OFT to investigate irresponsible lending by banks in consumer credit markets

Britain's banks are facing yet another regulatory clampdown after the Office of Fair Trading began a new inquiry into irresponsible lending practices in consumer credit markets.

Banks and loan sharks have been heavily criticised over the past few years for offering credit to consumers who could not afford it. The OFT said it would now look at establishing new guidance on the criteria which lenders should consider before handing out loans and credit cards.

"Credit is an important part of everyday life, so it is vitally important that consumers are safeguarded from irresponsible lending and that businesses have clarity about what this constitutes," said Ray Watson, the OFT's dir-ector of consumer credit.

Consultation responses will have to be filed by the end of October, with the OFT planning to issue initial guidance by next summer. News of the investigation came as the Government published new data on personal insolvencies, revealing that more than 15,000 people declared themselves bankrupt in England & Wales in the second quarter of 2008, while almost 10,000 took out Individual Voluntary Arrange-ments – an agreement among their creditors to write off some of their debt and establish more manageable monthly payments.

The number of bankruptcies was down more than 1 per cent on the previous quarter, and more than 5 per cent on the same period last year. Similarly, the number of people taking out IVAs was down 3.2 per cent on the first three months of the year, and down more than 12 per cent on the same period in 2007.

But analysts said the statistics disguised the truth. With housing, food and fuel costs having risen sharply over the past few months, many more households have found themselves in financial difficulty. Louise Brittain, a partner at accountants Baker Tilly, said many consumers were being drawn into debt management schemes, which were not included in the latest figures.

"Debt management schemes do not effectively deal with personal insolvency problems, and the process can prolong the issue, with individuals still forced into bankruptcy at a later date," she said. "We expect to see fewer individuals volunteering for insolvency and more being forced into it as the soaring energy prices, increased food bills and higher mortgage costs impact."

The lending industry said yesterday that it welcomed the OFT's investigation. In a statement, the Finance & Leasing Association said it already has a strict code of conduct for its members, and hoped that this would be worked into the new OFT guidelines.