Considered in Grand Committee
My Lords, I am pleased to introduce the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 and the Financial Services Act 2012 (Consumer Credit) Order 2013. I will refer to the former as the RAO order and the latter as the consumer credit order.
I am sure that we can all agree that a well functioning consumer credit market is vital to the functioning of a healthy economy. However, the market is not functioning as it should, and consumers are not being properly protected. The current licensing regime, run by the Office of Fair Trading and established under the Consumer Credit Act 1974, lacks the capacity and powers to comprehensively tackle consumer detriment in a fast-innovating market. The National Audit Office estimated that there was £450 million of unremedied consumer detriment in this market last year. This Government are determined to ensure that the market functions well for consumers, firms and the economy. That is why we are moving the regulation of consumer credit to the Financial Conduct Authority next April. Consumers will be far better protected; the FCA will require higher standards of firms and will have more robust enforcement powers. However, we will also make sure that the regime is proportionate and supports a sustainable and competitive credit market.
There is widespread support for the transfer to the FCA, and agreement that we have got the balance about right. We first consulted at the end of 2010 on broad policy options. Then, following extensive work on regime design with firms and consumer groups, the Government published detailed proposals on 6 March this year.
The statutory instruments that I am introducing today take into account the feedback that we received from a wide range of stakeholders during the consultation period. These instruments effect the transfer of consumer credit regulation to the FCA under powers taken in the Financial Services Act 2012. The RAO order amends the Financial Services and Markets Act 2000, or FiSMA, and associated secondary legislation, to bring consumer credit into the scope of FCA regulation and to apply the FiSMA regulatory regime to consumer credit. The order also makes extensive amendments to the Consumer Credit Act 1974—or CCA—in relation to the functions of the OFT. The consumer credit order ensures that retained provisions of the CCA continue to apply appropriately and can be effectively enforced.
Before turning to the specifics of the new regulatory regime for consumer credit, I draw attention to the scope of regulated activity in this market. The Government’s policy is to carry forward the current scope of consumer credit regulation. We are, however, making a few key changes that were well supported by respondents to the consultation. The most significant of these relates to a new growth sector in the market, peer-to-peer lending.
First, the RAO order creates a new, bespoke regulated activity that brings together what peer-to-peer platforms do when they arrange credit agreements between lenders and borrowers. It ensures that the consumers who borrow and those who lend via the platform are both protected. Secondly, we are aligning the definitions of credit broking and credit intermediation, and narrowing the definition of credit reference agencies to capture only those who provide credit references as a primary activity. Thirdly, we are removing third-party tracing agents from the scope of regulation, as they do not carry on a financial activity. Fourthly, we are clarifying that not-for-profit debt advice is carried out by way of business and is therefore a regulated activity. This was called for by not-for-profit debt advice providers themselves, and will ensure consumer protection is consistent. Finally, in view of responses to the consultation, we are extending the current exemption for insolvency practitioners to include advice that they may reasonably provide in their professional capacity in anticipation of a formal appointment.
I now turn to the three main components of the new FiSMA regime for consumer credit. The first one is authorisation. Unless they are exempt, all firms will need to be authorised by the FCA in order to carry on consumer credit business. They will have to meet a much higher bar than under the current licensing regime. The RAO order revokes the OFT licensing regime to allow for the move to authorisation under FiSMA, but the Government recognise that a one-size-fits-all approach will not deliver their vision for a competitive and sustainable credit market.
The RAO order therefore provides for what is known as the “limited permission regime”. To be eligible for this regime, firms must only conduct certain specified lower-risk credit activity. The quid pro quo is that those firms will face lower costs and fewer regulatory burdens. The RAO order defines the activities which are eligible for the limited permission regime. They include: credit brokerage, where firms do this as a secondary activity to their main business, such as car dealers; and sellers of goods and services who provide credit without interest or charges, for example a gym or golf club.
The FCA must assess firms against prescribed threshold conditions. Limited permission firms will have to meet a smaller, modified set of threshold conditions which have been designed to suit the lower-risk nature of their business. For example, a simpler solvency test will apply. One of the advantages of the FCA regime is that it can make rules to tackle actual or potential detriment in the market much more quickly than the Government could legislate. Its rules are also binding on firms, while the OFT’s guidance is not.
The RAO order repeals certain provisions of the CCA and related secondary legislation to allow the FCA to make rules in these areas. It revokes advertising requirements so that the FCA can make rules under its financial promotions regime instead and it revokes “form and content” requirements in the CCA so that the FCA can cover these requirements in its rules.
