Credit shake-up puts the bite on loan sharks

DTI's new rules aim for more transparency and fairness in loan agreements, but shy away from setting interest rate caps
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The Independent Online

The Government yesterday unveiled plans for a "formidable" reform of dated consumer credit laws that include an assault on loan sharks.

Patricia Hewitt, the Secretary of State for Trade and Industry, said the first reform of the laws for three decades was aimed at helping the most vulnerable in society.

However she held back from imposing a maximum lending rate, saying this would simply set a benchmark and could even raise consumers' costs.

She added that yesterday's reforms were not aimed at cutting people's appetite for debt, insisting that current record borrowing levels presented no wider economic threat. In its long-awaited White Paper, the Government outlined a range of new regulations and powers.

The main measures include undercover officers, or "loan shark hunters", working in deprived areas to tackle criminal gangs who lend people more than they can afford and use violence to extort repayments.

They also aim to make it easier for people to understand what they are getting into by making lenders increase the size of small print and use US-style honesty boxes to present information on a product in a standardised form

New powers will enable the Office of Fair Trading to fine lenders and launch surprise raids on loan companies.

The rules governing the licensing of loan companies will be tightened, and measures will aim to ensure the three-quarters of consumers who pay their debts early can do so without being hit by huge penalties.

Announcing the plans, Ms Hewitt, who famously cut up her credit card after racking up a substantial debt, said: "This represents a formidable programme of action.

"It is more often than not the most vulnerable who are preyed on by loan sharks. It is simply not possible to escape from poverty if what little you have is asset-stripped by predators. These measures will crack down hard on loan sharks and other rogue lenders."

The assault on loan sharks - one of the few measures not to have been flagged during the lengthy consultation period - will begin in April.

Under the plans, teams of trading standards and enforcement officers will use undercover surveillance to identify rogue lenders and recover their illegal profits.

It is based on work by Strathclyde trading standards officers in the 1990s who identified more than 60 rings operating in the Glasgow area. In one case they found a resident of a homeless hostel who charged 1.3 million per cent interest.

While this was the most headline-grabbing initiative, it is the bulk of the remainder of the reforms that will affect the typical borrower.

The Government wants credit agreements to become more transparent so consumers know exactly what they owe and what they will pay.

At its heart are new powers for the OFT - which will require new legislation - that will strengthen its licensing regime and enable it to fine companies that breach its terms.

The OFT will get powers to scour an applicant's track record and to vary the length of the licence to let it target sectors that pose the greatest risk.

The new law, which will have to fight for space in the legislative programme in the 2004 Queen's Speech, will also include a crackdown on unfair selling practices.

The DTI is proposing to replace the need to prove "extortion" with a wider test for "unfairness". The definition, which is up for consultation, may include unfair practices such as coercion, levels of interest rates and penalty costs.

The DTI will use existing regulations to bring in tighter controls next October on pre-contractual information, advertising standards and the ability to pay off a loan early.

The Government will insist on a standard format for the information that all lenders will have to show their customers, so they can compare terms.

This will include: the interest rate or rates, the amount of repayments, a "wealth warning" for any loan secured on property, the length of the agreement, the total charge for the loan, early settlement penalties and details of the right to cancel them.

On early repayment, Ms Hewitt said 70 per cent of lenders paid off their debts early but fewer than a fifth knew there would be a charge - typically two months' interest.

The new rules, governing loans of more than two years, will introduce a new method of calculating the penalty.

Ms Hewitt said if everyone switched to a cheaper credit card, consumers would save £1.9bn or more than £400 per household.

However she stopped short of setting a maximum interest rate that money-lenders could charge - which stood at 48 per cent before the introduction of the 1974 Consumer Credit Act.

The DTI rejected bringing back an interest rate cap, saying high rates were not on their own a sign of extortion while a cap could have the perverse effect of encouraging rates to "gravitate towards that ceiling".

The package of measures received qualified support from both consumer groups and the lending industry.

David Harker, chief executive of Citizens Advice, a charity that represents citizens' advice bureaux (CABs), urged ministers to get the laws on to the statute book quickly.

CABs dealt with more than a million new debt cases, half of which were related to consumer debt. "We urge the Government to do everything in its power to turn words into deeds to prevent thousands more people finding themselves trapped in grossly unfair credit deals from which there is no way out," Mr Harker said.

The National Consumer Council (NCC) hailed the reform to the current extortionate credit laws, which had achieved only 10 successful cases in 30 years.

Deirdre Hutton, its chairman, said: "Together these measures should enable the enforcement authorities to crack down on a much wider range of undesirable business practices and exploitative credit agreements quickly and effectively."

She urged the Government to do more to provide financing alternatives for the one in five households currently turned down by mainstream lenders.

But the Finance and Leasing Association, a leading industry body, said these people might become the unintended victims of the new rules.

Martin Hall, its director, said: "The proposals could easily backfire, increasing the cost of credit and creating credit deserts for consumers with little or no access to the mainstream market."

He criticised the fact that some of the new rules would apply retrospectively, and warned that the rules on unfair lending could become a "troublemakers' charter".

Ms Hewitt and Ruth Kelly, a Treasury minister, insisted the new moves did not reflect concern over borrowing levels, which rose by a record £19.6bn in October. Ms Hewitt said: "Although there has been a lot of concern expressed about the headlines about debt, the reality is that we have a strong economy." For most people, she said, the proportion of disposable income used for interest payments was the lowest it had been for 20 years.

Harsh lesson in borrowing

The ease with which anyone can obtain credit at a moment's notice is highlighted by the case of a schoolboy who was given a £400 overdraft without any rigorous checks.

When he turned 18 in April, Adam Zirps of Haslemere in Surrey was offered an initial £300 loan by his bank at an annual percentage rate (APR) of 17 per cent. As soon as he exceeded that the bank granted him an extra £100 - which he also used up during a pre-university holiday.

By the time his family paid off the loan some four months later they had to hand over £500.

His mother Sue said she had tried to speak to the bank manager after she discovered Adam had secured the loan despite not having paid employment at the time. "I got a bit upset and rang the bank to speak to the manager but she was less than helpful and told me to mind my own business as he was 18," Mrs Zirps said.

She said her son later received several more invitations to take out credit cards, including some from the same high street bank. In the end she paid off the debt. "The last thing I wanted was him starting university being minus in his account but there was this whole attitude [at the bank]."

She said her intention had been to protect other people being put in a similar situation in the future. "How it was possible for him to get credit is just mind boggling."

David Harker, the chief executive of Citizens Advice, whose bureaux took up the case, said: "He got an overdraft with no visible means of support and then the bank pestered him with offers of more credit."