Orders of the Day — Consumer Credit Bill

Part of the debate – in the House of Commons at 2:51 pm on 9th June 2005.

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Photo of Michael Jabez Foster Michael Jabez Foster Labour, Hastings and Rye 2:51 pm, 9th June 2005

I begin by congratulating Greg Clark on the competence of his maiden speech. He is of course very nearly my neighbour, joined as we are not at the hip but by the A21; he can be assured that I will join him in pursuing such issues. Given the competence of his performance today, no one in this place would say, "Hopeless—start again." He is to be greatly congratulated, as indeed is his predecessor, who worked so hard to improve the highways in that area.

The constituents of Tunbridge Wells will certainly be disgusted by some of the developments in consumer credit in recent years. I doubt whether the Wilson Government of the 1970s expected the Consumer Credit Act 1974 to be "fit for purpose" for more than 30 years. The truth is that it has not been so for some time, and there are perhaps two reasons why, the first of which is social attitudes to debt itself and expectations. In the intervening years, we have witnessed the creation of the "me, now" society, from which I fear we have not recovered. Such a society sets store by the acquisition of consumer goods that were once regarded as luxuries, but which many now regard as necessities.

However, I am also conscious of the real demands placed on families on low incomes, who feel the need to "keep up with the Joneses" by buying the latest designer trainers or the latest fad in football shirts, thanks to the pressure put on them by their children. I know that these things happen, because my children tell me that their own children sometimes place such demands on them. I say this not by way of criticism but in acknowledgement of the pressures that do exist, to which easy credit is often seen as the answer.

So this Bill is an important social tool to protect some of the most vulnerable in our society from exploitation by those who have the means to fulfil their desires. There can be few situations in which the parties to a bargain can be as unequal as in the provision of credit. Of course, for most, credit—such as borrowing on a mortgage or borrowing for a new car—is a perfectly reasonable way of acquiring an asset. Those who are economically literate, who surely include most Members, are capable of distinguishing between an offer through the post of two free flights to Europe—involving a loan at 30 per cent. APR—and the offer from a high street bank of a loan at 1 per cent. above the Bank rate. Many, however, do not possess such economic literacy, and I shall return to that issue in due course.

It is therefore my view that, although the Bill is important, it needs to be more precise about whom and how it is intended to help. Indeed, as was mentioned earlier, the concept in the Unfair Contract Terms Act 1977, whereby those who decide whether a contract is unfair take account of the relative bargaining positions of the parties, should be the starting point in determining unfair relationships. When someone with an income of £100,000 wants to buy a Mercedes, that is a matter for the market; but it is a different matter when someone with three children needs to buy some Christmas gifts. It is also a different matter because one will pay 6 per cent. and the other will pay 50 per cent. That must be wrong, too.

I should like the Bill to tackle the concern in at least two ways: first, as I say, by taking into account the respective bargaining positions of the parties when determining what is and what is not fair; and, secondly, by imposing an obligation on the lender not to lend where the repayments are unaffordable given the borrower's circumstances when the loan is made.

I am not suggesting that the lender should be responsible for subsequent difficulties that may arise, but it is my view that many lenders—this applies to the provision of store cards, in particular, and to certain doorstep operators—take no account whatsoever of the ability to pay. Indeed, it would be entirely possible, by regulation, to set a test for that ability—perhaps along the lines of requiring that a residue disposable income of, say, two thirds of the social security rate must be available for living after accounting for the maximum repayments under a contract, or something of that nature. In particular, such an arrangement should apply to store and credit cards, where vast credit limits are often set that, if used to their limits, can sometimes place debtors in an impossible situation.

Charles Hendry mentioned that he was offered additional credit irrespective of his means. I was pleased to receive, although did not accept, an offer of significant additional credit earlier this year, just before the election, when my Tory opponents were telling me that I had no chance of future employment. They were wrong, but the credit card company could have been wrong, too. Such offers are, indeed, nonsense.

My solution would be that, where excessive credit is granted in such circumstances, the debt should not be recoverable. The system should be as pressured as that for the lender. In short, when recovering debt, the creditor should be able to show that an assessment was made of the debtor's ability to repay at the time of the granting of the credit.

For many of those of us who may be lawyers, the discussion of consumer credit is of academic interest; but, for some, it is an issue of life itself. I should like to tell the House a little about a debt survey that was carried out in my constituency just last year by Peter Ambrose and Liz Cunningham of the university of Brighton, which serves to show just why the Bill is necessary.

The study, entitled "The Ever Increasing Circle", was published in November last year and commissioned by a charity known as the Tomorrows People Trust, with the help of GOSE—the Government office for the south-east—Hastings borough council and the Greater Hollington Partnership. Those working for the Tomorrows People Trust had noted in their efforts to move the unemployed into employment that around 30 per cent. of people were reluctant even to try to do so because they said that they could not afford to go to work. So the survey was commissioned to look at groups in both Hastings and Brighton to discover whether that perception was well founded.

