Select Committee on Treasury Second Special Report


3. OVER-INDEBTEDNESS AND RESPONSIBLE LENDING:

3.1  We strongly agree with the Committee the importance of ensuring that undesirable lending and marketing practices in the credit industry should not exacerbate or create significant over-indebtedness. The Task Force on Over-indebtedness considered and made recommendations on a number of relevant issues. The proposals in the Consumer Credit White Paper aim to establish a transparent market, create a fairer framework and minimise over-indebtedness.

3.2  We believe that it is important that this work is co-ordinated with work being carried out across Government and that being undertaken by voluntary sector organizations and credit providers. In order to ensure this a cross-Governmental Ministerial Group has been set up. The Ministerial Group will be supported by an Advisory Group made up of members from Government, consumer bodies, academia and the credit industry and will ensure that this work is joined up and will monitor work against recommendations in the Consumer Credit White Paper on over-indebtedness.

Over-indebtedness

Recommendation 27: There appear to be a small but significant minority for whom servicing debts, particularly large unsecured debts, has become a problem.

Recommendation 28: While it is not in the interests of industry to lend money to those who cannot afford to repay ….. all credit card issuers need to recognise their long-term responsibilities to prevent this from happening.

3.3  As the Committee has stated, "the evidence indicates that the majority of households still deal with debt in a responsible manner and avoid becoming over-committed". They use credit as an enabler allowing them to participate in the marketplace.

3.4  The latest Financial Risk Outlook 2004, issued in January 2004 by the Financial Services Authority, found that the level of over-indebtedness had not changed significantly since the 2002 Household Survey. 6.9 million families with a debt - roughly 22% of the population - subjectively assessed themselves as either struggling or falling behind with at least one of their borrowing commitments. This compares with roughly 20% in 2002.

3.5  1.8million families were spending 50% or more of their gross income on mortgages and consumer credit - roughly 5.8% of the population, compared with roughly 6% in 2002. While this stability is welcome, there remains a significant minority of households for whom servicing debt has become a problem.

3.6  The majority of these consumers find themselves in difficulties due to events outside of their immediate control - e.g. job loss, relationship breakdown, death or illness or other change in familial circumstances. However, we agree with the Committee that it is a matter for concern that often the change in income resulting in difficulties is relatively small.

3.7  We are particularly concerned that the credit industry should recognise its responsibility to ensure its practices do not exacerbate the difficulties for consumers. The report identifies a number of areas where the credit industry is engaged in practices that can facilitate over-commitment. We agree with the Committee that where the credit card issuers are aware that a consumer is particularly vulnerable, all credit card issuers must take special care to ensure that they recognise their long-term responsibilities. They must ensure marketing and lending practices are responsible.

Responsible Lending

Recommendation 29: Responsible lending is more than just meeting the minimum legal requirements. It is also about driving forward best practice and treating customers fairly. A credit card lender should be providing short-term debt as part of a convenience service rather than pushing a form of debt which sucks borrowers into a long-term cycle of indebtedness.

3.8  We strongly agree that responsible lending is more than just meeting the minimum legal requirements, it is also about driving forward best practice and treating consumers fairly.

3.9  The Consumer Credit White Paper outlines measures that will contribute to responsible lending across the range of lending practices. These include the proposals to strengthen the OFT's powers to sanction licence holders who act unfairly; and work by the Department for Constitutional Affairs to develop pre-action guidance in which responsible lending plays a key role. We also welcome work by credit industry trade associations to ensure their codes of practice and guidance promote responsible lending. The Government will be responding to the review of the Banking Code on this and related issues.

3.10  We agree that the credit industry needs to carefully examine their practices - such as raising credit limits, or the inappropriate selling of products such as Payment Protection Insurance (PPI) to consumers unable to make use of it. Both of these issues were considered by the Task Force on Over-indebtedness, which recommended that credit limits should not be increased without first carrying out further checks on the borrower's ability to repay and that the sale of PPI should be made more transparent. Issues relating to PPI are discussed in more detail in paragraph 3.19 below.

Automatic raising of credit limits

Recommendation 30: Issuers should never raise credit limits without carrying out appropriate internal and external credit checks. Lenders also need to recognise that in many cases, for over-indebted consumers, increases in credit limits are wholly inappropriate. Despite all the sophisticated scoring techniques used, it must be recognised that the borrowers themselves have an important contribution to make in the decision.

Recommendation 31: We recommend that the industry consider establishing a system whereby a limit is placed on unsolicited increases in credit limits.

3.11  We agree that responsible lending requires that the credit industry should never raise credit limits without carrying out appropriate internal and external checks. As the Committee points out, lenders need to recognise that in many cases increases in credit limits may be inappropriate. We will continue to facilitate discussions and monitor developments on this and other recommendations to the credit industry, through the work of the Advisory Group looking at joining up Government policy on over-indebtedness and other initiatives.

Increasing overall credit availability on transfer/conversion of balances

Recommendation 32: Balance transfers at a lower interest rate provide benefits to millions of card-holders, but should not be used as a device to lock consumers into additional debt.

