Consumer Credit Bill

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Standing Committee D

Tuesday 28 June 2005

(Afternoon)

The Committee consisted of the following Members:

Chairmen: †David Taylor, Derek Conway

†Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)

†Banks, Gordon (Ochil and South Perthshire) (Lab)

†Battle, John (Leeds, West) (Lab)

†Brokenshire, James (Hornchurch) (Con)

†David, Mr. Wayne (Caerphilly) (Lab)

†Dhanda, Mr. Parmjit (Gloucester) (Lab)

†Fabricant, Michael (Lichfield) (Con)

†Foster, Michael Jabez (Hastings and Rye) (Lab)

†Hendry, Charles (Wealden) (Con)

Lamb, Norman (North Norfolk) (LD)

†Penning, Mike (Hemel Hempstead) (Con)

†Reid, Mr. Alan (Argyll and Bute) (LD)

†Snelgrove, Anne (South Swindon) (Lab)

†Stewart, Ian (Eccles) (Lab)

†Sutcliffe, Mr. Gerry (Parliamentary Under-Secretary of State for Trade and Industry)

†Vaizey, Mr. Edward (Wantage) (Con)

†Wright, Mr. Iain (Hartlepool) (Lab)

Geoffrey Farrar, Emily Commander, Committee Clerks

† attended the Committee

[David Taylor in the Chair]

Consumer Credit Bill

4.30 pm

Clause 52

Power of OFT to impose civil penalties

Mr. Alan Reid (Argyll and Bute) (LD): I beg to move amendment No. 36, in clause 52, page 44, line 8, leave out from first 'is' to 'it' in line 10 and insert—'either—

(a) satisfied that a person (the ''defaulter'') has failed or is failing to comply with a requirement imposed on him by virtue of section 33A, 33B or 36A, or

(b) dissatisfied with the conduct of the licensee,'.

I am concerned that there is a loophole in the Bill. Amendment No. 36 was designed as a probing amendment to establish the Government's intentions. Under the Consumer Credit Act 1974, the Office of Fair Trading has the power to suspend or revoke a licence, but it was recognised that such a sanction might be too severe for certain offences, so the Bill is introducing a new sanction of requirements.

The clauses that we debated this morning include provisions that gave the OFT new powers to impose requirements on licensees in cases in which it is dissatisfied with the conduct of a licensee or any of his associates. The procedure for requirements is that the OFT must first identify the fact that the licensee is carrying out bad practice before it can take any action. An example of bad practice could be late-night doorstep pressure-selling. Having identified the fact that a licensee is carrying out a bad practice, the OFT will write to the licensee imposing a requirement that that bad practice be stopped. However, only if the licensee continues in that bad practice—the bad practice specified in the requirement—can the OFT impose a civil penalty. In other words, this is a two-stage process that involves handing out a yellow card first, and only if the written warning is ignored and the bad practice continues can a penalty be imposed.

I believe that there is a loophole in the procedure because there appears to be no sanction available to the OFT until after it has served the requirement. There appears to be no deterrent to bad practices committed before the OFT has identified the fact that the licensee has been guilty of bad practice and served the requirement. Civil penalties can be imposed only for continuation of the bad practice.

Without a deterrent for first offences, I can imagine the boss of a rogue credit business saying to his salesmen and collectors, ''OK lads, go out, twist arms and pressure-sell all you like. We've nothing to worry about until the OFT finds out and gets round to serving a requirement on us.''

In practice, it could take a long time for the OFT to identify the fact that a particular rogue agency is
 
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carrying out bad practices. It will have to identify the practices, collect evidence and serve the requirement. Moreover, victims may be too frightened to complain. The credit business will, of course, deny any allegation of wrongdoing, and so, in practice, it could take the OFT a long time to identify the pattern of bad behaviour, collect evidence and serve the requirement. Until that point, the rogue credit business would have nothing to worry about and it could continue with any bully-boy tactics it liked, without fear of penalty.

I therefore believe that there must be a deterrent to prevent such behaviour from occurring. Giving the OFT the power to impose a civil penalty for unsatisfactory conduct, as specified in the amendment, would plug that loophole. I accept that the amendment might not be sufficiently detailed to be added to the Bill, but it is intended to be probing so as to give the Minister the opportunity to respond to what we believe to be a loophole—the lack of deterrent against any bad practice before the OFT serves a requirement.

The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Gerry Sutcliffe"8,1>): I welcome you to the Committee's proceedings, Mr. Taylor, at the appropriate time of 4.30 pm. I believe you were here at 4 o'clock, alongside other members of the Committee, in anticipation of an exciting, challenging and forward-looking debate.

