House of Lords - European Union - Thirty-Sixth Report

Select Committee on European Union Thirty-Sixth Report

CHAPTER 9: RESPONSIBLE LENDING

166. Article 5(1) of the draft Directive, which is headed "Pre-Contractual Information", provides for adherence to the principle of responsible lending. Our Interim Report[98] suggested that basic principles for the conduct of consumer credit transactions might be founded to some extent on an agreed definition of responsible lending which had been introduced, but not fully developed, in the Commission's earlier draft of the Directive. We were also aware that considerable attention had been given in the media and published reports to the dramatic growth of consumer indebtedness in the UK and the perception that this was driven to some extent by irresponsible behaviour by lenders through mass marketing of consumer credit products with insufficient regard for the economic and social consequences.

167. We therefore decided that, before attempting to evaluate the references to responsible lending as set out in Article 5(1), we first needed to consider the published evidence of over-indebtedness in the UK, the extent to which this appeared to result from irresponsible lending, and the various steps taken in the UK to address the problem of over-indebtedness and to promote responsible lending both by legislation (including the recently-enacted Consumer Credit Act 2006) and by self-regulation. In doing so, we hoped that the UK experience might be relevant for other EU Member States and might provide some guidance for assessing the provisions of Article 5.

The Growth of Consumer Credit in the UK[99]

168. The subject of over-indebtedness is complex. Our treatment of it is necessarily brief and limited to the context described above. Undoubtedly there has been an explosive growth in consumer credit in the UK in recent years. Amounts outstanding now exceed £1 trillion, though some 84% of this consists of secured home loans,[100] for which there are accordingly matching assets. At the end of March 1996 net unsecured loans outstanding stood at £69.4 million. By the end of March 2006 that total had risen to £191.4 million.

169. This massive increase in both secured and unsecured lending results from a variety of factors. These include the removal of credit controls in the 1970s and a sustained period of low interest rates which has contributed to the growth of home ownership and the inflation of house prices. At the same time, a large number of credit institutions have entered what has become an aggressively competitive market, offering a much wider range of products than was previously available. The resultant competition has made consumer credit much more easily available. The number of credit cards issued,[101] the total volume of credit extended through credit cards, the number of cards held by one cardholder and the amount of credit card indebtedness of the average household have all increased substantially. The debt-income ratio has risen from less than 50% in the 1970s to 140% in 2005.[102]

170. Coupled with these developments has been the targeting of low-income consumers in the sub-prime (or non-status) market.[103] That in itself is not considered objectionable by the Government. On the contrary, as part of its strategy to tackle financial exclusion, the Government has gone to considerable trouble to encourage the major banks to develop business with low-income families, for whom borrowing through sources other than mainstream financial services is either unavailable or costly.[104] A number of banks have acted in partnership with charities for the homeless and other charitable bodies in opening up affordable forms of credit to low-income families. The Government is also seeking to enhance the financial capacity of credit unions and community development finance institutions.

The Problem of Over-Indebtedness in the UK

171. It is now some 35 years since the publication of the Crowther Report on consumer credit,[105] which discussed the problems of the over-committed debtor in some detail.[106] Much of that discussion remains valid today. What has changed is that the consumer credit business has become very highly competitive while much more information is now available about consumer debt.

172. Over the past few years many studies have been made of consumer over-indebtedness in the UK, among them the Kempson Report (2002),[107] the MORI Financial Services Report (2003),[108] the NMG Research surveys for the Bank of England (2003)[109] and (2004),[110] the OXERA Report (2004),[111] the inter-departmental annual surveys,[112] the Griffiths Report (2005),[113] the CSFI paper by Antony Elliott (2005)[114] and the recent report by Citizens Advice (2006).[115] In addition, the House of Commons Treasury Committee has examined credit card charges and marketing and its Second Report includes a chapter on data sharing and responsible lending.[116] Finally, the Department for Constitutional Affairs has made proposals for the relief of over-indebted consumers.[117]

173. As some of the above reports show, there is no agreed definition of over-indebtedness. Professor Elaine Kempson's survey reported heavy credit use strongly associated with reported levels of financial problems where more than 25% of the gross income of the household was spent on unsecured consumer credit.[118] OXERA, having noted that there is no generally accepted definition of over-indebtedness, defines over-indebted consumer households or individuals as those who are in arrears on a structural basis (as distinct from those who are simply unwilling to meet their commitments or are only temporarily unable to do so) or at a significant risk of getting into arrears on a structural basis.[119] A widely-used objective indicator of over-indebtedness is the ratio of debt to income, which as indicated in paragraph 169 has nearly tripled over the past 30 years. A subjective indicator is whether individuals or households consider themselves overburdened with debt.

