its resources spent on different types of regulatory activities." Paragraph 3.6 says, "Records are often incomplete" and that you are therefore unable to run off the management reports that you would need. Paragraph 3.12 says that the licensing data is out of date-for example, you do not even know how many staff work in the firms that you regulate. You lead the organisation. What I am saying is that if you are lacking basic data-if your records are incomplete-does that not compromise your ability as a regulator to do your basic job?

Clive Maxwell: I think some of those things that you mention do make it more difficult to do the job, yes. I cannot disagree with that.

Q293 Stephen Barclay: So why are there such glaring gaps-

Clive Maxwell: Can I run through two or three of those individually? First, on the proactive things, we do have ways of taking proactive action in response to developments we see in the market through complaints, for example. We track that sort of data-

Q294 Stephen Barclay: That is not so much proactive. My understanding is that you do a bit of thematic work, which is usually based reactively on data coming in from third parties. So you get data from consumer groups and other firms. You don’t do day-to-day supervision, I understand that, but it is very much reactive and intelligence-led from third parties: it is not proactive.

Clive Maxwell: I would describe some of that at least as proactive because it is taking action before you start to see significant problems emerging.

Q295 Stephen Barclay: How many firms have you fined?

Clive Maxwell: We haven’t fined any firms under the Consumer Credit Act-

Stephen Barclay: Not one?

Clive Maxwell: No.

Stephen Barclay: Ever?

David Fisher: No. The ability to fine under the Consumer Credit Act is limited to-

Chair: That is not the question you were asked.

Q296 Stephen Barclay: I am trying to understand how effective your enforcement powers are-

Clive Maxwell: We can fine firms only where we have imposed requirements on them and they have then breached those requirements. Where they have done so, in most cases we find it more appropriate to take action to revoke their licence and take them out of the market altogether.

Q297 Stephen Barclay: What I am saying is that you take two years to do that. Have any individuals been fined, ever, or is that outside your regulatory toolkit?

David Fisher: It is outside.

Q298 Stephen Barclay: Have you ever asked for that as a tool?

David Fisher: To fine individuals?

Stephen Barclay: Yes.

David Fisher: Not that I am aware of.

Q299 Stephen Barclay: So we have got some of the most vulnerable people in society being ripped off by firms, and what is suggested in response to Justin’s question is that you can take up to two years to get round to removing their licence. There is no fine on the firm, and there is no fine on the individual. That does not exactly strike fear in the hearts of those ripping off the most vulnerable people.

David Fisher: The decisions we have taken so far in terms of whether we should use the power to impose a fine are actually where companies have breached requirements. We have decided that the most efficient use of resource was to get them out of the market as soon as we possibly could, so we moved straight to revocation of licence-

Q300 Ian Swales: If I may, there is a really important point here in paragraph 2.16-companies can continue to trade while they appeal against that revocation, and in some cases that appeal can take many years. So you jump in and revoke the licence, but years later they are still trading while they appeal. That is outrageous.

David Fisher: It may be outrageous, but it is the legislation under which we operate. To finish my point, rather than going through a process of imposing a fine and then moving to whether we should revoke, we decided in the case of Yes Loans, which is the best example of this, to go straight to revoking the company’s licence.

Q301 Chair: Why? Explain the rationale behind that.

David Fisher: Because the evidence we gathered was such that we were absolutely-

Chair: Why revoke and not fine?

David Fisher: Because the evidence merited getting that company out of the market as soon as-

Q302 Ian Swales: Can’t you do both?

Chair: Quite. Why not fine? It is a good deterrent, you know.

David Fisher: Yes, fining is a good deterrent, but may I suggest that getting them out of the market is an even better one?

Chair: Why not both?

David Fisher: It is a question of the most effective and efficient use of the resource.

Chair: What we are sitting here saying is that it is because you haven’t got enough people or money to do it. Because you spend so little money on this-£4.5 million-you have not got the resources to do it. That would be the honest answer. It is not in consumers’ interest, and that is because you have failed to raise enough money.

Q303 Jackie Doyle-Price: Can I illustrate that with an example. You are right in revoking a licence for a small car dealer, or whatever, but let us say it is Lloyds TSB. It will never be proportionate to cancel its licence, so surely the ability to fine would be a good instrument for you to have.

Clive Maxwell: It would be, but remember that we can fine only when someone breaches some requirements we have imposed on them. If you are dealing with largely responsible companies, they are unlikely to breach requirements they have agreed to. I am not saying they never would, but-

Q304 Chair: Amyas wants to pop in.

Amyas Morse: I have no difficulty in understanding the logic that says that it is better to take them out of the market, but if you know as a matter of fact that they won’t be out of the market for quite a long time, that is an argument for doing something that is an effective sanction in the meantime, isn’t it? The question being asked is simply that if I know I can appeal and go forward, it might have more effect to say that at the same time as I am doing that-this may sound excessive-piling in with a fine would have an immediate impact rather than something that is deferred for a couple of years. Does that make sense to you, or not?

David Fisher: Yes it does, but may I remind you that every decision we take is subject to appeal, including a fine? Coming back to the point you made earlier, what we have done is to make a conscious choice about the most efficient use of the resource that is available to us in the particular circumstances.

Clive Maxwell: I should make it clear that when you revoke the licence from a business like that it is usually terminal for the business.

Q305 Ian Swales: First, a remark. I want to make sure that the Committee does not over-report on the point about the earlier discussion. Meg Hillier asked me to make the same point that on some of the estates, sometimes the people we are referring to are the only source of credit other than the criminals. Certainly I would not want such people to have no access to credit other than from real loan sharks, which do exist in my constituency and, I am sure, in many others. I think we need to record that.

My points follow on from some of the questions I asked Wonga last week, one of which was about APR. It rightly said that people do not pay 4,000% APR because they pay back in 20 or 30 days, or whatever. When thinking about it, I quickly worked out that, using the £207 example on its website and looked at from an individual customer’s point of view it is absolutely right, but looked at from Wonga’s point of view, excluding administration costs, that £207 can become over £4,800 in 12 months simply by relending it every 20 days to new people. That is a pretty attractive business. If someone offered me the chance to invest £200 at the start of the year and to get £4,800 back at the end, I think I would jump at it.

You talked about preventing people from lending irresponsibly. My question is: do you have any view at all about the rates that people charge? Is it within your remit, or is it whatever anyone can get away with, however they choose to sell it?

Clive Maxwell: We do not have within our remit the ability to set a cap on the rates that people charge. What we do have in our remit is to make sure that businesses consider the creditworthiness and the affordability of loans that are being made. That, of course, takes into account the level of interest and the cost of the loan. Listening to the discussions with the firms last week, one of the things that came out to me was that we are, in a sense, dealing with two sorts of problems. On the one hand, there are a set of problems about the behaviours of firms which are causing real harm in the way they treat their customers. We heard lots of examples of that. The second sort of concern that I have heard expressed is around the actual cost of credit to people-even if firms are behaving entirely properly and lawfully.

The consumer credit regime is not set up and designed to tackle that particular sort of issue, but there are some issues about the way in which the broader market works that we see in other markets. For the most part, the credit market is actually very fragmented, so you are not typically dealing with monopoly providers, for example. However, what really matters in markets like that is that you have an effective demand side. We see this in other areas as well. For a market to work effectively you need the supply side and the demand side to come together. The main reason why you do not have an effective demand side in some of these markets at least is the level of consumer capability. The financial capability of the people making those purchasing decisions means that they are not able to exert a strong competitive influence on the way that that market works, potentially.

Q306 Chair: So where does that take you?

Clive Maxwell: Where that takes me is that some of those problems are intrinsic. They are not about the regulation we are talking about here for the most part. It is about things like improving financial capability and the need to do that if you want to try to sort out the way in which that market works. In other words, the sort of regulation that we are applying here is not necessarily going to fix those sorts of problems.

