OFT proposals would expose cost of borrowing: Carsberg calls for changes in APR calculations Consumers' Association criticises watchdog's suggestions

THE OFFICE of Fair Trading is proposing radical changes to the Consumer Credit Act which, if accepted by the Government, will give the public more information on the cost of borrowing.

The central thrust of the review concerns the calculation of the annual percentage rate (APR), the standardised indicator of all the costs associated with a loan.

Sir Bryan Carsberg, director general of the Office of Fair Trading, said the APR formula had limitations, particularly when used to indicate the cost of long- term loans.

'When the need to avoid technical breaches of the law produces a mass of small print, the main purpose can become obscured and compliance costs can be large. There is also the risk of losing sight of what is really serious, oppressive or misleading,' he said.

The main OFT proposals are to change the calculation of APR in order to show fixed charges separately from the interest charge; to restrict the charges for settling loans early; to simplify the rules on advertisements; to remove the requirement to provide quotes; and to remove all business lending and hire quotations from the

Consumer Credit Act.

He also called for provisions in the Courts and Legal Services Act - which require lenders to break down the costs of component parts of a mortgage package - to be brought into force. He wants lenders to make it clear that borrowers do not have to take a package with insurance or endowments.

Direct Line, the direct insurer, yesterday claimed consumers pay pounds 3,000 in commission over a lifetime when they buy insurance through their lender.

On fixed-rate mortgages Sir Bryan said the APR should be restricted to the rate applying at the outset with an explanation that thereafter the variable rate would apply.

'It's best not to try to indulge in clever calculations but to tell it how it is. You really can't say what the cost of the whole life of the mortgage will be.'

Last night the Consumers' Association attacked the OFT proposals saying the APR was a useful benchmark that helped consumers to compare costs of borrowing from different lenders.

The Council of Mortgage Lenders said the proposals would not increase consumer choice. Lenders would be affected, not brokers.

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