174. In April 2004 the Rt. Hon. Oliver Letwin MP, then Shadow Chancellor of the Exchequer, set up the Commission on Personal Debt under the chairmanship of Lord Griffiths of Fforestfach to gather evidence about the way in which families, and especially low-income families, get into debt-spirals and to identify means by which those families could best be helped. The Commission published its Report[120] in March 2005. It contains an instructive analysis of the problems of over-indebtedness in the UK. This found that at least some of the causes of over-indebtedness arose from: the aggressive marketing of credit by banks and other credit institutions; the extension of credit to borrowers without an adequate or any prior assessment of creditworthiness; the automatic raising of credit limits; the inappropriate consolidation of loans, and taking out new credit cards to finance the repayment of existing debts. This accords with evidence from other surveys.

175. The substantial level of over-indebtedness, and the extent to which this has increased significantly over the years, is indicated not only by the above—mentioned surveys but also by records maintained by Citizens' Advice Bureaux and Money Advice Centres. For example, the latest survey conducted by Citizens Advice[121] showed that nearly two in five households depended entirely on benefit income, the average total household debt was £13,135 and on average debts were 17.5 times the borrower's total monthly household income.

176. Witnesses from the UK Cross-Industry Group argued that, since the percentage of defaults to credit extensions has remained broadly constant in money terms, the higher incidence of default is mainly a reflection of the overall increase in the growth of credit.[122] Moreover, the Government's second annual report on over-indebtedness[123] records that the number of borrowers who find their repayments a "heavy burden" has not changed significantly over the past 10 years and fell slightly in 2004. There also appears to be a relatively high level of satisfaction with the services of credit providers.

177. So far, the problem of over-indebtedness appears to have affected a relatively small number of households. No doubt that is due in no small measure to the strength of the economy and the relatively low level of unemployment and of interest rates currently prevailing in the UK. But many other households (including middle-income households) who are living at the limit of their resources would go into default on the occurrence of some adverse event, such as ill-health, loss of employment or substantial unexpected expenditure. Those risks would inevitably be greatly increased if there were a deterioration in the economic environment, a point to which the Bank of England has more than once drawn attention. This assumes particular significance with the prospect of higher interest rates and with a sharp increase in the number of individual insolvencies, nearly 70,000 becoming insolvent in 2005. That is the highest figure since records began.

The Importance of Responsible Lending

178. Against this background, it is important to bear in mind that the primary responsibility for avoiding over-commitment and for ensuring an ability to discharge commitments as they fall due falls lies with the borrower. In the words of the Kempson Report:

"A responsible credit agreement can depend just as much on responsible borrowing as on responsible lending".[124]

But as we have noted in paragraph 174, the Griffiths Report and other surveys have shown that at least some responsibility falls on the credit industry.

179. As indicated in paragraph 170, the grant of credit to low-income families by prime lenders is encouraged by the Government in order to prevent the economic exclusion of this category of borrower. But it is all the more important to ensure that such borrowers are likely to be able to meet their commitments. Much of the problem arises because in many cases lenders simply have no information about other commitments entered into by an intending borrower, upon whom they may be reliant for information if this is not stored on an accessible database (see paragraph 186).

180. In the UK voluntary codes of conduct drawn up by lending organisations have attempted to address these problems. The Finance & Leasing Association's Lending Code 2006, which replaced the 2004 edition and came into force on 1 June 2006, precludes FLA members from offering credit without a prior credit appraisal. Section 1C.1 provides as follows:

"We will make sure that all loans (including pre-approved loans and credit card cheques) go through a sound and proper credit assessment".