Q307 Ian Swales: Okay. Can I raise another point which I raised last week? Nearly all providers of credit, from banks and credit card companies downwards-or upwards, however you want to look at it-have a secondary market behind them for where they fail to collect the debts at the first instance. Talking to Wonga, they are about to enter this market, given the high level of write-offs that they have. Again from personal experience, I know that those organisations themselves can then on-sell the remains. When you get to the bottom of this pyramid, you are dealing with some very shady operators. I wonder to what extent your organisations take account of that, whether the regulations extend down the pyramid and whether you have any role in controlling what companies do with their debts?

Clive Maxwell: May I make a couple of comments and ask my colleague David Fisher to add a bit more detail? First, debt collection services need to be licensed, whether they are going on at that retail level or there are other types of businesses going on, as we know too well.

Q308 Ian Swales: They are licensed by you?

Clive Maxwell: Yes, they are licensed by us. You need a license to carry out that sort of business.

Q309 Ian Swales: So when they on-sell their debts, it is going to be to a company licensed by you, if they are doing the right thing?

Clive Maxwell: Yes.

Q310 Chair: And if they don’t?

Clive Maxwell: If anybody is doing debt collection who isn’t licensed, they are breaking the law-it is a criminal offence. The second thing is that where you have a retail-facing business that has been making loans to consumers and it then wants to use a different sort of debt collection firm, it has certain types of obligations, to make sure itself that those sorts of practices are well done.

David Fisher: I don’t have a great deal more to add to that. We put out debt collection guidance, which we have updated. It extends right across the sector. Initially our guidance on debt collection applied only to the collectors themselves. We realised that this was far too narrow in scope, so we have extended it right across the sector. It applies as much to the business that sells the debt as to the business that buys and subsequently enforces it. We set the minimum standards that we require. Debt collection is a sector about which we receive quite a few complaints and we have some active investigations into it. A common theme is the accuracy of the data. We regularly receive in the mailbox complaints from MPs whose constituents are being chased for debts, which they contest for wrong identity, etc. This is a real problem in that sector.

Q311 Ian Swales: How many companies are licensed in this secondary market-not prime lenders, just roughly?

David Fisher: I would have to come back to you with the number of companies.

Q312 Ian Swales: Ballpark? I mean, are we talking hundreds or thousands?

Clive Maxwell: If I am reading my figures correctly, about 5,000.

Q313 Ian Swales: Five thousand? You mention that you have had quite a lot of complaints. Have you revoked the licences of any of those companies, and if so, how many? What kind of action have you taken? Do you take action against those companies where complaints are appearing?

David Fisher: Yes, we do. We have a number of current investigations where the focus is very much on what we call aggressive debt collection practices, and we have taken action against debt collectors in the past; so we have, historically, and we currently are.

Q314 Ian Swales: When you use the word "aggressive", are there any limits? That is probably a difficult word to define, by some people. So what kind of practices would you be saying you act against?

David Fisher: You are right. Aggressive-it takes various forms. It can be literally physically aggressive; it can be verbally aggressive; it can be aggressive telephone calls; it can be multiple telephone calls; it can be telephone calls to your work. It can be leaving messages at work; for example, somebody leaves a message with one of my colleagues at the OFT saying "Such and such debt collection company wants to contact David Fisher-get him to ring us now." That would be a very good example of it, and we do see examples of that sort of thing, yes.

Q315 Ian Swales: You have given those as examples. Are you saying that in all of those cases you would say that that is unacceptable?

David Fisher: That is unacceptable. Yes, I am.

Ian Swales: Interesting. Wow, I would think you have got a very busy job to do there.

Chair: Well, they haven’t got the resources to do it, so I think it is more in the rules than in the implementation.

Q316 Justin Tomlinson: On a positive note, to start with, we did see regulation and reforms make a huge difference to the credit card market, so there are a lot of lessons I think have been learned from there.

The first thing is, last week we talked about some of the suggestions, if we could beef up regulation; so if I just summarise those, I wondered if-presumably everyone will just nod and agree-

Chair: Including Lesley, perhaps, on these ones.

Justin Tomlinson: Yes, but if some of them are a problem, perhaps say why. The first one was that everything was displayed in cash terms. My understanding is, at the moment, legally they have to display the APR, but it is a fair bet to say that a lot of people don’t understand what APR is, or how to calculate it accurately.

Lesley Titcomb: Can I just say there is a constraint here, on us, as I understand it, which is Europe. There is a European directive-and it is a maximum harmonisation directive-which prescribes what has to be disclosed to consumers entering into a credit agreement. So there are limitations on what we can do here, and what we can prescribe for firms.

Q317 Chair: Hang on a minute. Let’s just investigate that a bit. Europe prescribes what you have to put on-

Lesley Titcomb: In certain circumstances, yes.

Chair: But that’s a minimum.

Lesley Titcomb: No, it’s a maximum in this particular case. It’s a maximum harmonisation directive, which means we can’t go below the minimum, and we can’t go above the minimum.

Q318 Chair: Well why haven’t you been in there arguing the toss? Sorry, but if there is a European reg that limits your ability to properly protect consumers you should be in there arguing the toss.

Lesley Titcomb: Going forward, Chair, that might be what the FCA ends up doing, because we will have to go into Europe and negotiate on this.

Q319 Chair: When was this reg set?

Lesley Titcomb: A while ago, I believe.

Q320 Nick Smith: However long it might be, it has been in force for a while, and you haven’t challenged it yet.

Lesley Titcomb: I haven’t had the locus to challenge it yet.

Q321 Austin Mitchell: Is Europe stopping you protecting the poor?

Clive Maxwell: The consumer credit directive does set some limits on the sorts of things that a national regulator can impose on credit-some. There are other areas where we can go beyond that: for example, as I mentioned earlier, there are some aspects of credit business where we do require cash amounts to be set out in the way that contracts are set out to individuals, and we make full use of that.

Austin Mitchell: That is preposterous for such a benign organisation. Where does it stop you protecting the poor? How?

Lesley Titcomb: Well, for example, there might be circumstances beyond the ones where the OFT already does it where you would want to prescribe the disclosure of the total cost of the loan, not just the APR, but there may be certain circumstances in which we are restricted from doing that, because of the maximum harmonising directive that is in place.

Q322 Jackie Doyle-Price: Does it stop you from obliging firms to set out the cost of borrowing £100 for a finite amount of time?

David Fisher: We-

Q323 Chair: You shook your head. Yes or no?

David Fisher: I did shake my head.

Q324 Jackie Doyle-Price: So you can do it?

David Fisher: We can do it via guidance. It all gets rather complicated, but there is a distinction between what the law provides-

Q325 Chair: Let’s ask Jackie’s question. If you want, say, £100, you borrow it for a week or a month and it will cost you x. We may do it through regs because we haven’t got our consumer credit legislation right-or is it Europe that is stopping us doing it?

Lesley Titcomb: Firms can do it of their own choice-that is my understanding-and we would be able to set it out in guidance. Where I might run into problems, or where we, the FCA, might run into problems, is if we wanted to translate the OFT’s current guidance into rules. That is where Europe might constrain us.

Justin Tomlinson: I was at a credit action breakfast briefing on these issues this morning. They did some fantastic focus work with people, and the one thing that consumers are very clear on is that ability to understand things in cash. Some of the payday lenders do that, and they were very complimentary about them, but obviously others do not. I understand the point about Europe; we will add it to the Prime Minister’s list.

Chair: No, I think they can do it, Justin. They have just got to get on with it. I think we are being fobbed off.

Justin Tomlinson: At the very least, what we are trying to look at is, first, guidelines, because we have seen some of them. I will come back to that. The second point is about real-time credit checking-

Q326 Nick Smith: Sorry, before we go on to that, I have a question. Why have we not challenged this European directive before now, if you say that it has been a problem?

