DTI rejects interest rate cap
The Department of Trade and Industry has confirmed that it will not be imposing a cap on the level of interest charged on credit.
Such caps exist in France, Germany and Ireland to protect consumers, but new research from the DTI suggests that the cap can actually limit low-income borrowers’ access to credit.
The decision has been welcomed by the National Consumers Council (NCC) but condemned by Debt on our Doorsteps, which has accused the Government of “caving in” to loan sharks.
The DTI has been investigating the possibility of imposing a cap as part of its shake-up of consumer credit law. Its research found that in the countries with caps, lenders do not provide small loans over a short period, “excluding some low-income consumers from the market or leading others to take out larger loans than they need.”
It argues that with a cap, choice is reduced, and some low-income consumers end up taking out credit with extra charges that are not included in the interest rate calculation but which they are statistically more likely to incur, for example swinging late payment charges.
Crucially, it found that the percentage of consumers who admitted borrowing from unlicensed or illegal lenders in the UK was half that in Germany and France.
Announcing his decision, Consumer Minister Gerry Sutcliffe said: “The UK’s credit market is very sophisticated and we are currently undertaking a wide range of reforms to ensure protection and transparency for consumers and the industry.
“These reforms, rather than an interest rate ceiling, provide a better way to deal with problems in the market now, such as the high cost of credit and financial exclusion.”
The issue though will be kept under review.
The chief executive of the NCC, Philip Cullum, said he supported the decision, but called on the Government to focus on the other credit problems of low- income families.
Mr Cullum said: “The DTI’s research demonstrates that a cap on interest rates is not the most effective way of protecting low-income consumers. Indeed, it may be positively damaging. But far from being a reason for inaction, today’s research report strengthens the case for industry and government to work together to stimulate the market for low-income credit and prompt more responsible lending.
“As things stand in the UK, very few credit products meet the needs of low-income consumers. And lack of competition means there is little incentive for lenders to find more cost effective ways of meeting consumers’ needs.”
Debt on our Doorstep though says it has “serious concerns regarding the findings and the methodology employed.”
Damon Gibbons, co-chair of DooD, said: “The Government has caved into pressure from rip-off lenders and used flawed research as the basis for rejecting interest rate controls. The Government is effectively saying lenders can be as expensive and extortionate as they want.
“A legal ceiling on credit costs would help millions of people in poverty and show substance to the Government’s commitment to combating social exclusion.”
