FOOL'S EYE VIEW
Irresponsible? Who - Me?

By Jane Mack (TMFJane)
July 27, 2001

Plans to tackle the growing problem of consumer debt have finally been unveiled by the Government. They include a radical overhaul of the 30-year-old Consumer Credit Act, a clamp-down on loan sharks and an end to irresponsible lending.

It's a pretty substantial package of proposals and, if implemented in full, it'll be much easier for consumers to compare loan rates and to settle up early without some of the stringent penalties currently imposed by some lenders.

Indirectly, of course, it'll also mean a clamp-down on irresponsible borrowing since consumers who are already up to their neck in debt will find it much harder to borrow even  more.

The proposals have been published in a consultation document entitled "Tackling loan sharks and more" and it's the work of the Government's Debt Task Force, which was set up last October to examine the burgeoning problem of overindebtedness among consumers.

The proposals include, among other things, plans to:

-- Put a stop to irresponsible lending by ensuring that lenders check to see if their prospective borrower is already over-committed. There'll be an end to instant unchecked credit.

-- End the so-called 'Rule of 78' which penalises borrowers who want to make early repayments. Essentially, it means lenders will no longer be able to charge the interest up front, so consumers will find it much easier to switch to better deals.

-- Clamp down on loan sharks – the Office of Fair Trading will be given greater powers to levy hefty fines against rogue lenders and it'll be easier to challenge unfair credit agreements in court.

-- Stop the interest-free credit sting where, if consumers miss their final payment by one day, they are hit with backdated interest. In future, lenders will have to give advance notice of final payment dates and borrowers will be given a brief breathing space to settle the loan.

-- Improve the transparency of loan information - the snags usually hidden in the small print will have to be brought to the attention of the consumer.

-- Curb misleading marketing – there's to be a code of practice to tackle misleading and irresponsible marketing techniques, which give the impression that "easy" credit is available. To that end, complex advertising regulations are to be simplified to make it easier for consumers to compare products.

The government also intends to raise the financial limit of loans that fall under the protection of the Consumer Credit Act. At the moment, only loans of up to £25,000 are protected with cooling off periods and rights of withdrawal.

The trouble is, there are no proposals which are specifically aimed at teaching consumers to be more responsible with their borrowing. And, when you think of it, it's not surprising. How on earth do you educate a bunch of clueless adults who are more concerned with buying the right sort of car, television or computer than they are about how to pay for it?

Figures from the Bank of England show that the level of borrowing (excluding mortgages) in December 1997 amounted to £87.5 billion. Three years later it had risen to £127.4 billion! It's no wonder that Citizens Advice Bureaux have seen an increase of 37% over the last two years regarding inquiries about debt.

The consultation document is an interesting read and it certainly tackles the question of protecting consumers from irresponsible lenders. But, as the Task Force points out, mere factual information, however clear, is not enough to ensure that a consumer makes the right decision. Although issues pertaining to personal finance and consumer rights are now part of the national school curriculum, there are rather a lot of adults who left school a long time ago who clearly don't seem to know what they're doing.

Unfortunately, apart from forcing lenders to offer more transparent information, there is little the Task Force or the Government can come up with to ensure that those of us over the age of 18 become a bit more responsible with our money.

More: The Motley Fool's Get Out of Debt Centre