Finally on enforcement, the FCA has a more flexible and robust enforcement toolkit than the OFT, and will have greater resources to take action on breaches of its rules. The RAO order therefore provides that certain requirements in the CCA that are currently subject to criminal penalties should instead be punishable by the FCA’s regulatory powers. Some criminal offences in the CCA will remain in force under the FCA regime, where there is greatest risk of consumer detriment.
In addition, the consumer credit order applies the FCA enforcement toolkit to provisions of the CCA which will still apply under the new regime. It also ensures that there is no double jeopardy—a person may not be convicted of an offence under the CCA where the FCA has already used its enforcement powers in relation to the same breach. The consumer credit order provides for the continued role of local authority trading standards, and the Department of Enterprise, Trade and Investment in Northern Ireland, in investigating and prosecuting offences under the CCA. Trading standards will play an important new role in supporting the FCA to police the regulatory boundary and to take action against illegal loan sharks.
Consumer credit firms should not see this transfer as wiping the slate clean. The RAO order gives the FCA the power to take enforcement action against any breach of the CCA prior to the transfer, but it will not be able to apply its rules or sanctions retrospectively, as this would be unfair to firms. Unlike the OFT, the FCA also has the power to require redress to be paid to consumers. In addition, customers of consumer credit firms will still have recourse to the Financial Ombudsman Service.
The timetable for the transfer to the FCA is driven by the demise of the OFT on 31 March. We recognise that this is a challenging timetable for firms, which is why the Government have introduced provisions to help smooth the transition. We recognise that firms will need to prepare for FCA authorisation, so the RAO order allows the FCA to grant interim permissions based on firms’ existing OFT licences. Interim permissions will allow firms to continue to trade from 1 April, but all firms will still need to apply for full authorisation by April 2016.
This approach will mean business as usual for firms but allows the FCA to deploy its full enforcement powers to protect consumers during this period. The RAO order includes transitional provisions, so that firms who have already applied to the OFT for a licence do not have to reapply from scratch for FCA authorisation and live enforcement action will be seamlessly picked up by the new regulator.
The Government are committed to promoting continuity in the conduct requirements that firms need to abide by to ensure that the compliance burden is manageable. The RAO order allows the FCA to designate, as rules, secondary legislation made under Part 2 of the CCA. The new regulator is also incentivised to replicate CCA requirements in its rules. Where rules are the same, or substantially the same, as CCA provisions, the requirement to conduct a cost-benefit analysis is waived and the FCA’s competition duty does not apply.
I hope that I have been able to explain the purpose and the benefits of these orders and I commend them to the Committee.
My Lords, I will make a brief intervention in the Grand Committee’s proceedings. These are extensive and important orders. I confess that I defer to the knowledge that other noble Lords have on consumer credit, but I would like to tax my noble friend with a request for assurances about payday loans and unsecured household credit. There have been some big changes in that field and I want to detain the Committee for a moment on that issue.
However, before I do that—and my noble friend will understand why I have been put up to this in a moment—I want to raise an issue about Article 9 of the consumer credit order, which includes provisions for local weights and measures authorities to institute proceedings in England and Wales, and in Northern Ireland. Given my accent, he will not be surprised to know that I would like an assurance that this does not mean that weights and measures enforcement cannot take place in Scotland. I am sure that he will tell me that it is a Section 30 order or some such thing but I will be able to go home more safely at the weekend if I can say that I asked the question.
I come at these orders from the niche direction of the whole question about unsecured short-term household lending. Other people have been doing a lot of work on this but the matter has been drawn to my attention simply because of the massive increase that we have started to see in the amounts of money rolled over and borrowed under the existing payday loan provisions.
The Office of Fair Trading has been doing its best but is struggling to regulate this area and to get a handle on what has been going on. I remind noble Lords that the OFT’s most recent report on payday loans estimated that between £2 billion and £2.2 billion was borrowed in paydays loans in 2011-12, up from £900 million in 2008-09; so a very big and fast increase has taken place in a very short space of time. I am not asking for payday loans to be closed down or for anything like that because the industry that provides them is responding to a real and urgent need and, in the context of the period of austerity that we are going through, that need must be recognised, but I am saying that they need to be regulated better. Clients who seek payday lenders’ services need better protection.
I understand that these orders cannot suddenly magic the OFT into the FCA. That would be unrealistic, but if we cannot do something until the Financial Conduct Authority is established, can the Minister assure the Grand Committee that the time between now and April will be used to make sure that all the powers, toolkits and the rest of it that we hear so much about will be put in place so that when we get to April 2014 he and the ministerial team will be confident that the FCA is on top of an increasing problem of lack of regulation?