I also welcome the hon. Member for Argyll and Bute (Mr. Reid) to the Committee, and am grateful for the spirit in which he moved the amendment. I hope to point it out to him that the amendment is not necessary, although I understand its probing nature. He is right that the clause is designed to allow the OFT to impose penalties if licence holders do not comply with a requirement placed on them by the OFT. Clause 38 introduces requirements to give the OFT the ability to deal with practices that cause consumer detriment but are not serious enough to mean that a licence will be revoked. The requirement must relate to the licensable business. It must also address the matter with which the OFT is dissatisfied, or it must ensure that the problem, or a similar problem, does not arise again. The OFT can impose a requirement on licensees when it is dissatisfied with their conduct.

Requirements are a targeted and proportionate tool for dealing with problems. The amendment would allow the OFT to impose a financial penalty when dissatisfied with a licensee's conduct, without having first to impose a requirement to try to sort out the problem. We do not consider that a proportionate response and feel that it would be less likely to have the desired effect of improving the licence holder's performance.

The OFT can issue a stop now notice under the Enterprise Act 2002 if the conduct is bad enough, which covers the point raised by the hon. Gentleman. The OFT may also revoke or suspend a licence if consumers are seriously at risk. We believe that the OFT has enough power to deal with ongoing situations, and it has the power to revoke licences if necessary.
 
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I hope to have shown with those assurances that the amendment is not necessary. I therefore ask the hon. Gentleman to withdraw it.

Mr. Reid: The amendment is probing, as I said, and I shall examine what the Minister said about the 2002 Act. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Reid: I beg to move amendment No. 37, in clause 52, page 44, line 20, leave out '£50,000' and insert

'10 per cent. of the licensee's gross annual turnover in the year in which the fine is imposed'.

The Chairman: With this it will be convenient to discuss amendment No. 35, in clause 52, page 44, line 20, at end insert—

'(3A) The amount specified in subsection (3) shall be reviewed by the Secretary of State within five years of the passing of this Act, and thereafter at five year intervals.

(3B) The Secretary of State may, by regulation, amend the amount specified in subsection (3) following a review in accordance with subsection (3A).'.

Mr. Reid: As I was saying in the debate on the previous amendment, I support the principle that the OFT should have the power to impose civil penalties on those who default on the conditions of their licence or any conditions imposed by the OFT, but I am concerned that the proposed maximum civil penalty of £50,000 might be too low in certain circumstances.

It is important that fines should be whatever is sufficient to secure compliance. To follow that principle, it should always be cheaper for rogue companies to comply with the licence than to pay the penalty. The penalty should always be bigger than the gain that companies could make from breaching the licence or any requirements, and it should not be hampered by a cash limit. For many large companies, £50,000 would be a drop in the ocean and it would not serve as a deterrent for bad practice. We should remember that bad practices could adversely affect some of the poorest and most vulnerable in society.

The amendment would enable the OFT to impose a fine of up to 10 per cent. of a company's gross turnover. It would provide the OFT with the discretion to impose a fine proportionate to the offence, rather than the fine being capped at £50,000, which could be low for some companies. We took the figure of 10 per cent. of gross turnover from the Utilities Act 2000. There, too, it is the penalty for contravening the conditions of a licence, and I believe this formula to be appropriate to the Bill.

Charles Hendry (Wealden) (Con): I welcome you to the Chair, Mr. Taylor.

We have heard from the hon. Member for Argyll and Bute that clause 52 provides the OFT with the power to impose a civil penalty on a licensee that has failed or is failing to comply with a requirement. Subsection (3) provides that that amount should not exceed £50,000. We agree in principle with the measure and with the level at which the cap has been set, and we are not persuaded by the Liberal Democrats' argument.
 
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A fine of 10 per cent. of gross turnover would almost certainly lead to the closure of an organisation and it represents a punitive punishment, although other aspects such as criminal negligence could be involved. None the less, it is not right to fix the cap in primary legislation. In 10, 20 or even 30 years, the top rate of financial penalty will be the same, but, due to inflation and economic growth, it would be a much lesser penalty than it would be today.

It is 31 years since consumer credit legislation was last passed and £50,000 today is the equivalent of £7,000 in 1974—a sevenfold increase of equivalent value. People would be deterred by a penalty of £50,000 today, but it is far from clear whether a £7,000 fine would have any such effect. In the same way, if it is another 31 years until consumer credit legislation is next passed, a £50,000 fine will more than likely be regarded as a much lesser penalty than it is now. Indeed, if inflation is on average the same over the next 30 years as it has been over the past 30, the cap would need to be set at £350,000 in 2035 just to stand still. The Bill makes no provision for that to happen.

Amendment No. 35, to account for that problem, would allow the Secretary of State to review the cap on the financial penalty at intervals of five years after the passing of the Bill. Further, it would grant the Secretary of State the power to adjust the cap by regulation, subject to his or her consideration of the review. That is a better way to ensure that the financial penalties imposed on licensees remain as significant and continue to have effect throughout the life of the legislation.

I urge the Minister to break with the tradition of the past couple of days and accept amendment No. 35, due to the good sense it offers.

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Prepared 28 June 2005