Costly Credit-Card Tricks

SITTING IN THE back of my closet, I've got a teeny black dress that's about the size of a bathing suit. It's made out of some sort of frightening spandex material that I thought was absolutely fabulous about five years ago, when in a fit of spontaneity I slapped down some plastic and paid a ridiculous $199 for it. Since then, it's sat in my closet, tags still on, waiting for the perfect event. Recently I squeezed myself into it — and barring some sort of blackmail situation, I can safely say that this item will never, ever see the light of day.

That's especially a shame since I've now probably paid about $400 for it. You see, like 50 million Americans, I have credit-card debt. It's leftover from my 20s, when I was in grad school and then beginning my journalism career here in New York City. Back then my salary barely covered my rent, and, well, a girl's got to live a little.

Slowly but surely, however, I'm paying those cards off. But as more people, like myself, dig themselves out of debt, the cards seem stacked against us. It's appalling enough that the average annual percentage rate, or APR, on a standard credit card these days is just shy of 14%, according to Bankrate.com. But worse, many people are still stuck paying rates of 25% or higher. And penalty fees typically run $35 a pop.

Does it seem as if you can trigger those penalties just by breathing these days? You aren't far off: Over the past few years, credit-card companies have become increasingly dependent on the fees they charge users. In 2001, fee income represented 28% of credit-card companies' total income, according to CardWeb.com. Over the past five years, this figure has increased by 172%. So while it used to be that fees were applied to keep you on the straight and narrow, credit-card companies are now financially dependent on your breaking their rules — and paying the price. "It's a fact that they are tacking on new fees and more expensive fees," says Travis Plunkett, legislative director for the Consumer Federation of America. "Income from fees has become much more important for profitability."

Credit-card companies are now required to disclose all their various penalties, including their penalty APR for late payments. They also need to state clearly (and in decent-sized print) the permanent rate on a card that comes with an introductory teaser rate. Most of this information is included in what's known as the "Schumer" box (named after New York Democratic Sen. Charles Schumer), typically located on the back of an application.

But some consumer advocates say these rules don't go nearly far enough. "It's a bunch of baloney," says attorney Howard Strong, author of "What Every Credit Card User Needs to Know." "You can say in big letters, 'I'm going to rip you off!' or you can say it in small letters. It doesn't make a difference." Part of the problem, says Strong, is that credit-card companies are lightly regulated. Federal laws don't control things like over-the-limit fees and late charges, he says, and the majority of credit-card companies are located in Delaware or South Dakota — two states that have lenient usury laws.

In all fairness, though, when you signed up for your credit card, you agreed to play by the rules of the issuer — who is, after all, giving you an unsecured loan. And while those rules may not be in your favor, they are indeed disclosed. "Nine times out of 10, when consumers bitch and complain about their cards, the problem is that they just didn't read the terms," says Steve Rhode, co-founder of Myvesta.org, an online debt-management service.

So do yourself a favor and read the fine print before you sign up for that Molybdenum UltraCard with the $65,000 credit limit and the 4.1% introductory APR. You might be surprised by what you find. And before you do, here's my reader's guide to that fine print — a list of the costly little devils often hidden among the details by credit-card companies.

1. Looking for Any Excuse
Believe it or not, many credit-card companies will periodically review your credit report looking for late payments on other cards, according to findings from the 2002 Credit Card Survey by Consumer Action (a nonprofit consumer-advocacy group). Why? Because it's an opportunity to raise the interest rate on their card, perhaps by a dramatic amount. "Being late on another card could be a sign you're having financial problems," says Myvesta.org's Rhode. So be sure to watch your credit report carefully and make all payments on time to avoid a domino effect on your other lines of credit.

2. Offering "Fixed" Rates That Aren't Really Fixed
You might think that when someone offers you a fixed-rate card, the rate is indeed fixed. But you'd be wrong. A fixed-rate card simply means that the company needs to inform you in writing at least 15 days before changing its rate. So pay attention to the notices that come with your bill. And if you carry a balance, always be aware of the interest rate you're paying. If it goes up, it may be time to shop for a better card.

3. Penalizing Customers Whose Payments Are Five Minutes Late
Have you looked carefully at your credit-card statements lately? These days, not only are payments due by a certain date — they're often due by a certain time, like, say, 1:00 p.m.

And a late payment could really cost you. Not only will you be charged a late fee (which could be as high as $35), but you may also be charged a penalty APR, which is far more costly. Indeed, you could see your rate soar to 29.5%, and that new rate may be permanent, according to Consumer Action's survey.

4. Encouraging Minuscule Minimum Payments
The key to paying down your credit-card debt is to make payments early and often. Any extra cash you can squeeze out of your budget needs to be applied toward this debt. That's the only way to whittle down your principal.

Unfortunately, the credit-card companies are making it easier than ever to carry your debt endlessly by reducing the amount they require as a minimum payment. While it used to be that you had to pay off at least 5% of your total balance each month that requirement has now dropped as low as 2% on some cards, according to a study released in 2001 by the state Public Interest Research Groups, or PIRGs. At that rate it could take you decades to pay off your debt, even if you don't charge anything more to your card.

5. Offering Shorter Grace Periods
The grace period — or window of time before you begin accruing interest on new purchases — is also shrinking. While it used to be 30 days, it's now shrunk, on average, to less than 21, according to CardWeb.com. Some cards don't have any grace period at all. Of course, if you carry a balance, there are no grace periods, so it doesn't really matter. But if you pay off your bill each month, looking for a card with a grace period of at least 25 days could save you from unnecessary interest payments.

6. Whacking You Abroad
Using your credit card in a foreign country used to be the best deal in town. That's because, while Visa and MasterCard charged a 1% fee, it was still significantly less than what you'd have to pay if you exchanged currency at a bank or used travelers checks, and you usually got a better exchange rate to boot.

These days, using a credit card overseas is still a good deal — but it isn't quite as sweet. The issuers have tacked on an additional fee — usually 1% to 3% — in addition to the Visa and MasterCard fee, according to Consumer Action's survey. So a purchase might be more expensive than you thought.

7. Baiting and Switching
Just because you're preapproved for a card doesn't necessarily mean that's the one you're going to get after you apply. Once your credit history is reviewed, you might be sent a card with less favorable terms. So be sure to review a new card carefully to make sure it has the terms you expected. If you decide you aren't happy, you can simply not activate the card and close the account.

8. Finding a Better Card
So what should you do if you think your current credit card is costing you too much? Try to negotiate. Grab an offer that you recently received, and get on the phone with your current credit provider to see if they will meet or beat that offer, says Rhode. Tell them that if they don't work with you, you're going to switch cards. Of course, be prepared to see this threat through. Probably the best way to find a new card is to collect the offers you receive in the mail for about six weeks, and then apply for the best one. Alternatively, you can easily search online at Web sites like Bankrate.com for credit-card deals. Just keep in mind that if you don't have perfect credit, you probably won't be eligible for the best offers.

Store Cards Discredited

High rate store cards savaged for ripping off shoppers by not revealing true charges

By Ruki Sayid, Consumer Editor
 
CONSUMER groups were celebrating yesterday as an investigation was launched into an alleged monopoly on store cards charging sky-high interest rates.

