Credit law shake up aims to safeguard consumers

With the burden of UK consumer debt soaring to record levels, the government has announced a shake up in consumer law that will see authorities clamping down hard on loan companies and 'loan sharks' in deprived areas.

Under plans outlined in the Consumer Credit White Paper, the rules governing credit licences will be strengthened, putting debt management companies and rogue moneylenders under "closer scrutiny".

To support this, the Office of Fair Trading (OFT) will be given the power to fine lenders and conduct surprise raids on loan companies.

Lenders will also have to provide standard information when advertising financial products so consumers can compare like-for-like and find the best deal. Small print will have to be legible and lenders will need to provide upfront information similar to US-style 'honesty boxes'.

The DTI estimates that if everyone switched to a cheaper credit card, consumers would save around £1.9 billion, more than £400 per household. The reform of early settlement charges will benefit consumers to the tune of £60 million – a saving of around £1,300 on a £10,000 loan repaid over 15 years at 16% APR, settled early after five years.

Trade Secretary Patricia Hewitt said: "Credit has become an integral part of our daily lives. For many, it is the lifeline that enables us to deal with emergencies that arise, helping match regular income against irregular demands and the risks of modern life.

"But credit can also introduce risks of its own. Some consumers take out loans that are inappropriate and expensive. And some fall into debt because of unexpected events like redundancy or illness. These measures will help them find a way out."

The new 'loan shark hunter' pilot programmes will be run by Trading Standards in Birmingham and Glasgow and will begin next April. The projects are backed by £2 million of new funding from the DTI and are set to run for two years.

Using powers of investigation, including undercover surveillance under the Regulation of Investigatory Powers Act, the teams will gather the evidence necessary for the Proceeds of Crime Act to be used to recover the illegal profits of the lenders. Each team will consist of a mixture of experienced Trading Standards Officers and Enforcement Officers with a suitable background, such as police experience.

Ms Hewitt said: "It is more often than not the most vulnerable who are preyed on by loan sharks. It is simply not possible to escape from poverty if what little you have is asset-stripped by predators. These measures will crackdown hard on loan sharks and other rogue lenders."

Changes to the Consumer Credit Advertising Regulations will include new requirements for advertisements to be "clear, fair and not misleading". Currently, there are around 400 different types of loans available and interest rates vary widely.

Changes to the Form and Content of Credit Agreements will increase transparency, enabling consumers to compare the interest, charges and penalties associated with any type of loan.

(gmcg)