HC Deb 14 May 1964 vol 695 cc757-65

(1) Notwithstanding any provisions to the contrary in any agreement to which this Act applies, the hirer or buyer may discharge such agreement by payment in full at any time before the maturity of the final instalment payable thereunder and if does so shall receive and be entitled to receive a rebate of the credit service charge provided in the agreement. The amount of any such rebate shall represent at least as great a proportion of the balance of the credit service charge described in subsection (2) hereof as the sum of the periodic balances calculated for each and every period following that in which payment in full is made bears to the sum of all the periodic balances for each and every period comprised in the full term provided for in the agreement provided always that the hirer or buyer shall not be entitled to any rebate of the credit service charge where the amount of such rebate shall be less than £1.

The period to be used for the calculation shall be one month where the interval between any two consecutive instalments is one month or more and one week where such interval is less than one month.

"Periodic balance" shall be the sum of the instalments to mature under the terms of the agreement and shall be calculated for each and every period whether or not an instalment is due to be paid for that period.

(2) The balance of the credit service charge mentioned in subsection (1) hereof will be the credit service charge stated in the agreement less a handling fee which shall be a sum equal to 20 per cent. of that credit service charge subject to a maximum handling fee of £15, and a minimum of £3.

(3) At the end of the Notice set out in the Schedule to the principal Act, there shall be inserted the following:— Rebate for anticipation of payment: The hirer may pay the whole amount provided for under this agreement at any time before the final payment becomes due. In this event, he will be entitled to receive such rebate of the credit service charge as is laid down by section (Rebates of charges for anticipation of payment) of the Hire Purchase Act 1964".—[Mr. Darling.]

Brought up, and read the First time.

Mr. Darling

I beg to move, That the Clause be read a Second time.

This proposed new Clause deals with a matter which we discussed very briefly in Standing Committee. We considered how to make arrangements in law, if it was thought desirable to do so—and I think it is desirable—for a customer who ends a hire-purchase contract with a lump-sum payment before the contract has run out. We wish to provide means whereby customers who pay off their hire-purchase debts before time can have a return of that part of the payments to which we think they are clearly entitled.

At present, there is no legal obligation on finance companies to give the hirer who settles his contract ahead of time any rebate of charges, but, in practice, most reputable finance companies give a rebate. I gathered from the discussion which we had in Standing Committee that, in principle at least, the Parliamentary Secretary supports me to the hilt. He knows that rebates vary considerably between companies. If one asked a number of different companies what their rebate allowances were, one would get a number of different answers. We therefore think that there is a case for recognising rebates in law and for bringing some uniformity into the matter.

The main reason for our proposal is that the early settlement of transactions is not uncommon. I was surprised to learn that about half of all motor vehicle transactions are settled ahead of time. When people take out a hire-purchase contract for the purpose of a motor car, they apparently go for the longest period of payment, which is three years. They then get tired of the car and want to swap it for another, so they quickly settle up and either buy a new car or enter into a part-exchange deal which may involve a second-hand car. The rebate on early settlement is, therefore, of great importance, because many people are involved.

I understand, also, that the finance companies, noting the large number of cases in which people settle ahead of time their hire-purchase payments for motor cars, have entered into competition with each other to give attractive rebates. The attractions vary according to whether the finance company will be involved in the further deal for the second motor vehicle that the customer wants or whether the customer will go elsewhere. They offer favourable terms to keep the motor-car customer within the field of their operations. There are thus differences between the rebates which are offered in different circumstances. There are variations up to about £30 or £40 depending upon whether the second transaction will be with the same finance company or whether the customer goes somewhere else.

Our view is that the time has come to prescribe a minimum rebate to which the hirer should be entitled if he wishes to pay in full during the currency of the contract. As Parliamentary Secretary knows, this is done in other countries. We think that it should be done here. Indeed, the new Clause adopts an internationally known and accepted formula for the calculation of rebates in consumer credit transactions. It applies to the balance of the credit charge after the deduction of a reasonable handling fee so that the hirer will get an equitable rebate on the interest element in the credit charge.

At this late hour, I need not go into an explanation of the formula. Having had to study the matter before we put down our new Clause in Committee, and having had further opportunities to study it again, I now understand the 78th formula or the sum of the digits.

After considerable ingenuity, and with the help of people more skilled in these matters than I will ever be, we think that we have overcome the objections which the Parliamentary Secretary put forward against the Clause which we moved in Standing Committee. On that occasion, the hon. Gentleman said: I am sure that in general terms it is desirable that rebate should be given for early payment. I am told that many of the better finance houses do just that. The question is whether it would be desirable to put that into a statute, and if one decided to do so, whether it is actuarially practicable. After very careful examination of the matter, we believe that the method of the new Clause deals with the matter clearly and provides for a minimum rebate arrangement on the formula which the Parliamentary Secretary knows all about and which, if he does not understand it, I am willing even at this hour to explain to him.

