FOOL'S EYE VIEW
Tackling Loan Sharks

By James Carlisle
February 18, 2002

The level of consumer borrowings (excluding mortgages) has ballooned in recent years to reach £140.5 billion in December 2001, compared to £87.5 billion back in December 1997. Part of the reason is that lower interest rates are making the debt more affordable. Banks and other lenders expect these lower rates to last well into the future (subject to the normal short-term fluctuations), so they're apparently not too concerned.

The borrowers themselves, however, do appear to be worried about it, with Citizens' Advice Bureaux reporting a 37% increase in the number of enquiries relating to consumer debt problems over the last two years (to stand at 592,423 enquiries last year). So, whatever the lenders say, some people are feeling the pinch and that's only likely to get worse if short-term interest rates rise (as is now being predicted).

So people are getting themselves into difficulties over debt and that's nothing new. The trouble is that people often seek to borrow money when they're in a state of distress and that doesn't help the decision-making process. According to a Citizens' Advice Bureaux survey, more than half of those with debt problems had tried borrowing more money in an attempt to get on top of their debt problems and 40% felt unable to cope and 'in crisis'.

So the law, and religion before it, has taken the view over the years (mostly speaking anyway) that it needs protect borrowers from unscrupulous lenders. The current law on this in the UK is centred around the Consumer Credit Act 1974 (CCA) and, what with it being nearly 30 years old, the Government is taking the welcome step of modernising it. It's a slow process, but I guess the most important thing is to get it right.

Things kicked off last July with the publication of a consultation document called 'Tackling loan sharks - and more!'. Today saw the next step forward, with a summary of the responses received and a timetable for moving forward. This essentially involves the publication, over the next year, of a series of new consultation documents for each of the specific areas under review. So get ready for lots of discussion about consumer credit. The review areas are (in order of the publication of their consultation papers)...

Financial Limits (March 2002)

The scope of the CCA is limited to credit agreements below £25,000. The plan is to increase that limit to bring more agreements within the legislation, but the Government is consulting on the right figure to use.

Exempt Agreements (March 2002)

As well as the financial limits, some agreements are exempt from the CCA. This includes mortgages. With 'first mortgages' coming under the regulation of the Financial Services Authority (FSA) this summer, 'second mortgages' may escape regulation from the FSA and the CCA. So the plan is to include them under one or the other.

Early Settlement Regulations (Summer 2002)

Loans often carry tough penalties if you want to pay off your loan early. That obviously isn't much help to people trying to get out of debt. It also isn't much help to people wanting to switch to better deals. The Government thinks the current method for working out early repayments, the 'rule of 78', is biased towards lenders and it wants to change it.

On-Line Agreements (Summer 2002)

It currently isn't possible to enter into credit agreements online, because they have to be in writing and signed by both lender and borrower. The Government wants to change this to boost competition and make loan deals cheaper. You'd have to worry about people getting credit so easily though. At least signing on the dotted line feels pretty 'serious'.

Licensing Regime (Autumn 2002)

The current licensing regime hasn't been successful in keeping unscrupulous 'loan sharks' out of the market. The Government wants to tighten up the regulations. It might reduce choice, but so what? The smaller operators are unlikely to be offering the most competitive deals. There are also plans to improve enforcement.

Extortionate Credit (Autumn 2002)

The CCA contains provisions for the court to alter the terms of credit agreements where the terms are 'extortionate'. The definition of 'extortionate' in the CCA is 'grossly exhorbitant' but that hardly ties it down. The Government wants to reduce the threshold and tighten it up.

Advertising Regulations & APRs (Winter 2002/3)

The Government wants to 'magnify the small print' that comes with consumer credit agreements 'to prevent people from being misled and help them find good deals with no hidden snags'. Part of this will involve looking at the rules for calculating the annual percentage rate (APR) (which is rather like an interest rate with all the costs bundled in and is designed to be a means of comparing different loans). More financial education is needed as well, though, to make sure people can understand the 'magnified text' when they see it.

Task Force Recommendations (To be arranged)

This refers to the 'Task Force on Tackling Overindebtedness' that's currently looking into 'the causes and effects of overindebtedness and ways of achieving more responsible lending and borrowing'. The initial report was published last July and we're due the next instalment later this year.

Multiple Agreements (Spring 2003)

This refers to a section of the CCA that apparently causes confusion for lenders. It's purpose is to prevent a loophole by which lenders could bundle together different loan agreements, so that they exceeded the limit for loans to be covered by the Act. Unfortunately it has the knock on effect that different APRs have to be advertised for the same deal, causing confusion to consumers. So the Government wants to clarify the rules.

All in all, the old Consumer Credit Act is beginning to look a bit worn out and it's good to see the Government doing something about it, even if it is a painstakingly slow process.