181. This is amplified by section 5 of the Code, which lists a number of factors that are taken into account in making the credit assessment, and a separate set of factors which may show a high risk of experiencing financial difficulty, such as having four or more credit commitments and spending more than 25% of gross income (before deductions) on consumer credit. Reference is also made to credit-scoring (see paragraph 183) and the availability of a leaflet explaining it.

182. The Banking Code 2005 also provides for the lender to make a credit assessment before giving a limit on a credit card (section 10.9) or lending money or increasing the customer's overdraft (section 13.1). Both Codes also require the provision of information on key features of products offered to the consumer. However, the FLA Lending Code applies only to FLA members and the Banking Code only to those organisations that undertake to abide by it.

Credit Scoring

183. The traditional method of deciding whether credit should be granted to a consumer was by interview of the applicant for credit and appraisal of the application by a loan officer, who would also draw on his or her experience in coming to a decision. That method was shown to be unreliable, in that credit was being granted to consumers who should not have been given it and was being refused to those who were in fact well-qualified to receive it.

184. So the process of evaluation on an individual basis by a human agency was largely replaced by credit scoring, a computer-based process in which characteristics considered relevant to creditworthiness are assessed electronically in the following way:

Income, financial assets, amount of existing indebtedness, length of credit history, payment record, length of residence at current address, occupation, employment pattern, number of accounts and of credit cards held and other relevant data are identified by a statistical analysis of the profiles of a large sample of the creditor's customers and their repayment histories.

Each characteristic is weighted according to its relevance to the degree of predictability of the ability to repay or the likelihood of default.

The applicant for credit is then measured against the statistical pool of customers and for that purpose is allocated points for each characteristic based on information supplied by the applicant or obtained from other sources, for example, information held on databases maintained by credit reference agencies, and the register of county court judgments.

185. The total score will determine the applicant's eligibility for credit or alternatively influence the interest rate charged, a feature of the increasingly- used technique of risk-based pricing, in which the rate of interest a consumer is charged varies according to the lender's assessment of the likelihood of default.[125]

186. While credit-scoring has been found much more reliable as a method of assessing creditworthiness, it is based on statistical analyses which do not necessarily reflect a particular individual's suitability for credit of a given amount in any particular case. Most significantly, the accuracy of credit-scoring techniques has yet to be tested by an economic downturn and increased levels of unemployment. What is more, credit institutions often have only an incomplete picture of a debtor's circumstances. The relevant data, so far as it is available at all, may be distributed among various databases maintained by different credit reference agencies. Credit institutions are now taking more active steps to pool information in order to give a better picture of a particular consumer's overall position.

187. Lending institutions do not always resort to credit scoring. It is, for example, common practice for lenders extending home credit—that is, credit of small amounts taken for short periods of time with modest repayments collected weekly from the debtor's home—to rely on their prior knowledge of their customers instead of using credit scoring. Again, credit scoring may not be thought necessary for existing customers with a good track record; and various lenders may use alternative techniques for credit appraisal. The criteria for assessing risk vary from one credit institution to another, but the feature common to credit institutions, as we were told by the UK Cross-Industry Group, is that they do not extend credit without a prior credit check.[126]

Existing Measures to Promote Responsible Lending in the UK

188. In the UK various measures are already in place or impending to promote responsible lending. First, steps have been taken by lenders to reduce the risk of over-commitment by consumers. These include credit scoring as a prerequisite to the extension of credit, a move by the credit industry towards data sharing, the availability of free debt advice, and the encouragement of more transparent credit literature and better information and early advice to consumers.

189. Secondly, there is self-regulation through codes of practice such as those issued by the banking industry and the Finance & Leasing Association (see paragraphs 180-181). Some of these codes have in the past been criticized as being too lax and have been gradually tightened over the years. However, they are not always observed in practice (though observance of the Banking Code is monitored by the Banking Code Standards Board) and infractions are not necessarily visited with sanctions to secure enforcement. There is an innate tension between competition and the maintenance of ethical and prudential standards, and faced with loss of market share there must be a great temptation for lenders to depart from principles of responsible lending.

