1. INTRODUCTION:
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.
Self-regulation
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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