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Legislative Reform (Consumer Credit) Order 2008

Volume 704: debated on Wednesday 8 October 2008

rose to move, That the draft order laid before the House on 17 June be approved.

The noble Lord said: My Lords, the draft order is to amend the Consumer Credit Act 1974 in three ways: first, to exempt from regulation buy-to-let lending that meets certain specified conditions; secondly, to clarify the position on the provision of statements for fixed-sum credit agreements, such as personal loans; and, thirdly, to provide definitions of what constitutes “payments” for the purpose of issuing notices of sums in arrears for fixed-sum and running account credit agreements. Examples of these include credit cards and consumer hire agreements. The measures update the provisions introduced into the 1974 Act by the Consumer Credit Act 2006, which received Royal Assent on 31 March 2006. The measures therefore ensure that the regulations fully reflect the original policy intentions.

Until April 2008, the vast majority of buy-to-let loans were exempt from regulation. This was either because lenders were able to use an existing exemption under the 1974 Act or because the loan was for more than £25,000. The £25,000 limit was removed by the 2006 Act, effective from April, extending protection to all consumers’ credit agreements, regardless of value. This was in response to the changing nature of borrowing, with more and more loans above £25,000 not regulated. But it is not our intention to regulate buy-to-let lending in instances where the loan is secured on a property and the borrower, or a relative, intends to occupy less than 40 per cent of that property. Such activity is mainly for investment or business purposes. The risks to the borrower’s home are low in the event that they have difficulty repaying the loan. Currently, there is no evidence to suggest that regulation is needed in such cases. A transitional arrangement has therefore been put in place to exempt buy-to-let loans from regulation until such time as the draft order comes into force.

The draft order creates a new exemption from regulation under the 1974 Act, covering consumer credit agreements for buy-to-let purposes. It applies where the loan is secured on the property and where the owner, or a relative, intends to occupy less than 40 per cent of the property. The measure will maintain the status quo regarding regulation for buy-to-let lending at no additional cost to industry or detriment to buy-to-let investors. Both will continue to benefit from a level playing field in the market.

The 2006 Act introduced a new requirement for lenders to provide borrowers with regular statements for fixed-sum credit agreements. The statements are intended to cover a period of up to one year, run consecutively, and be provided within 30 days of the end of the period they cover. However, the new requirements of the 2006 Act, taken together with Regulation 11 of the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007, do not fully meet these objectives. The existing wording in the 2006 Act does not allow for the provision in the 2007 regulations which gives the creditor 30 days to send the statements.

The draft order therefore revokes Regulation 11 of the 2007 regulations and amends the 1974 Act. It provides that under a regulated fixed-sum credit agreement, the lender must give the borrower statements covering consecutive periods of not more than one year, and that such statements must be provided within 30 days of the end of the period to which they relate.

The 2006 Act introduced a requirement for lenders to provide notices of sums in arrears to borrowers with regulated fixed-sum and running-account credit agreements, and for owners to have a similar obligation under consumer hire agreements. Certain conditions have to be satisfied before this obligation arises, some of which relate to payments. This has given rise to a discussion over the precise definition of the word “payments”.

The industry has suggested that a definition of “payments” is required to avoid it being construed more widely. A broader interpretation might include any sums falling due under the agreement at any time, rather than just scheduled repayments and hire payments—for example, default sums that might become due as a consequence of a missed regular payment or over-limit amounts on credit-card agreements which could become payable immediately the customer exceeds their credit limit. As a result, first notices of sums in arrears could be triggered more quickly than would otherwise be the case. The draft order therefore defines “payments” for the purpose of issuing notices of sums in arrears as those payments made at pre-determined intervals provided for under the terms of the agreement. In the case of consumer hire agreements, “payments” is defined to mean those payments made in relation to any period of hire as provided for under the terms of the agreement.

This measure will ensure that the costs to industry of issuing statements and notices of sums in arrears are kept to a minimum by providing greater clarity. It will also avoid any unintended or unnecessary changes to systems. In addition, it will provide more clarity for consumers, who will receive information in a comprehensible and consistent manner. I believe that the order will benefit both consumers and businesses. It clarifies the obligations of industry, it simplifies the framework for consumer credit, and I commend it to the House. I beg to move.

Moved, That the draft order laid before the House on 17 June be approved. 12th report from the Delegated Powers Committee.—(Lord Brett).

