Clause 52 - Power of OFT to impose civil penalties
Consumer Credit Bill
4:30 pm
Alan Reid (Shadow Minister, Trade & Industry; Argyll and Bute, Liberal Democrat)
I beg to move amendment No. 36, in clause 52, page 44, line 8, leave out from first 'is' to 'it' in line 10 and insert—'either—
(a) satisfied that a person (the ''defaulter'') has failed or is failing to comply with a requirement imposed on him by virtue of section 33A, 33B or 36A, or
(b) dissatisfied with the conduct of the licensee,'.
I am concerned that there is a loophole in the Bill. Amendment No. 36 was designed as a probing amendment to establish the Government's intentions. Under the Consumer Credit Act 1974, the Office of Fair Trading has the power to suspend or revoke a licence, but it was recognised that such a sanction might be too severe for certain offences, so the Bill is introducing a new sanction of requirements.
The clauses that we debated this morning include provisions that gave the OFT new powers to impose requirements on licensees in cases in which it is dissatisfied with the conduct of a licensee or any of his associates. The procedure for requirements is that the OFT must first identify the fact that the licensee is carrying out bad practice before it can take any action. An example of bad practice could be late-night doorstep pressure-selling. Having identified the fact that a licensee is carrying out a bad practice, the OFT will write to the licensee imposing a requirement that that bad practice be stopped. However, only if the licensee continues in that bad practice—the bad practice specified in the requirement—can the OFT impose a civil penalty. In other words, this is a two-stage process that involves handing out a yellow card first, and only if the written warning is ignored and the bad practice continues can a penalty be imposed.
I believe that there is a loophole in the procedure because there appears to be no sanction available to the OFT until after it has served the requirement. There appears to be no deterrent to bad practices committed before the OFT has identified the fact that the licensee has been guilty of bad practice and served the requirement. Civil penalties can be imposed only for continuation of the bad practice.
Without a deterrent for first offences, I can imagine the boss of a rogue credit business saying to his salesmen and collectors, ''OK lads, go out, twist arms and pressure-sell all you like. We've nothing to worry about until the OFT finds out and gets round to serving a requirement on us.''
In practice, it could take a long time for the OFT to identify the fact that a particular rogue agency is carrying out bad practices. It will have to identify the practices, collect evidence and serve the requirement. Moreover, victims may be too frightened to complain. The credit business will, of course, deny any allegation of wrongdoing, and so, in practice, it could take the OFT a long time to identify the pattern of bad behaviour, collect evidence and serve the requirement. Until that point, the rogue credit business would have nothing to worry about and it could continue with any bully-boy tactics it liked, without fear of penalty.
I therefore believe that there must be a deterrent to prevent such behaviour from occurring. Giving the OFT the power to impose a civil penalty for unsatisfactory conduct, as specified in the amendment, would plug that loophole. I accept that the amendment might not be sufficiently detailed to be added to the Bill, but it is intended to be probing so as to give the Minister the opportunity to respond to what we believe to be a loophole—the lack of deterrent against any bad practice before the OFT serves a requirement.
Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)
I welcome you to the Committee's proceedings, Mr. Taylor, at the appropriate time of 4.30 pm. I believe you were here at 4 o'clock, alongside other members of the Committee, in anticipation of an exciting, challenging and forward-looking debate.
I also welcome the hon. Member for Argyll and Bute (Mr. Reid) to the Committee, and am grateful for the spirit in which he moved the amendment. I hope to point it out to him that the amendment is not necessary, although I understand its probing nature. He is right that the clause is designed to allow the OFT to impose penalties if licence holders do not comply with a requirement placed on them by the OFT. Clause 38 introduces requirements to give the OFT the ability to deal with practices that cause consumer detriment but are not serious enough to mean that a licence will be revoked. The requirement must relate to the licensable business. It must also address the matter with which the OFT is dissatisfied, or it must ensure that the problem, or a similar problem, does not arise again. The OFT can impose a requirement on licensees when it is dissatisfied with their conduct.
Requirements are a targeted and proportionate tool for dealing with problems. The amendment would allow the OFT to impose a financial penalty when dissatisfied with a licensee's conduct, without having first to impose a requirement to try to sort out the problem. We do not consider that a proportionate response and feel that it would be less likely to have the desired effect of improving the licence holder's performance.
