Motion to Consider
My Lords, I shall speak also to the draft Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2015. I am pleased to introduce these statutory instruments.
The Government have fundamentally reformed regulation of the consumer credit market, transferring regulatory responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April last year. The FCA is better resourced and more empowered than its predecessor and has been equipped with flexible rule-making powers to ensure that it keeps pace with developments in the market. The FCA regime is already having a significant positive impact and is helping to deliver the Government’s vision for an effective and sustainable consumer credit market that is able to meet consumers’ needs.
The raising of standards will improve further as the FCA undertakes authorisation assessments to assess firms’ fitness to trade—a process that has already begun for those industries regarded as the riskiest, including payday lending—and these instruments to be debated today help to support the effectiveness of the FCA’s regulatory regime.
First, the e-commerce order provides the FCA with powers to tackle credit firms, including payday lenders, which abuse their rights under the e-commerce directive to evade FCA rules. As noble Lords will be aware, the Government have taken robust action significantly to improve protections for consumers in the payday lending market. The Government transferred regulatory responsibility to the FCA’s powerful new regime and legislated to require the FCA to introduce a cap on the cost of payday loans.
The Government strongly welcome the payday lending rules introduced last year by the FCA, including limits on rollovers and the use of continuous payment authorities, and tougher requirements around affordability assessments. On 2 January, the FCA’s cap on the cost of payday loans came into force, as required by the Government. Consumers are far better protected under the FCA regime. The FCA has a wide-ranging enforcement toolkit to take action where wrongdoing is found, and the rigorous authorisation process for payday lenders is under way.
FCA regulation is already having a dramatic impact on the payday market—indeed, the FCA found that the volume of payday loans fell by 35% in the first six months since it took over regulation. These data are from before the cost cap took effect in January.
The Government are committed to preventing the gaming of the FCA’s regulatory regime, including the risk that lenders seek to relocate abroad and lend back into the UK. The important powers in this order will protect UK consumers by giving the FCA powers to take action against credit firms that abuse their rights under the e-commerce directive to establish themselves in another EEA member state but lend primarily to the UK. The powers will enable the FCA to require credit firms to comply with FCA rules—including, in the case of payday lenders, the price cap—or require them to seek full authorisation to continue carrying out their activities. The order therefore represents an important reinforcement of the FCA regulatory regime, helping to protect UK consumers from unfair costs and harmful practices.
I turn now to the miscellaneous order. This order will address a number of technical issues to ensure that consumer credit regulation strikes the right balance between proportionate burdens on business and providing robust protections for consumers. In particular, the order makes several provisions to minimise unnecessary regulatory burdens on firms.
For example, the order adjusts the working definition of a “domestic premises supplier”. This definition is important because it requires firms selling goods in a customer’s home to comply with the higher regulatory standards in the FCA’s “full permission” regime, thereby helping to protect consumers from the pressure-selling of goods or services on credit. However, it is important that this definition is drawn correctly to minimise unnecessary regulatory burdens on businesses and support the provision of goods and services to consumers.
The order ensures that firms providing goods or services in a home where no attempt is made to sell other goods or services, or anything extra provided is free of charge, are not regarded as “domestic premises suppliers”—for example, where a mobility aid supplier simply visits the customer’s home to measure up before a contract is signed, or where a kitchen supplier delivers and installs an item after it has been ordered. These firms can therefore benefit from the FCA’s lower-cost “limited permission” regime.
The order also makes a number of other technical adjustments to ensure proportionate regulatory burdens. For example, it ensures that solicitors—who are already subject to their professional regulatory regime—will not require FCA regulation when undertaking credit activities incidental to the firm’s professional services. I beg to move.
My Lords, I will speak only to the first of the two orders before us. This order has the usual eye-catching name for such things: the Electronic Commerce Directive (Financial Services and Markets) (Amendment) Order 2015. A better and clearer name for the SI would be: “Closing a Gigantic Payday Lending Loophole”, because, as the Minister said, that is exactly what the SI does.
