Miss Johnson: The hon. Gentleman seemed to suggest earlier that it was not at all useful to consider that example.
Mr. Waterson: There is a world of difference between considering the American experience and following it. I am merely trying to show where we might end up if we follow the Government's agenda, and America is a good place to look in that respect.
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The USA has fewer small business bankruptcies than the United Kingdom, therefore our regime is already more supportive than America's of risk taking. Most of the 1.5 million bankruptcies a year in the USA are nothing to do with business but involve consumers wiping out unwanted personal debt. For that reason, the Government must find a way of distinguishing consumer debt bankruptcies and business bankruptcies.
There is a potential for redistribution; if house prices collapse or falter, the provisions could allow debtors to wipe out any unsecured mortgage overhang. The credit community has expressed concern about student loans, as students could use the law to wipe out loans from commercial lenders, leaving them to start out their careers unburdened by debt. That idea would be very attractive to the students, but lenders would have to reconsider their lending policy if it were acted on.
If the effect were to restrict the supply of credit in the economy, as the Consumer Credit Association suggested, there may be even more bankruptcies as a result. Most such organisations predict that obtaining credit will become more cumbersome and that wholly unsecured credit will become a thing of the past.
Miss Johnson: I am trying to find my way through the hon. Gentleman's contradictory statements. He seemed to argue a moment ago that consumer credit was too freely available, but now he argues that it will not be freely enough available.
Mr. Waterson: Unusually, the Under-Secretary of State is not paying attention. I am describing the position that may be created by the new laws contained in the Bill. Consumer credit might become more restrictive in terms of both its availability and the conditions that are applied. The Consumer Credit Association says:
So the sort of people whom the Government are trying to benefit might be worse off under the Bill, because they are less likely to have assets or know people who are in a position to guarantee their borrowings.
I am reliably informed that another feature of the US market is that, as a result of the US approach to bankruptcy, a whole new sector of predatory lenders has sprung up to service the marginalised group who cannot get credit anywhere else. Most commentators would agree that notions of responsibility in the USA have been eroded simply by the ease with which bankruptcy can occur. It has also been estimated that the average American family pays $400 a year for the cost of bankruptcy across the US economy.
There is another practical issue. As the Under-Secretary of State will know, credit reference agencies tend to keep their records on consumers and their credit ratings for six years. If, as part of the Bill, the Government aim to make it easier for consumers and businesspeople to go in and out of bankruptcy, does the hon. Lady accept that a consumer with a bankruptcy record is unlikely to be able to get credit even if they come out of bankruptcy within 12 months or 2 months or whatever period? She wants to
Column Number: 646rehabilitate those who have become bankrupt, for whatever reason, but does she accept that under the current credit system the Bill might have no such effect for many individuals?
Mr. Purchase: Does the hon. Gentleman share my view that any local bank manager with any business experience would be highly suspicious of a bankrupt coming after 12 months to borrow more money or to set up any kind of business? Would not that manager take a very deep breath before committing any further funds? That underlines the point that the 12-month period will be a dead letter.
Mr. Waterson: One of the consumer credit industry's concerns is that the Government have not forgotten about that problem but intend to deal with it in a different way. Do the Government intend to change the system through the Information Commissioner, so that it is a matter of changing data protection law? How, if at all, is the question of credit records to be dealt with?
I referred to some examples of people trying to evade their responsibilities. Has the Under-Secretary of State seen the April edition of Credit Today? I gather that it contains a detailed investigation of the possible student bankruptcy scenario. In America, bankruptcy has become a regular device for allowing people to take advantage of private health care. They go bankrupt so that they do not have to pay their dues.
Another issue that the Consumer Credit Association has raised before in relation to the Bill is that in the regulatory impact assessment the Government say that the changes would not have a significant effect. However, I do not see how the Under-Secretary of State can argue with the assertion that a clear result of this legislation must be more bankruptcies, whatever tag we apply to them. As far as I can see, no assessment or allowance has been made for that significant increase and the extra cost.
Until now, British society has regarded bankruptcy as a serious matter. That was underlined 20-odd years ago in the Cork report. Society has a genuine interest in ensuring that the reasons for bankruptcies are investigated in detail and that the availability of assets is investigated at the same time. The Consumer Credit Association states:
That is a fair comment, because under clause 245, the Official Receiver apparently has an unfettered right to decide whether or not to investigate. It seems, however, that the Official Receiver is wholly unaccountable and is the only one who can decide whether to apply for an income payments order. Once the bankrupt is discharged, which could be within weeks or only a few months, no such order can be applied for.
The Consumer Credit Association states:
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The credit industry raises other concerns of a similar nature. I have already said that of the 1.5 million bankruptcies in the United States in 2001, about 97 per cent. were consumer bankruptcies. They do not seem to have a problem in distinguishing between consumer and business bankruptcies. It is clear that relaxation of the US bankruptcy laws in the late 1970s led to an explosion of personal insolvency, from 300,000 a year in 1980 to 1.5 million now, at a total cost of $40 billion. If the Under-Secretary does not like the US experience, we could consider Hong Kong. In 1997, the year before Hong Kong insolvency laws were liberalised, 639 bankruptcy orders were made; in 2001, there were 9,151; a massive increase. Again, I hesitate to trespass into Scottish bankruptcy law, but when that changed in 1985, bankruptcy grew sharply and, by 1993, cases were running at about 14,000 a year.
To sum up, the changesóthe reduced period, what we believe will be reduced scrutiny and the limited number of bankrupts who will be subject to penalty or stigma beyond the period of a year or lessówill have the following effects. First, they will undermine the concept of personal responsibility. Secondly, they will reward those who choose not to repay their debts, which will increase the cost of credit and the difficulty of obtaining credit for those honest people who need loans. Thirdly, if the US experience is relevant, they will encourage a new, more aggressive and more predatory type of lender, whose job it will be to service those who are marginalised by the changes and who are perhaps least able to afford the Bill's likely effects in the real world.
That is a massive charge sheet from an industry that, according to the Under-Secretary, was squared before we started our consideration of the Bill. I do not think that it was. A lot of people are worried about its effect not only on their businesses, but on individuals.
The Chairman: Order. Before I call the next speaker, I must point out that I have allowed the debate on clause 245 to be more wide-ranging in the expectation that debates on subsequent clauses will not be as broad.
Mr. Field: My hon. Friend the Member for Eastbourne has gone into great detail and all Opposition Members would agree with the points that he raised. I want to touch on some other issues. Much has been made of the issue of stigma. As I recall, the White Paper said that it hoped to strike
That goes to the centre of one of our concerns, which is that the Government's view of the insolvency procedure is rather simplistic, as was articulated by my hon. Friend. They envisage innocent bankrupts, who find themselves in that position solely through the misfortune of the market. The hon. Member for Wolverhampton, North-East referred to people who find their business going rather well, notwithstanding insurance issues about key suppliers or debtors who go bust and leave them in great difficulty. To a large
Column Number: 648extent, if not entirely, such people are blameless for the circumstances in which they find themselves. Alternately, the Government envisage some people with business interests who go under being largely to blame, for whatever reason. Perhaps they have cut corners in the past and will continue to do so in future.
To my view, that is a simplistic way to consider bankruptcy. In reality, it is not black and white. There are shades of grey, and within those we must ensure that any changes in law do not act to the detriment of individuals involved.
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