I beg to move,
That this House
has considered protection from logbook loans.
It is a pleasure to serve under your chairmanship, Sir Edward. I really did not expect to have to bring forward this debate, and it is with regret that I do so.
Until about four weeks ago, a Bill to reform logbook loans was expected in this parliamentary session. It was included in the Queen’s Speech, the Law Commission was tasked with drafting the text and the draft Goods Mortgages Bill was duly published last December. In effect, that was it—we were ready to go. And then the Government pulled the plug. On
Many of us are nonplussed by the Government’s U-turn. The Bill is largely uncontroversial and will have all-party support. It is undeniable that in their present form logbook loans cause great consumer harm. To say that reform of the loans is long overdue is pretty much an understatement. The case for reform is absolutely overwhelming. Bills of sale—their official title—are governed by two statutes that are dated 1878 and 1882. They were designed in a different age to be used in a different age. They are antiquated and have no part to play in the consumer credit marketplace of the 21st century.
Andrew Bailey, the FCA’s chief executive, recently called them “quaint”. They are a lot more than that: they are downright dangerous. Although they are not a huge part of the high-cost credit market, they affect a really vulnerable group. Citizens Advice, for instance, found that clients with logbook loans had twice as many debts as those without.
Logbook loans are a way for borrowers to use their car or van as security for a loan. The problem for the borrower is that the vehicle becomes the property of the lender until the loan is repaid. If any payments are missed at any time during the agreement, the vehicle can be repossessed without a court order—and that routinely happens, not least because the interest rates are so high. One example from logbookloans.com is that if a customer borrows £850 over 18 months, they will pay flat-rate interest of 132%, with an annual percentage rate, or APR, of 450%. That equates to 18 monthly payments of £140.70, and a total cost of £2,533.
I will give a case study of someone who took out a logbook loan. Sophie lives in Greater Manchester—that is around my area—and she needs her car to get to work. Two years ago, she took out a logbook loan for £2,700, with payments of £688 a month. She kept up with them until recently, when she had to pay a large council tax bill and she fell into arrears. The logbook loan company repossessed her car. She tried to negotiate with the company, but it would not listen. It demanded the total cost of the loan—£7,000—in full and is threatening to add charges. She cannot get to work, as she has no car, and she has a loss of income and the risk of losing her job.
I do not think borrowers always realise what they are letting themselves in for. Many borrowers are desperate. Logbook loans are aimed at people who cannot borrow from anywhere else. They do not fully engage with details of the loan agreement. Frankly, the tone of the advertising is irresponsible. I quote from an online lender, Mobile Money Ltd:
“You could get a same day loan without leaving the house. Try out a loan from the UK’s longest running logbook loan lender. Click ‘Apply Now’.”
To suggest that someone should “Try out a loan” makes it sound more like pizza delivery than a serious lender. Those words are not appropriate.
The other key fact is that logbook loans do not just disadvantage the original lender; unlike any other kind of lending, they can also harm people who are not party to the loan. Someone who buys a car that, unbeknownst to them, is subject to a logbook loan can have it repossessed because the original owner did not keep up repayments. There is nothing they can do about that, even though they bought the car in good faith. It is not even as though they can do a hire purchase investigation check, which can be done with cars bought on hire purchase. That is a real legal loophole.
The Law Commission measure—the Goods Mortgages Bill—would have given borrowers protections similar to those offered by hire purchase law. They would have gained a new right to hand back their car to the lender without being responsible for the remainder of the loan, and there would have been a new requirement for lenders to obtain a court order before seizing goods, provided that the borrower had paid off a third of the loan and had opted in.
Crucially—and this is one of the issues on which the Financial Conduct Authority cannot help—a private individual who bought a vehicle in good faith and without knowing it was subject to a logbook loan would become the owner of the vehicle and not be made liable for the loan. What protection can the FCA offer to an innocent third-party purchaser?
We all agree that it is not a perfect Bill. Some have questioned whether vulnerable customers should have to opt into protection, instead of it being by default. We might ask why protection does not extend to those who have paid off less than one third of the loan, but, taken in the round, the Bill would have been a huge step forward. StepChange, Citizens Advice, the Money Advice Trust—all the agencies said, “It may not be perfect, but it is a huge step forward.”