The orders refer to proper and proportionate—I make no complaint about it—regulation for micro-businesses. Micro-businesses deserve exemption from some of the heavy-duty regulation but some payday organisations that provide unsecured short-term household lending are small businesses, and some of the bigger risks come from smaller businesses. Some of the bigger companies are a bit better organised and are better able to be observed and controlled. Can I have an assurance that the exemptions for micro-businesses are not going to let slip through some providers of these services who may be as big a part of the problem, although on a smaller scale, as some of their more professional, larger scale colleagues in the industry?
Can we get the Financial Conduct Authority to address what the OFT put its finger on as the problem in this market? The market is failing because the way it works is that lenders have to grab and get an established connection with a borrower. Speed is of the essence. The advertising is now so slick and makes it all seem so easy. Speed comes before proper assessments of the creditworthiness of the families and households applying for these loans. The OFT is right in putting its finger on that as the key issue. If the Financial Conduct Authority is not alive to that, it may not be able to do the job that I hope it will do.
Continuous payment authorities, aggressive debt collection and the proportion of payday loans that are rolled over are serious problems. I hope my noble friend will take all these things back to the department and that he is able to give the Grand Committee an assurance this afternoon that, come April next year, we will be confident we can deal with them. I am concerned not just about the effect on low-income households but the increase in fraud. Professional fraudsters are stealing people’s identities and using payday lenders to defraud people’s bank accounts. That is an increasing problem that we need powers to deal with.
Do the Government have any plans between now and April to talk to responsible organisations such as the Consumer Finance Association, which has a code of practice, although it is not strong enough? I would like there to be a statutory code of practice and the association wants to resist it. Do the Government have any plans to use the time between now and April to stiffen the resolve of the trade association in this area and put things on a more professional and better footing?
My final question is about credit unions, which I think are included in these orders. I should be grateful if my noble friend could confirm that. My concern is that people are starting to think that credit unions are similar to providers of unsecured, short-term household lending, and they are not the same. Credit unions have an important role but they do not give out money to people who have trouble in repaying debts, because that would destroy the credibility of credit unions. I am getting serious representations from people in the credit union sector who say that they are being confused and conflated with those short-term lenders in a way that is not constructive.
These orders are the right thing to do. I am sure that the Government have carried out the consultation properly and the orders are a real and urgent upgrade on the 1974 consumer credit rules. I am in favour of all that. However, perhaps my noble friend can reassure me on some of these issues. I am sorry to detain the Committee on a relatively small matter but these could become big issues. It is therefore right for the Grand Committee to spend some time considering them.
My Lords, I shall comment on three aspects of these orders, of which I am very supportive. First, I welcome the elements of the order that create a regulated environment for peer-to-peer lending platforms. While most industries have spent their energies saying, “Remove red tape”, this industry has been coming to the Government and the regulator saying, “Please can we have proper regulation”, because it knows that without proper regulation, rogue players can come in from the outside, undermine the credibility of the industry and probably provoke a regulator to come in with inappropriately heavy regulation as a consequence.
Can the Minister reassure me that the industry has been involved in negotiating and structuring these regulations? It looks to me as though they meet the test, but can he assure me that they reflect the kind of safeguards that that industry has already outlined in its code of conduct, established under its trade association? I think that that code was to be the basis of most of the discussions. It is a real way forward because, as we know, the banks have been very challenged over providing the credit we need in our economy, and peer-to-peer lending is increasingly coming in to fill that gap to provide both competition and additional resource, which is useful and positive.
Secondly, I pick up my noble friend’s comments on payday lenders. I share many of his concerns about this industry. Indeed, the whole House did so, as the Minister will remember, during the passage of the Financial Services Bill in 2012, when an amendment that we colloquially called the Sassoon-Mitchell amendment put very effective powers into the hands of the FCA. When it takes over supervision of this industry in April 2014, the FCA will have powers to regulate, manage and supervise it.
The powers were written with an eye to some of the regulation that has been put in place in Florida—I believe 13 states use this kind of regulation—which includes the ability to limit the amount of borrowing to $500 outstanding at any one time, to limit the number of outstanding loans, to cap interest rates and fees and to provide for a grace repayment period. It also has various other characteristics. I would like assurance that the order does not compromise the wide range of powers sought by the House in the legislation and in the amendment.
Like my noble friend, I am concerned with the impression the industry is giving of marketing energetically and raising its interest rates above and beyond what most of us already regard as high levels. I hope the FCA will be able to hit the ground running. That means going through the consultation process and deciding how it will manage that regulation.