Claire Whyley, of the National Consumer Council, said: "Retailers and store card suppliers have been getting away with overcharging and failing to provide customers with clear information for far too long."

The Office of Fair Trading yesterday asked the Competition Commission to intervene after its own probe found the way the cards are run appeared to "prevent, restrict or distort competition".

It condemned High Street chains for using confusing jargon and failing to tell customers how their rates - of almost 30 per cent - compared with other plastic.

The watchdog also blasted shops for high pressure sales tactics saying most customers were not allowed to take application forms away to read them properly.

And it was unhappy that in one out of three cases there was no information at all on what interest rate was being charged.

Its study also revealed 40 per cent of consumers felt the information on application forms was inadequate.

About 30 per cent of adults have store accounts - more than 20 million cards - but are mostly unaware of the interest rates.

While John Lewis charges 13 per cent annual percentage rate (APR), Bhs, Ikea, Habitat and Mothercare shoppers pay 29 per cent - 0.1 per cent more than Harrods and 10.1 per cent above Marks and Spencer.

Creation Account cards - which covers stores including Adams, Carphone Warehouse, JJB, Miss Selfridge and Wallis - almost tops the league with an APR of 30.9 per cent.

Debenhams has an APR of 29.9 per cent and Allders 29.8 per cent.

Consumer groups have welcomed the OFT's tough stance and urged store card providers to "put their house in order".

Phil Evans of the Consumer Association condemned providers for a "lack of discipline". He said: "The market doesn't function in the best interests of consumers.

"Rates have stuck at an average of 28 per cent for the past few years and seem to be immune from competition within the wider market for credit."

Vince Cable, the Liberal Democrat Treasury spokesman, said: "Store cards are among the worst offenders in the whole credit industry. The high level of consumer confusion ensures high profits for providers.

"If we are to have genuine competition in this industry, we must make the way store cards and credit cards work genuinely transparent." Remedies open to the Competition Commission include introducing price caps or making it easier for new entrants to join the market.

The OFT began its probe after being taken to task by a committee of MPs in July for failing to do enough to protect consumers.

The Treasury Select Committee accused companies which offer store cards of "highway robbery" and of "running a cosy cartel" by charging broadly similar rates.

The watchdog has now pledged a campaign to educate the public on the dangers of store card debt and how to avoid the pitfalls, including looking at other forms of credit available and checking the interest rate.

GE Consumer Finance (UK), which operates store cards for Debenhams, House of Fraser and Arcadia - whose brands include Topshop, Miss Selfridge and Dorothy Perkins - said it was already taking measures to increase transparency.

Marketing director Najlaa Taqui-Eddin said: "We introduced a summary box in November giving details of a card's interest rates and charges.

"And we offer customers 60 days to walk away from a deal they have signed."

The company is responsible for half the store cards in circulation and has an average APR of 27 per cent.

Credit fever must be cooled

Alex Brummer, Daily Mail

IF Gordon Brown really wants to lock in his fabled stability when he delivers his eighth Budget today he should think seriously of finding ways of curbing the nation's love affair with credit. Britain has got into the habit of buying on tick and in doing so is storing up trouble.

A Mintel survey shows that in 2003 some £165bn was spent on Visa and Mastercard plastic across the 15 countries of the European Union - a 76% rise on 1998. But what is really stunning about this figure is that three-quarters of it, some £120bn, is accounted for by Britain alone.

As Mintel makes plain, this is largely because our financial system is different from the overregulated Continental model. The British consumer is bombarded by direct mail offers of credit cards and loans. We have become a nation of plastic addicts, using credit cards to pay for anything, even a lunchtime sandwich.

At the behest of the Treasury Select Committee the government is making an effort to tackle some of the sharp practice which is giving the card industry a bad name. It is supporting the use of a 'summary box' on card firms' statements, outlining the effective rate of interest charged.

The authorities are also promising to provide more debt counselling assistance to overstretched consumers.

None of this addresses the economics of borrowing. Household debt as a percentage of after-tax income stands at 134%, against the 1999 peak of 112%.

The Bank of England is seeking to curb this enthusiasm for credit by ratcheting up interest rates. The new Consumer Prices Index fell over the last month to 1.3% from 1.4%. Fears of any immediate jump in inflation have been a secondary factor in the Monetary Policy Committee's policy actions.

But the famous 'one club' tool of interest rates so far shows no sign of curbing credit. Moreover, there is a risk that if interest rates are pushed up too far there will be an almighty collapse in house prices and consumer spending, driving the economy into slump.

Vicky Redwood of Capital Economics looked at other ways to curb the lending boom. As far as home loans are concerned, direct intervention through a capital gains tax on first homes might end the speculative boom.

But it would be a political vote loser and could lead to a hard landing. Imposing tighter controls on lenders might work but would be cumbersome to administer. It might well drive mortgage business offshore.

If the goal were to curb credit card lending, direct controls might be effective. One idea floated by the Treasury Select Committee is that the minimum monthly repayment should always cover the interest charge. The authorities could go further than this by forcing a 5% to 10% repayment of principal, so that the total accumulated debt comes down.

Borrowers might seek to avoid the curbs initially by taking out new cards, which could push up their debt again. Indeed, the credit monster that has been unleashed may be too flexible to control.

What is certain is that credit has become a ticking time bomb which could yet explode the Chancellor's famed stability.

Britain's breach

IF the Pre-Budget Report offers any guidance, we can expect the Chancellor to wax lyrical in his speech today about how much better we are doing than our European partners.

But this may no longer be strictly correct. Britain is, in fact, joining Germany and France in the EU doghouse.

The European Commission estimates that Britain racked up a budget deficit of 3.2% of national wealth in 2003. This is above the Maastricht criterion of 3% and places the UK in the sin bin alongside Germany and France.

Even though Britain has broken the EU rules, there is no immediate indication that the Commission is planning any disciplinary action.

Indeed, having let Germany and France off the hook, to the anger of the smaller countries, the EC could hardly turn its guns in Brown.

But all eyes will, be focused on whether Brown has broken his own fiscal rules. It has been argued recently that it does not really matter if he does breach his 'golden rule' not to borrow for current spending over the economic cycle, since it is no more than a self-imposed guideline.

Maybe. But it would nevertheless be embarrassing for Brown, who is so pleased with his fiscal rules that he has been busy selling them to the rest of the world as chairman of the International Monetary Fund's main decision-making group.

Plastic in meltdown

BRITAIN has been taken over. Not by rats, roadworks or any of the other blights of modern life that are said to be so numerous as to be never more than six feet away from us. The invader in this instance is credit cards. Research published yesterday shows there are now 64 million in the UK ? more than one for every man, woman and child ? and we are spending greater amounts on them, despite failing to understand how much they cost us. It is a disturbing scenario with the potential to become a disaster.

