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Clause 3 - Exemption relating to high net worth debtors and hirers

Consumer Credit Bill – in a Public Bill Committee at 8:55 am on 23rd June 2005.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

With this it will be convenient to discuss the following amendments: No. 2, in page 2, line 8, after ‘declaration’, insert ‘is’.

No. 3, in page 2, line 14, after ‘agreement’, insert

‘at the time that agreement is signed’.

No. 4, in page 2, line 26, at end insert

‘unless supported by independently verified documentation’.

No. 5, in page 2, line 29, leave out ‘one year’ and insert ‘two years’.

No. 6, in page 2, line 39, leave out

‘must have been made in relation to each of them’ and insert

‘may be made by either of them’.

Photo of Charles Hendry Charles Hendry Shadow Minister (Higher Education and Intellectual Property), Deputy Chair, Conservative Party

The clause relates to the exemption for high net worth debtors and hirers on agreements undertaken by people of a high net worth, who are   currently exempt from the regulation under the 1974 Act providing certain tests are met and that the individual makes a declaration agreeing to forgo the protection offered by a regulated agreement.

We agree in principle with the exemption. It is a key factor for British business and UK lending institutions. Many people of high net worth come to the United Kingdom because of the nature of our financial systems and structures, and we need to protect that industry without neglecting the interest of customers. The measure is crucial to maintain what we in the UK call large sum borrowing; otherwise people may shift their custom to offshore centres, which could prove damaging to our economy.

We need to understand the nature of such people. They are mobile, often have more than one home and borrow huge sums at very short notice, and there is no shortage of people keen to lend to them. If we make it hard for them to borrow in the United Kingdom, there are plenty of other places. That world may not be familiar to Members of Parliament, although the new Northern Ireland Minister may know it; but those who discover themselves on a Caribbean island with a spare butler but are not quite sure what to do with him may decide instead, and at short notice, to buy a new yacht. The circumstances in which such issues arise are not common, but they are important for those affected. If delays are built into the system, people can turn elsewhere and borrow from other sources.

We are keen to have more detail on what the Government have in mind, particularly about the specified amount of income and assets mentioned in subsection (2)(a) of proposed new section 16A, which states:

“received during the previous financial year income of a specified description totalling an amount of not less then the specified amount”.

It would help if the Minister were to say what he has in mind about specified amounts.

Under the Bill, the declaration must be made in the agreement itself, which will place an unnecessary bureaucratic burden on credit and hire businesses. Lenders would be forced to maintain a separate suite of agreements containing the specified declaration, a process that would prove costly and time-consuming, yet time is often of the essence as people want the money quickly. Such costs are likely to be passed on to the consumer, and the time involved would drive people elsewhere.

The changes proposed in amendments Nos. 1 and 2 would allow the declaration to be made in a separate document, which would be sensible and in the interests of consumers. The document would be lodged permanently, and borrowers would merely have to confirm that it still applies, as set out in amendment No. 3, by adding in the words

“at the time that agreement is signed”.

Subsection (3)(a) provides that a statement:

“may not be made by the person in relation to whom it is made”.

Amendment No. 4 would add the words:

“unless supported by independently verified documentation”.

That seeks to address the issue of too much bureaucracy; it would allow greater flexibility yet still protect the interests of the consumer.

Amendment No. 5 would allow for greater flexibility by extending the life of such statements to two years rather than one, especially as protections are already included.

Finally, amendment No. 6 is about life partners. We think it appropriate that if life partners such as a husband and wife borrow jointly, but the income is concentrated in one individual’s name, that only one partner need certify. In other words, certification would not be necessary for both partners. The declaration would still be a mandatory requirement, so there would be no detrimental effect upon consumer protection. In fact, providing the declaration in a separate document is more likely to draw attention to its meaning and substance.

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

May I say at the outset that I understand where the hon. Gentleman is coming from. However, the amendments may be misconceived.

It is important is that the declaration forms part of the agreement at the time when it is made. Amendment No. 1 would make the declaration separate to the agreement. It could mean that consumers were provided with the required declaration at a different time, and that they may not necessarily have to sign it at the same time. That could create confusion.