We do not think that any of the arguments that the hon. Gentleman adduced against the previous new Clause apply to this one. In Standing Committee, the hon. Gentleman said: I am willing to look at this again, but when we looked at the new Clause we felt that it was too complicated. I shall certainly look at it again, because in general I am in favour of rebates."—[OFFICIAL REPORT. Standing Committee F, 9th April, 1964; c. 401–2.] I am confident, therefore, that the Parliamentary Secretary will now accept the new Clause, because even I can understand it.

The hon. Gentleman has said repeatedly today that it is difficult for him to deal with many of the problems which have been raised in debate this evening and tonight because he is not learned in the law. Neither am I. I can understand this Clause, however, and therefore it cannot be complicated. It is clear, concise and explains precisely what we mean. Even laymen who have never even bothered to find out what rebate charges are, could understand from the Clause what we are getting at, and we feel sure that if there were any legal disagreement on this matter in the court it would be quite easy on the basis of the Clause to settle it.

10.30 p.m.

The Parliamentary Secretary has frequently expressed himself in favour of the principle of the Clause, that a person who settles his contract ahead of time should get a rebate on the hire-purchase charges he has met over a long period. By settling ahead of time he is owed something by the finance house and we think it only just that a rebate should be given to him. I am sure that because the Parliamentary Secretary agrees with us and because the Clause is so clear, precise and understandable, the Government will accept it.

Sir E. Errington

The Clause is not as simple to read as the hon. Member for Sheffield, Hillsborough (Mr. Darling) has said it is. This does not seem to me a matter to be dealt with by statutory enactment. As has been said, rebates for charges, generally speaking, are given because it is a sound and prudent thing to do from a business point of view. It will not be very effective to put this principle into statutory form and it might produce disputes and difficulties which otherwise would not exist. I do not want to go into the details at this hour, but in general principle the present situation should be left as it is.

Mr. D. Price

I would remind the hon. Member for Sheffield, Hillsborough (Mr. Darling) that, although he quoted me extremely fairly, I gave warning in Committee of the practical difficulties which I feared we might encounter on this matter of rebates. As my hon. Friend the Member for Aldershot (Sir E. Errington) has rightly pointed out, many finance houses already give rebates to hirers who settle their agreements early. We all agree that this is desirable. The difference between the hon. Member for Hillsborough and myself is that he wants to make it statutory, and my hon. Friend the Member for Aldershot thinks that it should be discretionary and that good commercial practice will encourage finance houses to exercise that discretion.

Since the Committee stage I have looked carefully at this matter. To be acceptable, the scheme has to be fair to both hirer and finance house, and to be workable it will have to be a scheme under which the hirer could readily ascertain how much the rebate was to which he was entitled. The hon. Member for Hillsborough, as always in his modesty, underestimated his own intelligence and his ability at mathematics.

The problem of making the scheme fair to both sides is complicated. I realise that the Clause goes a long way, if perhaps or, somewhat arbitrary lines. The first thing is to divide up the hire-purchase charges. Part of them go to pay overhead expenses of the finance house, for such things as the setting up of the agreement and the collection of instalments. These are little affected by early settlement, and in the proposed new Clause they are excluded from the rebate calculation under the title of a "handling charge".

The figures, if arbitrary, do not seem to me to be entirely unreasonable, although £15 does seem somewhat high. But there is a more important point. When members of the public complain about this matter of rebates, it is often because they think that on an early settlement they should get a proportionate rebate on the whole of the hire-purchase charge. They do not realise there is this question of overheads, and that the interest element in each instalment reduces as the hire-purchase agreement proceeds, and so does the rebate. For these reasons, unless any statutory provision were very clear, the public might often think that they were being cheated and might try to enforce excessive claims.

The balance of charges after the deduction of the handling fee is what is to be eligible, under the Clause, for rebate. The amount of rebate is set out in subsection (1). I realise that since the Committee stage the hon. Gentleman has amended the formula to make it applicable to a wider variety of agreements than his Clause previously was, but the trouble is that, as far as any ordinary person is concerned, subsection (1) is not immediately comprehensible.

The only possibility, it seemed to us, would be if we could reduce the sum to a simple formula which an ordinary hirer could be expected to apply. We took expert advice and found that this would not be possible with the Bill as it now stands. We got a formula, but it was not a practical proposition for this purpose. Beside it, the formula which we rave incorporated in Schedule 3 for calculating a rate of interest is simplicity itself, and that formula is one which we felt able to include in the Bill because traders would have occasion to use it, but the public at large would not.