That brings me to the obvious question: why on earth is the Bill being dropped? Some say it is because of a lack of parliamentary time, but that cannot possibly be the case. Only last week, I spoke on Second Reading of the Non-Domestic Rating (Nursery Grounds) Bill, which irons out an anomaly in the business rate system as it applies to agricultural land. The Minister confirmed in that debate that the anomaly has applied to just a handful of people since it came to light in 2015, yet we had a Government Bill on the Floor of the House to deal with that handful of people.
Logbook loans affect 50,000 people a year, yet we cannot find time for a Bill? What is more, a Law Commission Bill, as the Minister knows, is able to use a special parliamentary procedure that minimises time on the Floor of the House. The procedure is designed to save parliamentary time, so it would be ironic if a lack of it was cited as an excuse not to bring it in.
There must be some other reason. Is the legislation more controversial than expected? If so, how? Could the issues not be dealt with by the parliamentary process? It could be argued, of course, that since the FCA has been undertaking a review of high-cost credit, the matter of logbook loans should sit with the regulator. However, the FCA explicitly declined to include the matter in the recent review, despite the fact that it took on responsibility for regulating logbook loans in 2014. Of course, the FCA knew that the Law Commission was taking on the task of looking at the issue and that many of us have had meetings with the Law Commission about it, and that may have prompted the FCA to shelve the issue. That could be seen as quite reasonable in the circumstances.
Even so, it means that the regulator is on the back foot and that wholesale reform, which is what we need, is years away. I have questioned before and I question again whether the FCA has the powers to deliver the protections that would be enacted by the Goods Mortgages Bill. The consensus is that we need a new statute, and the FCA cannot deliver that. Clearly, the FCA has not prioritised logbook loans, and it needs to do so now.
The FCA could do a number of things. For example, it could impose an interest rate cap and ban top-ups or roll-overs, as it did for payday loans. It could enforce more stringent affordability checks. It could do something about the kind of irresponsible advertising that abounds in the industry, or it could prohibit completely any products that allow for summary repossession. If it plans to do any of those things, it needs to do so quickly.
Frankly, anything the FCA brings forward can only be a sticking plaster—a temporary cover that will not heal the wounds. Outdated legislation, designed for the purchase of hansom cabs and distorted to fit a modern world by unscrupulous lenders, is causing misery for tens of thousands of the most vulnerable consumers every year. I urge the Minister to reconsider and allow the Law Commission Bill to make the progress that was promised in the Queen’s Speech.
I am grateful to Yvonne Fovargue for raising this issue and for the leadership she has shown on it. She has been following it for some time. The constituents and cases that she has raised are very serious. I am grateful for her involvement in the matter.
Like the hon. Lady, we believe that consumer credit plays an important role in society. It helps individuals spread income and costs over time and cope with unexpected financial shocks. However, it is vital that consumers are treated fairly and that we ensure that their interests are protected, particularly in the case of high-cost products, of which logbook loans are an important example. The hon. Lady set out a number of instances where the costs incurred in some logbook loans are egregious. One would have to question whether individuals should take out such loans.
It is worth pointing out that the number of logbook loans has fallen substantially in recent years. They now make up a very small percentage of the wider high-cost credit market. The total value of outstanding logbook loan debt was less than £100 million in 2016, compared with £2.7 billion of debt from payday loans, doorstep lending, and rent-to-own.
I hope I can give some explanation over the course of my remarks as to why we have chosen not to proceed with the Bill at the moment. My opening remarks that the market has shrunk considerably is not to diminish the concerns she has raised about some of those logbook loans. It is important context to the debate, though, that the market appears to be shrinking, at least for the moment.
The number of bills of sale registered at the High Court has fallen from 52,000 in 2014 to around 35,000 in 2016. That compares with 760,000 people taking out a total of 3.6 million payday loans in 2015 alone. Logbook loans remain an important, if small, part of the loan market and are worthy of attention.
