New Clause 4 - Liability of debtor on termination of hire-purchase etc. agreement

Consumer Credit Bill – in a Public Bill Committee at 4:30 pm on 27 January 2005.

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'Section 100 of the 1974 Act shall cease to have effect, other than for those agreements in place at the time of this Act coming into force.'. —[Mr. Robertson]

Brought up, and read the First time.

Photo of Laurence Robertson Laurence Robertson Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

This is our last throw in Committee so I shall try to make it a good one. This new clause refers to what is often termed the ''half rule'': the voluntary termination of a contract. To continue the car analogy, if someone enters into a hire purchase agreement to buy a car—having had such an agreement, I declare an interest—the law states that they may hand the car back at any time and be liable for only half of the due payments; that applies to the capital and the interest. I think that I have correctly understood the law.

On the face of it, that is beneficial to consumers who have a car and can hand it back as long as it is in a reasonable condition. The definition of ''reasonable condition'' can be problematic, but that is not the point I am making. The Finance and Leasing Association and other groups, such as motor manufacturers, financiers and rental companies, support my amendment. It may appear that handing the car back after three months, six months or halfway through the term benefits the consumer, but there is a problem. If that is costing the hire purchase companies a lot of money—I am advised that it is—somebody somewhere is paying for that. The hire purchase companies—I mean no disrespect to them—will not foot the bill themselves. If I hand a car back, somebody else will have to pay for it through slightly higher interest rates; indeed, I may have done so myself. Somebody somewhere has to pay.

The Finance and Leasing Association advises that between 80 and 90 per cent. of cars are handed back not because people have got into financial difficulties, but because that is the option available to them under those contracts. As a consumer, I have declared that interest, and I may indeed take advantage of the situation. Given that it is legal, there is no reason why people should not do so. However, that distorts the market and transfers to other people the responsibility of paying a fair price for the credit. Above all, it is a distortion of contract law.

It is neither a satisfactory way of doing business, nor is it beneficial to consumers or hire purchase companies. It is an area of the law that needs looking into, and, if I am correct, it emanates from the 1974 Act, which is 30 years out of date. I ask for the Minister's thoughts on the amendment and on the situation that I described. The Department has looked into the matter, so he may surprise the Committee and amaze me by accepting an amendment to the Bill for the first time, but I shall not hold my breath.

Photo of Gerry Sutcliffe Gerry Sutcliffe Parliamentary Under-Secretary (Trade and Industry) (Employment Relations and Consumer Affairs)

The hon. Gentleman is right; I shall not be able to satisfy him, despite his valiant efforts and despite the many amendments that have been   tabled even at this late stage. However, he is right to raise the matter, which was principally highlighted by the motor finance sector. It feels that financially savvy customers exploit the provisions by walking away from car finance agreements. One half of the amount has been repaid when such customers become aware that the remaining repayments exceed the residual value of the vehicle. Therefore, in handing the car back, they leave the finance company holding the loss.

The industry's views about the provisions are well known to the Government. That is why, at the end of last year, we consulted on its future. We hope to publish that consultation shortly. Hon. Members and the hon. Gentleman might not be surprised to learn that the responses vary greatly, depending on who gave them.

Whereas the lenders and the motoring industry fear the abolition of the provisions, groups that represent consumers and enforcers were equally adamant that those provisions should be retained. Having assessed the responses, we have concluded that section 100 and the right voluntarily to terminate should be retained. There are three main reasons why we have concluded that. The first is the lack of consensus, which I outlined. Views were polarised, and in such circumstances it would be difficult to justify the change.

The second reason is the compelling argument that we would need to remove an existing element of consumer protection. The right voluntarily to terminate is an essential provision of the hire purchase provisions—it is the consumer's key safeguard. Given that we cannot remove that right without calling the whole concept of HP into question, we do not believe that that argument has been made. Thirdly, the industry's economic evidence that it produced to support its claimed losses is open to interpretation.

The job of industry is to lobby hard, but we wonder whether changes in, for example, marketing practice and product design, which require large deposits, might alleviate the problem. We carefully considered the amendments—that is why we consulted—but on balance the responses to the consultation did not make an arguable case for repeal. In those circumstances, we believe that we should not remove those forms of consumer protection, and in the light of that explanation I hope that the hon. Gentleman will withdraw the motion and the new clause.

Photo of Laurence Robertson Laurence Robertson Shadow Minister (Treasury) 4:45, 27 January 2005

The Minister has proved that he is an extremely good goalkeeper. He is also, to use the technical term in football, a very good sweeper: nothing has got past him.

He said that section 100 is about retaining consumer protection, which I do not wish to undermine. However, perhaps consumers are paying more for credit than they should be because of it. It is a matter of weighing up and interpreting the evidence, and of striking the right balance. The Department has already looked at section 100, but it may need to reanalyse the situation, as it could become a problem, because more and more cars are being sold—although the section   does not apply only to cars. This rather strange area of law should be examined. The market was very different when the 1974 Act was introduced, and because of that—if for no other reason—section 100 should be looked at again in more detail. However, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.