The British love affair with plastic is laid bare by Mintel, the market analysts. Almost ?165bn was spent on the main branded credit cards across the EU last year, with Britons accounting for ?120bn of that. Greater home ownership is a significant factor. Rising house prices and low interest rates have made householders feel wealthy. For others, the prime example being students, borrowing has simply become a fact of life, a way to work the system in the absence of state or parental support. Credit cards can be useful, if deployed sensibly. But as another study for the OFT showed, fewer than half of those questioned paid off their credit card balance each month, 38% routinely allowed debts to "roll over" to the next month ? thereby incurring hefty interest charges ? and 13% sometimes did so. Some 21% had built up debts of more than ?1000 a month. When interest rates climb higher, these borrowers will find themselves sinking deeper into trouble.

What is to be done to save Britain's spenders from themselves? It is one thing to argue that consumers should be more responsible. Yet given the complexity of the arrangements ? an investigation by the Commons Treasury select committee found companies using 10 different ways of calculating annual percentage rate ? and the multitude of offers thrown at them, it is little wonder consumers are confused. The committee argued for the imposition of a single method of calculating APR, and a standardised summary box in all material (setting out APR, minimum charges, interest-free periods and credit limits). That was in December last year. In its response yesterday, the Department of Trade and Industry said changes to make credit card borrowing easier to understand would start coming into effect in October, and legislation to strengthen licensing of the industry would be brought forward as soon as parliamentary time allowed. In short, there appears to be precious little sense of urgency at work.

The balance of power and knowledge between borrowers and lenders is in urgent need of correction. One way of ensuring the same mistakes are not made by future generations is to make children more financially aware from an earlier age, perhaps by using more practical examples of real-life money decisions in their lessons. At the moment, too many of us are proving to be penny wise and pound foolish when it comes to credit cards. The parties who benefit most from that ignorance ? the lenders ? are the least likely to change their ways unbidden. Once he has today's budget out of the way the chancellor, Gordon Brown, should take careful stock of Britain's growing debt mountain. His fortunes, and those of millions of borrowers, may depend on it.

BRITAIN has been taken over. Not by rats, roadworks or any of the other blights of modern life that are said to be so numerous as to be never more than six feet away from us. The invader in this instance is credit cards. Research published yesterday shows there are now 64 million in the UK ? more than one for every man, woman and child ? and we are spending greater amounts on them, despite failing to understand how much they cost us. It is a disturbing scenario with the potential to become a disaster.
The British love affair with plastic is laid bare by Mintel, the market analysts. Almost ?165bn was spent on the main branded credit cards across the EU last year, with Britons accounting for ?120bn of that. Greater home ownership is a significant factor. Rising house prices and low interest rates have made householders feel wealthy. For others, the prime example being students, borrowing has simply become a fact of life, a way to work the system in the absence of state or parental support. Credit cards can be useful, if deployed sensibly. But as another study for the OFT showed, fewer than half of those questioned paid off their credit card balance each month, 38% routinely allowed debts to "roll over" to the next month ? thereby incurring hefty interest charges ? and 13% sometimes did so. Some 21% had built up debts of more than ?1000 a month. When interest rates climb higher, these borrowers will find themselves sinking deeper into trouble.

What is to be done to save Britain's spenders from themselves? It is one thing to argue that consumers should be more responsible. Yet given the complexity of the arrangements ? an investigation by the Commons Treasury select committee found companies using 10 different ways of calculating annual percentage rate ? and the multitude of offers thrown at them, it is little wonder consumers are confused. The committee argued for the imposition of a single method of calculating APR, and a standardised summary box in all material (setting out APR, minimum charges, interest-free periods and credit limits). That was in December last year. In its response yesterday, the Department of Trade and Industry said changes to make credit card borrowing easier to understand would start coming into effect in October, and legislation to strengthen licensing of the industry would be brought forward as soon as parliamentary time allowed. In short, there appears to be precious little sense of urgency at work.

The balance of power and knowledge between borrowers and lenders is in urgent need of correction. One way of ensuring the same mistakes are not made by future generations is to make children more financially aware from an earlier age, perhaps by using more practical examples of real-life money decisions in their lessons. At the moment, too many of us are proving to be penny wise and pound foolish when it comes to credit cards. The parties who benefit most from that ignorance ? the lenders ? are the least likely to change their ways unbidden. Once he has today's budget out of the way the chancellor, Gordon Brown, should take careful stock of Britain's growing debt mountain. His fortunes, and those of millions of borrowers, may depend on it.

BRITAIN has been taken over. Not by rats, roadworks or any of the other blights of modern life that are said to be so numerous as to be never more than six feet away from us. The invader in this instance is credit cards. Research published yesterday shows there are now 64 million in the UK ? more than one for every man, woman and child ? and we are spending greater amounts on them, despite failing to understand how much they cost us. It is a disturbing scenario with the potential to become a disaster.The British love affair with plastic is laid bare by Mintel, the market analysts. Almost ?165bn was spent on the main branded credit cards across the EU last year, with Britons accounting for ?120bn of that. Greater home ownership is a significant factor. Rising house prices and low interest rates have made householders feel wealthy. For others, the prime example being students, borrowing has simply become a fact of life, a way to work the system in the absence of state or parental support. Credit cards can be useful, if deployed sensibly. But as another study for the OFT showed, fewer than half of those questioned paid off their credit card balance each month, 38% routinely allowed debts to "roll over" to the next month ? thereby incurring hefty interest charges ? and 13% sometimes did so. Some 21% had built up debts of more than ?1000 a month. When interest rates climb higher, these borrowers will find themselves sinking deeper into trouble. What is to be done to save Britain's spenders from themselves? It is one thing to argue that consumers should be more responsible. Yet given the complexity of the arrangements ? an investigation by the Commons Treasury select committee found companies using 10 different ways of calculating annual percentage rate ? and the multitude of offers thrown at them, it is little wonder consumers are confused. The committee argued for the imposition of a single method of calculating APR, and a standardised summary box in all material (setting out APR, minimum charges, interest-free periods and credit limits). That was in December last year. In its response yesterday, the Department of Trade and Industry said changes to make credit card borrowing easier to understand would start coming into effect in October, and legislation to strengthen licensing of the industry would be brought forward as soon as parliamentary time allowed. In short, there appears to be precious little sense of urgency at work.The balance of power and knowledge between borrowers and lenders is in urgent need of correction. One way of ensuring the same mistakes are not made by future generations is to make children more financially aware from an earlier age, perhaps by using more practical examples of real-life money decisions in their lessons. At the moment, too many of us are proving to be penny wise and pound foolish when it comes to credit cards. The parties who benefit most from that ignorance ? the lenders ? are the least likely to change their ways unbidden. Once he has today's budget out of the way the chancellor, Gordon Brown, should take careful stock of Britain's growing debt mountain. His fortunes, and those of millions of borrowers, may depend on it.BRITAIN has been taken over. Not by rats, roadworks or any of the other blights of modern life that are said to be so numerous as to be never more than six feet away from us. The invader in this instance is credit cards. Research published yesterday shows there are now 64 million in the UK – more than one for every man, woman and child – and we are spending greater amounts on them, despite failing to understand how much they cost us. It is a disturbing scenario with the potential to become a disaster.The British love affair with plastic is laid bare by Mintel, the market analysts. Almost £165bn was spent on the main branded credit cards across the EU last year, with Britons accounting for £120bn of that. Greater home ownership is a significant factor. Rising house prices and low interest rates have made householders feel wealthy. For others, the prime example being students, borrowing has simply become a fact of life, a way to work the system in the absence of state or parental support. Credit cards can be useful, if deployed sensibly. But as another study for the OFT showed, fewer than half of those questioned paid off their credit card balance each month, 38% routinely allowed debts to "roll over" to the next month – thereby incurring hefty interest charges – and 13% sometimes did so. Some 21% had built up debts of more than £1000 a month. When interest rates climb higher, these borrowers will find themselves sinking deeper into trouble. What is to be done to save Britain's spenders from themselves? It is one thing to argue that consumers should be more responsible. Yet given the complexity of the arrangements – an investigation by the Commons Treasury select committee found companies using 10 different ways of calculating annual percentage rate – and the multitude of offers thrown at them, it is little wonder consumers are confused. The committee argued for the imposition of a single method of calculating APR, and a standardised summary box in all material (setting out APR, minimum charges, interest-free periods and credit limits). That was in December last year. In its response yesterday, the Department of Trade and Industry said changes to make credit card borrowing easier to understand would start coming into effect in October, and legislation to strengthen licensing of the industry would be brought forward as soon as parliamentary time allowed. In short, there appears to be precious little sense of urgency at work.The balance of power and knowledge between borrowers and lenders is in urgent need of correction. One way of ensuring the same mistakes are not made by future generations is to make children more financially aware from an earlier age, perhaps by using more practical examples of real-life money decisions in their lessons. At the moment, too many of us are proving to be penny wise and pound foolish when it comes to credit cards. The parties who benefit most from that ignorance – the lenders – are the least likely to change their ways unbidden. Once he has today's budget out of the way the chancellor, Gordon Brown, should take careful stock of Britain's growing debt mountain. His fortunes, and those of millions of borrowers, may depend on it.

