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Last Updated: Tuesday, 17 May 2005, 13:01 GMT 14:01 UK
Q&A: Why do we need new credit laws?
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It should be easy for borrowers to get a fairer deal

The first big shake-up of UK consumer credit laws for more than 30 years has been unveiled amid growing concern about the levels of personal debt.

BBC News explains why the new laws are needed - and what they could mean for borrowers.

What's wrong with the existing rules?

Consumer groups say the main law that governs the marketing and administration of credit to consumers - the Consumer Credit Act 1974 - no longer provides foolproof protection for consumers.

They say the credit landscape has changed dramatically over the last 30 years. In 1971, only one type of credit card was available. Now there are about 1,300 credit cards on the market.

So are lax laws to blame for growing consumer debt?

People get into debt for a variety of reasons. More often than not, a change in circumstances, such as a divorce or loss of a job, can send someone into the red.

However, consumer groups say the complexity and lack of transparency of some financial products make it difficult for consumers to pick the right product for their needs.

DEALING WITH DEBT
A stressed woman

They say loans often tie people in for the long-term, and include penalties for early repayment.

There is also concern that lenders are acting irresponsibly by failing to make sure consumers can afford the cost of credit.

What is the government doing about it?

The new credit bill outlined in the Queen's speech is the final stage of the reform of the UK's credit regime.

In 2004 the government made a series of amendments to the Consumer Credit Act 1974.

Put simply, the credit bill outlined in the Queens' speech includes all the changes to the existing credit regime that required a new act of parliament.

The measures in the credit bill include:

  • Creation of an "unfair credit" test, making it easier for people to take lenders to court if they feel they are paying an unnecessarily high level of interest or charges.
  • Consumers to be given free access to the Financial Ombudsman service to resolve disputes over credit agreements with lenders.
  • Lenders to provide annual statements to borrowers outlining in full the amount owed.
  • Office of Fair Trading (OFT) to be given new powers to fine rogue lenders. At present, the only sanction the OFT has is the removal of a lender's credit license.

What changes have already been made?

The APR, which refers to the costs of the loan, must be more prominent than all other financial information.

It will become an offence to conceal the true cost of a loan in the terms and conditions. Companies that flout the rules could lose their consumer credit licence.

In addition, charges for paying off a loan early will be limited to interest for one month and 28 days.

At present, lenders can charge two months and 28 days interest.

The industry has also acted to put its own house in order, incorporating a so-called "honesty box" in their credit card statements which outline the costs of the loan and any additional charges.

So that's it then, UK credit laws will now be left alone for another generation?

Certainly the credit bill, if it is approved by Parliament, is seen by the government as dotting the i's and crossing the t's on the reform of UK credit.

Some consumer groups, such as Which?say the changes don't go far enough.

They have called for a ceiling to be imposed on lenders' interest rates.

The Department of Trade and Industry (DTI) decided not to impose a cap on the grounds that it could make it hard for low-income consumers to get credit. Lenders often charge a high interest rate to cover themselves against the potentially high risk of certain borrowers.

But the DTI added that it would keep its decision under review.



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