Sir Bryan Carsberg, the Director General of Fair Trading, has written to leading trade associations in the lending industry and told them to ensure that their members stop using 'inertia' selling methods by the end of this year.
Lenders who continue to sell by this method face the possible loss of their consumer credit licences, Sir Bryan has warned.
Inertia selling, also known as negative option selling, works by requiring customers to indicate if they specifically do not want to make a purchase. The system has been used extensively by lenders to sell insurance policies that cover loan repayments if a borrower is unable to pay because of illness or unemployment.
Typically, loan applications have included a request for the applicant to tick a box if he or she does not want the policy. Many borrowers have not noticed the box and have been shocked to discover later that an insurance premium is included with their loan repayments.
This type of insurance is a money-spinner for lenders, since they receive commission from insurance companies when they sell a policy.
The Office of Fair Trading (OFT) dislikes the principle of inertia selling in general, but has focused on lenders because of their widespread use of it to sell credit protection policies. The OFT says it has no objection to the selling of credit protection insurance but consumers should make a positive decision to buy it.
Sir Bryan wrote at the end of last year to mail-order companies, which have also sold insurance through the negative option method, asking them to stop using the system.
He has now written to several trade associations, including the Council of Mortgage Lenders, the Retail Consortium, the British Bankers Association, the Consumer Credit Trade Association, and the Finance and Leasing Association, asking them to caution their members.
He said: 'It is my view that the use of the 'negative option' method contravenes the principle that the consumer should have a genuinely free and informed choice when purchasing a product.'
Sir Bryan points out that he has the power under the Consumer Credit Act to revoke a trader's licence to market loans if the trader engages in business practices that appear to be unfair or improper.
'The continuing use of negative option methods for selling credit protection insurance would be a factor which I would take into account during next year's market survey when I consider the fitness of businesses to hold a licence.'
His letter is already having an effect. Dixons, the electrical retailer, will stop selling credit protection insurance through the negative option system from July, a spokeswoman said this week. She said the company was already considering the matter when Sir Bryan wrote to the trade associations. Dixons then discussed the matter with Lombard Tricity, the finance house that arranges most of the loans sold in Dixons stores.
The Finance and Leasing Association (FLA), which represents more than 100 finance houses, is cracking down on the way its members sell credit protection insurance. The FLA's new code of practice, which comes into effect on 11 May, has new rules on selling of loan insurance.
Neil Grant, director of the FLA, says the association's members are phasing out the use of negative option selling. FLA members will in future be obliged to ask borrowers to say positively whether they want to apply for the insurance.
Mr Grant said the aim of the new rules in the code of practice was to ensure customers were fully aware of the cover offered and the cost before signing up. 'The code states that the main aspects of cover and the exclusions must be set out clearly and prominently and given to the customers with the cost before they make a decision whether to apply for the insurance.'
Mr Grant said the association had received complaints from self-employed people who had bought credit-protection policies only to discover, when they wanted to claim, that it excluded them.
As well as being given information about cover, exclusions and costs at the point of sale, people who sign up for the insurance must be supplied with full details of the terms and conditions as soon as possible after they agree to the purchase.
In the past, these details have sometimes been available only on request, Mr Grant said.
The FLA's new code has been drawn up following the merger of the Finance Houses Association and the Equipment Leasing Association to form the FLA last year. The FLA has 108 members who claim to account for more than 80 per cent of non- bank and building society credit transactions in the UK.
The association's new code also introduces protection for holders of store credit cards mirroring that provided by the banking code for conventional credit cards.
One of the main card-related provisions of the FLA code is that a customer's liability to mis- use of a stolen card is limited to pounds 50 until he or she reports a loss. There is no liability once the loss has been reported.
The FLA also runs a service that mediates between members and aggrieved customers.
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