Lesley Titcomb: To be fair, I was the one who indicated that there was a limitation on what we might be able to do in the future.

Q327 Nick Smith: Has it been a problem for the OFT in the past, and if it has, why have you not challenged it?

David Fisher: I don’t think we have seen it as a problem, because of the interaction between what the law requires by way of the circumstances in which a business is required to show the APR, which is not in all circumstances, and the OFT’s guidance, where we set out the minimum standards that we expect of people, but it is not the law per se. So in our guidance we can make it a matter that goes to the question of fitness.

Q328 Chair: I am completely muddled now. Is it in your guidance because consumer credit legislation stops you putting it into law, or is it in your guidance because European legislation stops you putting it into law?

David Fisher: In our guidance, we make it very clear to lenders that we expect them to make clear to potential borrowers-

Q329 Chair: Sorry, just answer the question. Are you prevented from putting a requirement for a statement that "£100 will cost you x for a week or x for a month" in law-insisting that they do it, not just having it in guidance-by consumer credit legislation or by European legislation?

Clive Maxwell: The OFT does not have law-making powers. The OFT does not have the ability to create law. We can create guidance which we expect businesses to follow.

Q330 Chair: I understand that, but could we, the UK Parliament, pass a bit of consumer credit legislation that says, "Thou shalt"-or are we, the UK Parliament, stopped from doing that by Europe?

Clive Maxwell: You are stopped from doing it in some respects of how those businesses operate, yes.

Q331 Chair: Explain that to me.

Clive Maxwell: Some of the areas where we require cash amounts are not covered by all aspects of the directive.

Q332 Chair: Give me an example, because you are completely muddling me.

Clive Maxwell: Would giving this information to individuals about instalments be covered by this EC-

Chair: Sorry?

Clive Maxwell: I am just checking with my colleague.

David Fisher: Forgive me, I am slightly confused by all the questions.

Q333 Chair: Where can we not give consumers the information that we, sitting round this table this afternoon, think they should have, because we are stopped by Europe? Give me an example of where we are stopped.

Lesley Titcomb: As I said, Chair, I started this-

Chair: Well, give me an example.

Lesley Titcomb: I do not have chapter and verse for you on that. I am happy to let you know what our understanding is about the limitations on that. What I have understood is that there is a European directive which will prevent us, in some cases, turning what the OFT currently does in guidance into law.

Q334 Chair: I want to know what cases.

Clive Maxwell: May I write to you with some examples of those cases?

Fiona Mactaggart: I am on the web, looking at the straight language summary of the European regulations to which you refer, and on advertising and APRs, in paragraph 2.1, it says: "If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example." That sounds like the opposite of what you have been saying. "This must contain certain standard information including a representative APR. The example must be clear and concise and must be more prominent than the information that triggered the inclusion of the example." That does not sound like they are saying you can’t do it.

Austin Mitchell: It’s insurance against an excuse, that.

Lesley Titcomb: I was the person who raised this as a possible limitation for the future. I just wish to put down a marker in that regard.

Q335 Chair: Well, we don’t understand it and we think it might be an excuse for inaction, so you need to write to us-urgently.

David Fisher: I will be very happy to write to you.

Q336 Justin Tomlinson: What about real-time credit checking? That would then avoid the problems of people suddenly clocking up seven loans within an hour, for example. Further to that-I was at another briefing today on business lending-what if a lender refuses because someone fails a credit check, but then signposts them for either alternatives or where they can get help?

Clive Maxwell: This is about the benefits of having that sort of real-time credit checking?

Justin Tomlinson: Yes,

Clive Maxwell: We think that is a good idea. The greater reporting of loans to credit bureaux, and then the use of credit bureaux by lenders to understand the creditworthiness of potential borrowers, is a good thing.

Lesley Titcomb: We absolutely think that the sharing of good data between lenders is important and we have promoted this in the mortgage market, for example. We heard last week some of the problems there can be with this in terms of the speed at which these deals are being turned round, so they are going to have to look at investing in this to make it happen.

Q337 Chair: And will you insist they do?

Lesley Titcomb: We will strongly encourage it wherever possible. This is what we have been doing. There are several industry-led groups working on this, to improve the data sharing.

Q338 Chair: Will you insist that they do?

Lesley Titcomb: We will work with them. It is important that we try to get the industry to do this for itself if we possibly can.

Q339 Chair: So you won’t insist?

Lesley Titcomb: Not initially, no. We would look at trying to promote it through an industry-led initiative.

Q340 Justin Tomlinson: And from your perspective and experience, it is not a barrier? Companies initially said to me that it was far too expensive, but the evidence we got last week seemed to suggest that was not the case. Are you satisfied that it is not an expensive thing for the industry to bear?

Clive Maxwell: I think it is a good thing. Whether that should apply to every business in every circumstance is the sort of thing I would want to look at, and I guess that is the sort of thing that Lesley is talking about. I should say that there is another benefit here: if you are reporting lending to credit bureaux and you show that over time people repay their borrowing, and that goes on to their files in credit bureaux, that actually helps them borrow more cheaply in the future. I think you heard that from your third witness last week. So there is an additional benefit through to customers if businesses use that sort of thing responsibly.

Lesley Titcomb: We would expect them to invest in getting the appropriate data that they need to do a proper affordability assessment.

Q341 Justin Tomlinson: The real concern we got last week was from the doorstep sellers and their "We take a look and we make a judgment" approach, but I was saying it is not necessarily their problem if people can’t actually service their debt. In the case of some of the others, if they can’t get the money, they can’t get the money back, so it is in their interest to lend only to people who can service that debt, but I wasn’t convinced that was the case for that part of the market.

The third section was on sales techniques, which we have already covered. Then there is the limiting of rollovers and freezing debt, so when people get into difficulty we stop the problem.

Clive Maxwell: Yes.

Q342 Chair: What does that mean?

Clive Maxwell: It means it is a good thing, and in many cases we already do that sort of thing. David, do you want to say-

Q343 Chair: So you have powers to do it?

David Fisher: It comes back to the question of the limitation on the powers that we have. To be absolutely clear, we do not have the power to, for example, set a cap on the maximum number of times that a lender may roll over a loan; however, we do have the ability to look at the individual circumstances. In some circumstances, rolling over a loan once for an individual might not be a problem; twice might not be a problem; but for a second individual, it could well be a problem. The question for us is how the firm is distinguishing between the different types of customers that it has.

Clive Maxwell: And what it does when it believes that a customer is in difficulty of some sort. That is one of the areas in which we have had concerns.

Q344 Nick Smith: Relating to that, last week Wonga said something like-you might remember it because you were here-that after someone has a problem paying back the loan, they let it run for, I think, 60 days, building up interest during that time. They suggested that 60 days was not a long time. I kept thinking, "Gosh, 1% a day could add up to be quite a lot of money." Do you have a view on whether 60 days is reasonable, or should it probably be much less?

David Fisher: I’m sorry, but that is a really difficult question to give a simple answer to. I am going to find myself saying, "It depends," I’m afraid; it depends on the circumstances of the individual borrower. Just as I said a moment ago-

Clive Maxwell: If, for example, a business did that and when it had carried out its credit check it found that that individual was very creditworthy, so they had no concerns about the affordability of the loan, allowing it to roll on for days extra may not present any concerns. On the other hand, if at the same time as that person did not repay when expected, the business became aware of other factors which led them to think that person was in financial difficulty in some way, that would be a cause of concern. It is about how you deal with people when you think they might be in some sort of financial difficulty.

Q345 Nick Smith: I understand it is tricky, so how can you get through that?

