Government proposes shake up to credit industry

Clearer advertising, a standard method for calculating interest rates and the removal of excessive charges for repaying a loan early are some of the measures contained in the government proposals designed to shake up the credit and lending industry.

Consumer Minister Gerry Sutcliffe said today that the package will "for the first time" allow consumers to get "clear and detailed information" about their credit agreements. Newly empowered consumers will be able to compare credit offers and shop around for the best deals, the minister said.

The move is the first set of regulations in the government's shake-up of the consumer credit market aimed at increasing transparency and improving consumer protection while minimising the impact on business.

The new regulations introduced today will:

• tighten up credit advertising so that consumers will be better able to compare products;
• introduce a standard way of calculating the annual percentage rate (APR) for credit cards, a key factor that consumers use to compare products;
• mean that when an APR appears in an advert, it will always have to be more prominent than all the other financial information;
• and introduce a new signature box for consumers to sign if they are purchasing any additional insurance products, such as payment protection plans, on credit. This will work to highlight any extra costs.

Mr Sutcliffe said that while credit can be a very useful tool, lending and borrowing must be "clear, open and responsible".

"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," he added.

The changes will apply to credit advertisements from 31st October 2004, and to all new agreements from May 2005. The new rule setting out what a lender can charge when an agreement is settled early will apply to existing agreements of up to 10 years from May 2007. For loans over 10 years it will apply from May 2010.

The time lapse before the measures kick in will allow businesses time to change their processes resulting in a level playing field at the end of the transition period, the Minister said.

However, the Consumers' Association has raised concerns over the measures. It says that legally, the government may need to go farther to ensure there is no confusion in the marketplace.

The association's Doug Taylor said: "We also fear that there will still be loopholes, particularly within the advertising regulations which may be open to misinterpretation.

"Specific requirements we have are, in relation to consumer credit advertisements, that the APR should be shown in all advertising of all credit products and that the deadline of 2010 in relation to early settlement regulations should be made much earlier to benefit disadvantaged consumers who need to spread their payments over a longer period.

He added: "We are also concerned that several issues may not have been addressed in the new regulations including, interest calculation methods, post-contractual information, credit scoring, credit data sharing, impact of risk-based pricing on the vulnerable and financial services advice."

(gmcg)