The OFT can issue a stop now notice under the Enterprise Act 2002 if the conduct is bad enough, which covers the point raised by the hon. Gentleman. The OFT may also revoke or suspend a licence if consumers are seriously at risk. We believe that the OFT has enough power to deal with ongoing situations, and it has the power to revoke licences if necessary.
I hope to have shown with those assurances that the amendment is not necessary. I therefore ask the hon. Gentleman to withdraw it.
David Taylor (North West Leicestershire, Labour)
With this it will be convenient to discuss amendment No. 35, in clause 52, page 44, line 20, at end insert—
'(3A) The amount specified in subsection (3) shall be reviewed by the Secretary of State within five years of the passing of this Act, and thereafter at five year intervals.
(3B) The Secretary of State may, by regulation, amend the amount specified in subsection (3) following a review in accordance with subsection (3A).'.
Alan Reid (Shadow Minister, Trade & Industry; Argyll and Bute, Liberal Democrat)
As I was saying in the debate on the previous amendment, I support the principle that the OFT should have the power to impose civil penalties on those who default on the conditions of their licence or any conditions imposed by the OFT, but I am concerned that the proposed maximum civil penalty of £50,000 might be too low in certain circumstances.
It is important that fines should be whatever is sufficient to secure compliance. To follow that principle, it should always be cheaper for rogue companies to comply with the licence than to pay the penalty. The penalty should always be bigger than the gain that companies could make from breaching the licence or any requirements, and it should not be hampered by a cash limit. For many large companies, £50,000 would be a drop in the ocean and it would not serve as a deterrent for bad practice. We should remember that bad practices could adversely affect some of the poorest and most vulnerable in society.
The amendment would enable the OFT to impose a fine of up to 10 per cent. of a company's gross turnover. It would provide the OFT with the discretion to impose a fine proportionate to the offence, rather than the fine being capped at £50,000, which could be low for some companies. We took the figure of 10 per cent. of gross turnover from the Utilities Act 2000. There, too, it is the penalty for contravening the conditions of a licence, and I believe this formula to be appropriate to the Bill.
Charles Hendry (Shadow Minister, Trade & Industry; Wealden, Conservative)
I welcome you to the Chair, Mr. Taylor.
We have heard from the hon. Member for Argyll and Bute that clause 52 provides the OFT with the power to impose a civil penalty on a licensee that has failed or is failing to comply with a requirement. Subsection (3) provides that that amount should not exceed £50,000. We agree in principle with the measure and with the level at which the cap has been set, and we are not persuaded by the Liberal Democrats' argument.
A fine of 10 per cent. of gross turnover would almost certainly lead to the closure of an organisation and it represents a punitive punishment, although other aspects such as criminal negligence could be involved. None the less, it is not right to fix the cap in primary legislation. In 10, 20 or even 30 years, the top rate of financial penalty will be the same, but, due to inflation and economic growth, it would be a much lesser penalty than it would be today.
It is 31 years since consumer credit legislation was last passed and £50,000 today is the equivalent of £7,000 in 1974—a sevenfold increase of equivalent value. People would be deterred by a penalty of £50,000 today, but it is far from clear whether a £7,000 fine would have any such effect. In the same way, if it is another 31 years until consumer credit legislation is next passed, a £50,000 fine will more than likely be regarded as a much lesser penalty than it is now. Indeed, if inflation is on average the same over the next 30 years as it has been over the past 30, the cap would need to be set at £350,000 in 2035 just to stand still. The Bill makes no provision for that to happen.
Amendment No. 35, to account for that problem, would allow the Secretary of State to review the cap on the financial penalty at intervals of five years after the passing of the Bill. Further, it would grant the Secretary of State the power to adjust the cap by regulation, subject to his or her consideration of the review. That is a better way to ensure that the financial penalties imposed on licensees remain as significant and continue to have effect throughout the life of the legislation.
I urge the Minister to break with the tradition of the past couple of days and accept amendment No. 35, due to the good sense it offers.
Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)
May I say at the outset that I am tempted by the offer made by the hon. Member for Wealden (Charles Hendry)? However, amendment No. 35 is not quite as excellent as the amendment we refused very early in our proceedings and again, although it is heading in the right direction, it is unnecessary. I shall explain why shortly.