David Fisher: That is where the guidance talks in terms of the principles we expect lenders to abide by. At the heart of it is the question, "Is a lender behaving responsibly?" For example, is it responsible in the way it carries out checks of affordability? Is it giving loans to people that it should not be giving loans to? If it is doing that, for example, it is not acting in a responsible way. If it is discovering that a borrower is experiencing financial difficulty or having reason to think that they are, is it showing appropriate forbearance in the particular circumstances? We look at it in those ways.

Q346 Nick Smith: I get all of that, but the 60-day policy was a blanket policy, wasn’t it?

David Fisher: Yes.

Q347 Nick Smith: It was not as nuanced as you suggest it could be?

David Fisher: I guess from any firm’s perspective, it is going to have a policy. It has to have a policy and has to know the framework in which it operates. The thing that really interests us is how is it applying it in the individual’s circumstances. In particular, we are focusing on how it applies the policy in circumstances when a borrower is in financial difficulty.

Q348 Chair: That all sounds really good, except you do so little monitoring. The rules have got to be right, because there is so little monitoring that assumes that every little individual knows the situation, and it will be the most vulnerable who don’t.

Can I just return to Justin’s point? Am I right that Which? has done a survey that says one in three loans taken out pays off another payday loan? Is that true? I got that as a bit of information. If that is correct, the rolling over is a huge part of the industry.

Ian Swales: It is also repeated as well. If it is rolling over in another company, then it will not appear in the stance as rolling over.

Chair: Is that right? That is a Which? survey.

Lesley Titcomb: I have no reason to question that. It illustrates that looking at the full range of the toolkit that is available to us as regulators in these circumstances is really important, because it may be that in these particular circumstances, limiting the number of times a loan can be rolled over, for example, is a far more effective tool for addressing the detriment than some of the others on offer. We as an effective regulator will have to look at our regulatory toolkit and decide what is the most appropriate to take-and take account also, as Clive said, of individual circumstances.

Q349 Justin Tomlinson: That was a very fair response from David in the sense that there are always going to be some people who simply refuse to pay-they could pay, but they refuse to pay-and there needs to be financial penalty to make sure that they do. It is about dealing with those people who find themselves in a position where they cannot and then making sure that they are, first, not overwhelmed by the debt and, secondly, helped to get back on their feet. We have to be careful because not all consumers are vulnerable; there are some who are just playing the system. It has to work both ways.

Given that a lot of this may end up being guidelines rather than legal regulations, what thought has been put into kitemarking so that I, as a consumer, who suddenly decides for the first time in my life that I wish to enter one of those markets, know something about it? We have kitemarks in other trades, and they make people think, "That’s something I can trust." Have you looked at that? With debt management, you’ve got DEMSA. Have you considered that sort of model for other sections?

Clive Maxwell: Our experience is that using codes like that and having members sign up to them can be useful to set standards of behaviour if you have some effective arrangements around that in a body, but I don’t think we can rely on that alone. It might be a way of having extra high standards, but it should not be the mechanism for simply making sure that the law is met.

Lesley Titcomb: We think that the type of situation where it sits on top of regulation and people sign up to it voluntarily is probably best way to promote that. Pre-approval of products is very difficult and costly for a regulator.

Q350 Justin Tomlinson: According to some of the research that we have done, with my chair of the Financial Education for Young People hat on, shows that 91% of people who get themselves into financial difficulty say that if only they had known better, they would have done things differently. Hindsight is a wonderful thing, but there is underlying principle there. I just wanted to put it on record that, as part of this, we need to keep pressure on the Government to deliver financial education because if we have informed consumers, a lot of people would not make some of the decisions that they do, but park that there.

We have talked about the speed of dealing with those whose licences you are looking to revoke. I agree with you that biggest thing you can do is take the licence away so that they cannot trade, because compared with the profits they can make in a short period, the fines you could impose are a drop in the ocean. I worry about how easy it is for them to reinvent themselves, particularly now that this is an internet business-you just change the colour of your branding and off you go.

When I talked about real-time credit checking and talked about people who had been turned down being signposted, did not necessarily mean signposting people to another company that might not be quite so stringent to lend them money, but pointing them towards people like Citizens Advice. I also felt that, with a lot of these products, especially those with door sales teams, there should be a requirement to say something like, "You’ve got a seven-day window when you can cancel, but, by the way, here’s your health warning: if you want independent advice, go to your citizens advice bureau."

Before Yvonne Fovargue jumps on me and says that there isn’t any money, let me say that I think that the way to pay for this, and to give you a bit more money so that you can do a bit more proactive chasing-up, is through Money Advice Service money. Frankly, Money Advice Service money is wasted-£54 million, with which they have reinvented a rubbish website when money-saving experts already do that. They could have used that money to help you and citizens advice bureaux do the one-to-one advice. I know from my casework that vulnerable consumers who get themselves into financial difficulty invariably have a carrier bag full of letters they have not opened. No matter what websites exist, they need somebody to sit down and hold their hand as they go through things and put their lives back on to an even keel. Would you support raiding the Money Advice Service?

Clive Maxwell: I genuinely do not know whether that is the best source of funding, but I do I endorse what you were saying about the importance of two things: first, education around financial capability-the OFT has recommended and pushed for that in the past and we carry on doing that-and secondly, debt advice to individuals, which needs to be personalised. We also expect firms to point individuals towards sources of debt advice if they get into trouble. Again, that is the sort of service that needs the right resources to make it effective.

Justin Tomlinson: One last comment. If you could write to Liz Truss, the Education Minister, on the point about financial education, it would be very helpful.

Q351 Chair: Can I pursue one thing that Justin parked? If you close down a company and remove their licence but they reinvent themselves, what can you do about that?

David Fisher: It is a problem. Phoenixing is possible, and we have found examples of it.

Q352 Chair: What can you do about it? Nothing?

Clive Maxwell: We can look at the directors.

Q353 Ian Swales: Do you disqualify directors?

David Fisher: We do not have the power to disqualify directors-

Q354 Ian Swales: How do you raise cases if directors have acted irresponsibly? Surely there is a recourse in company law to remove their ability to be directors?

Clive Maxwell: We could do that.

Lesley Titcomb: One thing I should perhaps indicate that we have the flexibility to do within the FCA regime is to approve individuals who work in these firms separately. That power gives you the ability to track them through the industry. We know if they have misbehaved at one firm, so if they apply in a different guise, we can refuse them entry and deem them not fit and proper.

Q355 Ian Swales: How often do you do that?

Lesley Titcomb: A lot of times.

Q356 Ian Swales: We are hearing that it is a problem.

Lesley Titcomb: Yes. We have used that power extensively to refuse people entrance-

Q357 Chair: With them?

Lesley Titcomb: No, because they are not with us yet, Chair.

Q358 Chair: Why can’t you do it now?

Clive Maxwell: We do not have the same sorts of powers that the FSA does under the Financial Services and Markets Act.

Lesley Titcomb: This is one of the advantages of the move: we will have a wider range of tools and powers.

Clive Maxwell: I would love to have many of the FSA’s powers.

Q359 Nick Smith: On Justin’s point about financial literacy, it would be pleasing if the Education Minister could support that because it is so important. If you look at figure 3 and the notes about personal loans being valued at £102 billion, you see that it is a massive, big ticket problem, isn’t it? Second in Europe, and all the rest of it. You talk about valuing financial literacy and education, so what was the scale of your past action to address this problem, and what do you think is needed for the future?

Clive Maxwell: We have recommended to Government getting the right sort of financial capability arrangements in place-we said that in our report on high-cost credit in 2010. We have made those recommendations. We are not ourselves responsible for going out there to provide financial education to people, but we have, in the past, worked with other agencies that are to make sure that the information that they are giving is correct and relevant to the problems that we see.

Q360 Nick Smith: Do you think that is a big enough response to the problem?

Clive Maxwell: Taken together within the system, I do not think that there is a big enough response, no, as I was saying.

