Clause 9 - Notice of sums in arrears under fixed-sum credit agreements etc.
Consumer Credit Bill
9:55 am

Charles Hendry (Shadow Minister, Trade & Industry; Wealden, Conservative)

I beg to move amendment No. 31, in clause 9, page 8, line 16, leave out ‘four’ and insert ‘eight’.

The clause relates to the notice of sums in arrears under fixed-sum credit agreements, and we propose to substitute “eight” for “four”. We support in principle the concept that borrowers should be sent an arrears notice when they have fallen behind with their payments. That would greatly help them in ensuring that they understand that they are in arrears and would enable them to plan to get out of arrears as soon as possible. However, to work effectively, that information must be accurate and relevant. As the Bill stands, the danger is that it might not work as effectively in the interests of the debtor as it should, especially for home credit borrowers.

For conventional credit that is paid monthly, the arrears notice must be issued when the customer is, in aggregate, two months—eight weeks—behind. An aggregate amount of arrears is involved, so if a monthly credit consumer misses one payment and then a year later misses another, he must still be sent an arrears notice. The situation is different for home credit customers, who pay weekly and who are sent an arrears notice when they are a month—four payments—behind.

That fails to recognise the way in which home credit works. Four missed payments is not seen as a problem. Home credit is designed to be flexible. Borrowers pay back a fixed amount, but if they lose their job or their circumstances change, or they simply want to miss a payment for another reason, the length of time they use to pay back the amount can be varied. It will even be changed if it is more convenient for the borrower to miss a week because of a holiday or a birthday. If someone misses two payments over the summer, one at   Christmas and one when a child has a birthday, he must receive a formal arrears notice, even though technically he is not in arrears or in any form of difficulty.

That raises two issues. The first is the impact on the borrower of being told that they are in arrears when that is not the case. He might simply have been out of the house when the agent called and therefore missed a payment. Nevertheless, he will still be given a formal arrears notice. Telling people who are worried about money and are in debt—that is the reason why they opted for a home credit loan in the first place—“You are now in arrears” in a formal notice, which looks a very legal document to them, is bound to cause great distress and concern.

The second issue relates to the bureaucracy. About 3 million people are home credit borrowers. On average, they are four weeks behind in their payment. The Bill requires all 3 million to be sent a formal letter of arrears. Assuming that the cost of writing, posting and administration is just £1 a letter, that represents an extra £3 million in administrative costs, which will inevitably be passed on to borrowers in the form of higher charges. We are talking about precisely the sort of people who are already worried about the level of charges that they pay.

There is a simple solution. Our amendment would create parity between conventional monthly lending and weekly home credit, making the relevant period two months for both. Where arrears continue for home credit borrowers, that would simply be included in a notification in the required annual statement. Alternatively, the Minister might consider saying that the arrears notice should be required only if the terms of the loan change as a result of the arrears or if extra charges are incurred. The key point is that the people we are talking about have not incurred any greater level of debt or any additional charges and therefore it is misleading to send them a letter saying that they have.

I would also be grateful if the Minister commented on privacy. The consideration applies in particular when children have taken out a loan and are living with their parents. Their parents might not be aware that they have taken out the loan—clearly, we are talking about children over the age of 18. We could discuss whether their parents should be aware, but if a letter comes through the letter box that says, “Important, read this”, parents will want to know what it is about.

The same situation might occur in a relationship, where one partner has not told the other why they have taken out a loan. We may all feel that people should be clear with their partners about why they have done such a thing, but in cases where they have not, we are in danger of intruding on the privacy of their relationship by sending a bold envelope through their letter box telling them that something is wrong. If such a notice does not go in a bold envelope, it might be put to one side or discarded, so that is not a possibility.

Can the notice be delivered electronically? We have discussed that before. How do the notifications need to be delivered? Do they be in the form of a simple letter? Can they be sent by registered post? Do they have to be signed for? How do we ensure that they are received by the right person? In a household of four, five or six students—a house in multiple occupation—that could regularly be an issue of concern. How can we be certain that notifications are received in a way that people will understand? That point relates to people who are blind, who do not have English as their first language, or who have learning issues and learning difficulties. There are many things to consider and I hope that the Minister addresses them.

Norman Lamb (Shadow Secretary of State for Trade & Industry, Trade & Industry; North Norfolk, Liberal Democrat)

I have some sympathy with amendment’s attempt to address a mischief. It seems to be all about the law of unintended consequences.

As I understand it, the home credit market often works in such a way that if payments are delayed—perhaps, as the hon. Gentleman suggested, because the debtor is simply out when the collector calls, or because there has been an agreement between them that repayment will be delayed a little—and, cumulatively, four weeks of payments are missed and a notice has to be served, the debtor could end up being caused unnecessary anxiety. If the proposal impinges on the proper flexibility of the agreements, and if the debtor is not actually prejudiced by delayed payments—that is, if the debtor does not have to pay any more and is allowed to pay at a later date—that would be too onerous. There is potential to cause unnecessary anxiety and be overly bureaucratic. Does the Minister accept that there is a genuine concern about how the provision will work? If so, is the amendment a way of addressing that concern, or does he have an alternative approach to ensure that the process is not overly bureaucratic and does not cause unnecessary anxiety to the debtor?

Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)

I am afraid that it will come as no surprise to the hon. Member for Wealden to hear that we will not accept the amendment, but that is not because he did not raise many important issues. We looked into the subject at great length in our discussions when developing the proposals and decided to use a similar approach to that taken by the Financial Services Authority regime for mortgages. The regime introduced by new section 86B(1), as set out in clause 9, applies to agreements with monthly payments. While missing only two repayments is appropriate for longer-term agreements with longer repayment intervals, small, short-term loans are different. So simply applying the same timing is not appropriate. For that reason, we have made specific provisions for those short-term agreements.