190. Thirdly, in considering fitness to hold a licence under the Consumer Credit Act 1974, the Office of Fair Trading (OFT) has always been required to take account of business practices appearing to it to be deceitful or oppressive or otherwise unfair or improper (whether unlawful or not), which could include a failure to act responsibly in extending loans. Under a new section 25(2B) of the Act (introduced by section 29(2) of the Consumer Credit Act 2006) the OFT is now specifically enjoined to take account of practices that involve irresponsible lending. In future, where such practices have been adopted, the OFT will have extended powers to impose sanctions, including not only refusal, suspension or revocation of a licence (as now) but also the imposition of a civil penalty. The OFT will also have powers to issue what may conveniently be labelled cease and desist notices.

191. Moreover, section 19 of the recently-enacted Consumer Credit Act 2006 (not yet in force) prospectively replaces the extortionate credit bargain provisions of the Consumer Credit Act 1974 (which had proved ineffective) by giving the court wide powers to order repayment of sums paid by the consumer, or the reduction or discharge of the consumer's liability, where the court determines that the relationship between the creditor and the debtor arising out of the agreement is unfair. For this purpose, the court may take account not only of the terms of the agreement but also the way in which the creditor has exercised or enforced any of its rights under the agreement or any related agreement and any other thing done (or not done) by or on behalf of the creditor, either before or after the making of the agreement or any related agreement.

192. Somewhat surprisingly, the statutory provisions do not identify any badges of unfairness or, indeed, supply any meaningful criteria for identifying an unfair credit relationship. The question is left entirely open to the court to decide, although we assume that the OFT will give some guidance. So one of the grounds on which the court could exercise its powers, when the amending legislation has come into force, is that the creditor acted irresponsibly in making the loan. That could apply where the creditor had no reason to suppose at the time of making the loan that the consumer would be able to repay it in accordance with its terms. This is also a factor which the Financial Ombudsman Service could take into account in cases referred to it.

193. Finally, various measures have been proposed by the Department of Constitutional Affairs to assist the consumer who wishes to repay debts incurred but needs a breathing space to do so or has no prospect of repaying debt.[127] Among these are reform of the administration order system and the introduction of enforcement restriction orders. For debtors who have no prospect of repaying their debts it is proposed to introduce a new form of order, the debt relief order. The bankruptcy regime has already become lighter in that a debtor can obtain discharge from bankruptcy in 12 months instead of three years, whilst the individual voluntary arrangement, by which the debtor reaches an arrangement with creditors, is available as an alternative to bankruptcy

The Directive's Provisions on Responsible Lending

194. These considerations set the context in which we examined Article 5 of the Directive. Article 5(1) is expressed in the following terms:

"The creditor and, where applicable, the credit intermediary shall adhere to the principle of responsible lending. Therefore, the creditor and, where applicable, the credit intermediary, shall comply with their obligations concerning the provision of pre-contractual information and the requirement to assess the consumer's creditworthiness on the basis of accurate information provided by the latter,[128] and, where appropriate, on the basis of a consultation of the relevant database.

Where the credit agreement allows the creditor to change the total amount of credit, after the date of conclusion of the credit agreement, the creditor shall update the financial information at his disposal concerning the consumer and shall assess the consumer's creditworthiness before any significant increase in the total amount of credit."

195. Paragraphs 2 and 4 of Article 5 set out the information which is to be provided to the consumer, though in the case of overdrafts and other agreements covered by the "light touch" regime the provisions of paragraphs 2 and 4 are replaced by Article 6.

196. Article 5(5) then goes on to say:

"Member States shall ensure that creditors and, where applicable, credit intermediaries provide adequate explanations to the consumer, in order to put the consumer into a position to assess whether the proposed credit agreement is adapted to his needs and to his financial situation, where appropriate by explaining the pre-contractual information to be provided in accordance with paragraph 2 as well as the advantages and disadvantages associated with the products proposed. Member States may adapt the manner by and extent to which this assistance is given, as well as by whom it is given, to the particular circumstances of the situation in which the credit agreement is offered."

197. Thus under Article 5(1) the principle of responsible lending has at least three aspects:

(1) The creditor must supply the consumer, in good time before the consumer becomes bound by the agreement, with the items of information prescribed by Article 5(2) and (4).

(2) The creditor must provide the consumer with such explanations as will enable the consumer to assess whether the proposed credit agreement is adapted to his or her needs and financial situation. This may involve explaining the advantages and disadvantages of the products proposed.