Q361 Austin Mitchell: I have been sitting here, deferentially silent-well, largely silent-but I get the impression that you are a collection of gutless, powerless bureaucrats who are presiding over, rather than controlling, a situation that is becoming a festival of screwing the poor. A classic instance is where we started: this industry has been growing more profitable; more people are in debt; the loans are bigger and the interest rates have been extremely high for the last two years, yet you have not increased charges. That seems to be a real abdication.

Clive Maxwell: We have increased fees. We have not increased them as much as you would have liked us to-I am quite clear about that. I would say that when I look at the staff who work for me, I know that many of them are passionate about sorting out problems in this market and work hard to do so.

Q362 Austin Mitchell: That is a confession: you are powerless.

Clive Maxwell: We think that the powers we have got have not been sufficient. We have asked for additional powers, such as the ability to suspend licences urgently, and we are also supportive of the move to a new regime, such as the one that the FSA has under the FSMA, which will give that regulator more powers.

I would add one other point, which is that all of this has happened during a period of change in the credit market. We have seen technological change and a switch away from some types of mainstream lenders, such as banks, which have been unwilling or unable to lend, and that has driven other types of lending. Some of these problems are emerging. They are related to technology and our economic climate. We think that the sorts of powers that the FCA will have are the right ones, and more appropriate for dealing with this market.

Q363 Austin Mitchell: I can see that. Wonga has come in and exploited that technology, but it makes me wonder what efforts you have made to persuade the banks that they need to get into this market. All these firms are burgeoning because the banks will not come into this market of loans to poor people-short-term loans particularly-because they are too snobby, or they are inconvenient and difficult. They do not want to do it. Why have efforts not been made to persuade the banks that they have got to get into this market?

Clive Maxwell: I am not sure what the OFT could do to persuade banks to take part in this market. I know that politicians have tried to stimulate lending of different sorts across the economy and it is not an easy thing to achieve. To put this in context, we saw consumer-

Chair: Banks are not lending to anybody.

Clive Maxwell: Unsecured lending in the economy fell from something over £200 billion a year to something like £170 billion, so we have seen a contraction at that level, and there are those big changes going on. The sorts of markets that you have been particularly concerned about today-understandably-are those in the high-cost credit market, which is roughly £10 billion a year, of which payday lending is about £2 billion a year. When you look at the sorts of businesses that we are licensing and the nature of that market, you don’t have to have a very large reduction in lending by banks to create quite a significant change in the response.

Q364 Austin Mitchell: You said that one of the reasons for not increasing the charges was that a new regime was taking over, so let me ask Lesley Titcomb: are you going to increase the charges, so that they are proportionate to the profits made by these firms, the scale of these firms, or the height of their charges?

Lesley Titcomb: We will be differentiating between these firms in two ways. First, they will have to pay a fee to be authorised by us in the first place, and we are considering a differentiated fee regime, so larger firms would pay at least £1,500 to be licensed by us, perhaps more if they are very big.

Austin Mitchell: That is peanuts.

Lesley Titcomb: No, the very big ones will pay more. For example, at the moment a bank applying to be authorised by the FSA would typically pay £15,000 minimum. Going forward we will obviously be looking at differentiated authorisation fees, but we have to recognise that we should not be a barrier to entry. More importantly-

Nick Smith: £15,000 isn’t much of a barrier.

Chair: I think we would all support it as a barrier to entry, if there might be more responsible lenders.

Lesley Titcomb: More importantly, we will also then have to charge an annual fee to recover our costs of regulation, so we will be levying these firms on an annual basis and that fee will be based on the volume of business that they do.

Q365 Austin Mitchell: Will you increase the charges to such a degree that they will give you the extra resources you clearly need to administer this?

Lesley Titcomb: We expect to be expending significantly more on this regime than the OFT does.

Q366 Chair: Have you a planned figure in mind?

Lesley Titcomb: Chair, we are working on this. It is significantly more, but we are still working on our budgets and our plans, so I would not like to be too definitive. Let me just give you a flavour: this year in the FSA we are forecasting that we will spend nearly £13 million on enforcement activities in retail financial services alone.

Q367 Austin Mitchell: Help me with a quandary. I have been watching this for ages, and the arguments roll backwards and forwards on whether we should cap interest rates or charges or whether, if we do that, it will drive people to back-street lenders or whatever. That was what the Labour Government told us when we asked about capping charges. A former member of this Committee is now urging that charges be capped. What is the situation? What can we do to control the scale and cruelty, in fact, of the charges made to the poorest of the poor by these firms?

Lesley Titcomb: We will have a range of tools available to us, as I indicated earlier. In the Financial Services Act 2012, Parliament has given us in this sector, among other things, the ability to cap the cost of credit agreements-a specific power to do so. That is something that came through very late in the legislation.

Q368 Austin Mitchell: And will you be using that?

Lesley Titcomb: We are assessing it at the moment. I am sure the Committee will appreciate that effective regulation is important here, so we have to work out and do the proper analysis to see if it is the right tool to address the detriment. I have to say that the research, the academic studies we have seen so far, have not been complete on this, and they are very doubtful about whether it would achieve the desired effect, which is why I was at pains to emphasise earlier the other elements of the regulatory toolkit that could be there: for example, limiting the number of rollovers and insisting on proper affordability assessments-that kind of thing.

As a responsible regulator, we cannot go out and announce immediately that we are going to use that power. It would be irresponsible of us to do so without doing a proper analysis.

Q369 Stephen Barclay: Can I just clarify how many licences you revoked last year?

David Fisher: I don’t have the figures for last year.

Alex Scharaschkin: It was 27 in 2011-12.

David Fisher: Yes, in 2011-12 we refused 27 applications for new licences, and-

Q370 Stephen Barclay: I was not asking about applications for licences. We had an exchange earlier, and when I asked whether your enforcement was effective, you said, "We don’t impose fines. The tool we use from our regulatory toolkit is to suspend licences." So how many did you suspend last year?

David Fisher: We do not yet have the power to suspend consumer credit licences-

Q371 Stephen Barclay: That is the immediate suspension. Okay, how many licences were revoked last year?

David Fisher: Last year, we decided to revoke the licences of 40 businesses. That is 2010-11.

Q372 Stephen Barclay: It suggests here that it was 6% of the cases you opened. Was it 620 cases you opened for enforcement?

Chair: This is a 2010-11 figure, Stephen, not an 2011-12 figure.

Q373 Stephen Barclay: So 2011-12-how many? It is not a complex question. Your enforcement is predicated on revoking licences, not imposing fines, so how many did you revoke?

David Fisher: In 2011-12, 25.

Q374 Stephen Barclay: Twenty-five. Am I correct in saying that there are 80,000 licences on your books?

David Fisher: Something like 72,000, I think.

Q375 Stephen Barclay: So there are 72,000 licences. You impose no fines; we have already established that consumer detriment continues during the enforcement process that can take up to two years; and you only revoked the licenses of 25. That is correct, is it?

David Fisher: Those are the facts.

Q376 Stephen Barclay: Could you clarify something? You mentioned phoenix firms; have you checked whether any of the people involved where you have taken the licence away are now with firms that have licences?

David Fisher: Yes, that is something that we have done and that we do.

Q377 Stephen Barclay: And some are?

David Fisher: Yes, we have seen some evidence of that, yes.

Q378 Chair: How many of the 25 have set up anew?

David Fisher: Sorry, I do not have the answer to that.

Clive Maxwell: We check as part of our gateway process whether there are directors who have previously been involved in companies-

Q379 Stephen Barclay: What I am struggling to understand is how your enforcement is actually working. I fully accept that moving to the FSA will give greater powers, but that is in the future; you have been leading this organisation in the here and now and there are no fines, there is a delay in which detriment occurs, and you revoke a fraction of licences. How many complaints did you have?