Consumer confusion over credit card costs

Consumers find financial information relating to credit cards difficult to understand, new research by the OFT has shown. Over three-quarters of credit cardholders do not know what Annual Percentage Rate (APR) applies to their card, despite being aware that this is the key piece of comparative cost information. Consumers welcome proposals to introduce a simple summary box containing essential credit cost data.

The research involved interviews with a representative sample of 1890 consumers. Based on the responses, the survey found that over 70 per cent of people surveyed have at least one credit card, with 37 per cent of cardholders having two or more credit cards. While 60 per cent of cardholders felt they had a good or fair understanding of credit cards, they couldn't generally answer specific questions or extract key information ( e.g. about the APR and fees for late payment or cash withdrawal.

The OFT commissioned the research to establish consumers' understanding of the key financial terms and conditions of credit card agreements; to explore how consumers make choices about cards; and to investigate how understanding and choice might be improved through the clearer provision and presentation of information.

The research findings, which are being published, have informed the OFT's response to Government proposals for reform of consumer credit legislation, especially on how to improve information to borrowers and transparency in the credit market.

Other key findings include:

* 21 per cent of those surveyed who did not pay off the balance in full each month have credit card balances of 1000 or more consumers find it difficult to compare products in terms of cost; brand loyalty is an important factor, with many consumers simply taking cards from their own bank

* key financial information must be displayed prominently and separately from the general terms and conditions of agreement if consumers are to use it effectively

* consumers like the concept of a simple summary box, containing the APR charged, details of any additional charges, the interest rate, the minimum payment to be made, the interest free period, the period over which interest is charged and the credit limit.

John Vickers, OFT Chairman, said:

'Consumers need key information presented in a way that is easy to understand to make good choices about credit cards. Our research provides consumer evidence on how to do this.'

Credit Card Information 'Difficult to Understand'

By Andrew Woodcock, Political Correspondent, PA News

Consumers find it difficult to understand financial information relating to their credit cards and are confused about how much their debts will cost them, according to research released today.

More than three-quarters of card-holders do not know what APR (annual percentage rate) they are being charged, even though it is the key piece of information which determines whether they are getting a good deal, found the survey for the Office of Fair Trading.

The research was published as the OFT and Department of Trade and Industry responded to MPs’ criticisms of their oversight of the credit card market.

In a scathing report last December, the influential Commons Treasury Committee said consumers were being “badly let down” by lenders and that the regulatory regime operated by the OFT and DTI had failed to keep up with developments in the industry.

In its response, published today, the DTI said that changes to make credit card borrowing easier to understand would start coming into effect in October this year.

And legislation to strengthen licensing of the industry and bring about a “significant overhaul of the credit regime” would be brought forward as soon as parliamentary time allowed.

The DTI “strongly rejected” the committee’s accusation that it had failed to act quickly enough to prevent abuse by lenders. Proposals for legislation will be published in May following the completion yesterday of a three-month consultation on its White Paper on the issue.

Today’s OFT research suggested that 71% of British adults now carry at least one credit card, with 37% holding two or more.

Less than half of those questioned (47%) paid off their credit card balance in full each month, while 38% routinely allowed debts to “roll over” to the next month and 13% sometimes did so, even though this generally meant they incurred interest charges at a higher rate than if they had taken out a loan.

Of those who did not pay off the balance in full each month, the average amount outstanding in a typical month was £718. But some 21% had built up debts of more than £1,000.

The survey found that, while 60% claimed to have a good or fair understanding of credit cards, many were unable to answer basic questions about deals that were on offer.

Less than half (43%) correctly picked the best deal from three sample ads, and just 2%-3% were able to calculate the minimum payments they would face if they ran up debts on any of the cards being advertised.

People taking part in the survey voiced support for the inclusion of a standardised summary box in all credit card marketing material, containing information such as APR, additional charges, minimum payments, interest-free periods and credit limits.

The summary box proposal was strongly backed in the Treasury Committee report. The DTI today confirmed that it would require consumers to be given key information about credit agreements before entering into a contract.

OFT chairman John Vickers said: “Consumers need key information presented in a way that is easy to understand to make good choices about credit cards. Our research provides consumer evidence on how to do this.”

FDS International interviewed 1,890 British adults between December 15 and 31 for the OFT.

Why change needs to be on the cards

A WEEK ago, I received a letter from John Mann MP detailing the case of Mr Stephen Lewis, who had amassed £70,000 of debt on 19 credit cards. Mr Lewis felt he had nowhere to turn and his case ended in tragedy.

Our immediate reaction is to feel intense sympathy for Mrs Lewis and her family. Understandably she wants answers. Why did this happen and how can it be prevented from happening again?

These questions highlight an issue that has dominated the credit card debate recently - over-indebtedness - and there are practical steps both industry and government can take.

At the heart of Mr Lewis's case is the need for banks to understand a customer's overall level of borrowing.

Broadly, the science of credit scoring works, but it is not foolproof. Why? Often, we simply can't see how much a customer owes elsewhere.

Some companies - including Barclaycard - share with the industry the amount owed and credit available on a customer's cards.