The clause does not require lenders to prepare a separate collection of agreements specifically for high net worth debtors. Lenders are free to prepare agreements in the manner that they find most convenient so long as they comply with the relevant legal requirements. It is important that the declaration is made at the same time that the agreement is made.

Amendment No. 2 is in a similar vein, It proceeds on an incorrect assumption and seems misconceived. I hope that that theme is not adopted throughout the Committee stage.

Photo of John Battle John Battle Labour, Leeds West

I am sure it will be.

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

Perhaps so; I shall try to find other words to describe the amendments.

It is important that the declaration forms part of the agreement at the time it is made. Like amendment No. 1, amendment No. 2 would allow the declaration to be separate from the agreement. Amendment No. 3 involves the same point: it is important that the agreement should be made at the same time as the declaration.

Photo of Charles Hendry Charles Hendry Shadow Minister (Higher Education and Intellectual Property), Deputy Chair, Conservative Party 9:15 am, 23rd June 2005

Does the Minister fully understand the nature of the agreements? People want to borrow substantial sums at short notice. If they must go through a process of extensive paperwork, which might often include having to file it while abroad and get it verified and sent back here, they will simply go to other lending markets where they can get the money without that system of bureaucracy. We are talking about an important part of a British industry. Does the Minister understand the danger of his approach?

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

I do. In previous discussions we discussed the provision as the helicopter clause—because it might apply to people who wanted to buy or hire a helicopter at short notice and did not have ready funds available. They could step outside the normal protections to get the high-worth definition. I understand the hon. Gentleman’s argument. We received an approach from the industry to prevent a move out of the market to foreign parts, perhaps elsewhere in Europe, and we were careful to allow discussion about ensuring that rights would be protected and that there would be flexibility. We are happy that the clauses are appropriate and proportionate.

Photo of Norman Lamb Norman Lamb Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury)

The Minister says that the measure was a response to representations from the industry. Was the framework in the Bill discussed with the people whom the Minister’s Department spoke to, and did they say that they would be satisfied with it?

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

Clearly, there has been a great deal of discussion, throughout, from the time of the consumer credit White Paper, about issues affecting the consumer credit market, which is very mature in the UK compared with what is happening elsewhere in Europe and the wider world. An approach was made and we listened sympathetically to what was said; we think that we have arrived at the most proportionate and flexible solution that still safeguards consumer rights.

I am happy with what we have established. I understand what the hon. Member for Wealden says, but matters would be further complicated because of the two types of agreement. He asked about consultation on the figure that we had in mind, and we shall consult further on that in detail in relation to the statutory instruments that will arise from the Bill. We originally proposed a gross annual income of £100,000 and net assets of £250,000. Those could not be in non-liquid assets such as the person’s share in the principal   home and pension funds. The figures reflect those used by the Financial Services Authority to define a sophisticated investor.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

The regime that is being created with respect to high net worth debtors, or high net worth individuals, is, as far as I can see, quite similar to provisions in the Financial Services and Markets Act 2000 about what is meant by financial promotion and agreements where it would be sensible for a sophisticated investor to be excluded. As to what the Minister said about thresholds, some consistency between the two regimes is needed; will he comment on whether they are consistent with each other?

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

We believe that to be the case, and that is the reason for setting the figures in question, but we are prepared to consult on whether they are appropriate, during the period relating to the statutory instruments. The expertise that the hon. Gentleman brings to the Committee, in the form of knowledge of the FSA, is welcome.

There is nothing to stop the borrower lodging the current statement of high net worth with a lender and leaving it with him as long as it is current, but borrowers should make the declaration each time they enter into an agreement, stating where they want the advantage or the exemption. The two should lie alongside each other.

Photo of Charles Hendry Charles Hendry Shadow Minister (Higher Education and Intellectual Property), Deputy Chair, Conservative Party

For further clarification, is the Minister saying that, once the documentation has been filed and lodged, it can be used for separate borrowing? In other words, if he wants to borrow for a helicopter this week and a yacht in two weeks’ time, as one does, once that documentation has been lodged, will it be sufficient to confirm that it still applies on subsequent occasions, or would all the documentation have to be resubmitted on a second occasion?

