Ministers reject proposal to cap interest rates for consumers

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The Independent Online

The Government yesterday ruled out imposing a cap on the interest rate that lenders can charge borrowers as part of its shake-up of consumer credit.

The Government yesterday ruled out imposing a cap on the interest rate that lenders can charge borrowers as part of its shake-up of consumer credit.

The Department of Trade and Industry (DTI) said research had shown that imposing a ceiling had a negative effect on low-income borrowers. It said, however, that it would keep the question under review.

Gerry Sutcliffe, the Consumer minister, said evidence from other countries showed that caps limited the access to credit for low-incomes families, who were then forced to use illegal loan sharks.

"The UK's credit market is very sophisticated and we are undertaking a wide range of reforms to ensure protection and transparency for consumers and the industry," he said. "These provide a better way to deal with problems in the market now, such as the high cost of credit and financial exclusion."

The decision was welcomed by the banking industry and the leading consumer action groups, which supported the DTI's findings. Eric Leenders, a director at the British Bankers Association, said: "We feel it is for the market to decide how the pricing should be set."

The DTI looked at the impact of capping the amount of interest that could be charged at 36 and 200 per cent, and studied countries such as France, Germany and the US, which impose a limit. The research found that lenders there did not offer small loans that could be repaid quickly. The percentage of people in France and Germany who admitted they had borrowed money from illegal lenders was twice as high as in the UK.

The charity Citizens Advice welcomed the Government's decision. It said: "Extortionate credit is about much more than the interest rate. Just capping interest rates would not enable the regulator to tackle the full range of unfair deals now and in the future, or give consumers the best protection."

The National Consumers Council said the research would put pressure on the industry and Government to stimulate the market for low-income credit. It said: "As things stand, very few credit products meet the needs of low-income consumers."

However another body, Debt on the Doorstep, accused ministers of giving lenders carte blanche to charge "extortionate" rates. "The Government has caved into pressure from rip-off lenders and used flawed research as the basis for rejecting interest rate controls," it said.

The report is unlikely to quell unease along backbench MPs over rates. John McFall, the chairman of the Commons treasury committee, said: "This makes it more important that the industry regulates itself and that's an agenda we are going to pursue."

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