We are permitted to share data in this way, but some companies only show accounts in arrears. For student loans, council tax or rent arrears, we see nothing.

The legislation is not consistent on the issue of sharing data. This is a situation that banks and government can and should fix quickly.

Credit cards have made an enormous contribution to the UK economy and to the lifestyle of British consumers.

The card market is one of the most competitive in the world and has helped to boost retail spending and to underpin economic success. We are a UK success story.

Borrowing may be the focus at present, but credit cards are a convenient way of paying wherever you are in the world. Half of all credit card bills are still paid in full each month.

But the industry is under close scrutiny and indebtedness is top of the agenda.

A banker's view of over-indebtedness should be simple.

It cannot make sense for us to lend money to customers who cannot afford to pay it back.

Some have described Mr Lewis as a 'perfect customer' for the banks. How could this be true? Mounting debts meant Mr Lewis had neither the means to make his minimum payments nor to repay the original loan.

No customer and no bank would actively seek such a situation. We must do all we can to help our customers avoid it.

Lenders will explain that access to credit remains limited - one in two applications are declined. But the statistics don't add up to an answer.

Lending money comes with a special responsibility which banks must take seriously.

Credit cards are one of the most popular consumer products of the last 50 years.

That places banks in a unique position. We have to work harder to help customers understand our products; guide them through the small print to find the facts that matter; lend responsibly in the first place; and help customers to see the danger signs.

Progress is being made. Last year's Treasury Select Committee was a wake-up call for the industry and issuers are looking more closely at their marketing than ever before.

There has been positive change with the introduction of the Summary Box, which spells out important information right up front.

Clearly, there is more we - the industry and government - can do to improve further. In doing so, however, we must take care not to patronise consumers and presume a superior right to control their lives and make decisions for them.

The overwhelming majority of customers make mature, reasoned decisions based on their own considered priorities. When they sign on the dotted line, they take responsibility for their decisions.

But intensely competitive offers and hassle-free applications, while demanded by customers, can be too much to resist for those who are vulnerable, particularly against the backdrop of unrelenting images of aspirational lifestyles.

From where I'm sitting, there is clearly room for improvement.

Gary Hoffman is the chief executive of Barclaycard

Watchdog savages credit card firms

CREDIT card providers are in the dock again today after it emerged that more than 75% of consumers don‘t understand how the interest rates on their bills are calculated.

Many feel confused by some of the terms and conditions that apply on their cards.

The findings are contained in research from the Office of Fair Trading as part of its response to Government proposals to reform the consumer credit legislation.

Credit card providers have been slated by MPs and a range of consumer groups which allege that they are trading on people‘s ignorance to maximise their profits.

In November the OFT severely criticised Barclaycard after it announced a '0% APR forever' offer which the watchdog decided was highly misleading.

It became clear that the only way consumers could get 0% on a balance transferred from another card was by spending at least £50 per month and being charged interest, averaging 17.9%, on it. Barclaycard backed down and agreed to cancel the advertising and marketing of the deal.

But other credit card issuers also offer what the OFT believes are misleading 0% or 'low interest' rates to people who transfer balances.

The latest OFT research, based on a survey of 1,890 consumers, shows that many people remain mystified by some of the terms and conditions that apply on their cards.

The survey found that consumers find it difficult to compare products in terms of cost and like the idea of a simple 'honesty box' that sets out the details of the APR charged.

The box will also include details of any extra charges, the interest rate, the minimum payment to be made, the interest free period, the period over which interest is charged and the credit limit.

John Vickers, OFT chairman, said the latest study showed that consumers were unhappy with being kept in the dark and being expected to understand the terms and conditions of their card by wading through reams of small print.

He added: 'Consumers need key information presented in a way that is easy to understand to make good choices about credit cards. Our research provides consumer evidence on how to do this.'

The OFT is about to publish the second part of its investigation into credit cards and later this week will release details of a its investigation into store cards.

The report into store cards is likely to tackle the issues highlighted by This Is Money‘s Card Sharp campaign, which drew public attention to the problems in the market.

The OFT‘s investigation was also prompted by harsh criticism from MPs on the Treasury Select Committee about the way the store cards market operates and reflects growing concern that consumers are being ripped off by unscrupulous financial services companies.

Credit card rip-offs report due today

An influential committee of MPs publishes details of responses to its scathing report on credit card rip-offs today.

Last December's report from the House of Commons Treasury select committee said consumers had been "badly let down" by credit card and store card companies whose lack of transparency left them confused about charges and unable to shop around.

It was also critical of the Department of Trade and Industry and Office of Fair Trading for failing to act over what the MPs said was irresponsible lending and excessive interest rate charges.

The committee was today publishing its second report on the issue, looking at the official and industry reaction to its recommendations.

December's highly-critical report accused credit card companies of using marketing practices which were "highly misleading and highly damaging" to the interests of consumers, and could lead to people sleep-walking into debt.

Normal processes of competition were hampered by complex and varying methods for calculating interest charges, which meant consumers found it difficult to know if they were getting a good deal.

The committee said the regulatory regime governing credit and store cards was from a "bygone age", and had not kept up with changes in the market.

It called for a number of reforms including the introduction of a single method for calculating APRs (annual percentage rates) and standardisation of the way interest charges are calculated.

The Banking Code should require a "summary box" containing key information on rates and charges to be included in marketing material and on monthly statements, the MPs said.

Last week it emerged that a 37-year-old man committed suicide, after he built up a mountain of debt on 19 different credit and store cards. The incident highlighted the question of responsible lending on the part of card providers.

Proposed Changes to The Consumer Credit Regime

United Kingdom: Proposed Changes to The Consumer Credit Regime, Including Reforms Concerning Consumer Credit On-Line
Article by Clare Sellars

On 8th December 2003, the DTI published a White Paper entitled "Fair, Clear and Competitive--The Consumer Credit Market in the 21st Century" (the White Paper) as part of its review of the Consumer Credit Act 1974 (CCA), including proposed changes to regulate the conclusion of on-line consumer credit agreements.

The White Paper outlines the Government’s proposals for reform of consumer credit under a number of headings including: (i) establishing a more transparent regime by (a) changing the advertising regulations to make credit advertisements clearer and simpler for consumers to understand, (b) providing consumers with clearer information before and after agreements are signed, (c) changing the law to prevent those who settle loans early from being penalised and (d) enabling consumers to enter into and conclude agreements on-line; (ii) creating a fairer framework that encourages competition while stamping out irresponsible and unfair lending practices by (a) strengthening the credit licensing regime to target rogue and unfair practices, (b) changing the law to end unfair selling practices, including replacing a limited extortionate test with a wider unfairness test and providing an effective dispute resolution mechanism and (c) removing the £25,000 financial limit that creates a two tier lending framework and impedes consumer protection; (iii) shaping the European agenda, particularly in the context of two draft Commission Directives in the consumer credit sector (mentioned below); and (iv) minimising over indebtedness (although we do not focus on this proposal below).