I have a formula with me, but it is so complicated that I will not attempt to read it out. Whereas I would be prepared to discuss it in mathematical terms, I find it difficult to make speeches in trigonometry, although I would be prepared to discuss it with a blackboard.

We found that the only way in which we could reduce the calculation of rebates to a simple formula would be if the Bill laid down that every hire-purchase agreement must provide for the payment of equal instalments at equal intervals. Such a general provision could be very restrictive in some circumstances, particularly in the field of hiring agricultural machinery, and we do not think that we would be justified in imposing it for this purpose which is not central to a hire-purchase transaction.

There is, moreover, one factor which is not specifically mentioned in the proposed new Clause. If a hirer is entitled to a rebate for paying early, it would also seem reasonable that this rebate should be diminished to take account of any occasion during the course of the agreement when he was, in fact, late in making a payment. This is another of the practical points which the Molony Committee examined. In the early stages of an agreement, late payment by the hirer clearly is relatively expensive for the finance house.

Many finance houses adopt a sympathetic attitude if a hirer falls behind in his payments for some genuine reason such as ill health or temporary unemployment. This, I am sure we would all agree, is desirable. But I wonder, if they were bound by a rebate scheme which presumed that the hirer had paid as required under the agreement at each appropriate moment, whether finance houses would necessarily feel able to maintain such a sympathetic attitude to those who fell back, for good reasons, on their payments.

I have, I hope, said enough to show that we have considered this matter carefully. Had I thought the proposal was practical, we would have given effect to it. Given the facts, much though in spirit I would like to do so, I cannot advise the House to accept the proposed Clause. The size of the matter, as a problem of consumer protection, I believe can be exaggerated. In practical terms, this is a question of motor cars. A large proportion of hire-purchase transactions for motor cars are settled early, and the amount involved is sufficient to suggest a significant rebate. Even here there is a qualification. The rebate is not very much once the two-thirds mark has been passed—that is, after two years under the common three-year agreement. Rebates are, in fact, widely paid.

The usual reason for early settlement of agreements for cars is that the hirer is changing his car for a new one or a better model. It is true that at least some finance houses try to hold on to their customers by offering a higher rebate if the new hire-purchase agreement for the replacement car is made with them. That is understandable—and it is, of course, something which this Clause, which would prescribe a minimum rebate, would not prevent. The suggestion that it is unfair competition for a finance house to try to hold on to its customer in this way does not seem to me to be justified. After all, finance houses are in business to have their money at work, and it is no advantage to them to have it repaid prematurely.

In conclusion, I come back to agreeing with the Molony Committee, that, desirable though rebates are, it is not a matter for a statutory provision. Therefore, I could not advise the House to accept the new Clause, simple though the hon. Gentleman would have us believe it is.

Mr. Darling

Naturally, I am disappointed with the reply. I find it hard to believe that the matter has had the full consideration which the Parliamentary Secretary promised. After all, other countries are able to run this.

I should like to quote two sentences from a booklet issued in the State of New York which covers the point in respect of anyone taking up a hire-purchase agreement: You have the right to pay the contract or obligation in full at any time before the date of the final payment regardless of what may be stated to the contrary therein in the contract. If you are able to repay your debt before the maturity date you are entitled to such refund of the credit service charge, if any, as determined by a formula prescribed by law. This is the formula. As the Parliamentary Secretary says, it is as simple as in Schedule 3.

Sir E. Errington

With reference to what the hon. Gentleman quoted, is not that a law based on the personal loans principle rather than hire purchase?

Mr. Darling

No. It is called by a different name, but it is precisely in line with our chattel mortgage, which we call hire purchase, where one lodges the same goods, in effect, as security against the loan.

In the circumstances, and owing to the way we are conducting the proceedings on the Bill, we cannot take this further. However, I am glad that the Parliamentary Secretary uttered two or three sentences which we shall use very effectively when we come to the next Clause. He said that we must be fair as between owner and hirer, that the hirer must understand clearly what he is entitled to receive, and there were one or two other quotations, for which we thank him very much indeed. I think that he understands how well they will be used.

I regret that we cannot press the Clause for inclusion in the Bill. It ought to be included.

Question put and negatived.

Mr. D. Price

I beg to move, That further consideration of the Bill, as amended, be adjourned. I think that the House will agree that we have made reasonable progress. I hope that we may look forward to completing the Bill during the course of another day.

Question put and agreed to.

Bill, as amended (in the Standing Committee), to be further considered Tomorrow.