FOOL'S EYE VIEW
New Rules To Make You Richer!

By Cliff D'Arcy
October 27, 2005

There are times when being a writer for the UK's most popular no-nonsense financial website isn't enough for my ambition. Indeed, because I'm something of a control freak, I'd like to have a hand in shaping future financial legislation.

From what I've learned about financial legislation elsewhere in the world, British consumers get a pretty raw deal, while banks and so on get an easy ride. If I were given a free hand to draft a new "Foolish Finance Bill", here are the rules that I'd create. Although they'd help us all, they are particularly designed to protect financially unsophisticated and vulnerable Brits. Off we go!

1. A cap on credit-card interest rates

Several other EU countries, such as France, Germany and Ireland, cap interest rates. In other words, lenders aren't allowed to charge more than a legally determined rate. However, this isn't the case in the UK: although the 31-year-old Consumer Credit Act requires that interest rates aren't "extortionate", it doesn't even define this word. Hence, lenders can charge annual interest rates of, say, 300% APR and argue that these are reasonable, on the grounds that they are dealing with high-risk borrowers.

Critics of interest-rate caps argue that they drive vulnerable borrowers into the arms of illegal loan sharks. Still, I believe that it's important to draw a line in the sand, so here is mine: no credit- or store-card issuer can charge an interest rate more than fifteen percentage points over the Bank of England's base rate. As the base rate is currently 4.5% a year, this allows card issuers to charge up to 19.5% a year, which is more than enough to make a decent return for their shareholders!

What can you do until this law arrives? Why pay any interest at all on your plastic, when you can take a break for up to a year with a cool 0% credit card? Learn more in Beware Of These 0% Card Traps!

2. An interest-rate ceiling on personal loans

I'd extend the above restriction to personal loans, too. According to the Moneyfacts database, borrowing £5,000 over three years (without rip-off payment protection insurance) costs a mere £5,424 with the cheapest lender, Fool Partner Moneyback Bank (5.5% typical APR). On the other hand, the same loan would total £6,503 with the most expensive mainstream lender, Secure Trust Bank. In other words, Secure Trust charges more than three times as much interest as Moneyback Bank does. This is exactly at the limit of what I'd allow lenders to charge: base rate plus 15%.

What can you do until this law arrives? If you don't want to be a victim of 21st Century bank robbery, read my Five Tips To Choose A Loan and check out the Best Buys in our Personal Loans centre!

3. A maximum mortgage rate

You may remember Merseyside couple Tony and Michelle Meadows going to court to prevent a mortgage lender from seizing their home. This couple originally borrowed £5,750 in 1989, but thanks to an annual interest rate of 34.9% and accumulating arrears, their debt swelled to a mind-blowing £384,000!

I've decided to be even tougher when setting the maximum interest rate for mortgages, secured loans, second mortgages, impaired-credit loans and so on. That's because I've seen far too many people lose their homes to dodgy lenders, as I revealed in Lessons From The Last Housing Crash. If mortgage lenders can't make money from, say, base rate plus 10%, they shouldn't be in this business.

What can you do until this law arrives? If you don't want to be mugged by mortgage lenders, read Cheaper Loans Mean Happier Homes and check out the great rates in our Mortgage centre!

4. An upper limit on the amount that any individual can borrow

In my three years at the Fool, I've seen struggling borrowers post thousands of messages on our Dealing with Debt discussion board. It's not unheard of for someone with an income of say, £30,000 to have debts of, say, £100,000+, plus a mortgage on top. Aaaargh!

To me, excessive personal debt has become the "biggest elephant in the room" - in other words, a massive problem that we're either too polite or too nervous to talk about. Also, although there's been some industry talk about sharing data on individuals' borrowing, nothing concrete has materialised.

Hence, I'd introduce a law to create an upper limit on how much each of us could borrow, based on, say, our take-home pay. For example, lenders cannot give a borrower more than, say, twelve times their monthly take-home pay. So, a person taking home, say, £1,500 a month could only incur total non-mortgage debt of £18,000. To encourage lenders to stick to this limit, any borrowing over and above this maximum would not be enforceable and must be written off at no cost to the borrower. That'd keep the banks on the straight and narrow!

What can you do until this law arrives? If you don't want to drown in debt, read Twenty Steps To Debt Freedom and visit our Get Out of Debt centre!

5. A minimum savings rate

One thing that really pulls my chain is how banks and other deposit-takers "bait and switch" savers. This is when they lure in savers by launching a savings account that pays a good rate of interest. After a while, this account is quietly withdrawn and the fun begins: the bank slyly starts lowering the savings rate - what I call the "death of a thousands rate cuts".