On 9 December 2013, in response to amendments put down by the noble Lord, Lord Mitchell, and by me, the Government finally accepted the need for strict control of payday lending. The FCA rules that followed capped the cost of payday loans and limited the number of permitted rollovers. They also created the conditions for real-time data-sharing by lenders in order to reduce the incidence of multiple simultaneous loans. The Treasury and the FCA are to be congratulated on that. Together, with some prompting from your Lordships’ House, they have entirely changed the nature of the payday loan sector in the United Kingdom. What started out as outrageous and cruel usury has been reduced to more or less sensible costs and more or less sensible limits. The capacity of payday lenders to inflict terrible damage, as they were doing, on the most disadvantaged has been severely reduced, and I am pleased to be able to say that many payday lenders have simply shut up shop in the UK as a consequence of the new regime.
I do not think that the situation is ideal yet because, for many of us, the number of rollovers is too high, there is not yet a proper real-time database of loans outstanding and there is no mechanism for automatically preventing multiple simultaneous loans. Of course, as we speak, payday lenders are busy changing their business models in ways that will require continued vigilance on our part. We will have to see how all that works out.
In the debate of 9 December 2013, I raised for the first time the question of what seemed to me a gigantic loophole in the proposed new regulations. This was the loophole to do with the e-commerce directive, which we are discussing. As the Minister said, this directive would allow any payday lender to avoid our regulation if they were based elsewhere in the EEA and were trading in the UK only electronically. This would mean that any payday loan company could continue to operate in the UK but entirely outside our rules, caps and limits if it were based in the EEA and had no bricks and mortar presence here in the UK.
I asked the Treasury at the time what it intended to do about this. I had subsequent conversations with the Minister and officials about the problem. This order is, as the Minister correctly said, the solution to that problem. It closes the gigantic loophole in the regulations. If payday loan companies based abroad now try to use the e-commerce directive to avoid UK regulation, they can now be stopped from operating in the UK or forced to comply with our rules if they want to continue to operate in the UK. This is a very good and very necessary step forward, and I am delighted that the Government and the FCA have acted.
As the Minister said, this new order adds to the protection against the immoral and unscrupulous exploitation of the most vulnerable people in our society. However, it is a Treasury order and it is written in the Treasury’s normal, deathless—meaning, obvious-on-the-face-of-it—prose, which means that there are just a couple of questions that I would like to ask the Minister.
New Regulation 11A lists the kinds of activities that the order will apply to. Can the Minister say whether this list includes debt management companies? I know that he is aware of the wholly unacceptable charges and practices of some companies operating in this sector.
New Regulation 11B (2)(a) seems a little ambiguous. It says that the authority must be satisfied that the incoming provider,
“directs all or most of its activity to the United Kingdom”.
The question is: how is “most” to be interpreted here? Does it mean “most” by weight of advertising, “most” by number of customers or “most” by the value of lending to those UK customers? How will the authority arrive at a measure of whichever interpretation of “most” it wants to use? I very much hope that my noble friend the Minister will be able to say that the FCA will be able to use all or any of the above interpretations and that it will be able to use, as a conclusive determination, whatever measures it considers reasonable.
Those are details but, in this area, detail is often absolutely critical. However, I do not want the detail to overshadow my congratulations to my noble friend the Minister and the FCA. They have closed a potentially very damaging loophole in the payday regulations.
My Lords, I start by welcoming the noble Lord, Lord Sharkey, to our debates. The noble Lord, Lord Newby, and I feel flattered that we are now three instead of our usual two on these instruments. The noble Lord, Lord Sharkey, and colleagues on my Benches are to be congratulated on the campaign they have waged on this issue. The noble Lord’s description of the e-commerce directive and a gigantic loophole is absolutely valid, and I join him commending the Government on closing that hole. However, we believe that this is only part of the way forward. The payday scandal has been attacked in the sense that many unscrupulous operators have been driven out of the market, and that will go further, but we wish to promote safer and more ethical forms of lending. We will try to ensure that co-operatives and mutual ownership models are able to compete on a level playing field. We will look to give greater power to local authorities to eliminate the spread of payday lending shops in town centres, and we will want to investigate ways in which to support mutuals—for example, by improving the regulatory structure in which they operate and making available support from the British investment bank. The sad fact is that we have problems in our society that mean that short-term loans are needed. It is not just about driving out the bad guys; it is about creating opportunities for a new breed of good guys. We already have credit unions to turn to as an example.
On the second order—and I thank the Minister for showing us how the two orders fit together—the Explanatory Memorandum makes perfect sense, except for the part of it that he explained, which I am left having trouble understanding. Paragraph 7.1 says:
“To extend the scope of the limited permission regime in relation to ‘domestic premises suppliers’”.
