Select Committee on Treasury Second Special Report


1.1  The Government welcomes the Committee's Report, which is particularly timely given the plans for the reform of consumer credit legislation announced by the Government in its White Paper "Fair, Clear and Competitive: The Consumer Credit Market in the 21st Century". The Government shares the Committee's view that there is much to do in this market to ensure that consumers are empowered, and that both business and consumers get a fair deal. It will continue to work with business, consumer groups, regulators and others to achieve this.

1.2  The White Paper was published on 8th December 2003, and sets out the Government's findings and proposals for reform across the range of issues covered by its Review of the Consumer Credit Act 1974. We intend to strengthen the licensing regime to enable more effective enforcement of standards of conduct; to enable borrowers to challenge unfair credit transactions rather than only those that are extortionate; and to provide for a system of alternative dispute resolution. These reforms will require primary legislation, which we will bring forward as soon as Parliamentary time is available. In addition, detailed proposals for amendments to secondary legislation to simplify the rules governing the advertising of consumer credit; standardise the calculation of the APR; make the form and content of credit agreements clearer; introduce a fairer method of calculation of the costs of early settlement of loans; and for the facilitation of online credit agreements have been set out in a consultation paper published alongside the White Paper. The White Paper also sets out an ambitious implementation programme. We are committed to bringing the first changes into effect in October 2004.

1.3  The White Paper package is currently out for consultation - the consultation period closes on 15th March 2004. The Government will finalise its proposals in the light of both responses to the White Paper and the Committee's own recommendations. We will therefore submit a further paper in May 2004 once the consultation on the White Paper package of reforms has been completed and the results analysed.

1.4  The Government strongly rejects the suggestion by the Committee that the DTI has displayed a lack of awareness in its efforts to reform consumer credit legislation and is only now treating the issue of reform as urgent. We have always been determined to achieve a significant overhaul of the credit regime, but have been equally determined to do so in a responsible way. The exhaustive testing of proposals with stakeholders has been an essential pre-requisite to producing a regulatory regime that will remain relevant for many years to come in a fast-moving market.

1.5  We would also point out that it is important that any changes to the domestic regime in this area are compatible with the existing EU regime, and changes planned to it. As the White Paper explains, this has been and will continue to be a feature of the Government's approach.

The level of interest rates charged

Recommendation 1: The high interest rates charged by some credit and store cards are excessive … they result in part from a lack of transparency in pricing which obstructs effective competition. It is for Government to ensure that competitive forces can work.

1.6  The Government welcomes the attention that the Committee's hearings have given to the issue of transparency, and the impetus that has been given to industry initiatives - such as the Summary Box - designed to improve the awareness of consumers as a result of its hearings. We share the opinion of the Committee that greater transparency is a vital pre-requisite for a credit market where fair competition can flourish. The package of measures promoting transparency described in the White Paper is designed specifically to remove informational distortions before consumers have committed to a credit agreement. Our proposals are designed to give consumers both the quality and the quantity of information that they need to choose the best product for them. This should enable consumers to compare products with confidence, make informed decisions and therefore drive competition between lenders. The reforms will ensure that all credit advertisements are clear, fair and not misleading, and will require a single set of assumptions to be used in determining the APR. They will also address the transparency and fairness of pre-contractual information; the key terms of the contract; the costs of early settlement; and other costs.

Regulatory environment

Overall responsibility for consumer credit

Recommendation 2: The Government should consider (perhaps within the current review of the Financial Services and Markets Act 2000) examining the boundary between the respective responsibilities of the DTI/OFT and the FSA for consumer credit regulation.

1.7  The Financial Services Authority (FSA) regulates first charge mortgages where at least 40% of the property is used as, or in connection with, a dwelling by the borrower or a member of their immediate family. The boundary of the FSA mortgage regime was defined following extensive public consultation. Industry and consumers are expecting the FSA mortgage regime to commence on 31st October and it would not be appropriate to review the boundary before this regulation has even started.

1.8  Close co-operation between regulatory bodies is, of course, essential. The Government believes in the principles of good enforcement, as set out in the Enforcement Concordat. To that end, DTI has worked closely with both the Office of Fair Trading (OFT) and the FSA during the course of its Consumer Credit Review to ensure a co-ordinated approach. The proposals on credit advertising have been drawn up in close collaboration with the FSA to ensure consistency across the two regimes, and both will come into force at the same time in October 2004.

Recommendation 3: The consumer credit regime is from a previous age in terms of the developments which have taken place in the market. It is essential that a regulatory regime is in place that keeps pace with developments and protects consumers. We expect improvements to be brought forward with urgency. We hope the White Paper is the start of a period of action by the DTI, rather than just the start of a new round of consultations, and that consumers will soon see real benefits alongside increased protection.

1.9  The Government strongly agrees with the Committee about the need to ensure that our reforms are flexible enough to adapt to what we anticipate will continue to be a dynamic, innovative market.

1.10  Chapter 3 of the White Paper explains our proposals for reforming the consumer credit licensing regime. We propose to strengthen the test of fitness to hold a consumer credit licence, so that the OFT is able to look forward to assess the competence of a business to provide credit and focus on the particular competencies necessary for that particular type of business. We also intend to strengthen the OFT's powers of investigation, so that it can check that licence holders remain fit during the currency of their licence. OFT will be able to impose intermediate measures to enforce compliance with the regime, rather than the only available tools being revocation, suspension or variation of a licence. In future, we propose licences will be issued for an indefinite period (rather than being subject to 5-yearly renewal) - this will allow the OFT to focus its resources on monitoring licence holders, and particularly those posing a greater risk to consumers, and will reduce the burdens on business. These proposals will be taken forward in primary legislation, as Parliamentary time permits.


Recommendation 4: Self-regulation through industry codes, if accompanied by monitoring and enforcement, can play an important role in supplementing statutory requirements. We note and welcome the commitment of Capital One and American Express to join the Banking Code in the very near future.

1.11  The Government agrees with the Committee that self-regulatory initiatives by the credit industry have a vital role to play alongside our reforms in giving consumers the information that they need. We would therefore support any project that contributes to a better deal for consumers, and are continuing to work closely with the Association for Payment Clearing Services (APACS) to ensure that self-regulation continues to supplement and enhance statutory protections.

European regulation

Recommendation 5: We welcome the DTI's commitment that delays in European legislation will not be used as an excuse for UK consumers to wait longer than necessary for vital improvements. The EU draft consumer credit directive needs to be redrafted (and the FSA should be involved at an early stage in the discussions).

1.12  The Government confirms its commitment that ongoing negotiations towards a possible new consumer credit Directive will not in any way delay the reform programme set out in the White Paper.

1.13  The proposed Consumer Credit Directive has the potential to reduce barriers in the internal market. However, as it currently stands it would need significant amendment to do so. The current form of the Directive would give no material benefit to UK consumers, and would potentially cause difficulties for them in a number of areas. DTI has worked closely with the FSA, OFT and other Government Departments in developing and pursuing the UK negotiating line on the Directive.

1.14  We continue to lobby the Presidency, the European Commission and the European Parliament to ensure that the views of the UK Government are heard, understood and taken into account during discussions on the proposed Directive.

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