Why do we need new credit laws?

The first big shake-up of UK consumer credit laws for more than 30 years has been unveiled amid growing levels of personal debt.

BBC News Online explains why the new laws are needed - and what they could mean for borrowers.

What's wrong with the existing rules?

Consumer groups say the main law that governs the marketing and administration of credit to consumers - the Consumer Credit Act 1974 - is now too lax and no longer provides foolproof protection for consumers.

They say the credit landscape has changed dramatically over the last 30 years: In 1971 only one type of credit card was available, compared to around 1,300 credit cards on the market now.

And the amount of money owed on credit cards back then was £32m but now it is over £49bn.

So are lax laws to blame for problem of debt?

People get into debt for a variety of reasons. More often than not it is a change in circumstance, such as a divorce or loss of a job that can send someone into the red.

However, consumer groups say the complexity and lack of transparency of some financial products make it difficult for consumers to pick the right product for their needs.


DEALING WITH DEBT

There is criticism of the way loans often tie people in for the long-term, and include penalties for early repayment.

There is also concern that lenders are failing to act responsibly by making sure consumers can afford the cost of credit.

And there is a lack of clarity about whether aspects of the law protect shoppers overseas.

Why has it taken so long for the credit laws to be reviewed?

It has taken the government three years to get to the white paper stage, when proposed legislation is published to allow for consultation.

The process started with a task force on over-indebtedness, and in 2001 the Department of Trade and Industry announced a review into the 30-year-old Consumer Credit laws.

But any law changes are still some way off.

Parts of the legislation are due to come into force during October 2004, some in April 2005.

The Treasury Select Committee is also looking into credit and store card charges, transparency of credit agreements and the Annual Percentage Rate (APR) that lenders charge.

How bad is the problem of debt?

Bankruptcies are at a 10-year high, and the Citizens Advice Bureaux says that more people are getting into problems.

It has seen a 46% increase in the number of people seeking help with their debt problems.

Since 1997, average personal debt has risen by 50%. We now owe an average of £5,330 in unsecured debt, which excludes mortgages.

One in seven adults in the UK is affected by loan sharks and sub-prime lending of some kind, which the Consumers' Association says is costing the UK economy £16bn per year.

What is changing?

Rules which penalise consumers who pay back loans early are to be scrapped.

Around 70% of all personal loans are settled early but often under the weight of heavy charges.

The government believes reform of early settlement charges will benefit consumers to the tune of £60m.


WHAT ARE SCHUMER BOXES?
A Schumer Box draws together all the key disclosures spread throughout the small print of a credit agreement into one highlighted place
The aim is to make it easy to understand and make comparisons between products
Schumer Boxes are a statutory requirement in the USA under the Truth in Lending Act
They are named after Senator Charles Schumer who led the passage of a bill through the US Congress in 1988
To improve transparency, small print on credit agreements will have to be enlarged and lenders will need to provide a range of information about the credit deal in a so-called "honesty box", similar to the "Schumer box", used in the US.

Lenders will also have to improve the way they advertise products, so that they are easier to compare.

What about dodgy lending practices?

The government is also introducing a range of measures to clampdown on irresponsible lending.

It will strengthen credit licences, and put debt management companies and rogue money lenders under closer scrutiny.

New powers will be given to the Office of Fair Trading - responsible for enforcing consumer credit laws - to fine lenders and conduct surprise raids on loan companies.

It also plans a new telephone gateway to debt advice services.

What is more, the government is to spend £2m tackling the menace of loan sharks.

Loan sharks lend people more than they can afford and then extort payment with the threat of violence.

Teams of 'loan shark hunters' are to target criminal gangs in Birmingham and Glasgow - and if successful the government may roll out the scheme nationwide.