(3) The creditor must take appropriate steps, including any appropriate consultation of the relevant database, to assess the consumer's creditworthiness.

198. Unfortunately, what is less clear is whether the concept of responsible lending is limited to these three requirements or whether it is a more general concept of which the three requirements in question are merely examples. If the latter be the case, there is no definition of responsible lending in the Directive and it is presumably for Member States to determine the extent, if any, to which the duty goes beyond the above requirements[129] or alternatively to leave the matter to the courts.[130] These are points that could usefully be clarified in the final text of the Directive.

199. The mutual harmonization provisions in Article 21(2), which we have examined in some detail in Chapter 8, apply to Article 5(1), (2) and (5). Consequently, a creditor who satisfied the responsible lending requirements imposed by its home State in conformity with the Directive would not also have to comply with any higher standards that might be imposed by the law of the host State.

200. On behalf of the European Commission Mr. Staudenmayer told us that the lender would have to assess creditworthiness on the basis of the information available and ask relevant questions of the prospective borrower as well as supplying the latter with information. But he stressed that the ultimate responsibility for assuming the commitment lay with the borrower.[131] He pointed out that most indebtedness was caused by unforeseen personal difficulties. The Directive could not protect against "accidents of life". Nor was "the fight against over-indebtedness" one of the Directive's main aims.[132]

201. Our evidence from the credit industry took issue with Article 5 on three grounds. The primary ground was that responsible lending was best left to self-regulation and, in particular, to the codes of practice and the monitoring of them by the relevant industry organizations. Subsidiary grounds of objection were that the concept of responsible lending was too vaguely expressed (a view which appears to be shared by the DTI),[133] and that the duty imposed by Article 5(5) to provide "adequate explanations" and information as to "the advantages and disadvantages of the products" constituted an interference with the market which might impose burdens which the industry was not equipped to bear.[134]

202. The UK Cross Industry Group, while acknowledging that at first glance the proposals appear to embody concepts that are sensible and benign, felt that the rules would create serious market inefficiencies, lead to a swing to running-account credit products, rule out cross-border lending and intervene in the lender's credit-grating processes to the detriment of the consumer.[135] The Group was particularly concerned that, in contrast to the UK legislation directing the lender not to lend irresponsibly, the Directive seeks to dictate how the lender should act in every case. They saw that as abrogating the right of lenders to make their own risk assessment and potentially subjecting them to speculative civil claims by their customers, thereby forcing lenders to adopt defensive lending systems[136]

203. The European Banking Federation was also concerned with the potential private law liability that Article 5 might impose. The Federation considered that responsible lending was a matter for banking supervision, not private law, and also noted that it was not accompanied by a balancing provision for responsible borrowing.[137]

204. The joint written evidence from Citizens Advice, the National Consumer Council and Which? noted that the number of consumer debt enquiries received by Citizens' Advice Bureaux (CAB) had grown by 118% over the last 10 years. In 2004/5 the CAB dealt with over 5 million problems, almost a fifth of which related to credit indebtedness. The three bodies support the responsible lending principle but consider that it is poorly defined, and that it is not clear how Member States are to ensure compliance.[138] They tend to agree with the Government that responsible lending does not lend itself to a single definition; what was needed was guidance to lenders, backed up by regulation. The National Consumer Council likewise considered that flexibility was needed, particularly because there were different problems in different Member States.[139]

205. Ms McCarthy thought that it would be wrong to try to tackle the problems of indebtedness through the Directive, although better quality credit products and improved information could help to prevent indebtedness. Poor lending practice was often a cause of bad debt, but it was hard to see how it could be monitored effectively. It was not clear how the "duty to advise" should be interpreted. The Parliament was still considering how best to deal with this.[140]

206. Professor Weatherill thought "responsible lending" was a "nebulous" concept which would be hard to define legally. Apart from the possibility of some general statement of obligation on credit suppliers, he considered it would be best to leave the problem to be tackled at national level, according to local needs and circumstances.[141]

207. Both the National Consumer Council and Citizens Advice[142] felt that the Directive should do more to tackle the post-contractual practices of some lenders over debt collection, undue default charges and irresponsible debt consolidation.