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

At each point where the borrower wants to have an exemption, a declaration would have to be made. A statement of net worth would have to be current. If there had been changes, it would be the borrower’s responsibility to notify the lender of those changes at the time that he wanted to declare an exemption for a new agreement. I do not know if that helps the hon. Gentleman.

Photo of Mike Penning Mike Penning Conservative, Hemel Hempstead

As a new boy, I want to be a sponge and listen to everything. It seems to me that you accepted that there may be a threat of business going to other European lending centres. I am very worried that we are going to force business away not just to the European market but to other lenders around the world, especially in the Caribbean and offshore lending countries. Are you certain that this profitable—

Photo of David Taylor David Taylor Labour, North West Leicestershire

Order. The hon. Gentleman should refer to the Minister in the third person.

Photo of Mike Penning Mike Penning Conservative, Hemel Hempstead

Is the Minister sure that we are not going to damage British businesses by allowing other companies to take away this profitable business?

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

I am very confident that that will not happen. That was the sole purpose of getting involved in these discussions: to ensure that that group of people with high net worth were dealt with differently. We have a mature market in the UK. We do not want to damage that. That is why we listened to what the industry had to say to us.

Photo of John Battle John Battle Labour, Leeds West

I wonder whether I have come into the right Committee, because I noticed that, in a letter in last night’s Evening Standard, Tim Montgomerie said that

“the person who wins the crown of the Tory leadership will be the person who demonstrates a real heart for society’s most vulnerable people.”

Yet the first amendment we get to is about yachts and helicopters. Can the Minister assure me that this Bill is not the Bill to sort out Abramovich poaching players from other clubs and that it is not about that short-term money? I say to the hon. Member for Wealden that there are other ways in which rich people can get money to do the deals that they want to do. We ought to sort them out in other ways, not through this Bill.

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

I am grateful to my right hon. Friend for bringing us back to the main purpose of the Bill, which is transparency, responsible lending and borrowing. The Opposition, however, have raised fair points on this issue.

To clarify, the statement of high net worth is a different document from the declaration. If one has a statement of high net worth, every time one wants to use that facility, one has to have a different declaration. That declaration has to be current.

I hope that, with those explanations, the hon. Member for Wealden will accept that his amendments are not necessary and that he should not press them to a vote.

Photo of Charles Hendry Charles Hendry Shadow Minister (Higher Education and Intellectual Property), Deputy Chair, Conservative Party

It is lovely to hear the voice of old Labour still resonating in this Room. I understand where the right hon. Member for Leeds, West is coming from, but he should be assured that we are thinking not of the interests of the Conservative party, but of the Prime Minister’s friends—the people whose villas he borrows when he is on holiday. We are considering the matter from a very wide perspective, which I hope he will appreciate.

I press the Minister to look at the matter one more time. There are concerns within the industry, which is an important sector. An important area of British business could be lost. Will he consider tabling an amendment on Report so that, if there are signs that business is being lost, the measure could be amended through regulation? That way, we would not be tied in permanently. The original Act has been in place for 31 years. This is not an area that we are likely to address again in the short term.

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

I am happy that, on the basis of the discussions that we have had with the industry, we feel that we have reached an appropriate agreement but, during the passage of the Bill, we will always look at what has been said to us by members of the Committee and stakeholders outside. If there is a view that we have not got things completely right, we will consider that. However, I think that we have got the Bill right as it stands and I therefore ask the hon. Gentleman to withdraw his amendment.

Photo of Charles Hendry Charles Hendry Shadow Minister (Higher Education and Intellectual Property), Deputy Chair, Conservative Party

I realise that I am not going to persuade the Minister on this occasion. I am sure that, as the consideration of the Bill progresses, he will see the light, but it is clear that he is not going to back down on this amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 ordered to stand part of the Bill.