Separate consultations on the proposed draft regulations giving effect to the changes proposed on consumer credit advertising, early settlement of credit agreements, credit agreements’ form and content and also on the alternative dispute resolution mechanism regarding consumer credit related disputes were published in conjunction with the White Paper. Whilst as part of these consultations, proposals on consumer credit online were put forward, no draft legislation has been published as yet.

Other Proposals

In September 2002, the European Commission published a draft Directive on consumer credit (COM (2001) 443 final), (Consumer Credit Directive). This aims to fully harmonise the laws on consumer credit in the Member States. The White Paper indicates the issues that the Consumer Credit Directive will need to address, such as fair and equal cross border data access and exchange, the adoption of an EU wide approach to regulation of consumer credit information, advertising and unfair practices, common rules on APR calculations, barriers to cross border debt collection and recovery practices, an effective out of court redress mechanism and an effective passporting regime for lenders wishing to market and sell credit products cross border.

Additionally, on 18th June 2003 the Commission published a draft Directive as a harmonisation measure, on Unfair Commercial Practices in the field of consumer protection (COM (2003) 356 final). This draft Directive contains a prohibition on Unfair Commercial Practices and highlights two principal categories of Unfair Commercial Practices: misleading commercial practices (actions as well as omissions) and aggressive commercial practices. In each case, the Directive sets out criteria to establish whether a practice is misleading or aggressive and includes an annex containing a non-exhaustive list of examples of unfair commercial practices intended to demonstrate further application of the criteria. The DTI have concerns about the possible impact of this "cross cutting measure" as they describe it, on highly regulated sectors such as financial services and are consulting separately on it.

Implementation Timetable and Impact on Existing Agreements

Of particular concern to lenders and regulated firms, will be the impact of the new regulations on existing agreements. New regulations relating to advertising, form and content rules, on-line facilitation (including cancellation/withdrawal rights), early settlement and unfair credit test rules will probably be effective from October 2004 for agreements entered into after that date. New regulations enabling consumer credit on-line will probably be implemented by an order under the Electronic Communications Act 2000. The early settlement rules will probably apply to existing loans from October 2006. Whether to apply the unfair credit test rules (indicated below) to existing agreements is also being considered. The Treasury implementation of the Directive on the Distance Marketing of Consumer Financial Services (the DMCFS), (Directive 2002/65/EC) should also be noted.

The Existing Consumer Credit Regime

The consumer credit market broadly comprises secured lending (other than those first mortgages to be regulated by the FSA from 31 October 2004), credit cards, loans, mail order, hire purchase, store cards and credit unions.

Subject to certain exceptions, the CCA currently regulates consumer credit, consumer hire and related agreements for amounts up to £25,000. Credit includes any form of financial accommodation. Its protections apply to agreements with individuals (defined to include partnerships and other unincorporated bodies, unless all the members are corporate bodies). Additionally agreements for the bailment of goods are regulated consumer hire agreements under the CCA, subject to certain conditions. The CCA lays down rules covering: the form and content of credit agreements; credit advertising; the method of calculating the Annual Percentage Rate (APR) of the Total Charge for Credit; the procedures to be adopted in the event of default, termination, or early settlement; and the provision of remedies in cases of extortionate credit bargains.

A short summary of the key provisions of the White Paper is set out below.

Consumer Credit Advertising

The White Paper’s proposals relating to consumer credit advertising will apply to all forms of media used to advertise credit. The new regulations will apply where financial information is included in the advertisement, or certain statements are made regarding the credit itself or to whom it is targeted. The existing categories of simple, intermediate and full credit advertisements in the 1989 Regulations (Consumer Credit (Advertisements) Regulations 1989 SI 1989/1125, as amended) will be replaced with new requirements clarifying and simplifying credit advertisements for consumers and making the regulations easier for authorities to enforce.

Basic Information

Various changes are proposed in respect of provision of basic information to consumers, including the fact that the lender’s name must be included in all advertisements. Advertisements including no financial information will only have to comply with the overall requirements that advertisements be clear, fair and not misleading. However, where the company/web-site name quoted makes any subjective claim about the nature of the products offered there will be a requirement for the APR to be shown.

Requirement to Show the APR

There are also various proposed changes relating to the requirement to show APR, e.g., where any interest rate is quoted in the advertisement, the APR must also be displayed. Where the APR is displayed this may be done without the requirement to include any other financial information. However, where other financial information is included, APRs must always be located with, more prominent than and double the size of any other financial information in the advertisement. Where advertisements advertise multiple products with different APRs, all APRs must be given identical prominence. APRs must also be quoted in other circumstances, e.g. where the credit amount/range is described.

Content of Advertisements

Where a credit advertisement includes any of the items of information listed in Schedule 2 to the draft regulations (page 57 of the Consultation on proposals for regulations), apart from the amount of credit, the advertisement must include every other item of information listed in that Schedule. All those indicators must be shown together and be given equal prominence. Such indicators include (among other things) the deposit (if required), the advance payment (if required) and the total amount payable. Whenever the key indicators are required to be included, the APR (as defined) will also have to be displayed in the same place as the other information and twice the size and more prominent. The same approach will apply to hire agreements with a separate set of key financial indicators.

Typical APRs

APRs quoted in advertisements, must be representative of the business they are expected to generate. Advertisements must quote the highest APR that at least 66 per cent of the eventual number of consumers formally accepting a credit agreement in response to the advertisement are expected to be given. This accords with the FSA’s proposed approach on mortgage regulation.

Where interest rates for products will vary according to the applicant’s credit-worthiness (personal pricing) lenders may quote a typical APR. Again, this will have to be the highest rate reasonably expected to be given to at least 66 per cent of the eventual number of consumers who accept a credit agreement in response to the advertisement.

Advertisers may also quote from APR. This must be based on 10 per cent of business written and be accompanied by the corresponding "to APR" based on 90 per cent of business written. The 66 per cent typical APR must always be shown twice the size and more prominently than the upper and lower figures.

Calculating the APR

A single method of calculating APRs based on a single set of assumptions, for running account credit so consumers can easily compare different advertisements is to be introduced and the relevant regulations will be amended accordingly. In respect of credit cards, one of the assumptions proposed is that the rate used to calculate the APR must be the standard rate for purchases because this is a credit card’s primary purpose.

Security

Secured lending advertisements stating that offered products will be secured by a charge over the borrower’s home must include a wealth warning.

Form and Content of Credit Agreements: Precontractual Information

Certain essential information must be given to consumers prior to entry into credit agreements to allow them to consider the information before deciding whether to enter into the Agreement. This includes certain information concerning the creditor, credit (e.g., information relating to interest rate, repayments, early settlement information, security etc.), the agreement itself and redress. The precontractual information must be provided in a form that does not form part of the credit agreement and must precede it. The draft regulations set out specific precontractual information requirements in the case of voice telephone communications.

These pre-contractual information requirements will incorporate the pre-contractual information requirements set out in the DMCFS and extend them to all consumer credit agreements, regardless of whether they have been concluded at a distance.

Sometimes the interest rate charged will depend on the lender’s assessment of the individual applicant’s credit worthiness. Whether it is feasible for consumers to be made aware in the precontractual information of the rate they will pay before committing to a credit agreement is being considered. The pre contractual information must also include a statutory wealth warning for any loans secured on homes.