208. The DTI's provisional position, as reflected in its supplementary consultation paper,[143] is that while the revised Article 5 is an improvement on the previous draft there are still grounds for concern. If Article 5 is intended to confine the duty of responsible lending to the provision of pre-contractual information and a creditworthiness check then, since it is a full harmonisation provision, that might preclude action by Member States in clear cases of irresponsible lending. On the other hand, a general responsible lending requirement ignores the fact that ultimately it is for the lenders to decide how best to assess the creditworthiness of potential borrowers. The DTI supplementary consultation paper[144] suggests recasting the requirement to prohibit irresponsible lending. That would be line with the newly-added provision of the Consumer Credit Act referred to above.

Our Views on the Approach to Responsible Lending in Article 5

209. It is clear from the evidence we have received that British creditors do not dispute the good sense and fairness of the policy embodied in Article 5, namely that creditors should adhere to the principle of responsible lending and that this involves both the provision of adequate pre-contract information to the consumer and a proper assessment of the consumer's creditworthiness. Moreover, despite the large-scale marketing of consumer credit which is unavoidable if products are to penetrate the market, the evidence we have received from the UK consumer credit industry insists that it is the almost invariable practice of lenders to appraise the creditworthiness of consumers who apply for credit in response to the marketing where information about them is not already on file.

210. Nevertheless, in the light of the accumulated experience of the CAB and other organisations dealing with the problems of the over-indebted consumer in the UK, we do not feel able to accept the view that this should be left entirely to self-regulation, although we acknowledge that self-regulation has a useful role to play. Given that the duty to refrain from irresponsible lending is now enshrined in UK legislation, we do not see how the UK can argue that self-regulation suffices for the purpose of Community law.

211. We have not been able to examine the extent to which the British experience is relevant to that of other Member States. We accept that much will depend on local circumstances, with which Member States are best-placed to deal. On the other hand, we would expect the convergence of business practices in this field to generate similar problems, if they have not already done so. We therefore see the need to establish a common benchmark of essential requirements on the lines of Article 5, around which Member States could frame their own consumer protection measures as appropriate.

212. However, it does seem to us that the ambit of the duty to lend responsibly is uncertain. While responsible lending is probably not susceptible to a comprehensive legal definition, we consider that Article 5(1) should be revised to make it clear whether the content of the duty is limited to fulfilment of the specific requirements laid down in other paragraphs of Article 5 or whether these requirements are simply illustrations of a more general duty. In the latter case, we consider that duty should be left in the hands of Member States to interpret through local laws and regulations that take account of local circumstances, so long as the requirements of Article 5(2) and (5) are satisfied. Much would also depend on the effectiveness of local regulatory practice.

213. We also have some sympathy with the industry view that the ambit of the duty to provide the consumer with explanations, including the advantages and disadvantages of products, is unclear and could impose burdens beyond those the creditor could reasonably be expected to assume. It is true that effect of the last sentence of Article 5(5) is to leave it to Member States to determine the manner and extent to which the assistance to the consumer is to be given. It is also true that the new section 140A of the Consumer Credit Act (see paragraphs 108-109) is as indeterminate as Article 5(1) and (5) of the Directive. On the other hand, we see some force in the argument that there is a difference in kind between a duty to refrain from lending irresponsibly and a duty to furnish the consumer with the advantages and disadvantages of the products offered so as to enable him or her to make an informed choice. Lenders cannot reasonably be expected to denigrate their own products, and there are limits to the extent to which they can be expected to take steps to protect intending borrowers from the consequences of their failure to have proper regard to their own interests. After all, it is always open to the consumer to ask for more information.

214. We believe it would be reasonable to provide that (a) lenders should not engage in irresponsible lending, and (b) that consumers should be given the information prescribed by Article 5(2) and any further information about the products offered which they may reasonably require and which is known to the lender and is practicable for the lender to furnish. But we do not believe that the onus should be on lenders to explain the relative advantages and disadvantages of different products. That is a matter on which consumers should be expected to exercise their own judgment. Article 5 should be revised accordingly.

215. We note that section 33E of the Consumer Credit Act 1974, inserted by section 42 of the Consumer Credit Act 2006, expressly provides for the preparation and publication of guidance by the OFT in relation to the manner in which it exercises its new statutory powers over licensees. Experience in implementing that guidance in relation to the requirement not to engage in irresponsible responsible lending may shed valuable light on the implications of Article 5, in whatever form it finally appears. Given the uncertainties of this Article, effective regulatory supervision will be critical and a vital potential safeguard.

