MP's urged to strengthen Consumer Credit Bill
6th June 2006

Debt on our Doorstep today urged M.P's to take steps to strengthen the Government's proposed consumer credit bill, which is due for its second reading on Thursday 9th July.

A copy of the briefing for M.P's is available here.

At the heart of the Bill is a proposed 'unfair' credit test. This is seen as an improvement on the woefully ineffective extortionate lending provisions in the current Act. However, there will be no definition as to what is or is not unfair in the Bill, and no statements from the Government have clarified this issue. The position of the Government is simply that the courts should be given a free hand to determine what is and what is not unfair.

This leap of faith in the judicial system is at odds with the reality for many low income debtors. Firstly, many people on low income are not taken to court for non payment of their debts. Loans are simply rolled over into future borrowing rather than court action taken on default. There is little opportunity therefore for allegations of unfairness to be made. Secondly, low income borrowers are unlikely to take out court action themselves or to allege unfairness pro-actively. The reality is simply that people on low incomes do not generally enforce their rights in this way. And if the courts interpet 'unfairness' in a restrictive way, the Bill does not provide the Government with a power to publish guidance to correct the approach at a later date.

Lessons need to be learned from the current Act, which sought to make it easy for people to challenge agreements on the grounds that they were 'extortionate' but in the end has been frustrated by the courts which interpreted that term narrowly. As a result the Act has remained largely toothless for the past 30 years.

The Government is proposing that borrowers will be able to make a complaint to the ombudsman as opposed to going to court. However, the proposals are limited in this respect. For example, the ombudsman will only be able to make recommendations to settle the individual issue, but not to make wider recommendations or to insist on changes in practice across the industry, even though the same problems are likely to crop up again and again. Even the ombudsman will have to wait until what is or what is not unfair is defined by the courts before any coherent approach is established.

Debt on our Doorstep believes that there are some things that are always going to be unfair and that the Government should make these clear from the outset. These are:

Lending to people without taking into account their ability to repay; and

Charging unjustifiably high interest rates - in other European countries, and several of the US states there are restrictions on the level of interest and other costs that can be charged.

We believe that clear guidelines on these issues should be made available so that lenders are forewarned about what is and is not acceptable practice and so borrowers are able to know what their rights are before signing up to an agreement, as opposed to only finding out in retrospect if a court case results or a complaint to the ombudsman is made.

A further legal requirement that default charges should not exceed the actual additional costs incurred by the lender is also being sought as a means of preventing lenders (including many high street banks and credit card companies) from using charges on default to unduly penalise borrowers who are already experiencing financial problems.

In the recent South African review of consumer credit law, the Government there has addressed these by including a 'responsible lending' test and providing a power for the DTI to introduce interest rate ceilings where there is evidence that this is needed. Debt on our Doorstep is seeking the support of M.P's in the UK to ensure that similar measures are included in the U.K's Consumer Credit Bill.

If you want to assist in this campaign, please write to your M.P asking them to support amendments to the Bill to ensure responsible lending, at a fair price, and without hidden default charges.