For agreements with weekly instalments, which are likely to be short-term agreements, missing four repayments will probably to be a significant problem for consumers who rely on that form of credit, for reasons that hon. Members have given.

Charles Hendry (Shadow Minister, Trade & Industry; Wealden, Conservative)

Does the Minister not accept the point that the hon. Member for North Norfolk and I made: that the individual is not prejudiced by being behind in those payments? An extra four weeks is simply added to the time in which the debt is to be paid. There are no charges involved, no extra interest payments and no arrears. To send the person a note saying that they are in arrears is actually incorrect, and can only cause concern to the borrower.

Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)

We have to be consistent. I shall come to the point raised by the hon. Members for Wealden and for North Norfolk in a second.

Missing four payments is likely to be a significant problem for consumers who rely on that form of credit. It sends a warning sign, notwithstanding what has just been said. In many agreements, four weekly repayments can equal a significant proportion of the loan.

Our proposals mean that a notice must be provided within 14 days after the fourth missed period. That means that for an agreement with weekly instalments, the creditor will send a statement six weeks after the first missed repayment. The amendment would shift the onus to 10 weeks. We think that that is more harmful and would cause problems.

The purpose of the arrangement is to give consumers early notice of potential problems to allow them to deal with them. Consumers in this sector are often vulnerable, with limited incomes. For that reason, we do not believe that the debtor should be treated in the same way as other consumers. The amendment would treat them in the same way as lenders with monthly repayments. That would potentially mean that these consumers—whom we all agree are often vulnerable—are put at a disadvantage. At this stage we do not intend to prescribe the format of the notices in detail, but the content will be prescribed, and the lender will have to provide the notices in a clear and transparent way.

As for the concern about lenders potentially frightening consumers, and consumers being frightened themselves, we believe that there is scope for the information to be presented in a consumer-friendly way—for example, as a letter rather than as a formal notice. Again, the Department will consult on the issue after the Bill becomes law. So we feel that a safety valve is in place.

Norman Lamb (Shadow Secretary of State for Trade & Industry, Trade & Industry; North Norfolk, Liberal Democrat)

I shall try one more time. For various reasons—perhaps the debtor was on holiday or out—four payments might be missed in the course of a year. Those delayed payments might not result in any extra payment by the debtor—in other words, no extra interest has been ratcheted up—and they may simply have to be made later. The debtor has in no sense been prejudiced by the later payments. Is not there a case for saying that there is no purpose in sending an arrears notice, because so far as the debtor is concerned, they are not in arrears and have simply agreed with the creditor or lender that they will be paid later?

Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)

I do not agree, because the warning signs are there. This part of the Bill is about responsible lending and responsible borrowing. If people are having difficulties, we will make them aware of the warning signs at the earliest stage and given them help and support. That is what we are focusing on.

I accept that no arrears or charges may be incurred, but the amendment would let 10 weeks go by before the debtor is sent a letter. It is six weeks under the Bill—four weeks of missed payments and then two weeks. It does not have to be a threatening default notice; it can be a letter to say that he has missed six weeks of payments. That is proportionate and appropriate, and I would be concerned to go to 10 weeks, because that could cause difficulty.

I do not think that the people who take out these loans will be going on the long holidays that the hon. Gentleman suggested. They will not be in a position to do that.

Norman Lamb (Shadow Secretary of State for Trade & Industry, Trade & Industry; North Norfolk, Liberal Democrat)

It is an aggregate.

Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)

Again, there is a disagreement between us about the period. I understand and accept why the amendment has been tabled, but it would be less of a safeguard.

Norman Lamb (Shadow Secretary of State for Trade & Industry, Trade & Industry; North Norfolk, Liberal Democrat)

On a point of clarity, I was not for one minute suggesting that people in such circumstances go on four-week holidays. As I understand it, we are talking about four weeks in aggregate. If someone just happens to be out at a football match one week in January, to be out for another reason one week in February, to be on holiday at Easter and then to miss a payment for some other reason, that will be four weeks. A letter will then arrive, but from the individual’s point of view, they will not be in arrears because they have an agreement that the payments will be made the following January, February, March and April. I do not understand what the problem is.

Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)

I think that there is a problem. There is the potential to allow that individual to think that it is not appropriate to make payments regularly as per the agreement; that is where the difficulty comes in. If we allow that in one part of the Bill, we will undermine what we are trying to do throughout. People must be responsible as regards paying loans on time. That is the basis of what we are trying to achieve.

The home credit relationship is very good. Usually, somebody comes by every week and a relationship develops. That is a cause of concern in some areas, and a competition inquiry is looking at sectors of the home credit market. On balance, however, the approach in the Bill is correct and the amendment strays too far.

Charles Hendry (Shadow Minister, Trade & Industry; Wealden, Conservative)

I am not persuaded by what the Minister has told us so far. As the hon. Member for North Norfolk said, we are talking about aggregate missed payments, so they could be missed over a period of nine or 10 months, or even longer. Missing four payments on the trot is rather different from missing sporadic payments over a period of time.

Furthermore, because we are talking about home collection, the reasons why those payments have been missed will be known early on. Somebody may say, “I’m not going to be able to pay next week because I’m going away” or, “It’s a child’s birthday and I’m going to be doing something different.” The person collecting the payments will sometimes know the reasons for a missing payment in advance, or perhaps   just a week later. If somebody misses two payments that were to be made by standing order or direct debit, it will take longer for the people who gave them the loan to understand the cause. So I am not persuaded by the Minister’s argument.