New Clause 5

Financial Services Bill – in a Public Bill Committee at 1:30 pm on 14th January 2010.

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Restrictions on provision of credit limit increases

‘(1) A consumer credit firm which provides an increase in credit limit otherwise than in accordance with this section commits an offence.

(2) Credit limit increases may be provided only to a person who has asked to receive such an increase.

(3) This request may take the form:

(a) of a specific one-off request from a person, or

(b) of a decision by a person to opt in to being offered a limit increase.

(4) In the case of section 3(b), the consumer credit firm may offer a person a limit increase, but must gain specific approval from the person before providing this increase.

(5) In the case of section 3(b), a person may choose to opt out of receiving offers of limit increases at any time by informing the consumer credit firm, and their request must be processed with immediate effect.

(6) A consumer credit firm must undertake proper credit checks and an assessment of the person’s ability to repay before offering an increase in their credit limit.’.—(Mr. Breed.)

Brought up, and read the First time.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

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

Before speaking in support of the new clause, I want to refer hon. Members back to clause 27, which we discussed earlier in our proceedings. Clause 27 restricted the provision of credit card cheques. I see new clause 5 as being complementary to clause 27.

A couple of the provisions within clause 27 are very similar to those that I am proposing in new clause 5. Clause 27(2) says:

“Credit card cheques may be provided only to a person who has asked for them.”

It also says:

“The number of cheques provided in respect of a request must not exceed three (or, if less, the number requested).”

We have been talking about consumer protection and perhaps to a certain extent this is legislation that tries to protect the consumer against themselves. That may seem a little strange. However, clause 27, which has passed our scrutiny, seeks to stop the unsolicited distribution of credit card cheques. Thousands, if not hundreds of thousands, of such cheques are distributed, but only a very small number are ever taken up and often only by people who are already in rather desperate circumstances.

As I say, new clause 5 seeks to complement clause 27 by amending the Consumer Credit Act 1974 in a similar way, to prevent unsolicited increases in credit card limits. I suspect that we may all have been subjected to such unsolicited increases at some stage. The first time that someone realises that the limit on their credit card has been increased may be the first time that they see the new limit on their credit card statement; perhaps they have not even been advised that the company has decided to increase their limit.

Unsolicited increases in credit limits can, on perhaps a relatively small number of occasions, put off the evil day, as it were, for people who are already under pressure regarding their credit card and who have not yet recognised that they have to reorder their financial affairs. Then, out of the blue, they see their credit card limit increased and bingo, the pressure is off. They can make additional borrowing on the card and relieve the immediate problem, thinking—as we all do—that that will be the last time and that they will now get to grips with everything. Of course, they are then in an even worse position than before.

New clause 5 has six subsections. Subsection (2) says:

“Credit limit increases may be provided only to a person who has asked to receive such an increase.”

It is rather similar to clause 27, which says that people have to ask for their credit card cheques.

Subsection (3) of new clause 5 says:

“This request may take the form:

(a) of a specific one-off request from a person, or

(b) of a decision by a person to opt in to being offered a limit increase.”

In other words, credit card companies may offer the opportunity to increase limits to a considerable number of customers. If such an offer is made to a particular customer, that customer or consumer specifically has to opt in. A consumer credit firm may offer someone a limit increase, but must gain specific approval from that person before providing the increase. Even if they put out a general offer, it cannot take place until the offer has been clearly taken up by the individual consumer.

Subsection (5) states that

“a person may choose to opt out of receiving offers of limit increases at any time by informing the consumer credit firm, and their request must be processed”.

It is rather like not wanting to receive all sorts of advertising material through the post. People should be able to say, “I do not want to be continually badgered by the credit card company to increase the limit. If I require an increase, I will request it, but in the meantime please take me off your list for any further offers.”

Subsection (6) states that

“A consumer credit firm must undertake proper credit checks and an assessment of the person’s ability to pay before offering an increase in their credit limit.”

