William Kay: 'Crackdown' on loan sharks seems neither fair nor clear

Now we know the Government's answer to illegal moneylenders: send trading standards officers, acting incognito, to collect evidence of rogue behaviour which they can pass to police.

This week, the Department of Trade and Industry published a White Paper on consumer debt, echoing several of the proposals it announced in July about greater transparency and cracking down on penalties for early loan repayment.

But, back in those balmy summer days, there was much sabre-rattling about clamping down on loan sharks. And this week the DTI's spin paramedics (they're not up to full doctor level) made the most of a plan to hunt down illegal moneylenders in Birmingham and Glasgow.

But we are not talking about the Consumer Credit Act here. This is to do with the Proceeds of Crime Act, when money has been extorted through the threat or use of violence. It would be a more positive gesture to compete with these thugs than simply to play cops and robbers with them.

The more widespread problem is that of the lenders who operate just within the law, using no violence but ruining borrowers' lives with horrendous penalties for loan defaults or breaks in payments. And they know well that, at this end of the market, there is going to be a high proportion of defaulters. But this is a tougher nut to crack than going after thugs, and requires fresh legislation for which there simply isn't parliamentary time. How very unfortunate.

So it will be a long time before Britain's consumer credit market lives up to the title of this week's White Paper, Fair, Clear and Competitive. In the face of such misery, the White Paper does at least admit the urgent need for financial education, the more so because the Government's achievements on this front makes a sorry list: a bit part in two elements of the national curriculum, a couple of adult initiatives, a "range of materials" from the Financial Service Authority (FSA) and Office of Fair Trading (OFT) and, er, that's it.

* The FSA this week fell into the trap of confusing the parade ground with the battle ground. It has arranged for mock interviews to be held to test how well the public understands the so-called Sandler simplified savings products, and whether the accompanying sales process is up to scratch. But do they?

Michael Folger, an FSA director, trumpeted that the report "demonstrates that 80 per cent of consumers got the same, or similar advice from sales advisers recommending simplified products as they would have received from a fully qualified adviser".

Maybe. Only the actual report makes clear that these were mock interviews involving role play. In other words, the sellers could not really have cared two hoots whether their mock customer bought or not. The rent was not on the line, for no commission was going to change hands.

On top of that, the sellers knew their interview was being monitored and cross-checked, so cutting corners or going by anything other than the book was out of the question.

In that light, it is significant that only 80 per cent of consumers were satisfied. Mr Folger prefers not to dwell on the corollary, that one in five were unhappy. I predict that proportion will rise dramatically once the sellers are firing real bullets.

* One reason that sellers of financial products, especially those lurking in bank branches, are desperately in need of better training is that they will be facing a consumer audience which admits it is financially illiterate. So, for the foreseeable future, the sales process will have to contain a large educational element, however much this may militate against quick and lucrative sales.

The trouble, as Professor David Miles has discovered, is that British consumers are unstoppably pig-headed and obsessively short-termist. Professor Miles is the Imperial College London academic charged by the Chancellor, Gordon Brown, with reviewing the frenetic fixed-rate mortgage market to see why so few of us shy away from long-term mortgages. His interim report this week showed the professor has learnt a thing or two about human nature in the past six months.

Borrowers, he found, do not understand risk properly, so they undervalue the benefits of a long-term, fixed-rate loan. What's more, "longer-term benefits did not form a significant part of borrowers' information needs". In other words, not only are they ignorant, they prefer to be ignorant.

It is just a touch arrogant to declare that the bulk of the British population does not understand risk. They may be wildly optimistic about their chances of winning the National Lottery (£13.5m rollover this week), but they can be sophisticated when it comes to working out the odds on soccer or horse racing.

Borrowers do not look at the overall cost of a mortgage for four reasons. First, they remortgage every four years and move house every six years, so they are not accustomed to looking far ahead. Second, the mortgage market is so ferociously competitive over deals up to two years that borrowers are not encouraged to look beyond their noses.

Third, neither lenders nor brokers nor the media spend much time explaining the virtues of longer-term evaluations. And fourth, who knows what interest rates are going to be in five years, let alone 25?

We have yet to see exactly what Mr Brown has in mind about long-term mortgages, and what he is prepared to do to encourage us in that direction. But Professor Miles has encountered the towering cultural barriers against change that either bedevil or enrich the UK housing market, depending on your point of view. And it's going to be a tough job to shoehorn the Acacia Avenue semi into some high-flown European agenda.

w.kay@independent.co.uk

William Kay is Personal Finance Editor of 'The Independent'