It is also a systems issue. As the Minister knows, the various US states that have regulation have systems that allow them to see on a real-time basis what applications are taking place, what the amount is, what the interest rate is, unauthorised rollovers and so on, and they are able to manage the process. This not only allows the regulator to look at the data and intervene in retrospect, but enables it to set up systems so that if the rules are contravened an automatic decline shows up and an offending loan cannot be made. While it needs time to put such a system into place, I wonder how likely it is that the FCA will be in a position to deliver it as early as April and, if not, what the thinking is around it.
I am afraid my next question comes from my lack of understanding and my difficulty in reading my way through orders. It concerns social impact investment, the financial promotions order and its relationship to the FCA. The Minister will know that if, for example, a social enterprise attempts to create a new community hall, it can turn to members of the local community and ask them to donate. However, it cannot ask them to invest without offending Finprom unless it has become a qualified investment, which is financially impossible for any kind of small project.
We raised this issue during the passage of the Financial Services Bill and the Government expressed their desire to deal with this problem and enable a project to turn to individuals with small amounts of money and allow them to invest. Will the FCA have the necessary power to make those changes under Finprom without having to come back for new primary legislation? I assume that, in the end, we will see a kind of materiality clause that will state that if you want to make an investment of less than £500, or whatever, you will not have to go through all that incredible palaver and you will be able to do so. Will these orders affect that, or will it fall outside their scope?
My Lords, I thank the Minister for his clarity in introducing these orders. Very often we are not wholly behind what the Government are doing but, on this one, we are. We welcome the move to the FCA and these SIs. I have supported the policy behind them for a long time, but I do not know for how long my party has done so. We particularly welcome the powers they give to the FCA. As the Minister implied, they will be its enforcement tool kit for consumer credit and will strengthen its powers to punish misconduct. We also welcome the Government’s decision not to exempt small businesses, as that might have weakened, rather than strengthened, consumer protection.
I have two concerns, and a very small one which I hope to raise. I know that the first will be familiar to the Minister. It is the concern raised by R3 Group about insolvency practitioners who are already regulated, albeit by a plethora of recognised professional bodies. R3 pointed out that the exemption for insolvency practitioners—which both it and we welcome—might not work quite as intended if it covers only any pre-appointment advice which is reasonably likely to lead to an appointment. R3 is worried that IPs, having given advice and heard more, may consider that formal insolvency is not the right way forward. R3’s question is whether the earlier advice that it gives requires it to be FCA authorised. It has a slight worry that if it did, it might find itself recommending insolvency in order to avoid double regulation, which would clearly not be to anyone’s advantage. It might have to do that to avoid double regulation or bite the bullet and be regulated. However, that would probably be too expensive, particularly for smaller IPs. Is the Minister sure that the term “acting with reasonable contemplation of appointment as an insolvency practitioner” will not force IPs into launching a formal insolvency, rather than giving general debt advice, in order to avoid such double regulation? I hope that the Minister will give some comfort on that today. If not, perhaps he will talk further to R3 about it.
The second issue is payday loans, and I make no apology for returning to it. This has already been raised by the noble Lord, Lord Kirkwood of Kirkhope, and the noble Baroness, Lady Kramer. We and the charity StepChange are concerned that the staged transition to FCA regulation may allow payday loan companies to continue to run on a business model based on multiple rollovers of debt, with predictable and rather serious consequences for the borrower.
We very much welcome the FCA’s power to consider business models, especially given what we know about this industry. The OFT found that half the revenue of these firms comes from loans that are rolled over at least once and one-fifth of payday loan companies’ revenue comes from customers who are forced to roll over a loan four or more times. Their very business models are based on people getting into debt trouble. That is why the scrutiny of business models is so much needed, but—to echo other noble Lords—it is needed now, not in three years’ time.
Will the Minister confirm that the interim permissions regime, which allows for staged transition to FCA regulation, will not be used by payday loan companies to delay that scrutiny of their business models by the FCA? The Minister knows better than us, because it is in the impact assessment, the figures from StepChange, which suggest that unaffordable, unsuitable credit is a key contributor to its clients’ debt problems. Furthermore, many of the worst examples of poor conduct seen by that charity include firms that operate very much at the margins, lending to lower income and vulnerable consumers. We do not want to wait until 2016 for the FCA to cast its—hopefully—extremely beady eye over these firms’ business models. We therefore look forward to quick and effective implementation of the FCA credit regime.
Lastly—and this is a very small issue—the FLA has raised with us its anxiety that the new rulebook is not yet available in draft, and it wants the Government and the FCA to ensure that arrangements for the new regime coming into operation in April will be promulgated in good time. That does not seem too much to ask; we simply seek some reassurance on progress on that matter.
We welcome and support these SIs and hope that the Minister will be able to give us those small bits of reassurance.