What makes me even angrier is that some of the most vulnerable people in society, such as the disabled and elderly, have large sums stashed away in so-called accounts paying as little as 0.1% a year before tax. No more! I'd force deposit-takers to pay a minimum amount of interest, say, the base rate minus 2%. At present, this would come to 2.5% a year - not good, but not disgraceful, either. Personally, my aim is to find a savings account that pays a rate greater than the base rate - indeed, my money's in a Best Buy account paying over 5% a year before tax.

What can you do until this law arrives? If you don't want your savings to suffer, read Five Steps To Smarter Saving and check out the ace accounts in our Savings centre!

6. Limits on banking fines, plus the right to fine your bank

Judging from my mailbox, perhaps our biggest pet hate is the ridiculous fines that banks and credit-card issuers impose for minor offences. If you go over your overdraft limit, bounce a Direct Debit, miss a credit-card repayment or overshoot your credit limit, you're looking at a fine of between £20 and £40. Frankly, this is daylight robbery, because, in most cases, the actual work involved in chasing up these customers is negligible, as much of it is automated. Hence, I'd cap these charges at a maximum of, say, £10, plus allow customers an equal right to fine their bank if it messes up. Fair's fair, right?

What can you do until this law arrives? If you don't want to be battered by your bank, read The Banking Battle Heats Up and check out the awesome accounts in our Banking centre!

7. A maximum commission rate for insurance policies

Before I joined the Fool, I worked for an insurer which had a subsidiary in Australia. As they don't like to be ripped off Down Under, the Aussies introduced a law to limit the amount of profit that insurance policies can make. In Oz, the maximum commission rate on any general insurance policy is limited to a fifth (20%) of the total premium.

In other words, if a policy costs A$100, no more than A$20 is available for sharing among the insurers, its partners and its agents, with the remaining A$80 going into the claims pot. Here in the UK, I know of insurance policies that do the reverse: the insurer and its partners seize over 80% of premiums, while less than 20% is paid to claimants, as I explained in Millions Conned By Card Cover!

What can you do until this law arrives? To avoid pathetic protection policies, beware of my Rule of Three and slash your premiums in our Insurance centre!

8. Compulsory pension contributions

Employers, plus a large proportion of workers, aren't going to like my next law one bit. The fact is that the majority of workers aren't putting nearly enough aside for retirement, as I explained in. That's because we're spending too much today, which means that we're also making ourselves poorer later in life (remember that pensions are nothing more than deferred pay). Hence, I'd force employers and employees to contribute, say, 5% apiece each year into a low-cost pension scheme.

What can you do until this law arrives? Power up your pension: read It's Time To Build A Better Future and visit our Pensions centre!

9. Abolish stamp duty on share-buying

When you buy shares listed on the main UK stock market (the London Stock Exchange), the government grabs a slice. To be precise, you pay stamp duty of ½% of the value of every purchase, so when buying shares worth £2,000, you're forced to cough up an extra tenner to HM Customs & Excise. In order to encourage more of us to invest in shares, and to boost returns to investors (including the pension and insurance funds in which we all have a stake), I'd abolish stamp duty. A tax on investment is a tax on all our futures, so consider it gone!

What can you do until this law arrives? Good news: you don't pay stamp duty when you buy iShares. Also, for simple, low-cost investing, try an Index Tracker!

10. Child Trust Funds for every child

Unlike most of my other suggested laws, this one actually stands a chance of getting into the statute books. I'm one of the millions of parents who received a Child Trust Fund (CTF) voucher earlier this year. Although this will come in handy, it also presents me with a problem. Although my daughter received a CTF voucher, my son was born before 1 September 2002, so he doesn't qualify for a CTF handout.

Hence, my daughter gets a cash incentive from the government, plus her own tax shelter, into which I intend to invest £1,200 a year. Sadly, my son gets no gift, nor can we open a CTF for him with our own money. My final law would extend CTFs so that anyone under the age of eighteen could have one. As parents, relative and friends would fund these accounts, the impact on the government would be minimal - all it stands to lose is a little tax on these kids' investments.

What can you do until this law arrives? Read Children Can Make Gains Too and pop over to our Saving for Children centre!

Finally, there's no chance of any of these laws being enacted any time soon (and even less chance of me ever becoming a politician), so it's up to you to wise up and get smart. Remember, a little knowledge and a bit of shopping around will seriously fatten your wallet or purse!

More: Visit our Credit Card, Personal Loan, Mortgage, Get Out of Debt, Savings, Banking, Insurance, Pensions, Index Tracker and Saving for Children centres.

Cliff owns iFTSE 100 shares, plus shares in HBOS and Lloyds TSB.