Sadly, the situation was even worse than those involved had believed. The survey showed that a staggering 38 per cent. of people found that debt was the main barrier to seeking employment. It was recognised that the welfare-to-work strategy in which the Government have created initiatives—such as the job grant, housing and council tax benefit run-on and adviser discretion grants—was helpful in assisting the long-term unemployed. Yet all that was not enough for many people to deal with and overcome debt as an impediment to seeking employment.

Of course, it was not only the barrier to work that was a problem when debt became unmanageable. Indeed, health—particularly mental health—family breakdown and exclusion from community activity were all part and parcel of the dilemma. However, for a significant minority—38 per cent.—debt was their major barrier.

The respondents were then asked why. Some said it was the amount of emotional energy, not just the cash, that the issue took that made it difficult for them to concentrate on finding work. They said things such as:

"I think it stops me looking for work—it's always on my mind, especially with all these court things. If I get a job, then they're going to take it out of my wages and things like that. I can't really afford for that to happen if I've got to pay housing and council tax and look after my son. It's quite scary."

Another woman said:

"It's a no win situation. If you get back into work then you fall into a less helped category and take on more responsibility and it's this big support thing of going back to work, sorting things out."

As people try to sort out their debts, the creditors come after them. Many others told similar stories of their concern that creditors hold back when there is nothing to touch but, once the debtor is in work, the creditors move in. The objective is surely to avoid, wherever possible, that downward spiral into despair. It is not simply the individual who loses out by this impossible credit obligation that they take on, but society too—be it through the NHS or the continuance of the unemployed.

Surely we are seeking to give particular protection to those in the lowest-income bracket. A social exclusion report of April 2004 provided further evidence of the differential impact of debt when it noted that those on incomes of less than £11,500 owed on average about 35 per cent. of their annual income in debt whereas for, higher income groups, only 10 to 20 per cent. of their income was committed. Indeed, all those on incomes of less than £7,500 had serious debt problems.

I mentioned earlier that it was my belief that many individuals fail to manage credit because of financial illiteracy. Many households are still incapable of managing a household budget. Many see the solution to managing their budgets by filling the gap in the short term by borrowing. We all, of course, know of the day of reckoning that will come, with the often tragic circumstances that arise. We cannot protect everyone from themselves. This is not a nanny state, and neither should it be. However, in a society that cares, we must ensure that people are not unfairly treated and that their relative bargaining position is recognised and, where possible, that we educate, perhaps even through the national curriculum, to ensure a degree of economic literacy.

I now wish to look briefly at some provisions of the new Bill and how they appear to improve on the earlier legislation. As has been said, the extortionate credit provisions of the Consumer Credit Act 1974 do not work as consumers are either unable or unwilling to challenge extortionate conduct by lenders or, in any event, lack the will or ability to do so. My hope is that the new provisions against unfair relationships as set out in clauses 19 to 22 will offer a solution. In particular, clause 19 inserts the new "unfair relationship test" but it is important that there is even clearer direction as to what an unfair relationship consists of.

I appreciate that the provisions of the Bill are to ensure that the court pays regard not only to the terms of the agreement, but to the way in which the creditor has exercised or enforced his rights and any other thing done or not done by the creditor. Indeed, it may additionally take into account any other matters, but the Bill still does not say precisely what I want it to say. I want it to say that the court shall specifically take into account the specific strengths of the parties at the time that the agreement was entered into. Nothing short of that, I fear, will protect the vulnerable.

Although I notice that the Opposition did not, I particularly welcome the burden that is intended to be placed on the creditor to prove that the credit relationship is fair rather than on the debtor needing to prove that it is unfair. In that respect, it is important that the creditor has taken account of the debtor's ability to pay or repay the debt at the time of the making of the agreement. Indeed, I still think that there is a need for a cap on interest rates perhaps by some formula linked to the Bank of England lending rate. After all, the money lenders Act provided that a rate in excess of 48 per cent. was prima facie excessive. I would not have thought that it would be difficult to create some sort of framework to set out a rate of interest that would normally be considered excessive—say, 10 times the Bank of England lending rate—to give the court guidance, yet still leave it discretion.

I want to highlight the fact that poor people are in the main those who suffer from the current credit market. It is thus they who need the support, so surely their individual circumstances must be taken into account. The study by the university of Brighton to which I referred also queried why poor people were prepared to deal with companies such as the Provident that charge rates of perhaps 40 or 50 per cent., or even more. It found that the answer was twofold. First, it found that other credit lines were not available. Most people found the social fund almost impossible to access. As we all know, the vast majority of people who apply to the social fund are turned down. Additionally, people in many parts of the country failed, or were unable, to contact credit unions, which would often be the answer. The second reason found by the study was simple. It found that the relationship between clients and collectors from groups such as the Provident operated on first-name terms with frequent contact, so the collectors were trusted.

If we are to avoid poor people falling into such pitfalls, we need to give greater help to groups such as credit unions, which are already making a difference in a small way. Certainly the Hastings credit union is making a difference and I congratulate it on its work. Incidentally, I understand that the rates of interest that credit unions can charge are limited, which is an argument for issuing guidance on the matter.

I pay tribute to the sterling work of debt advice services, such as that run by the Hastings citizens advice bureau. They really are life-savers, and I hope that through the Bill we can lighten their load.