BIS and HM Treasury response to Consumer Credit and Personal Insolvency Review
19 July 2011In October 2010, BIS and HM Treasury issued a joint Call for Evidence covering extensive ground on consumer credit and personal insolvency options for reform. Our Industry Minute article at the time, discussing the scope and specific questions raised in the Call for Evidence, can be accessed here.
The Call had sought to examine views on commitments that had been set out in the Coalition Agreement on reforming the regulation of financial services and stopping unsustainable lending. Other areas were also considered, from advertising to bank charges, resulting in a wide-ranging set of questions for response.
Today, a formal Government response has been provided in respect of the personal insolvency aspect s of the paper. A summary of responses is also provided about the consumer credit aspects. A written ministerial statement sets out some key next steps:
Debt advice provision - The Money Advice Service (formerly CFEB) will take on responsibility for coordination of debt advice services. It will first carry out a review of the current debt advice landscape and gather information, then use this knowledge to create a basis to make sure advice is being delivered in the optimal way.
Bankruptcy on creditor petition - BIS will consult on increasing minimum petition debt levels for creditors later this year, with clear implications for the use of statutory demands. The current £750 level has not been increased for around 20 years and bankruptcy is felt to be a disproportionate response to debts of such low magnitude.
Basic bank accounts for bankrupts - Accounts for undischarged bankrupts have proved a long-standing issue, and this was highlighted accordingly in responses. The underlying problem is the concern that trustees in bankruptcy could seek control of funds acquired during bankruptcy from the account provider. The Government says it will consult on amendments to insolvency legislation to remove this concern.
Administration Orders - The Government intends to consult on whether the provisions on County Court administration orders should be repealed. There are currently only around 5,000 of these in existence.
Capping the total cost of credit - The Call for Evidence asked about caps on credit pricing purely in the context of credit and store cards, in line with the Coalition Agreement and acknowledging the OFT's recent work on High Cost Credit. However, the Call received over 1,800 'out of scope' responses demanding action on prices in the high cost credit market. Amongst the responses were 29 from MPs. As the foreword to the response says:
"It became clear that the real concern about interest rates was centred on the high cost credit market and a number of responses called on us to introduce a cap on the total cost of credit... Unfortunately there was a lack of hard evidence submitted... The research that does exist suggests that introducing price controls can restrict the availability of credit..."
BIS will therefore commission new research on the impact of introducing a cap on the total cost of credit.
Some other points from the response paper:
• All respondents to Q30, about future access to financial service after debt remedies, indicated a desire for increased differentiation in credit scoring to recognise some debt remedy procedures were more 'serious' than others. Respondents cited that the effect on credit scores was similar whether an individual had entered bankruptcy, a DMP or other process. The Government says it will "work with CRAs and the lending community to ensure that they are aware of... the differences between them" but that it recognises the commercial aspects.
• The paper points out that there is "potential for the landscape to change" in the area of DMPs following the proposed transfer of consumer credit regulation to the Financial Conduct Authority.
• The majority of responses to questions relating to home collected credit had been submitted by individuals. Many responses expressed doubts about the effectiveness of the Competition Commission remedies in effect since late 2007.
• Objections given to increasing data sharing included concerns that missing a utility payment could reduce an individual's access to credit and that utility companies could use the information to charge higher rates to poorer scoring customers.
The combined Government response can be found here. A BIS press release is also available here and an Insolvency Service release here.
The requirements of OFT Guidance that debt recovery steps must be proportionate, with less drastic remedies considered first, should already mean that creditor petitions for bankruptcy are rare at low debt levels. Raising the prescribed limit is therefore arguably unnecessary to address concerns of disproportionate application.
The intention to address basic bank account provision to undischarged bankrupts coincides closely with yesterday's recommendation by the European Commission that member states should ensure that all citizens have access to a basic and affordable bank account. Member States have been asked to take action on this within six months, with the implication that binding measures will be proposed if this fails to occur.
Respondent concerns about utilities data sharing appear to us to be misplaced. Missed payments would only ever be relevant in proportion to any increased propensity they signal for credit default. Meanwhile showing payments met could grant access for individuals who have not previously used credit, or those who have not needed to use it for some time.
It cannot be imagined that Ofwat or Ofgem would permit any attempts to increase prices for poorer scoring customers. Ironically, it may prove that sharing data could even help customers in financial difficulty to access better prices for water. The Flood and Water Management Act 2010 will for the first time allow companies to create such social tariffs funded by cross-subsidy, subject to guidance to be issued by DEFRA.
The commissioning of independent research on total cost of credit restrictions is a welcome move. It is likely to provide much needed certainty in the future following a year of political and social activism on the cost of credit. While much research has been conducted to demonstrate the likely negative effects of interest rate restrictions, there is little evidence specifically on a 'total cost' approach. Settling this issue will allow the industry to move on positively, whatever the findings.