Recommendation 33: If lenders are encouraging consumers to consolidate credit card borrowing into a personal loan, the industry should consider making it their practice to reduce the credit card limit accordingly to take account of the consumer's loan commitments.

3.12  We strongly agree that balance transfers at lower rates should not be used as a device to lock consumers into additional debt. We agree with the Committee about the importance of ensuring the consumer is fully informed about the credit they are taking out. As the Committee notes, although the interest rate on a personal loan may be lower, taking into account the longer repayment period the total cost of the credit to the consumer may work out greater than credit card borrowing, and it might be secured on their property. The new requirements for pre-contract information will enable consumers to shop around for the best deal for them.

Inadequate credit checking

Recommendation 34: It is important that lenders assess a consumer's ability to repay based on as complete as possible a picture of their current income and credit commitments and not just on their payment history. We welcome the Minister's intention to review the information given by lenders to credit reference bodies.

3.13  The Committee is right to note the importance of lenders assessing a consumer's ability to repay based on as complete a picture as possible. We will be reviewing the information given by lenders to credit reference bodies and we will facilitate discussion on this through the work of the Advisory Group.

Credit card cheques

Recommendation 35: Credit card cheques are being issued irresponsibly by some lenders. Regulatory changes are necessary to prevent this behaviour. The sending out of unsolicited credit card cheques should be banned.

3.14  As with all other credit agreements, credit card cheques should be accompanied by clear information. The new Regulations on pre-contractual information will require that any additional charges or variable rates of interest associated with the product be communicated clearly to the consumer before signing.

3.15  The Government believes the key to protecting consumers from the adverse effects of such practices as the unsolicited sending of credit card cheques is ensuring responsible lending - expecting the industry to carry out adequate checks before sending credit card cheques; and ensuring all information is adequate and transparent. Our approach is to empower consumers to make informed decisions. We also look forward to the outcome of other discussions being carried out by the credit industry led by APACS looking at the sending of unsolicited credit card cheques.

Other marketing practices

Recommendation 38: Lenders should take particular care when marketing credit cards to young people, vulnerable consumers and those on low incomes. OFT should develop best practice guidelines and these need to be incorporated into the Banking Code or directly enforced by the OFT. People should be encouraged to complain to the OFT regarding misleading marketing.

Recommendation 39: We recommend that the OFT should set down clear guidance on credit marketing, laying down the standards of conduct that consumer credit licence-holders need to demonstrate.

Recommendation 40: It is essential that where credit cards are marketed by sales representatives consumers are given sufficient information to make an informed choice in what can be a pressurized environment. A clear version of the Summary Box should help in this respect, but if customers wish they should always be able to take away details of the product along with the application form to make a considered decision.

3.16  We strongly agree with the need to ensure that the marketing of credit cards by some companies is not misleading or damaging to the interests of the consumer. The measures set out in the White Paper are designed to ensure greater consistency and transparency in credit advertising, allowing consumers to compare financial products with confidence and make informed purchasing decisions. They also aim to ensure that clear pre-contractual information is provided to allow the consumer to consider and reflect on the information before making a decision.

3.17  The OFT will issue guidance on compliance with the new legislation on licensing and in relation to unfair credit transactions and will work with the trading standards service to address the small proportion of advertisements which fundamentally breach advertising requirements.

3.18  We also believe it is imperative that the credit industry take particular care when sending marketing material to consumers, particularly vulnerable consumers such as those on low incomes.

Payment protection insurance (PPI)

Recommendation 41: The terms and exclusions [of payment protection insurance] need to be clearly explained to customers. Insurance should not be sold to customers who would not benefit from it due to their age or current employment situation. The OFT should investigate the selling practices of payment protection insurance, how it is priced and whether the market may benefit from increased competition.

3.19  The Task Force on Over-indebtedness expressed concerns about the selling of PPI. It made clear that those who sell PPI should ensure that the terms and conditions were transparent to consumers and that the product was not sold to consumers who would be excluded by the terms of the policy from benefiting from it. These views were also passed on to the FSA, who will be responsible in future for the regulation of general insurance. The Task Force also recommended that where a lender is selling PPI alongside a regulated credit agreement, an extra signature should be required from the borrower to signify their consent to purchase that product. As set out in the White Paper, we will be implementing this recommendation as part of the new requirements on the form and content of credit agreements. In addition, information will need to be given separately in the agreement regarding the associated costs and the cash price.

Responsible borrowing

Recommendation 42: While credit cards are a flexible and convenient method of short-term borrowing, there is no doubt that they are an expensive way of borrowing for the long-term. Borrowers must recognize this.

3.20  We strongly agree that consumers must borrow responsibly. While the measures announced in the White Paper will make it easier to understand and compare credit agreements, consumers must recognise that the final decision is ultimately their responsibility. We would refer them to the three questions the Minister for Employment Relations, Consumers and Competition suggested they should ask themselves when deciding whether to borrow: "how much will it cost me, can I afford it and what happens if it goes wrong?" We will work with the FSA's Financial Capability Steering Group to improve consumers' financial capability in order to ensure they are able to make informed, responsible decisions about borrowing.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 16 March 2004