First, however, to help the hon. Member for Argyll and Bute, we believe that the £50,000 limit is proportionate. We considered using the Competition Act 1998 and the figure of 10 per cent., but we decided that that would be disproportionate. We are not talking about cartel activity or the abuse of a monopoly or dominant market position, which is what that legislation tackles and which is the reason for using the figure of 10 per cent. of turnover. We are talking about individual infringements of specific conduct requirements. Fines of £50,000 will hit lenders where it hurts—in their pockets—but there must be a limit to ensure compatibility with human rights obligations.
We should also bear it in mind that the cap of £50,000 is a limit, not a target. Some lenders will be fined less than £50,000, so it is possible to set a penalty that is proportionate both to the breach and to the licence holder's ability to pay. Also, multiple penalties will give rise to questions relating to the fitness of the licence holder. The figure of £50,000 is appropriate and we ask the hon. Gentleman to withdraw the amendment.
On amendment No. 35, as the hon. Member for Wealden said, the OFT is already required under the 1974 Act to advise the Secretary of State on the working and enforcement of the legislation, including the civil penalties. A set timetable would not add anything to the efficient use of the civil penalties provision and might suggest that the penalty should be reviewed only at five-yearly intervals, when, under current provisions, it will be reviewed whenever necessary.
The power to amend the £50,000 limit is already in the Bill under proposed new section 39B(3) of the 1974 Act, in clause 53. The maximum penalty may be changed by order of the Secretary of State, as approved by an affirmative resolution in both Houses. We do not need to go down the route suggested by the hon. Gentleman, and I hope he does not press amendment No. 35.
Alan Reid (Shadow Minister, Trade & Industry; Argyll and Bute, Liberal Democrat)
I still believe that the £50,000 limit is too low. We need a higher figure—I am bearing it in mind that the 10 per cent. figure is a cap—but I do not detect any support in the Committee, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
David Taylor (North West Leicestershire, Labour)
The question is that clause 52 stand part of the Bill—
Charles Hendry (Shadow Minister, Trade & Industry; Wealden, Conservative)
What about amendment No. 35?
David Taylor (North West Leicestershire, Labour)
Amendment No. 35 does not get called separately. When amendment No. 37 was withdrawn, the hon. Gentleman's amendment was also withdrawn, as he did not say that he wanted to press it to a Division separately.
Question proposed, That the clause stand part of the Bill.
Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)
In the spirit of openness and trying to keep the Committee informed about what each clause does, I shall set out the power of the OFT to impose civil penalties, which we touched on in discussions on amendments. The clause means that licence holders who do not comply with requirements placed on them by the OFT will face civil penalties. There is a need for powers to censure licence holders exploiting consumers where withdrawal of their licences would not be proportionate. The requirements, which can be imposed through the provisions in clauses 38 and 39, will do that.
I shall refresh hon. Members minds regarding clauses 38 and 39. Clause 38 provides that the OFT may impose requirements on a licensee if it is dissatisfied with a matter relating to its licensed business. The requirements take the form of a notice requiring the licensee to do, not do, or stop doing something related to the licensable business in order to address the matter with which the OFT is dissatisfied or to ensure that the problem, or a similar one, does not arise again.
Clause 39 enables the OFT to place requirements on supervisory bodies that hold group licenses. It can use its requirement powers to address a wide range of problems. As I said earlier today, if there were problems with the way in which certain employees explain credit agreements to customers, a requirement to train them could be imposed. Such a requirement might provide that sales representatives in a named branch should be trained to inform consumers how they can cancel agreements. If a debt collector's employees unfairly pressurise people by calling late at night, a requirement could stipulate that they should call only between 8 am and 8 pm. Such requirements may relate to persons other than licensees, but will be addressed to and be binding on licensees. They may require that particular people should not undertake specific activities, such as not collecting debts in person.
The OFT must also be able to monitor licensees' fitness on the basis of up-to-date information, so penalties can be imposed for breach of information requirements through provisions in clause 45, which deal with duties to notify changes in information.
I return to clause 52. Civil penalties will deter firms from not complying with OFT requirements. The OFT will impose penalties by issuing penalty notices to defaulting licensees. Any such notice must set out the OFT's reasons for imposing the penalty, the amount of the penalty and why it has been set at that level, and the deadline by which it must be paid. Any decision to impose a financial penalty is subject to the same procedural safeguards as other licensing decisions, such as the licence holder's right to a hearing before an adjudicator and to appeal to the Consumer Credit Appeals Tribunal, which is established under clause 55. The deadline for paying a penalty must not be earlier than the end of the appeals period.