I see the importance of extending the scope to domestic premises suppliers. I went to the order—and you know that you are driven to your limit when you actually read the order—and I found that,
“domestic premises supplier” means a supplier who … sells, offers to sell or agrees to sell goods, or … offers to supply services or contracts to supply services … to customers who are individuals while the supplier, or the supplier’s representative, is physically present at the dwelling of the individual”.
I am gripped of the importance of the regulations applying in those circumstances. The key issue is the caveat in sub-paragraph (3B), which says:
“A supplier who acts as described in sub-paragraph (3A) on an occasional basis only will not be a domestic premises supplier unless the supplier indicates to the public at large, or any section of the public, the supplier’s willingness to attend”,
and so on. It seems that the differentiation is on whether they advertise or not. If I have got that wrong, I would be grateful to the Minister for writing to me. I cannot see how the words of the provision translate to the picture that he has just described, with what I would have thought was almost peripheral to suppliers not being covered rather than this specific thing, whereby,
“unless the supplier indicates to the public at large”.
I do not know what that means other than that they are in the advertising business.
Finally, does the Minister know of any specific instances where the issues that the order remedies have manifested themselves, or is this anticipatory and intended to stop a problem before it arises? Is he satisfied with the FCA’s performance as a regulator so far, since it took up those responsibilities from the OFT?
My Lords, I thank both noble Lords who have participated in this debate. I, too, congratulate the noble Lord, Lord Sharkey, on his persistence in this area and on drawing this issue to the attention of the Government for the first time, I think. When he first did so, it was by no means clear that there was a legal route which enabled us to deal adequately with payday loan companies which just moved offshore. He spurred the creative minds in the Treasury to come up with a legal route, so we are extremely grateful to him for that.
He asked a couple of very specific questions, including whether the provisions include debt management companies. The answer to that is yes, they do. He asked how one defines “most” and gave a number of contributory definitions of “most”. It is for the FCA to determine that definition on a case-by-case basis. It will take into account all the factors in deciding how to do it.
The noble Lord, Lord Tunnicliffe, spoke of the Labour Party’s wish to promote a safer and more ethical lending environment. I think we all share that wish. That is why we have taken action on payday lending and have taken a range of actions to promote mutuals and credit unions, including giving £38 million to the credit union expansion project and undertaking a review of how we can promote credit unions further. Credit unions are, in the medium term, probably the best bet we have for many people having easy access to proper financial services and small loans. A key thing now will be to get credit unions up to the ease-of-use level that the payday loan providers have. To be critical of the payday loan sector, its great strength and weakness is that it is so easy to use. It is not so easy to get access electronically to your credit union account or to loans via credit unions. One of the key things that the credit union expansion project is doing is improving back-office infrastructure to enable credit unions’ systems to be more user-friendly, particularly for young people who are used to electronic methods of banking. I do not think we disagree on that.
The noble Lord, Lord Tunnicliffe, asked about the definition of “domestic premises supplier”. The key is to ensure that firms selling in the home, where there is a risk of pressure selling, are subject to greater regulatory scrutiny. We are clarifying that this includes where firms promote themselves as being willing to visit consumers in their homes. That makes them a domestic premises supplier, irrespective of the number of visits they make. This will make it easier for firms and the regulator to judge on which side of the line they fall. I think—and I will write to the noble Lord if I am wrong on this—that there is a big difference between a company that sells in its shop or online and then just delivers stuff to your house and a company which comes and gives a quote in your house. That is the sort of distinction we are trying to make. If I can expand on that further in any helpful way, I will do so.
I thank the noble Lord for that promise. I find the description that he just gave entirely understandable and reasonable but then I look at the draft legislation. It takes a heroic understanding of words to move from those in the order to the explanation I have just heard. If nothing else, I shall value the letter that explains how you move in such a way.
It will be a great pleasure to give the noble Lord something of such value. We will attempt to do that.
Finally, the noble Lord asked whether we were satisfied with the performance of the FCA in taking over the reins of the OFT. The short answer is yes. Looking at the payday loans element alone, the impact of the FCA, combined with the legislative procedures that have been put in place, has been very dramatic in a direction that most people would welcome. The relative speed with which it was able to get the cap agreed and implemented is an example of that. The short answer to that question is yes, but of course both the Government and Parliament will scrutinise carefully what it does in future.