The government has rejected criticism of the DTI's handling of consumer credit reform and says consumers taking out credit agreements in future will be markedly more protected by pending legislation, according to comments received by the Treasury Select Committee and published in its Second Special Report into credit card charges.
Both primary and secondary legislation will be beefed up, the government promises, in order to boost transparency in the market for credit cards, making it easier for consumers to keep on top of their debts and make genuine choices between card providers.
New primary legislation will be introduced as soon as possible, the government says, which will:
- improve enforcement of standards of conduct,
- enable borrowers to challenge unfair credit transations, and not only those that are “extortionate”,
- introduce a system of alternative dispute resolution.
Proposed secondary legislation would:
- simplify rules on advertising consumer credit,
- standardise calculation of APR,
- make credit agreement forms clearer,
- introduce a fairer method of calculating early settlement costs,
- facilitate online credit agreements.
The government expects to publish another paper on consumer credit by May this year, following a review of responses to its White Paper Fair, Clear and Competitive: The Consumer Credit market in the 21st Century.
Key to the success of any reform will be eroding "informational distortions" to ensure consumers can do like-for-like comparisons between credit offers. Among other things this will require "a single set of assumptions to be used in determining the APR," the government says.
Change would also hit the credit licensing regime, where the exiting five-year renewal demand should be replaced with an indefinite licence enabling the OFT to better monitor licence holders on an ongoing basis.
However, one thing that would not change is the FSA’s role, which the TSC should not be altered ahead of the introduction of the new mortgages regime – linked in the report to issues of credit – as "it would not be approapriate to review the boudary [ of the mortgage regime] before this regulation has even started."
The government is also pledged to introducing consumer credit rule changes regardless of what happens to the EU’s Consumer Credit Directive, the TSC report suggests. The directive as it stands would not benefit UK consumers, but instead could even create difficulties in its current proposed guise.
Although TSC officials recognised payment protection insurance will soon fall under the regulatory eye of the FSA – once general insurance regulations come into force next January - terms and conditions of any PPI will also need to be clearer to the consumer, as too many cases have surfaced, according to the TSC, of policies being sold to the wrong person or in cases where policyholders cannot make a claim.
Some of the comments from the TSC are scathing of activity, as MPs intimate the current practice of credit card companies is to push debt which "sucks borrowers into a long-term cycle of indebtedness" rather than provide short-term credit.
As a result, TSC members have suggested the credit card industry establish some form of system which restricts the amount a credit limit can be increased by, when the increase is unsolicited by the consumer, as well as ensure those limits are not raised without completing internal and external credit checks on each client.
One response, in particular, appears to be directed at Barclaycard, after it recently marketed a new deal offering 0% interest on transfers providing consumers spent £50 per month on their credit card.
Recommendation 32 suggests lower interest rate balance transfers should not be used as a device to lock consumers into more debt.
Rather, the industry should be encouraging people to cut their credit card limits where credit cards are being used to consolidate or transfer existing debt to a new provider.
Certain practices, such as the issuance of what appear to be unsolicited credit card "cheques" – identical to those issued on a bank chequing accounts – should also be banned, says the TSC.IFAonline
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