For fixed sum variable rate credit agreements an illustration of how interest rates rises will increase payments will be required and the overall amount paid tailored to the individual loan.

The FSA proposed rules and guidance on the DMCFS raised the issue of whether for successive operations, the pre-contract information requirements must be continually adhered to. Article 1.2 of the DMCFS provides that for contracts for financial services comprising an initial service agreement followed by successive operations or a series of operations of the same nature, performed over time, the provisions of the DMCFS shall only apply to the initial agreement. Where there is no initial service agreement, but there are further operations of the same nature between the two parties, the pre-contract information requirements apply only when the first operation is performed, provided there is less than a year between operations. It will be interesting to see how this is implemented by the DTI and the Treasury.

Format and Content of Credit Agreements

Regulated credit and consumer hire agreements will have to contain certain core information comprising main financial details and key statements as to the consumer’s rights and responsibilities immediately following the parties’ names and agreement description. The new statutory wealth warning for unsecured lending stating that "missing payments will have severe consequences and may make obtaining credit more difficult in the future" is also being introduced. Where applicable, information will also be required relating to "Your Home", "Your Responsibilities", early settlement, cancellation, Hire Purchase, lost/misused cards, exchange-rate/cross border charges and pawned goods. The Consumer Credit (Agreements) Regulations of 1983 will be amended accordingly.

A "summary box" has been proposed to ensure consumers are fully aware of all charges in a standard format to aid making comparisons.

Payment protection insurance (PPI) and similar policies sold in conjunction with credit agreements which are also funded by credit, will have to be sold in the same clear and transparent manner as the credit product. Products like PPI can remain within one document with the credit product, however separate sets of main financial details for the credit product and each insurance product purchased on credit, statements of combined total charges for credit and separate signatures for each product will be required.

Under consideration is the issue of "consent indicators". Signatures will be required for paper agreements or possibly another consent indicator for electronic agreements at the end of the agreement and by any separate product purchase. Terms and conditions of credit agreements must be no less prominent than the rest of the Agreement.

Post Contract Information

It is proposed that consumers will regularly be made aware of the outstanding amount they owe and be informed if they fall into arrears or incur additional charges attracting interest. Other post contractual information requirements will include warnings regarding the implications of only making minimum payments on credit card debts and the consequences of defaulting. The possibility of introducing repayment scenarios into regular credit card statements is also under discussion.

On-Line Agreements

The changes here will encompass the relevant requirements of the Electronic Commerce Directive (ECD) (Directive 2000/31/EC, Article 9) and the DMCFS. The Government wishes it to be possible, but not mandatory to contract electronically. The CCA was conceived with paper in mind and there is currently no clear provision for facilitating or regulating the conclusion of electronic contracts.

The CCA (s61(1)(c)) requires that when regulated agreements are presented to the consumer for signature, all their terms must be readily legible. This will be retained, although in an online environment it is unclear what this means as it is acknowledged that it is not necessarily appropriate to prescribe a minimum font size for computer screen text, which can easily be altered by the consumer. However, at page 75 of the Consultation on proposals for regulations, the draft regulations provide "None of the lettering in an agreement shall be less prominent than the rest, except that headings may be afforded more prominence whether by capital letters, underlining, larger or bold print or otherwise".

The regulations implementing the ECD require that the terms and conditions of the contract be provided to the recipient in a form that enables the recipient to store and reproduce them. The DMCFS contains a similar requirement employing the durable medium terminology. There will be a requirement for consumers contracting on line, to receive copies of the documentation received from the lender, in a form which can be stored on a durable medium, however lenders will not have to determine, in advance of agreeing to contract electronically, whether the consumer has the capability to be able to store and reproduce them electronically.

Termination and default notices will still require to be sent in paper format to protect consumers’ interests. However, lenders may send such notices in both electronic and paper versions if they wish.

Generally, the medium for contract conclusion should determine the way notices should be delivered to the consumer. Accordingly, where consumers agree to conclude credit agreements electronically, future communications should also be electronic, subject to the termination and default notice requirements. However, Article 5.3 of the DMCFS will require that Member States ensure "the consumer is entitled to change the means of distance communication used unless this is incompatible with the contract concluded or the nature of the financial service provided" and it is proposed that lenders/consumers will be able to amend the means of communication. Lenders will be entitled to charge ‘reasonable’ fees, should the change in communicating method be at the consumer’s request and be more costly to the lender.

The issue of whether delivery should be deemed to have been effected 48 hours after transmission of electronic communications is being considered.

The Consumer Credit (Agreements) Regulations 1983 1983/1553, as amended, will be amended to ensure the adoption of a technology neutral approach so the prescribed information and layout of agreements will be the same regardless of the method of contracting.

One particular form of digital signature is unlikely to be mandated to conclude agreements on-line. Regulations will determine how the consumer’s consent is to be indicated.

Copies of documents may be provided electronically including the original executed copy of the agreement, provided the consumer has agreed he will communicate electronically and the lender ensures the copy he retains can be stored in a durable medium and reproduced any time. As already provided in the CCA (s77-78), consumers will be able upon payment of a prescribed fee to request a copy of the executed agreement at any time during the course of the agreement.

With regard to the right to cancel, or withdraw without penalty, or rescind a consumer credit agreement, the CCA provides detailed rules on cancellation/withdrawal, regulation 15 of the Electronic Commerce (EC Directive) Regulations 2002/2013 provide a right of rescission in certain circumstances, the DMCFS in Article 6 provides for a right of withdrawal and the proposed revised Consumer Credit Directive also provides for a consumer right of withdrawal in certain circumstances.

More particularly, the draft revised Consumer Credit Directive at Article 11 states that, the consumer should have a period of 14 calendar days to withdraw his acceptance of the credit agreement, without reason. The DTI are of the view that the opportunity should be taken to make all credit agreements subject to a cancellation/withdrawal period of 14 days, although no draft regulations have been published as yet. However, the extension of the right to non-distance agreements in the case of products regulated by the FSA is unlikely to be mandated. Note that Article 6.2(c) of the DMCFS provides that the right of withdrawal will not apply to "contracts whose performance has been fully completed by both parties at the consumer’s express request before the consumer exercises his right of withdrawal."

Early Settlement

Proposals regarding early settlement of credit agreements include replacement of the Rule of 78 (set out in the Consumer Credit (Rebate on Early Settlement) Regulations 1983) with a new early settlement formula. Generally, this formula has been criticised as providing an insufficient discount for early settlement in the context of long term loans secured on property. Although these criticisms are directed specifically to unregulated secured lending, Paget points out that the underlying reasoning is equally applicable to any long term loan (see Paget’s Law of Banking, Twelfth Edition, page 52). The White Paper takes the position that this rule can result in substantial benefits to the lender as the settlement fee is not necessarily in proportion with the actual "breakage" costs associated with repaying the loan early. The new regulations will prescribe a formula based on actuarial principles to determine the maximum amount payable on any particular loan.

Lenders will be required to respond to early settlement quotation requests within seven working days from the date of the request as opposed to 12 working days as currently allowed.

