David Prosser: A credit crackdown is too easy

Outlook What's not to like about a crackdown on irresponsible lending, of the type unveiled yesterday in a White Paper on consumer finance? After all, we've just been through a credit bubble inflated by reckless lenders. And everyone dislikes those money-grabbing lenders with sky-high rates.

Actually, there are two good reasons to be concerned. The first is a nanny-state argument. Should we really be legislating to protect people from themselves? When a lender raises its limit on what a borrower may spend on its credit card, no one forces them to rush out and buy a flat-screen television. What we're effectively saying when we ban lenders from offering credit in certain ways is that we don't trust borrowers to behave responsibly.

We should, of course, ensure that borrowers have every opportunity to make informed decisions about the way they use credit. So if a lender offers credit card cheques that carry much higher rates than its plastic, borrowers should be told so clearly. But improving disclosure standards is not the same as credit control.

The second issue is demand. Most borrowers don't pay sky-high interest rates because they are too dim to realise what they're doing. They do so because the lenders charging such prices are the only ones prepared to deal with these borrowers. There will be people who regard such lenders as exploitative – though they would claim their interest rates reflect the risk of customers defaulting – but they are at least accountable companies. The alternative is that many desperate borrowers end up dealing with the sort of lender that pops round and breaks your fingers if you fall behind on repayments. This is why consumer groups often dislike the idea of maximum interest rates.

In any case, the annual percentage rate that is the standard way of comparing loans isn't terribly useful with very small advances. Payday loans, for example, which may now be outlawed, typically carry a fee of £20 or so a month in return for an advance of as little as £100 to see the borrower through to payday. That would imply an apr of more than 2,000 per cent – outrageous when you see it written down, but not relevant to what is paid in real life.

By all means legislate to ensure that lenders are honest and clear. And some of the White Paper's suggestions are good – creating a consumer advocate could work well. But by cracking down on lenders ministers believe are behaving badly, people may find themselves starved of credit altogether. That deprives those borrowers with poor credit ratings of any chance of ever rebuilding their profiles, condemning them to a lifetime deprived of affordable borrowing or worse, in some cases, throwing them to the loan sharks.