Minister launches consumer credit reforms
The Consumer Minister has announced an initial package of reforms intended to promote better consumer understanding of credit products.
The new regulations include the introduction of a standard method of calculating the annual percentage rate (APR) so that consumers are able to better compare products. This APR, if quoted in the advert, will always have to be more prominent than other financial information.
The Government is also proposing the introduction of a separate signature box for any associated insurance products, such as payment protection plans.
There has been concern that consumers are unwittingly signing up to insurance, which they may not need, that dramatically increases the cost of the loan.
Any financial penalties applied if loans are settled early will also have to be set out clearly by the lender.
Gerry Sutcliffe, said: “This is all about transparency, enabling and empowering consumers to make informed choices.”
“These reforms ensure that at every step from the moment a consumer considers using credit, to when they sign on the dotted line, right through to when the agreement ends, they will have the fullest information possible about how much they need to pay and for how long, enabling business and consumers to make responsible lending and borrowing decisions.”
All new adverts from 31st October 2004 will be required to conform to the new rules, and new credit agreements from May 2005.
The Government’s reforms do not go far enough to satisfy consumer groups though.
The chief executive of the National Consumer Council (NCC), Ed Mayo, said: “‘We welcome some of the new rules – especially a standard way of calculating APRs which has been a long-standing NCC campaign.
“Greater clarity in credit advertising, and illustrative examples of charges for paying loans off early are also welcome. It is one step forward, but in other ways, two steps back.
“Under the new rules, borrowers will still be penalised for settling their loans early. They will have to make an extra month’s worth of re-payments and pay an additional one month’s interest.”
“This is just not good enough. Seventy per cent of borrowers pay off their loans early and will be hit by these unfair penalties.”
The NCC is also disappointed that an “honesty box” is not being made compulsory.
Honesty, or summary, boxes were a key recommendation of the Treasury Select Committee’s investigation into consumer credit.
The boxes, commonplace in America, would display all of the crucial credit information in an easily accessible tabular form.
Commenting on the omission, Mr Mayo said: “We are astonished to see that the ‘honesty box’ will not be compulsory, will depend on lenders’ goodwill and will lack the prominence it requires.
“We want key information presented clearly at the top of the agreement within a defined perimeter. With consumer debt growing to record levels, people need clear information and no hidden charges.”