David Fisher: In that year, we received about 5,500.

Q380 Stephen Barclay: Right. We also know that in the Report the NAO suggests that the number of complaints is a fraction of the true number, because the type of people affected by this are not normally forthcoming with complaints.

David Fisher: Yes, I would agree with that. The other point I would make about the number of complaints is that we frequently find that many of the complaints are about a small number of companies, so, from memory, in the payday sector approximately half of the complaints that we were receiving at one point were about two or three businesses that we were actively investigating.

Q381 Stephen Barclay: It still seems a remarkable drop-off rate if only a small number of the true complaints actually come forward and you open cases on just 620 of those 5,500-plus and revoke just 25 licences. Does that not, from a management point of view, strike you as quite a striking drop-off rate between those that are identified and those that actually go through to revocation?

Alex Scharaschkin: Let me clarify the numbers: 600 would be the licence applications and 5,000 the complaints against firms, some of which will already have been licensed.

David Fisher: Yes, there is a distinction to be made between the cases where we have an application for a licence and we are considering whether to grant it, for example; and the cases we call our "own initiative" investigations. When we were talking about revocations, we were talking about own initiatives. You are right, it is largely based on the complaints that we receive, of which, in the last year, we received 5,500. I repeat that, in most cases, they are about a relatively small number of companies. We then take a decision on which of those cases we will prioritise. For example, at the moment we have 34 active investigations into businesses that we have licensed, and last year we revoked 25.

Q382 Chair: Can I interrupt? The way you are operating just seems to me so inconsistent and illogical. You say you are reactive-you only respond to complaints-yet you have just said, in answer to one of Steve’s questions, that the sort of people who experience the greatest detriment are the least likely to complain, so you are not anywhere touching the problem.

Clive Maxwell: Those sources of information include organisations, like Citizens Advice, which are very often dealing with people who are facing those concerns. We do have those sources of advice.

Another aspect of our work, which I think is relevant to this, is that where we identify problems going on perhaps across a group of businesses or a sector of the economy, we find it far more efficient and quicker to deal with a trade organisation, perhaps, to improve standards of behaviour, especially if the problems are not sufficiently severe that you would want to take the licence away straightaway. We will flex around using informal means to improve compliance-even just writing to firms and things like that-rather than taking out formal enforcement action. The formal enforcement is for when things get particularly bad and you really feel you have to take that sort of action. The FSA and other regulators have a similar approach, I think: a graduated spectrum of responses to problems you see in the market. Straightforward enforcement-the tough end of enforcement-is what you use when you have to, but there are often better, cheaper and quicker ways to solve the problem.

Q383 Stephen Barclay: No one is disputing that you use a number of tools. What I am trying to establish is whether, from an enforcement point of view, that works. Given that you have so few enforcement cases, could you explain why you do not know the actual cost of those cases?

Clive Maxwell: We understand the cost of running our teams. We look at the number of cases we have going through them. I think the work the NAO has done on this is useful in identifying some of those points, but we are well aware of the overall costs of running the group and make resourcing decisions on a daily or weekly basis.

Q384 Stephen Barclay: I am just going on the Report, Mr Maxwell. You used to work in the Treasury, of all places, so I am sure you are particularly aware of these things. Paragraph 3.7 of the Report states: "The OFT does not know the actual cost of their enforcement cases. We"-the NAO-"carried out our own costing exercise". That seems quite a remarkable statement. You lead this organisation, and you have a Treasury background. I am just trying to understand why a public body, the OFT, would not have the data, which the NAO had to create for themselves.

Clive Maxwell: I do not have an answer to that.

Q385 Fiona Mactaggart: Chair, you asked about the vulnerability of the groups of people affected by this, and Mr Maxwell’s answer was that citizens advice bureaux are one of the sources of evidence. I just wanted to refer back to Mr Tomlinson’s point, which is that citizens advice bureaux are underfunded for this work. In my constituency, they do not have the capacity to provide advice to these people, because they have not been funded for it. I am very concerned that if you depend on them, you are depending on a narrow group of citizens of advice bureaux that have that funding, not on a universal service; and that any approach that depends only on complaints-even if you recognise that complaints from advisory bodies are part of your complaints-will not reflect the depth of the problem. It is not the depth of the problem that we experience as Members of Parliament.

Clive Maxwell: The sorts of problem identified by Citizens Advice are often consistent with other sources of complaints, including correspondence we receive from MPs. There are multiple sources. Are we capturing all the problems? No, we are not.

Fiona Mactaggart: Exactly.

Q386 Stephen Barclay: Coming on to a different point, Mr Fisher, I note that you are responsible for money laundering. The Report was surprisingly silent on that, so can you tell us how many cases of money laundering you have identified in the last 12 months?

David Fisher: We are responsible for ensuring that certain types of business put in place policies and procedures to mitigate the risk of money laundering. They are primarily estate agents, which are quite well recognised as somewhere money laundering can happen, and certain other financial institutions that are not separately regulated or regulated by the FSA.

Most of the work in terms of our anti-money laundering responsibilities has been focused on ensuring that estate agents are complying with the regulation. Perhaps the biggest impact case we had recently was in the payday sector where we took a decision both to revoke the consumer credit licence of a Finnish-based payday lender and to impose a £500,000 fine on it. The fine element was because it was very clearly not complying with the anti-money laundering regulations, as a result of which it was massively defrauded. So that is perhaps the best illustration I can give you of what we are doing in that space.

Q387 Stephen Barclay: Could I come back to the question? How many cases have you identified? How do we know if the policies are working?

David Fisher: I do not have the figures to hand but we can get back to you. In terms of the absolute number of cases, it is a relatively small number.

Q388 Stephen Barclay: But ballpark, are we talking fewer than 10?

David Fisher: Can I come back to you on that?

Q389 Stephen Barclay: So how do you satisfy yourselves that your anti-money laundering policies are effective?

David Fisher: It is largely a question of doing frequent inspections, particularly in the estate agency sector. We have a team that is dedicated to doing that. All companies for which we are responsible are required to register with the OFT. We make sure that we have a public register that people can access so that they can see who is registered and bring to our attention, for example, estate agents who should be registered but are not. And then we have an inspection regime.

Q390 Ian Swales: One of the things that the Committee is probably struggling with is whether your response is proportionate to the problem. Paragraph 7 of the Report says: "We estimate that unscrupulous behaviour by firms in this market cost consumers at least £450 million in 2010-11, with the most vulnerable customers potentially most at risk." Amazingly while I have been sat here this afternoon I received a message which I did not know was coming from my local social housing providers, Coast and Country Housing. They have launched a campaign this afternoon called the Shark campaign against payday lenders. Apparently tomorrow is payday loans danger day. It is the peak day for payday loans in the year, because so many people got paid just before Christmas and are not being paid until the end of January and are running out of money right now.

They have launched that campaign today. As a small step, they are advertising the benefits of credit unions and so on. They are putting adverts against payday loans on the livery of some of their vans, just to have a go at the asymmetry in the advertising market. Well done to them. That just shows you. Why would a social housing provider feel that was a valid thing for them to do? I will leave you to speculate, but it is pretty obvious that they are seeing the pain caused by all of this in a way that I think that your organisations, in reactive mode, waiting for official complaints, are simply not seeing. How do you react to that?

Clive Maxwell: We do get concerned about some of the problems we see in this market. When I look at the overall work of the OFT, of which credit is part, some of the most distressing stories and examples of problems we see are very much about credit provision. It matters a lot to us to tackle these problems. Turning to the £450 million detriment, as the NAO says, that is made up of a large number of different factors and different sorts of detriment. All regulators seek to reduce detriment. I think seeking to reduce it to zero is not a realistic option. It is also worth noting that because that detriment comes from different sources and different sorts of problems, different sorts of responses will be needed.