It would mean that credit firms were not able indiscriminately to send a load of unsolicited increase offers without making a proper investigation of whether individual consumers were able to make their payments. I accept that, in many respects, it would inhibit the business of credit companies, which will obviously want to increase their business. However, the potential to exploit the weaknesses of some consumers, who may already have over-borrowed, giving them the opportunity to become even more over-borrowed through the receipt of unsolicited increases in their credit card limit is something that we should seriously consider.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 1:45 pm, 14th January 2010

I sense that the hon. Gentleman may be near the end of his remarks. The approach of credit card companies in offering increases in limits—it is called “low and grow”—is to give the customer a low limit, and increase it over time as the customer demonstrates the ability to handle that level of credit. Banning unsolicited increases will mean either that fewer credit cards are issued, or that credit cards issued to new customers do not have a low limit; people will be offered a higher limit. That may not be the optimal outcome. What impact does he believe the new clause will have on those starting offers?

Photo of Colin Breed Colin Breed Shadow Treasury Minister

I thank the hon. Gentleman for that intervention, as it raises some interesting points. First, a proper assessment will need to be made before a decision is made to provide a credit limit. The credit card company will have to ensure that it takes all necessary information into account in assessing the customer’s ability to repay. That is the essential factor. They should take account of repayments for all borrowings and the usual household bills, and of disposable income.

A proper assessment would have to be made. Deciding whether to pitch it low, and well within a person’s ability to pay, or at the top of his ability to pay, would be a policy decision for the credit card company. It would be entirely up to the company if it wanted to try something out on a particular individual, on a low-and-grow basis. Whatever the limit, however, the company would have to demonstrate that the customer could pay. I see no problem with that. The only problem will be if the company assessed a limit above the customer’s ability to pay. That would not be appropriate.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Would the hon. Gentleman be content if someone at the credit card company said, “I think that this person, based on my assessment of their credit risk, should have a credit limit of, say £5,000.” Under the current regime the company might give that customer a credit limit of only £1,000 and see how the customer copes before increasing the limit in stages towards £5,000. Would the hon. Gentleman be happy to go straight to that £5,000 limit?

Photo of Colin Breed Colin Breed Shadow Treasury Minister

I would only agree if that were requested. What I would not want to see is the customer being quite happy with a £1,000 limit, but then being told, “Okay, we’re going to give you a £5,000 limit because we reckon you can afford to pay up to £5,000.” The proper relationship between a customer and the provider is for the customer to seek what he or she requires. If he or she requires to go to £5,000 straight away and the assessment and ability to repay can demonstrate that such a limit would be appropriate, I do not have any qualms. Most of the time with a “low and grow” limit,  we are already on the edge of what can be done. The aim is often to attract business. There is already a credit card balance with another company and people are trying to attract that balance, which they often do by offering interest-free periods for balance transfers and such.

I do not want to stifle—if that is the right word—the relationship between the consumer and the credit card company, but I want to restrain the unsolicited aspects and operations of the credit card companies. Many people—the vast majority—are quite capable of saying, “Thank you very much, but I am not going to use it. I pay off my balance every month anyway, so it does not really matter whether I have a limit of £2,000, £4,000 or £10,000.” However, for a significant number of people—I have already said we should be looking at vulnerable younger people in particular—the opportunity to creep up the limit, on an unsolicited basis, is too much of a temptation, and that does not need to be part of the credit cards’ armoury.

My amendment is entirely complementary to clause 27, which was pretty uncontroversial, at least in Committee. If we are going to restrain the use of credit card cheques, my amendment has a similar aspect. That does not in any way stop someone from applying for an increase in their credit card limit, or the credit card company from offering a limit increase, but it would have to be based on the assessment of the customer’s ability to pay and, clearly, on the consumer accepting that offer themselves and not just being able to take advantage of it because it was given unsolicited.

As I said, the proposal is complementary to clause 27 and, for some people, a safeguard against their own better judgment. Citizens Advice and other bodies far too often see people who have taken advantage of unsolicited increases in their credit card limits and got themselves into more trouble. Had they been stopped or had it been prevented at a much earlier stage, their chances of getting themselves back on the straight and narrow again would be much easier.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

I strongly agree with the hon. Gentleman’s objective in the amendment. His intentions must be right. We have worked on some such issues together in the Treasury Committee. I wonder only whether there might be another route, a route through greater transparency, which we have discussed in Committee to a degree. Such transparency could be furthered by bolstering competition in the sector.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

I am sure that there could be. Competition in the sector is pretty fierce, hence the great offers to take balances for extended periods with no interest. There is quite a demand. If anyone goes to buy a pair of shoes somewhere, they are often harangued more about whether they would like to buy them with a store card than about the shoes themselves.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

But is not that competition without full transparency, and without people fully realising what they are buying?