216. In preparation for the Commission's review of the Directive 5 years after entry into force under Article 24, we suggest the Government should invite the OFT to consult with its counterparts in other Member States to compare best practice and offer suggestions on practical ways of implementing that requirement in relation to developments in the market. We hope that this might contribute to a fresh approach by the Commission to the problem and perhaps to the drawing up of some useful guidelines for EU regulators. But in doing so, important national differences of implementation would need to be given due weight. Any guidelines would also need to avoid being unduly prescriptive.

217. Our Interim Report[145] suggested that consideration might also be given to the desirability and feasibility of common measures to curb high-pressure sales tactics, deliberate mis-selling of credit products, extortionate interest rates, irresponsible extension of credit levels and debt consolidation, and coercive debt-collection practices. That reflects concerns expressed to us in evidence by the National Consumer Council and Citizens Advice.[146] Article 5 does not itself deal with aggressive or otherwise abusive or undesirable marketing practices. But we note that there is a separate and more general Directive on Unfair Business-to-Consumer Commercial Practices[147] which prohibits unfair and aggressive commercial practices and misleading actions and omissions.

Conclusions and Recommendations

218. While the amount of over-indebtedness in the UK does not appear to have risen significantly relative to the amount of credit extended, we conclude that it nevertheless gives cause for concern. Moreover, we see a serious risk of a substantial increase in the level of default if interest rates were to rise or there were to be a significant deterioration in the economic environment.

219. We accept that the concept of responsible lending, in the sense of not lending irresponsibly, is accepted by all interest groups in the UK, and that codes of practice already require prior assessment of creditworthiness and the provision of information on key features of products offered. But we conclude that making of offers of credit on the basis of inadequate information in a highly-pressured marketing environment contributes to the causes of over-indebtedness.

220. We further conclude that, while self-regulation, including the adoption of codes of practice, has an important role to play in ensuring responsible lending, it should not displace the need for legislation.

221. On the whole, we accept that, for the time being, necessary measures to protect consumers from irresponsible lending are best left for Member States to evolve in the light of local circumstances, as has been done in the 2006 Consumer Credit Act. Nevertheless, we conclude that there is a need for some Community-wide framework for the regulation of irresponsible lending.

222. But we have reservations about the concept of responsible lending as a satisfactory basis for a legal requirement. Moreover, it is unclear from Article 5 whether the requirement of responsible lending is limited to fulfilment of the conditions specified in Article 5(2) and (5) or is a general concept of which these conditions are merely illustrations. We recommend that Article 5(1) be revised to clarify this point.

223. If Article 5(1) is intended to prescribe a general duty relating to responsible lending, we recommend that it should be amended to make it a duty not to engage in irresponsible lending. For the time being, the interpretation should be left to Member States through their own national laws, regulations and regulatory practices.

224. We also recommend that consumers should be given the information prescribed by Article 5(2), and that Article 5(5) should be reworded so as to limit the lender's duty to the provision of further information about the products offered which the consumer may reasonably require and which is known to the lender and practicable for the lender to furnish.

225. We conclude that effective regulation is a vital safeguard, given the uncertainty of Article 5, which must be taken fully into account when the Directive is reviewed 5 years after entry into force under Article 24. We therefore recommend that practical guidelines on interpreting responsible lending, recognising important national differences and avoiding being unduly prescriptive, should be drawn up after full consultation with national regulators as part of that review process.

98 13th Report of Session 2005-06, HL Paper 37 Back

99 We have not ourselves examined the growth of consumer credit in other Member States, but the Commission has procured various studies and Mr. Madelin drew our attention to the annual statistical publication of the European Credit Research Institute, the most recent of which gives detailed statistics of consumer credit in what were then the 15 Member States of the European Union over the period 1995 to 2004. See Camille Selosse and Lorna Schrefler, ECRI Statistical Package 2005: Consumer Credit and Lending in Europe 1995-2004. Back

100 See Bank of England Monetary and Financial Statistics April 2006, table A4.3. Back