We have had a lot of discussion today about the behaviour of certain types of credit firms. That is the sort of thing the OFT can take action against and does take action against. Some other problems are about the design of credit products, for example. That is typically not something that the OFT can get involved with, given the powers that we have. It is something the FSA will be able to tackle in the future.

The third area we have touched on concerns problems to do with the way in which consumers relate to these firms, in connection with consumer education. That is not something we can tackle directly but we can help other organisations that do.

Q391 Ian Swales: That brings me to my final comment and to figure 6, which is a long catalogue of the risks to consumers. I am not sure that people watching this discussion-obviously we have not had time to look at every bit of detail-would have the confidence that the sum total of the official response to all the risks, and there is a big catalogue here, is adequate to deal with the problem. If you look at all the various factors under the various headings, I do not know if any of you have done this, whether you have gone down this page and said, "Yes, we do that and we do it well. We don’t do that, that is not us". What would be your reaction to the catalogue in figure 6?

Lesley Titcomb: That very helpful delineation of the risks by the NAO is forming the basis of a lot of the proposals that we are developing for our regime in the FCA. For example, we are taking that catalogue of risks and saying, "What are the types of firms that demonstrate those risks to the highest degree?" We propose to have a differentiated regime where we impose higher requirements, such as more intensive supervision on those firms doing high-risk activity. They will also be charged more for authorisation, as we talked about earlier. They will, for example, have a wider range of people registered with us as approved persons. We will collect more data from them and generally apply the full range of our regulatory toolkit more to them.

It is also important from the point of view of our demonstrating that we are being proportionate-I am sure that is a real concern of the Committee-and that we are not applying the full panoply of what we can do to small lower-risk firms and driving them out of business. We are very much designing a risk differentiated regime based on that very comprehensive analysis.

Q392 Ian Swales: That is good to hear. The report also talks about self-regulation and codes of conduct. Do you believe that key parts of that should be moved on to a statutory basis and, if so, in what area?

Lesley Titcomb: First, I should say the vast majority of areas which the OFT has as guidance at the moment we would propose to include in our rule book. Much of it as rules, rather than guidance. We feel that industry codes sometimes have a role to play. We have used them perhaps rather less than the OFT, but they can have value, for example, in data sharing. We make less use of them-

Q393 Ian Swales: Do you have the freedom to add rules and then have the teeth to enforce them without having to come via this place?

Lesley Titcomb: Yes, you have hit on the No 1 differential here between the regime of the OFT and us. What we get here is flexibility, because we do not have to come back to Parliament every time we want to change our rule book. We will be able to make rules and I illustrated to you earlier the extent-as many people will be aware from reading the press-the extent of our enforcement powers and the range of sanctions that are available to us.

Ian Swales: That gives me slightly more confidence. Thank you.

Q394 Chair: We heard about fraud last week and the use of continuous payment authority to take money out of people’s bank accounts fraudulently. What are you doing about that aspect?

Clive Maxwell: That is an issue about which we have a growing concern in exactly the way that you set out in the Committee last week. It is something that we are actively looking at. When we conclude our report on payday lending in February we will say something about that.

Q395 Chair: What does that mean?

David Fisher: The short answer is that it goes directly to the question of the competence of the firm, which is one of the things we look at when we ask whether it is fit to hold a licence.

Q396 Chair: So will you look at allegations of fraud for-

David Fisher: The incidence of fraud is relevant to the question of whether a company is fit to continue to hold a credit licence. That is what we can say about that.

Clive Maxwell: Clearly, individual businesses may find they suffer from that sort of thing occasionally. What we are bothered about are the firms that suffer that systematically, which appear not to have the processes in place to deal with it.

David Fisher: I gave an example a few moments ago of the Finnish company, MCO; it was absolutely rife in that business. That led us to revoke the licence and secondly to impose a fine.

Q397 Chair: What is the threshold of rife as opposed to acceptable?

Lesley Titcomb: Typically, if we were looking at it from our perspective we would be looking for systematic and repeated cases of abuse, it would not be a one-off case. We have the advantage that we can come at this issue from the other side; that came up last week. We can make it very clear to the public that they can go to their bank and cancel a continuous payment authority. We have issued a booklet which makes it very clear to the public, and have publicised this through social media, that they can insist on their bank cancelling the CPA and the bank cannot say, "You need to get the lender to do it." The banks are absolutely at liberty to and should be cancelling those CPAs if requested to do so by the customer.

David Fisher: We also looked to see whether the customer-

Q398 Chair: Do all the agencies know that? That is really interesting. You sign this contract and what you are really telling us now is that when I take out a payday loan and authorise them to go to my bank to start withdrawing payments, I can override that.

Lesley Titcomb: You as the customer can go to the bank and cancel the CPA.

Q399 Chair: They can then sue you on the contract?

David Fisher: You still owe them the money.

Lesley Titcomb: You still owe them the money. There was confusion expressed last week about that.

Q400 Chair: Have you considered the action taken in other countries because there is a huge range of responses on things like capping which Austin raised. What is your view there? What do you want in your toolkit?

Lesley Titcomb: We are looking at what is happening in other countries. Indeed a Member of the House of Lords sent me some very useful information last week about what they do in Florida to limit access to payday loans. We are indeed looking at what other countries do in this regard. We see a variety of tools such as limiting rollovers, limiting the number of loans that a person can have, that type of thing.

Q401 Stephen Barclay: Is there any estimate of what the resource allocation will be?

Lesley Titcomb: I spoke a little bit about that earlier. We expect it to be significantly greater than that available to the OFT. We are still planning budgets, doing the design of our regime so I am not in a position to be definite.

Q402 Stephen Barclay: Could we have a note about what it is for the OFT at the moment so that we can baseline that? Could you clarify this, Mr Fisher? I appreciate that enforcement takes time, but on those firms where you have a concern and are taking action, do you send in investigation teams as a matter of routine policy to look at those firms for other issues while that initial investigation is ongoing?

David Fisher: We would. So, for example, if we were looking at the fitness to hold a consumer credit licence we might also look at their compliance with the anti-money laundering regulations, for example.

Q403 Chair: Do you warn consumers if you are investigating a particular firm?

David Fisher: No. Not individual firms. We are constrained-

Q404 Chair: Should you?

David Fisher: We are unable to.

Q405 Chair: Could you?

Lesley Titcomb: The situation at the moment is that if we are carrying out an enforcement investigation, we do not usually talk publicly about that. In the FSA 2012 Act, Parliament has given us powers to publish warning notices, so to go public on something at an earlier stage in the process than has hitherto been the case. We are examining how we may use that power.

Amyas Morse: I want to check on whether they will be able to hit the ground running on this. In other words, transition year 2013-14, what protection will people get during that time? How are you going to work together to make sure that you get things in place very quickly?

Lesley Titcomb: We are already working very closely with the OFT. We have a programme up and running-I am in front of you because I’m responsible for it at the FSA-to plan for taking on this work. We’re working very closely with David, Clive and their teams. We will retain the OFT expertise because the legislation that will give effect to this allows for a TUPE-type transfer for OFT staff into the FSA/FCA. We are looking at how to improve their certainty about what that would mean for them and to increase their familiarity with the organisation so that we make sure that we get the key expertise. We have some in this area because of our experience with the banks and the mortgage market in particular, but we very much want to make sure that we bring the expertise over.

On the protections, we are looking to introduce what we call an interim authorisation regime. If our consultation and everything go to plan, we want to be able put firms through the full FSA authorisation process, but, given the numbers involved, that will probably take us two years or so from 2014, if we get the powers. In the meantime, we want to have an interim regime.

The first thing we need to do is know who these firms are, so we will require them to register with us by a particular date. They will be subject to our enforcement powers and our rule book during that period and we will carry out some supervisory activity on them. Once we have put them through the full authorisation process, which is quite a high hurdle for them to get over-they have to demonstrate to us that they are fit and proper to do business-they will then be subject to the full supervisory regime and the full range of powers.