In September 2014, the Government asked the Law Commission to examine the Bills of Sale Acts—the legislation that underpins logbook loans. As the hon. Lady set out, those Acts hark back to a long-distant era. There were concerns over stories of consumer exploitation and high levels of interest, and she has given further examples. Those stories include vehicles being seized too readily on default and unwitting third parties buying a vehicle subject to a logbook loan. All of those things are cause for concern. The Law Commission concluded that the Bills of Sale Acts were out of date and recommended that they should be replaced with a new Goods Mortgages Bill. The Government were sympathetic and agreed that the Law Commission should prepare a draft Bill, which it did, consulting on the draft clauses in the summer of 2017.
Separately, in September 2017, the Government, again showing our good faith and desire to progress the matter, consulted on the aims of the Bill and published the consultation response in May 2018. Although the consultation responses undoubtedly showed a degree of concern about the logbook loan market and broad support for the proposed approach set out in the draft Bill, many stakeholders raised significant concerns, which I will discuss in a moment. Overall, there was less agreement on the detail of the draft Bill than we would normally expect following the Law Commission process, and less than we would wish to see before being ready to proceed with it.
Let me set out a few of the concerns from different stakeholders. Consultees suggested that the draft Bill did not do enough to provide clarity for courts, and expressed concern about its requirement for consumers to opt in to the court process, rather than its being the default. Some consultees also said there needed to be more clarity about the circumstances in which a lender could repossess a secured good without requiring a court order—an important issue, to which the hon. Lady alluded. Other consultees highlighted the risk of borrowers exploiting the protections in the draft Bill for fraudulent purposes.
In addition, a number of consultees argued that the draft Bill could encourage lending to vulnerable consumers by making it easier for consumers to grant security over their goods. Access to credit is obviously an important issue to Members on both sides of the House. The Government are determined to ensure that any legislative changes lead to better outcomes for consumers and do not have unintended consequences.
Having given careful thought to the concerns raised in the consultation, we decided that it was not the right moment to take forward the Bill as currently constituted, and that we wanted to give the matter further consideration. In the light of that decision, the Financial Conduct Authority has decided to look more closely at the logbook loan market, and we welcome that. The FCA will use its supervisory and policy tools to assess whether further action is required, including new rules that are necessary to protect consumers.
The hon. Lady has already set out examples of some of the actions that the FCA could choose to consider, at its discretion. The Government believe that at the moment that is a more proportionate approach, given the declining numbers in the logbook loan market and the concerns that were raised in the consultation about the Bill as currently drafted.
That is one of the matters to which the FCA will need to give careful consideration. We hope that it will take that forward. It is also considering, as the hon. Lady suggested, a number of measures with respect to the high-cost credit market. It published an update on
Those measures show the seriousness with which the FCA is taking the wider issue, and I hope that it will give this issue the consideration that it deserves. The hon. Lady has raised one of a range of issues to which the FCA will need to give careful thought. This is an example of the FCA using the powers that it has been given by the Government to protect consumers. We will continue to work closely with the FCA as it undertakes its review of, more generally, the high-cost credit market and, in particular, the logbook loan market. We will consider whether the Government should take any further action in the light of its findings. This is not the end of the story. We want to give the matter a great deal more thought.
Alongside that, the Government are taking further action to protect borrowers. We are supporting families to build their financial literacy through the Money Advice Service, and £27 million is provided every year through MAS to co-ordinate financial education in schools and to improve the public’s financial capability. A further £49 million was spent in the previous financial year on providing more than 440,000 free-to-client debt advice sessions across the country. We want to continue to look for measures to protect the public and to improve financial literacy and awareness.
I know that the hon. Lady is disappointed by the Government’s decision at this stage. I reassure her that the decision was not taken due to pressures on parliamentary time, although that is always a consideration when introducing legislation. The Government’s primary objective is to ensure that, if we legislate, we do so correctly, and bring in interventions that will protect consumers without unintended consequences. That is why we decided, following the consultation, that the Bill was not yet in the right place.
Question put and agreed to.
Sitting suspended for Divisions in the House.
Sitting adjourned without Question put (