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Last Updated: Saturday, 14 April 2007, 13:35 GMT 14:35 UK
Law gives borrowers new rights
By Paul Lewis
BBC Radio 4's Money Box

A 5, 10 and 20 note
The ombudsman can be brought in if a complaint is not resolved
A new law will force lenders to change the way they sell loans to people on low incomes.

It allows borrowers to challenge loans that create an "unfair relationship" between them and the lender.

Campaigners say lenders will have to examine their procedures and practices to make sure they comply with the new law.

The act also means all complaints about consumer lending can be taken to the Financial Ombudsman Service.

The campaigns lawyer from Which?, Ingrid Gubbay, told BBC Radio 4's Money Box the new law would bring about major changes.

The lender will bear the burden of proof as to whether they did engage in unfair relationships or not
Ingrid Gubbay, Which?

"This unfair relationships test means that lenders must look at the whole circumstances of borrowers before they agree to lend - which means they have to look at their ability to pay back, their health, their age," she said.

"If the borrower has problems with repaying and that's accompanied by behaviour from the lender to recover the money that contravenes the unfair relationships test, that is going to cause problems for the lender."

Although the new law does not allow high interest rates to be directly challenged, if those rates mean the borrower cannot repay the money, then the interest rate could fall foul of the new test.

And once a borrower complains, Ingrid Gubbay said the lender will have to prove they did not behave unfairly.

"They will have to record a lot more information - all their discussions, whether on the phone, in the office or wherever. They must record everything because in the end the lender will bear the burden of proof as to whether they did engage in unfair relationships or not," she said.

Dispute resolution

The Consumer Credit Act 2006 will also give borrowers new rights to complain to the Financial Ombudsman Service.

Chief Financial Ombudsman Walter Merricks
We'll be able to order redress up to 100,000
Chief Financial Ombudsman Walter Merricks

Before 6 April, only credit agreements with large regulated companies like banks, building societies and insurance companies were covered by the Financial Ombudsman.

But now all credit deals consumers take out with licensed credit providers will be covered by the ombudsman.

That includes loans given in a shop to buy a sofa or kitchen, hire purchase on a car, even an instalment plan to pay for gym membership or dental treatment.

Walter Merricks, the Chief Financial Ombudsman, told the programme: "In principle it applies to new agreements made on or after 6 April. But there will be people who already have agreements entered into before 6 April, and if something new happens we will be able to look into that.

"For example, if you wanted to repay early under an existing agreement and you had a complaint about the way the early termination worked then you could complain about that."

Complaints should always be made first to the company but if that is not resolved then the ombudsman can be brought in.

"We'll be able to order redress up to 100,000 but what we try to do is identify what are the rights and wrongs and help a resolution and only use those powers as a last resort," Mr Merricks added.

The new law will also apply to credit reference agencies which keep information on credit deals and how we repay them.

BBC Radio 4's Money Box was broadcast on Saturday, 14 April 2007 at 1204 BST.

The programme was repeated on Sunday, 15 April 2007 at 2102 BST.

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