For example, when we took on the regulation of the sale and rent back market, where there is a great deal of consumer detriment, we took that approach. We didn’t grandfather the firms in; we put them through the authorisation process, and a large number of them chose not to apply or didn’t make it through the process.

Q406 Chair: What proportion?

Lesley Titcomb: My understanding is that there are only one or two firms left in the sale and rent back market. That is interesting in itself because there is a balance to strike about barriers to entry and whether a change of regulator means that more people leave the market than would otherwise be the case. Does that reduce the availability of credit for consumers? It’s a very interesting balancing act that we’re trying to get our heads around at the moment.

Chair: I wouldn’t mind the barriers-I’ve said that before. They should be pretty high.

Jackie Doyle-Price: Except that that sends it to the illegitimate sector.

Lesley Titcomb: Indeed.

Q407 Jackie Doyle-Price: I hear what the OFT said, having lived with this for a long time. You haven’t had enough resources or powers to tackle this, but I’m not clear about how far we will see a change. I want to seek some assurances from you on that.

One of the questions that I had earlier was about how fleet of foot the regulator can be in dealing with risk because a lot of detriment can be caused if it is too slow. I joined the FSA in 2005. In my first week, you did the first study into payment protection insurance and abuse, and it took five years to deal with that. Can you give me an assurance that, on credit, you will be a lot quicker?

Lesley Titcomb: It will not surprise you to know that we are learning the lessons from PPI and that experience. I’m sure you have read a lot of what Martin Wheatley, the CEO designate of the FCA, has been saying about how the FCA will need to be more on the front foot, more interventionist and braver at an early stage, intervene when it sees emerging risk, and deal with it quicker. We are redesigning the way we do conduct regulation in the FCA. That is set out in our "Journey to the FCA" document, which you may have seen.

We will, for example, change our approach to the supervision of firms in terms of how they conduct their business. If I can expand a little on that, it may reassure you. We will give the largest firms a relationship manager, who will regularly carry out a risk assessment of a firm’s activities, its business model and so on. Where there are weaknesses in what it is doing, the firm will have to address them. There will then be a considerable number of people in supervision who focus on products and issues and across sectors rather than just on a firm-specific basis. Then there will be a number of people who do what you might call event-based, reactive stuff, but the real trick is to get the balance so that you do less of that and more of the proactive spotting stuff early and intervening early. That is how the FCA aims to distinguish itself from the FSA in the past.

Q408 Jackie Doyle-Price: You mentioned earlier, in response to another question, that you had set aside £13 million for enforcement action in the retail market. Again, in my experience, I found the FSA a bit too reticent about enforcement action. How does that compare with what’s gone before?

Lesley Titcomb: In its current activities, the FSA this year, for the stuff that’s already in our remit, is forecasting to spend nearly £13 million on retail enforcement action before we then apply extra resource for consumer credit. I was using it as a kind of illustration of scale, because I cannot be more definite on the figures at this stage.

Q409 Jackie Doyle-Price: Is that an increase on what you spent on retail enforcement action in the past?

Lesley Titcomb: I would think it is pretty consistent. What I can tell you is that, over the period since 2010, we have achieved £290 million of redress for retail consumers through our enforcement actions.

Q410 Jackie Doyle-Price: What has come out quite clearly is that the OFT has not had the power. It can give guidance and it has been reactive, but when we see detriment, what sort of tools will you be applying? We have discussed caps and I agree with you that they are not the best tool. We have discussed product regulation. It comes back to behaviour. Do you see that being about challenging firms or more rules?

Lesley Titcomb: It will be a range of things. For example, in the most egregious cases, we move into enforcement investigation and work through to that and then have the range of sanctions that could involve anything from a private warning to a fine and the removal of authorisation and all the rest of it. However, it is important to understand that, before we get to that, we have a range of supervisory tools as well.

Q411 Jackie Doyle-Price: We are looking at rules around responsible lending.

Lesley Titcomb: Yes, absolutely. Affordability assessments-

Q412 Jackie Doyle-Price: Treating customers fairly.

Lesley Titcomb: Well, this is the other point. We have the principles available to us. The principles have the status of rules. Principle 6 is the requirement to treat customers fairly, and the vast majority of the enforcement actions we take are actually taken under the principles, rather than for the breach of a rule.

Q413 Jackie Doyle-Price: So your power is actually much stronger than the OFT’s historical powers in this regard.

Lesley Titcomb: We believe so, and we also have specific new powers around the ability to ban products and to ban them temporarily while we go and consult on whether it is appropriate to continue that. That is an important new power in the FSA 2012. We also have the powers around financial promotions as well.

Q414 Jackie Doyle-Price: We just need to be sure that you are going to use them. I will give you an illustrative example, and you can perhaps tell me what you would do. We have a payday lender called When a consumer defaults, that lender charges £25 for each reminder, which they send on the first, third, fifth and seventh day of default and £50 on the 10th, so you can see in that scenario that the consumer will be racking up debts very quickly. What tools would you apply there?

Lesley Titcomb: The first question is whether the supervisors have picked it up in the course of their regular contact with the firm or whether it has come in through a complaint or whatever. We would have rule in there first of all about how people in arrears are being treated, and we have had those successfully operating in the mortgage area, for example. We would have similar rules to that which the OFT has and the guidance about how we expect people to behave when their customers get into difficulties. Now, if an egregious thing like that comes to our attention, we obviously would make contact with the firm and look at it and tell them to stop. A supervisor then has to weigh up whether the issue is sufficiently difficult, problematic, ongoing and so on that it needs to be referred to enforcement as well. The first thing that we have to do, as I am sure you would agree, is to get it to stop. Merely referring it to enforcement does not do that. For example, we may need to intervene and tell them that they cannot continue, put a limitation on their permission of activities and all that kind of thing. The priority is to stop the action.

Q415 Ian Swales: Would you have retrospective powers in that case? Would you be able to go back to the people who have had those charges-

Lesley Titcomb: Exactly.

Q416 Ian Swales: You could. Is that a yes?

Lesley Titcomb: Then you look at what you could do about the back book. Absolutely. The first thing is to stop the bad behaviour. The second point is to work out who has suffered detriment and to secure redress.

Q417 Jackie Doyle-Price: I have one final point on the risk of regulatory action creating risk elsewhere. We talked about the impact of overdraft charges, which I think has actually fuelled payday lending, but you referred to the mortgage market review, which has had the effect of removing self-certification from the marketplace. However, that brings with it its own consumer detriment, so how do you tackle that?

Lesley Titcomb: Reducing self-certification. I think the mortgage market review has been interesting in that regard. Yes, it has cut the level of self-certification loans, and there was concern when we first went out with our proposals that it would be removed entirely. We were at pains to emphasise that there are certain circumstances when people have to self-certify if they are setting up a business, for example, and are looking for a mortgage. They will not have lots and lots of years’ accounts to show or that type of thing. We were at pains to say that we were not trying to outlaw it entirely. We were trying to get through that it was important for lenders to do proper affordability assessments and that just allowing people to self-certify their income was not the right way to do so. Even in a set-up situation, are small businesses going to have a business plan, projections and that type of thing?

Q418 Chair: You have done a very good job of convincing us that the FCA is going to be much more fleet of foot. Why have they left you as an acting chief operating officer for getting on for three years?

Lesley Titcomb: Because just at the point I took over the role, the Chancellor announced his intention to break up the FSA, and I can confirm that I will be joining the FCA going forward. I suspect that the issue of my status as acting will then be resolved.

Chair: Thank you very much indeed. The other thing to say is that we will come back to this, if the NAO is happy to, in a couple of years-two years-to see whether what you are promising us happens.

Prepared 30th May 2013