My Lords, I thank the noble Lord, Lord Brett, for taking us through this Legislative Reform (Consumer Credit) Order 2008 so thoroughly. It passed through the other place unopposed and without debate. As the noble Lord has so described it, we support it. I do not need to describe it further other than to ask for clarification on a couple of points.

According to the department for business impact assessment, the combined savings arising from the order amount to some £103.2 million. The same assessment envisages no cost whatever. Can the noble Lord confirm that there will be no unforeseen cost to businesses or consumers as a result of the order? Secondly, despite the deregulation the order achieves, consumers will still be able to seek redress through the courts or the Office of Fair Trading. Can the Minister outline what action the Office of Fair Trading can take against lenders found to be in breach? That is all I wish to say at this stage.

My Lords, having congratulated the Minister on his elevation to future success, I understand that the noble Baroness will be relinquishing her position. This may be the last time we see her under these august circumstances. I understand that the noble Lord, Lord Hunt of Wirral, will replace her. We congratulate the noble Baroness on the charming and eloquent way in which she has conducted this portfolio.

My Lords, this is clearly an important order. The orders that come to us in this way are always highly technical; however, they raise very serious and important issues. It is important to see how buy-to-let lending, which was always intended to be excluded under the framework of the consumer credit legislation, will be dealt with. It is slightly less important, although nevertheless important for the lending community, to have clarification of what they need to do on the giving of statements for fixed-sum credit agreements. A technical matter, but one which is very important for the industry, is that there should be a clear definition of how payments for the purposes of issuing notices of sums in arrears are determined.

While I feel the heavy weight of the chairman of the Delegated Powers Committee behind me—the Minister has also sat on that committee—I must say that these issues should be dealt with by affirmative order. We cannot amend but we can scrutinise and it is very important that such issues are dealt with in that way. Also, I suggest—looking nervously at the Box—that an affirmative order concentrates the mind of those who draft these regulations to ensure that they are effective. This is a very good example of complex issues and I fear that despite the elevation of the noble Lord, Lord Brett, he will not appear on the “Today” programme tomorrow morning. Nevertheless, the regulations are very important for the industry. The combination of consultation and concentration on the affirmative order have produced regulations that I can support.

My Lords, I thank both noble Lords for their contributions. I made my debut yesterday when the adrenalin was flowing faster and my nerves much tighter than they are tonight—the audience was much larger. I am very appreciative of the kindness and tolerance of the whole House, particularly of the Front Benches of both the Conservative and Liberal Democrat Parties. I am also delighted because the points that have been made are ones that I can respond to positively.

It is the case that unlike some pieces of legislation, this one has been heavily consulted on and enjoys broad support not only in Parliament but also across industry, and therefore I can offer the assurances sought by both speakers. I turn first to the points made by the noble Baroness, Lady Wilcox. On the question of whether there will be additional burdens, I can assure her that there are no additional costs to business associated with these proposals. The proposal to exempt buy-to-let lending from the regulations simply maintains the status quo, while the definition of and proposals on statements ensure that the costs to business are kept to a minimum. There has also been considerable consultation within industry about how to minimise the costs to itself by issuing these statements.

The only point I would slightly disagree with is that this is a matter of deregulation. The Government do not believe that it is a question of deregulation at all; these are corrective measures designed to achieve what the original policy intention sought to provide in each case. However, in doing so, the provisions will ensure that the Consumer Credit Act 1974 does not place unnecessary or unintended burdens on business as a consequence of the ambiguities of the previous legislation, so in that sense I am able to offer the assurance that there should be no additional costs. On the noble Baroness’s second question about what will happen to people who are in breach, the 1974 Act provides under the exemptions that there can still be challenges to agreements in the courts on the grounds that the relationship between the creditor and the debtor is unfair. In addition, the debtor can complain to the Office of Fair Trading which can take action under the requirements of the creditor’s licence by, for example, imposing penalties or, if necessary, the licence can be revoked.

Turning to the points made by the noble Lord, Lord Razzall, again I do not believe that there is a great deal between us. Having read the statement, I agree that these are highly technical matters, and while they may relieve the adrenalin they probably enhance the desire to go to sleep during the making of the statement. Noble Lords in this House, of course, are more likely to listen and always to make pertinent points, but I hope that we do not have any areas of major disagreement. On that basis, I hope that I have met the points that have been made and I commend the order.

On Question, Motion agreed to.