Photo of Colin Breed Colin Breed Shadow Treasury Minister

The hon. Gentleman is right. We have said that there should be more health warnings—if that is the right description—on credit card statements, particularly asking people whether they realise that, if they made the minimum payment and no other withdrawals, it  would still take them 10 years to repay the balance. We should make clearer exactly what the credit card debts entail. Many of us would like to see an increase in the minimum payment and a greater explanation of the way in which interest is charged because it differs between credit companies. Some take it straight away; some take it on the last balance first basis, but for many people—to protect them sometimes from themselves—without huge inconvenience to anyone else, we could ask credit card companies to ensure that they do not send out unsolicited increases in credit. They can certainly offer increases, but the offers must be properly accepted by the consumer in the knowledge of what they are letting themselves in for, and there must be a proper assessment by the credit card company before any such offers are made.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The Government are concerned about the issue, which is why we are considering taking action in such areas as part of the current review of credit card and store card regulation. However, it would be inappropriate to introduce reform before the review has been completed. As the hon. Member for South-East Cornwall knows, the consultation document was published in October and the consultation period ends next week. We are consulting on a wide-ranging package of measures, including possible restrictions on unsolicited limit increases. One of the reasons that the Government introduced the review of the regulation of credit and store cards was to assess the potential impact of any changes—legislative or otherwise—to the current arrangements.

When there is evidence that industry practice is balanced against the interest of consumers, particularly the most vulnerable, the Government will take strong action, but not before we have examined the responses to the consultation. We have called on credit card companies and consumer representatives to submit evidence in support of their arguments, and we look forward to assessing what they have to say.

There was a helpful exchange between the hon. Members for Fareham and for South-East Cornwall. It showed some of the potential unintended consequences if we do not get matters right, and why we want to make sure that we examine the issue thoroughly. During the passage of the Bill, we have considered the issue of the Government making helpful nudges and trying to achieve better social outcomes through choice-editing, setting sensible defaults or, in this case, drafting legislation on limits. That is something that a Government should be considering, but we need to do it on the right evidence base.

Another point to bear in mind is that the review is looking at linked issues that bear on all aspects of store card business, namely, the allocation of customer payments, the level of minimum payments, to which the hon. Member for South-East Cornwall referred, the re-pricing of outstanding debt and the need for further information requirements, as well as unsolicited credit limits. An important aspect is to consider the linked effect of the various options being considered. To be clear, we want a consumer-friendly outcome working on the most important issues for consumers, and introducing legislation now would pre-empt the outcome of the review.

I must point out that the new clause is technically defective. It contains a number of key expressions that are not defined under the Bill. Had an amendment been inserted into the Consumer Credit Act 1974, at least the term “credit limit” would have been clear. The new  clause is also not complete in that it does not include a consequential amendment to schedule 1, setting out the sanction in respect of the offence. None the less, the debate has been helpful. It has highlighted the fact that we are all concerned about the issue. A review is going on, and the Government will want to take action if they believe that the balance of interests is against consumers. With my comments in mind, I hope that the hon. Member for South-East Cornwall will withdraw the motion.

Photo of Colin Breed Colin Breed Shadow Treasury Minister 2:00 pm, 14th January 2010

I thank the Minister for his comments, from which I take great heart. I am minded to say that if we are waiting for the review, why have we got clause 27 in the Bill? It seems to impinge on that same review.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The issue of credit card cheques has already been consulted on. We are consulting on the issue that the hon. Gentleman raised; that is the reason.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

That is a very brief explanation. I see the issues as complementary in many respects. If we merely stop credit card cheques being issued, we do not really address the fundamental point, whereas the new clause does seek to address it. I accept that it would be useful to wait for the review. I hope that the required legislation will be introduced as swiftly as possible. We might see the back of the recession in the next year or two, but I suspect that its implications and effects will last for a long time and will put pressures on individuals and families. The danger of significantly increasing personal debt during a perhaps fragile economic recovery means that there could be serious social problems in the future, so I hope that when the review is done, new legislation will be introduced. On that basis, I beg to ask leave to withdraw the new clause.

Clause, by leave, withdrawn.