The maximum penalty that can be imposed by the OFT is £50,000 for each breach of a requirement. Penalties of £50,000 will hit rogue lenders where it hurts. Some hon. Members expressed concern that the limit is too low, and some that there is a limit at all, but it is right that licensees who may be subject to financial penalties should know the extent of the penalties that they may face. The limit also ensures that the legislation is compatible with human rights legislation. The £50,000 limit is proportionate.
The limit in the Competition Act 1998 of 10 per cent. of turnover, which I used as an example earlier, would be disproportionate. We are not looking at companies with a monopoly market share built up over years, which is what the Act deals with. We are looking at smaller infringements. Some hon. Members suggest that the limit should be set by secondary legislation, but that power is introduced in clause 53(3). If the defaulter does not pay the penalty, the OFT may recover it, and the unpaid balance will incur interest.
Some hon. Members suggest that firms will face penalties for dealing in extortionate credit. Penalties will be imposed only where OFT requirements have been breached. They are not fines for firms that have entered into unfair relationships—that issue will be dealt with by the courts and through other procedures. It is for the courts to decide the appropriate form of redress in such cases. Neither are they fines for firms whose cases have been dealt with through alternative dispute resolution. It is for the Financial Ombudsman Service to decide the appropriate form of redress in such cases. If licensees are subject to several court cases, or if the alternative dispute resolution finds against them, the OFT is likely to reconsider their fitness to hold a licence.
Civil penalties are sanctions for breaching OFT requirements, and licensees can easily avoid them by complying with the requirements. The penalties are a necessary deterrent to licensees causing consumer detriment, and a vital part of the OFT's new licensing regime.
Charles Hendry (Shadow Minister, Trade & Industry; Wealden, Conservative)
We are generally happy with the clause, but I would be grateful if the Minister clarified a few aspects of it. How does he envisage that the OFT will decide on appropriate levels of penalty? He said that the maximum penalty for each breach would be £50,000; where there have been several breaches, could there be several fines of £50,000? How will the OFT go through the process of establishing what the right sort of penalty would be for individual actions that had been taken? Who would it consult in the process of doing that, and to what other bodies would it look to bring into the discussions on that? What sort of right of appeal is there against the OFT when it imposes such civil penalties?
Could the Minister also go a little further in clarifying what range of penalties would be available to the OFT? A fine is one element and revoking a fine would be another, but how many other options would it have, such as issuing warnings and, ultimately, if the breach of the rule and regulations were particularly serious, could it lead to imprisonment? In general, we are happy with the clause but some more clarification would be helpful.
Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations and Consumer Affairs), Department of Trade and Industry; Bradford South, Labour)
I welcome the broad acceptance of the clause. As we have said before in relation to other clauses, the OFT is the responsible body and has to operate within the confines of the Cabinet Office concordat. It has to respond to Parliament in its annual report. Anything that it does must be proportionate. The hon. Gentleman is right to say that the maximum fine for each breach is £50,000. Each breach of the requirement brings into play the OFT looking overall at the licence, and whether the holder is a fit person. The OFT statement of policy is subject to consultation with the Secretary of State and the Treasury, but it would be up to the OFT to consider each case on its individual merits within the framework and the appeals mechanisms that exist: appeals to the adjudicator or, if necessary, to the tribunal. The safeguards are in place. Under the 1974 Act, it was disproportionate: it lead to the revocation of a licence and nothing else. This gives an opportunity for refinements and improvements. There are issues under the Enterprise Act 2002 in terms of the stop-now orders that can be put in place. The OFT can use a range of tools proportionately and reasonably in different circumstances. The level of any fine would reflect that, with a maximum of £50,000.
There are other ways in which the OFT can deal with matters. It can consider action within the licensing regime, or the requirements that it outlined. It can also issue informal warnings about the conduct of individual companies, but there will be no prison sanction within the framework of the Act. However, if people commit fraudulent actions, criminal sanctions would be appropriate.
I hope that, with those assurances and explanations, the hon. Member for Wealden will support clause 52.
Question put and agreed to.
Clause 52 ordered to stand part of the Bill.