Credit law to end pain of small print

SWEEPING changes to Britain’s consumer credit laws will see an end to confusing small print and exploitative credit deals that cost borrowers more than £60 million a year.

Debtors trapped by hidden charges will receive what amounts to a "get out of jail free" card under the government’s new white paper published today.

They will be able to bring legal challenges over unfair deals if they can prove charges were not properly explained by their credit company or hefty financial penalties were imposed for early settlement of debts.

Loan companies entering the credit business will be vetted under new powers given to the Office of Fair Trading, with more thorough research into their history, surprise raids and fines for those who lead borrowers astray or overcharge.

Other major reforms expected include plans to set up a new telephone debt advice service to give free information to consumers who get into difficulties.

In a bid to make the industry more transparent it is expected the government will require lenders to provide standard information on products in adverts and promotional leaflets, and increase the size of small print.

American-style honesty boxes, presenting in a standardised and unambiguous way exactly what is being agreed, how much will be repaid and what charges and penalties could be incurred, will become mandatory.

The move has been welcomed by debt counselling agencies, struggling to cope with the thousands of people falling foul of Briton’s multi-billion pound credit explosion.

According to government research released yesterday, 75 per cent of Britons do not understand credit adverts, and more than eight in ten are confused by the small print of the forms they sign.

In October, Matt Barrett, the chief executive of Barclays, admitted he would not use the credit card issued by his own bank, or any other company, because it was too expensive.

Under ‘Rule 78’ financial companies are currently permitted to impose heavy penalties on borrowers who pay off their loans early, forcing them to pay most of the interest that would have been due if they had kept the loan for the full term.

Around 70 per cent of loans are currently paid back ahead of time, but despite this consumers are often hit with heavy charges.

The Consumers Association has called on the government to set a limit of one month’s interest on penalties for early payment, so encouraging borrowers to get out of debt.

Put forward by Patricia Hewitt, the Secretary of State for Trade and Industry, it is hoped that the series of measures will make it easier for people to shop around and understand what they are signing up for when they borrow money.

It is understood that the powers will be retrospective, making them applicable to contracts already agreed and thereby allowing borrowers trapped in unfair deals to challenge lenders. The fairer rules could save consumers around £60 million.

Ms Hewitt said: "Consumers are often bombarded by complex loan offers and confused by reams of small print. Our use of credit and the amounts available have changed significantly since the rules were put in place. This research shows they need better information when choosing between loan deals and to be clearer about their rights.

She added: "The UK’s credit laws are long overdue for reform. The DTI’s review of the Consumer Credit Act will bring our regime up-to-date for the 21st century."

Borrowing has never been easier since consumer credit laws were drafted 30 years ago, and credit card debt has doubled in the past four years, with the nation now up to £168 billion in the red.

Competition for customers is so strong between the 1,300 companies offering cards today that the Royal Bank of Scotland even offered a dog named Monty a gold card with £10,000 spending limit and free air miles.

Frances Walker, a spokeswoman for Scottish Debtline, a subsidiary of the Consumer Credit Counselling Service, said: "Hopefully, as a result of this white paper, things will become a lot more transparent. These changes are absolutely to be welcomed."

Carolyn McAdam, head of group communications for the Royal Bank of Scotland, said: "There is nothing new in measures such as the honesty box, which is being introduced across the board within the credit card industry in January.

"With regard to the rest of the white paper, we very much look forward to receiving a copy and will then be reviewing its contents closely."

• A PUBLIC relations assistant who has racked up about £8,000 of debt welcomed the government’s move to vet money-lending businesses yesterday.

Debbie Gemmil, 30, who lives in East Lothian, said she was worried about how she was going to pay off arrears she has accrued with her husband, Duncan, 29, on credit cards and an overdraft.

The pair, who were forced to flee their home in Zimbabwe when their land was reclaimed by the government last year, are now hoping for a miracle to help them to combat their financial problems.

Mrs Gemmil said she had been subject to hidden charges and blamed financial institutions for forcing her into a "trapped" situation.

Mrs Gemmil, who lives in East Linton, said: "I got a letter the other day from the bank with more charges, and I don’t even know what they are for. It is all mounting up, and we can’t even get a loan to pay off the debt.

"We are trapped. Every month we are just paying back interest, and we don’t want to get into more debt.

"This new white paper is a good thing if it stops financial institutions charging astronomical interest rates. We have constantly been looking at ways out and need someone that will give us advice.

"Another thing which needs to be looked at is the system of loan repayments. The bank won’t let you pay off chunks of a loan, but instead insist you pay off the whole thing, or continue making the monthly installments."