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Financial Services Bill

My Lords, one of the great strengths of the House is the expertise that Members bring to issues either by virtue of their past or parallel careers, or because they become doggedly interested in a subject and persistent in their search for understanding. That certainly applies to the noble Lord, Lord Marlesford, in respect of credit cards. I think that we can rest assured that, as the noble Baroness said, this matter will not be left to drop by the noble Lord, whom I expect with a high degree of confidence to see seated in his usual place on the Benches opposite after the general election and continuing to press these matters. Indeed, I expect to see the noble Lord, Lord James of Blackheath, similarly in his customary place. The amendments tabled by the noble Lord, Lord Marlesford, would set up a central register of credit card holders and introduce restrictions on access to and use of credit cards, with particular provisions relating to those under the age of 21. The Government sympathise with the noble Lord’s concerns about the minority of people who become seriously indebted through credit cards. But this is not the experience of most customers of this product. Data provided to the BIS review show that the vast majority of consumers pay back their credit card borrowing within a reasonable period. Only 3 per cent make the minimum payment for 12 consecutive months. However, we very much recognise the concern that credit cards should not be used for long-term borrowing and that there has been considerable consumer appetite for a change in the terms on which credit cards are offered. That is why we announced on 15 March the agreement that we have reached with the credit and store card issuers to introduce a number of new rights for card holders designed to prevent and reduce overindebtedness. These new rights were secured in an agreement between the Government and the credit and store card companies negotiated in the light of feedback from thousands of customers to a government consultation on credit cards. This will mean that the most expensive debt is paid off more quickly. New cards will encourage better repayment practice by having a higher minimum payment, a ban on credit limit and rate increases for people at risk of financial difficulty and a right to 60 days to reject interest rate increases. The key changes will be introduced by the industry this year and given statutory force as soon as possible. Amendments 302 and 303 would place the Government under a duty to create a central register of credit card holders and require credit card issuers to check the register before issuing a card. But it is difficult to see what a statutory register would add to the information that is readily accessible by lenders. The three main credit reference agencies already hold data about consumers’ credit commitments, including mortgages, overdrafts and loans, as well as credit cards. All credit card companies already consult CRA data before advancing any new credit. This would already give them a picture of the number of cards that the consumer has, and the limits and balances on each of those cards. Moreover, credit card lenders are improving the data that they share in order to identify customers at risk of financial difficulties who should not have credit extended to them. They are committed to sharing behavioural data, including whether someone is making only the minimum payment or whether they withdraw cash, both of which are regarded by the industry as indicators of risk. The consumer credit directive, which comes into effect shortly, will make checking a borrower's creditworthiness a statutory requirement and a new OFT irresponsible lending guidance note issued on 31 March will create new requirements to check that credit is affordable for the consumer. Amendment 304 would introduce severe restrictions on the use of new credit cards which would totally undermine the flexibility and value of credit card products, converting them in effect to a series of short-term personal loans. It would undermine the existing business model for card lending and would completely kill the product. We believe that new OFT requirements, coupled with the approach we have taken in the agreement with the credit card issuers, represent a more proportionate response. While much hazard is associated with credit cards, I think most of us are aware that a credit card is a very simple and effective way of making payment and most of us would struggle if we did not have use of that piece of plastic in our wallets to make regular settlements. We should be careful not to damn something which for the vast majority of the population has had considerable utility and which they greatly value. The OFT's new irresponsible lending guidance requires a credit card company, for example, to have regard to the borrower's ability to pay off the maximum amount of credit available over a reasonable period of time. The guidance specifies that, in the case of credit cards, the borrower should be able to repay the credit on a timeline at least akin to that used for other forms of unsecured lending, such as fixed-sum personal loans, made for an amount equivalent to the credit limit. The fact that a borrower may be able to "service a debt" over many years simply by making minimum repayments does not, in the OFT's view, equate to being able to pay off a debt in a reasonable period of time. On 15 March we announced an agreement with the credit card industry to introduce a number of new rights designed to prevent or reduce overindebtedness. One specific element of the new agreement with the credit card companies is that they will increase minimum payments for new accounts to help prevent a build up of excessive debts and will send letters to consumers at risk warning about the consequences of making very low repayments. The new clause introduced by Amendment 305 would impose a duty to verify whether a person under 21 at date of application already holds a credit card and prevent issue unless the issuer considers that there are special circumstances making the issue appropriate and to record the special circumstances in the proposed register. Effectively, it identifies under-21s as being at much higher risk than other credit card users, but this is not necessarily the case. The Government consider a better approach is to focus on the risk of the individual. The new requirements that I have already mentioned under the consumer credit directive and the irresponsible lending guidance issued by the OFT are relevant here. Together, these measures mean that lenders have to take a responsible approach to lending to this group of consumers. On average, it is likely that under-21s will already have less access to credit than older consumers given their shorter credit history and lower earnings. I hope that the recent announcement of the new rights for credit card holders, together with the explanation that I have given about the significant statutory protections that we are putting in place for borrowers, will give some assurance to noble Lords that the Government have established a tough but proportionate approach to tackling irresponsible lending. Our primary focus continues to be that we should be regulating the lender rather than the borrower, which has been manifest in a number of announcements we have made, including in respect of mortgages. The noble Lord, Lord Marlesford, again raises the valuation that banks are placing on consumer credit debt. I can assure him that the FSA forms a view on the adequacy of the marking of all assets by regulated banks to ensure that they represent a true and fair view of the recoverable amount from the credit card borrower in respect of the issues that he raised. Of course, the FSA also makes use here of peer review to attempt to ensure consistency across the industry. The noble Lord, Lord Oakeshott, referred to the fact that credit card debt is unsecured, but we also had the noble Lord, Lord Marlesford, referring to securitisation. Here we have again the complexity of the banking industry which securitises the unsecured. I continue to hold my view that packaging for disposal to someone interested in recovery represents a placing of a debt within a security structure or package. But securitisation is a term which is normally used in creating a tradable instrument. However, I believe that the noble Lord, Lord Marlesford, and I can both go away from this evening’s debate content that our understanding is correct and that we are both using the term correctly, albeit to describe something rather different. I also note the contribution made to the debate by the noble Lord, Lord James of Blackheath. I was for a while a director of a company which issued credit cards. The noble Lord asked whether twitchers represent safer credit exposure. I imagine that they probably do: the people who are drawn to the rural habits of sitting and watching birds are probably likely to be the type who are more diligent in meeting their obligations than some of those who specialise in other sports or recreational activities.