Clause 30 - Guidance on fitness test
Consumer Credit Bill
10:30 am
John Battle (Leeds West, Labour)
I beg to move amendment No. 38, in clause 30, page 24, line 7, at end insert—
‘and that guidance shall include a duty on licence holders to lend responsibly.’.
As in any Bill, it is necessary to refer to previous clauses. This clause comes in a cluster of clauses that deal with the fitness of a business to hold a licence in the first place. It inserts proposed new section 25A after section 25 of the 1974 Act. That requires the OFT to prepare and publish guidance on how it determines the fitness of a person to hold a licence. In light of the previous debate, I would add that the OFT may revise the guidance on fitness at any time. That opens up the question of who is fit to hold a licence. That will be an evolving process, and it will keep pace with market developments.
However, I want to turn the telescope around and suggest that the reference to fitness concerns the person holding the licence. There is an ambiguity because on first reading
“whether persons are fit persons as mentioned in section 25”,
one could be forgiven, having glanced through the Bill, for thinking that it refers to the poor lender, but it is the person who receives the money who has to be in a fit position to survive the loan that he has received. It seems that we are more concerned about the fitness of the coach than we are about that of the athlete to keep up, or the team member to play. If all the emphasis is on the fitness of the coach, there could be a case in which the team is of no use, but the coach is perfectly fit and all the athletes are flogged to death. That is what worries me, and that is why I drive the analogy. The lender could lend to people who are not able to pay back, and who might well know that and carry on regardless.
Lenders are eager to assert that they are responsible. We have had briefings from banks and lenders who say that they are good people. Most are. Their purpose is not—to coin a euphemism and to use language that I am sure is not parliamentary—to screw people for the sake of it. Yes, they want to make a fair income, but the majority believe that they are doing it in a fair way. However, how do they go about their business and how do they check repayments?
To give a practical example, there is plenty of evidence that it is easy to gain credit. We had this debate in Committee in the previous Parliament, and there were plenty of examples across the board. I have made it clear that my primary concern is with doorstep lending, but credit is easy even in the credit card market. Cards in an envelope fall through one’s letter box and a PIN is supplied; just sign and go. We all know about that, but what checks are made? Most lenders now use an automatic process to score credit applications. They use sophisticated computer modelling but do not check whether the person can afford the credit repayments.
Lenders do not carry out a full income test, as they do for mortgages. One can borrow more than the amount of their mortgage through credit companies without even a fraction of the checks that are done when papers are filled in for a mortgage. That is irresponsible lending. Lenders do not examine the borrower’s income and expenditure to check whether they can afford the credit repayments but tend to rely on information held in credit reference files, which usually involve the payment records of past credits and loans. If someone pays back loans and keeps up with payments, they are a good creditor and can borrow more. Lenders do not ask whether borrowing more will push the payments out of the reach of the borrower but simply ask whether they will keep up the payments. They do not ask whether that will mean not being able to live or keep one’s family. If they simply repay the money, they will have a good record.
Someone with no past record of default will be regarded as a good credit risk whether or not their outstanding credit commitments are beyond their income. They might have to find the money in other ways. As long as they are paying back the loans, they will be a good credit risk.
Unfair sales techniques are often used. We could go into that in more detail. I am sure that all hon. Members are aware of such techniques from their ordinary constituency casework, from the press and so on. Sometimes people are pushed to take further credit without any checks at all on their ability to repay.
The key question should be whether a person has the ability to pay back without going deeper and deeper into debt. I make this point again; those on doorstep loans are not likely to go to court because, at any hint that they cannot repay, the companies offer them another deal or an extension. They will even advise other companies that can give another loan. The borrower is pushed further and further out without any checks as to whether they are able to repay the loan.
In the previous Parliament, I referred to the Lord Chancellor’s advice to the magistrates courts. They are under an obligation to check whether a person who has been fined for non-payment has the ability to pay the fine. It is not only illogical but a ludicrous economic situation to fine people on top of money that they owe but cannot possibly pay back. People are driven into debt that is totally unsustainable and that they cannot get out of, and it must be dealt with in a different way. There is guidance to the courts to ask whether people have the ability to repay.
We need to tackle what I would describe as irresponsible lending that drives people who borrow into deeper and deeper debt and desperation. It is not enough for the companies to say that they have checked the credit rating, that the person has paid their instalments and that therefore they are okay. All that that means is that the company is okay because it is getting interest. The person’s ability to manage their budget at the other end is not taken into consideration.
I simply suggest to the Minister that he ask the OFT to include in its guidance a duty on licence holders to lend responsibly. We must get that phrase into the legislation. It is fairly bland and vague. Like the unfairness test itself, it is open-ended, but it would give the OFT a handle on changing marketplaces and new kinds of companies. I recommend it to the Minister and look forward to a positive response.