Clause 13 - Interest on default sums

Consumer Credit Bill – in a Public Bill Committee at 2:15 pm on 23rd June 2005.

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Question proposed, That the clause stand part of the Bill.

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

Clause 13 is about the interest on default sums. It talks about a simple rate of interest, but although that appears to be straightforward enough, I am not sure that it is when one considers it further, even if we all agree that it is an admirable goal. A simple rate of interest says nothing about whether the default fee itself is reasonable. If the default fee on a £1,000 loan is £20, a compound rate of interest on that would not be unreasonable to most of us. If the default fee on that £1,000 loan is £200, we would feel that even a simple rate of interest would be unreasonable.

Has the Minister considered how that would affect people who go overdrawn on their current account, in which interest is traditionally compounded, if not initially paid? That would have serious costs for lenders—millions of pounds worth—which they would seek to recoup elsewhere, presumably from charges on non-defaulters. Why does the Minister think it right that non-defaulters should have to subsidise defaulters?

I am concerned about the level of overdraft charges, as I mentioned earlier, but should not the real target be loan sharks with staggeringly high levels of compound interest?

Photo of Gerry Sutcliffe Gerry Sutcliffe Parliamentary Under-Secretary (Trade and Industry) (Employment Relations and Consumer Affairs) 2:30 pm, 23rd June 2005

Hon. Members will be aware of the high-profile cases in the press in which compound interest on default sums has resulted in massive escalation of the original debt—we are all aware of the case that is currently at appeal. The issue is one of considerable concern and clause 13 addresses it.

Creditors or owners are entitled to the cost of recovering the debt, but that should not unduly penalise debtors or hirers. The clause will prohibit the compounding of interest on default sums and allow the charging only of simple interest. A default sum will be defined in a new section 187A of the Consumer Credit Act 1974 as an amount payable, other than interest, by the debtor or hirer for any breach of their agreement. That could include, for example, a late payment fee, a missed payment fee or legal fees, as we discussed this morning. Any current agreements that permit compound interest will have to be amended to allow simple interest only. I hope that that satisfies the hon. Gentleman.

Question put and agreed to.

Clause 13 ordered to stand part of the Bill.