My Lords, I am grateful to all noble Lords who have spoken in this debate and for their broad welcome for the provisions that we are introducing.
The noble Lord, Lord Kirkwood, asked about Scottish weights and measures. He will have read Paragraph 9, which says:
“Local weights and measures authorities may institute proceedings in England and Wales”.
As he will know, it would be completely improper in Scotland for anybody but the Lord Advocate to initiate prosecutions. I have no doubt that he will wish to talk to his noble and learned friend Lord Wallace of Tankerness, as I am sure that he is doing his job properly.
The noble Lord, Lord Kirkwood, concentrated, as other noble Lords did to a certain extent, on payday loans and what is happening about them. The FCA has a formal responsibility for managing payday loans from next April, but it is not waiting until next April to start to think about the issue. Indeed, it is going to set out draft rules in September for a consultation. I am sure that many people will want to get involved in that consultation. That gives a certain amount of time to get rules in place by the time it takes over the formal responsibility. The FCA has also reminded the banks of their obligations when cancelling continuous payment authorities, which is obviously an issue for payday lending consumers.
The noble Lord said that he hopes that micro-businesses will not be exempt from this provision because they are very important even if they are not very big. The micro-business exemption does not apply in this area; that would obviously compromise consumer protection because there are a lot of small businesses. Although we tend to be familiar with a number of brand names, very often the worst offenders—literally—are small, local operations.
BIS has launched a review on voluntary payday codes that will survey lenders and consumers and provide a sense of progress. The codes were implemented by lenders last November, and we expect BIS to publish findings in the autumn. We hope that will put pressure on the trade association to raise its game ahead of April.
The noble Lord made the point that credit unions are not a perfect substitution for payday lenders, and I completely agree. The extent to which the two seem to be equated with the good and bad ends of short-term lending has rather surprised me. Credit unions are really vehicles for people who take a longer-term view of a loan. If you are signed up to a credit union and have established a history of savings, it can help if you get into difficulties and can act in the same way as a payday lender would, but they are very different. The other problem is that, in many areas, there is no credit union of any significance or it is quite difficult to find out about it. Having said that, the Government support credit unions, and we are doing a number of things to make them more attractive, such as increasing the maximum rate of interest that they can charge from 2% to 3%, but as the noble Lord said, they are a partial solution to the problem.
The noble Baroness, Lady Kramer, began by discussing peer-to-peer lending. I congratulate her on the extent to which she has been able to raise peer-to-peer lending as an issue in this House and more broadly and has encouraged the Government to come forward with these regulations. We are in discussions with the industry. We were actively engaged with it before we produced these regulations and it has been very keen to be regulated because it, in a sense, gives a stamp of authority to the whole sector which, for a new sector, is very welcome.
On payday lenders, the noble Baroness asked whether the order in any way compromises the FCA’s ability to undertake a number of things, including a capping power. It does not. That was one of the issues that it will consider as it thinks about its rule-making power. She described the conditions in Florida which have enabled very effective regulation of payday loans while enabling the payday loans sector to carry on in operation. Like her, I have been extremely impressed by the extent to which Florida has managed to go a long way to solving the issue that we are grappling with, which is how to ensure that poorer people can get access to money when they need it but do not get fleeced. We hope that there are some lessons that we can take from Florida, not least on a real-time payday database, which the FCA is very interested in. If we decide to go for it, it will take a bit of time to put in place, and it would be expecting a bit too much to think that we could do that by next April.
The noble Baroness asked about social investor exemption from the financial promotions regime. These regulations do not affect the rules in that respect. We are actively looking at how we can resolve the problem she explained. The challenge is, as ever, to make sure that we are able to put in place a regime that not only allows the kind of lending she is talking about but safeguards consumers. That is the balance we are still grappling with.
The noble Baroness, Lady Hayter, asked about R3 and its concern that in extending the exemption for insolvency practitioners, in part in response to its concern, we might not have got it quite right. We are pretty confident that the extended exemption that is designed to give comfort to insolvency practitioners when giving advice will do that without running the risk that she talked about. Officials have been and will remain in discussions with them to make sure that their fears are put to rest. We do not believe that they need to be worried.
The noble Baroness raised multiple rollovers of debt and hoped that we will not delay work in this area. The FCA is very much on to this. There is no delay. The business models of payday loan companies is one of the things it will look at.
Finally, the noble Baroness asked when the rule book will be available in draft. It will be available in draft early in the autumn, and we hope that the FLA and others who have a direct interest in it will, as they have until now, play a major part in scrutinising it and giving us their views. I hope we will be able to come up with something that they will find easy to live with.
I hope that I have answered the questions that have been raised, and I commend the order to the Committee.