Lenders rights to postpone the settlement date of a loan will be limited to 28 days from the date of the consumer’s request. Consumers may request longer deferments if they wish.

Lenders will be permitted to recover an additional one month’s interest only above the settlement figure for loans of more than one year, towards their costs. This will not generally apply to loans under 366 days.

Lenders must provide three examples (tailored to the specific loan) of early settlement in the precontract information (representing the costs of settlement at the quarter, half and three quarters stages of the repayment period) as part of the key financial particulars to be provided pre-contract.

Reforming the Current Licensing Regime

A licence is required for the carrying on of a consumer credit, or consumer hire business (s21(1) CCA) and ancillary credit businesses (see CCA s145(1) for types of ancillary credit business). Applicants must satisfy the Office of Fair Trading (OFT) they are "fit" to carry on the relevant business. The relevant tests focus on past failings as evidence that traders are unfit to hold licences, but do not expressly consider traders’ abilities to conduct their credit businesses in a fit manner in future. The Government wants to strengthen the current fitness test to hold a licence so the OFT can look back at applicants’ past conduct and forward in assessing their competence to run their credit business. The OFT will produce initial guidance on the fitness standards required for the conduct of credit businesses.

The Government proposes to move from a system where licences are renewable every five years to one where the OFT can grant licences for indefinite periods with periodic licence maintenance payments.

The licensing system will be updated to include development of new categories of licensable activity such as credit repair, which are currently not covered. The Secretary of State for Trade and Industry will be allowed to vary the activities for which a licence is required for ancillary activities.

The OFT will be able to seek additional information from licensees and third parties including e.g. the requirement to produce books, documents and records. Licensees will be required to notify the OFT on an ongoing basis of any material changes in circumstances relating to their fitness to hold a licence.

The OFT will also be able to impose special conditions on or take undertakings from licence holders. Breaching such conditions or undertakings could result in a financial penalty or ultimately result in a revocation of the licence. Decisions to impose conditions or financial penalties would be subject to the same procedural safeguards and rights as decisions to refuse, revoke or vary a licence.

The Appeals process against the OFT’s licensing decisions will be made more transparent and there will be a revised licence fees structure reflecting the new regime.

Extortionate Credit

The limited extortionate credit bargain test in the CCA will be replaced with a wider unfairness test (see below) making credit agreements easier to challenge. Currently a credit bargain is deemed to be extortionate if it requires a borrower to make payments which are grossly exorbitant or otherwise grossly contravene ordinary principles of fair dealing (see CCA ss138). The CCA already allows the court to re-open a credit agreement in these cases so as to do justice between the parties. The present definition has resulted in few successful court cases and the current test is regarded as unsatisfactory in various ways, including because of the fact that the courts have not tended to examine events which post date the agreement.

Reform Proposals, ADR and Unfair Credit Transactions

The Government intends to make it easier for consumers to challenge unfair agreements and for individual consumers to seek redress through an accessible ADR system. A new test in respect of "unfair credit transactions" will be introduced which will widen the current "extortionate bargain" definition and will allow account to be taken of unfair practices, e.g. whether the lender/any broker has misled, coerced or otherwise unduly influenced the borrower regarding the transaction and also of unfair credit costs (whether credit payments substantially exceed market levels). It is intended that the legislation and OFT guidance will provide clear guidance to businesses, the courts and ADR adjudicators in determining the fairness of credit transactions.

Responsible Lending

The concept of responsible lending, setting out certain lender obligations in providing credit may also be introduced, including requiring that reasonable steps be taken to ensure a consumer’s credit worthiness and ability to meet the full terms of the agreement at the time it was concluded. This concept is proposed by the Commission at Article 9 of the draft Consumer Credit Directive. The White Paper suggests that creditors should be expected to undertake proportionate enquiries, having regard to the type of agreement, their relationship with the customer and the costs and risks involved.

Representative Actions

Designated bodies will be allowed to bring actions on behalf of the collective interests of consumers requiring a trader to refrain from engaging in conduct which constitutes an unfair credit practice.

Codes of Conduct

The Government believes industry codes of conduct can help effect change within the lending sector and that all creditors should be covered by and comply with principle based codes of practice.

Abolition of Financial Limits

The Government intends to remove the £25,000 financial limit in respect of credit agreements and reexamine current exemptions under the CCA, but retain the limit for all business lending to unincorporated bodies (sole traders, partnerships up to and including three partners and other unincorporated bodies not consisting of bodies corporate). Because the personal and business affairs of people running small business may be intermingled, the DTI argue, they should receive the same protection in their business capacity as is afforded to them as consumers.

Exemptions

Many lenders offering secured loans are exempted from the CCA under generic exemptions. The most important exemptions for banks and building societies are certain mortgage loan agreements (s16 CCA) and agreements where the payments to be made by the debtor do not exceed a specified number (s16(5)(a) CCA), or the rate of total charge for credit does not exceed a specified rate (s16(5)(b) CCA). However, provisions dictate that some lenders, but not others, must be named in an order under s16 of the CCA for their loans to be exempt. Retention of such exemptions is being considered.

Enforcing Credit Agreements

Abolition of the financial limit must be considered alongside s127 CCA. S127 CCA governs the enforceability of agreements and sets out powers a court has to enforce a regulated agreement. Under the CCA (s127), the court cannot make an enforcement order if the agreement is improperly executed and certain other formalities have not been complied with, such as where it is a cancellable agreement, but the duty to give notice of cancellation rights under s64(1) CCA was not complied with. With the £25,000 ceiling being removed lenders could be exposed to greater liability where agreements are held to be unenforceable. Proportionate proposals to balance the need to ensure the statutory requirements are met against the financial consequences of unenforceability for lenders will be introduced.

Variation of Agreements

Abolition of the financial limit has concerned the lending industry regarding their increased exposure to liability when varying /supplementing existing credit or hire purchase agreements. Because the formal requirements which must be followed if the new agreement is to be enforceable with regard to modifying consumer credit and consumer hire agreements (s82 CCA) are regarded as overly complex leaving lenders exposed to arguments on unenforceability, the DTI is consulting on whether reform is needed in this area. A consensual variation of a credit agreement gives rise to a modifying agreement. If a modifying agreement varies or supplements an earlier agreement it is treated as revoking it and reproducing the combined effect of both agreements (s82(2)). Accordingly, it must if regulated, comply with all the provisions concerning the entry into agreements (see Paget’s Law of Banking. Twelfth Edition, page 53).

Multiple Agreements

Consideration is ongoing regarding clarifying how transparency for consumers and legal certainty for lenders can be achieved in respect of agreements packaging together different credit products which fall within more than one statutory category, as such agreements must comply with the relevant statutory requirements for each category.

Conclusion

Clearly the regulations resulting from the White Paper’s proposals will have far reaching implications for all providers of consumer credit products and services. Those lenders subject to the CCA and those firms to which the Treasury implementation of the DMCFS will apply must carefully monitor the developments and not delay (as the final regulations are published) in reviewing their advertisements and terms and conditions to ensure that they comply with the new regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.