1.  DEBT ON OUR DOORSTEP

  1.1  Debt on our Doorstep is a national campaigning organisation made up of local activists and public organisations. We aim to end extortionate lending and ensure universal access to affordable credit and other financial services. To this end our objectives are to:

—  Publicise the extent and impact of extortionate lending on low income groups.

—  Lobby Parliament, assemblies and other decision makers to end extortionate lending.

—  Research and promote models of affordable credit.

—  Provide a platform for people on low incomes to comment on the impact of debt.

  1.2  A list of current members of the campaign is contained in the Appendix to this submission.

  1.3  This submission has been prepared following discussions with the Institute for Financial Services in Hamburg (IFF) with whom Debt on our Doorstep has developed close links during the past two years.

  1.4  Debt on our Doorstep is currently organising a series of conferences with IFF and other European partners with regard to consumer protection in Europe and these are scheduled to take place in November 2005.

  1.5  The EU proposals for Consumer Credit Harmonisation

  1.6  Debt on our Doorstep welcomes the opportunity to provide this submission to the House of Lords inquiry. We believe that there are three fundamental issues that need to be considered in relation to the proposed Consumer Credit Directive as follows:

—  The need to balance market harmonisation with measures to prevent overindebtedness (currently absent from the Directive).

—  The need to debate openly the likely impact of the Directive on the operation of interest rate ceilings in many EU states and to consider whether a market without any limit on the price of credit is acceptable for consumers.

—  The need to enshrine the principle of responsible lending within the Directive, to define this, and to learn from other EU countries in relation to UK legislation in this area.

  1.7  The Need for Debate

  1.8  The first point to note is that the amended proposal from the Commission bears little relation to the original proposal (2002), and that the amendments almost all relate to a weakening of consumer protection.

  1.9  As a consequence of the scale of the changes from the original proposal to the new amendment, Debt on our Doorstep believes that the "amendment" should be viewed as an entirely new proposal and that all national Governments should debate this prior to determining the future direction of the Directive.

  1.10  Instead of consumer protection, the goal of the Directive as currently written appears to be the opening of markets for more aggressive lenders who favour the Internet, standardized products, cross-selling, refinancing and concessions to lenders who provide small amounts of credit at unreasonably high prices seems.

  1.11  There is considerable concern relating to the proposal in other European countries that have stronger regimes for consumer protection in respect of consumer credit than the UK.

  1.12  Indeed, it is disappointing to note that the UK has one of the weakest consumer protection frameworks in Europe in this area. This will remain the case despite the measures announced by the Government in the current Consumer Credit Bill.

  1.13  In particular, Debt on our Doorstep is concerned that the proposed directive will allow lenders based in the UK to export socially harmful lending products to the continent, and bypass the significantly better consumer protection regimes that have been established in, for example France and Germany.

  1.14  In this respect the US experience is an interesting comparator. For many years individual US states were able to regulate against predatory lending and control interest rates through the use of ceilings set by state legislatures. In recent years, however, these protections have been eroded by court rulings. Lenders can now base themselves in states without usury laws and make loans cross border into those states that were previously protected. Some states have permitted this in order to attract the finance sector as employers, but it has come at a cost for many consumers. The resultant growth of (for example) payday lending in those states that were previously protected, has been particularly harmful.

  1.15  The same can now be foreseen for Europe. The Directive as currently proposed would allow UK based lenders (which are not regulated in terms of the costs that they can charge) to start to lend in European countries that have had long histories of controls against usury.

  1.16  In Germany, France, Holland and Italy there are controls on the levels of interest that can be charged through anti-usury legislation. These are now all at threat as a result of the proposals in the Consumer Credit Directive.

  1.17  What Improvements Can be Made?

  1.18  Debt on our Doorstep believes that the directive needs to include the prevention of overindebtedness as an aim alongside that of consumer protection. There has been a significant amount of work done at a European level in respect of assessing the causes and extent of overindebtedness and the measures that may be effective in preventing this. Debt on our Doorstep would therefore like to see this incorporated into the Directive as a balance against a liberalisation of the consumer credit market. If the market is to be liberalised and competition encouraged across national boundaries (which we accept is a major part of the rationale for the EU) then this should not come about at all costs but be balanced with the needs of individual consumers to remain in control of their finances.

  1.19  There appears to be no single measure of APR proposed within the Directive. This is also absent from the UK Government's Consumer Credit Bill. This is confusing to borrowers with recent evidence given to the UK Treasury Select Committee demonstrating that even mathematics professors have difficulty in understanding how APR's have been calculated by lenders in respect of certain types of agreement. If there is to be harmonisation across the EU then there should be harmonisation concerning how interest rates are calculated and expressed by lenders.

  1.20  All nation states should sign up to anti-usury controls prior to harmonization. At the present time, nearly all European countries have usury rates or rate ceilings which prevent exorbitant pricing in credit and a systematic exploitation of consumers who feel or are personally forced to take up credit, to prolong credit at any price. While most countries like France, Italy and the Benelux as well as Scandinavian countries prefer administratively fixed rate ceilings (informed by the work of the equivalents of the Office of Fair Trading), Germany and Austria use the old systems of usury linked to the legal concepts of "bona fide" or reasonableness that has been developed through case-law. In all systems, however, the rate ceiling is fixed according to a market rate at about 150 to 200 per cent of the average market rate in consumer credit. This margin gives enough space to allocate different risks and service intensity in the provision of consumer credit and have proven to be acceptable for the credit industry.

  1.21  It should be noted that the increase in confidence and trust in such regulated consumer credit systems has kept the levels of financial exclusion low in comparison to those few countries (unfortunately including the UK) who still accept credit extension at any rate. In countries without price regulation, we have experienced a retreat of banks from the provision of credit to lower income households, increased denial of access and the growth of a "grey" market that menaces especially those consumers who face temporary income problems or are already overindebted.

  1.22  All goals of this directive: harmonisation, consumer protection and the prevention of overindebtedness necessitate the core regulation of some form of limit on prices. The present situation leads to basically different systems of cost allocation and hinders trans-border credit extension. They are to the detriment of the economic interests of weak consumers and they are to a large extent a reason for overindebtedness which rises through unscrupulous refinancing and ever higher interest rates. The Directive therefore appears to Debt on our Doorstep to necessitate a debate as to whether we wish to see a European credit market without an upper limit on credit prices, or a European market with that regulation in place in all EU countries. It will simply not be possible to have a harmonized market along the lines envisaged in the Directive that contains some countries with interest rate ceilings and some without,as the US experience teaches us that those countries that reject interest rate ceilings will eventually erode the protection in other states.

  1.23  The amended Directive (Article 9) proposes that lenders adhere to the principle of "responsible lending". We support that, however the Directive only then refers to the provision of information at pre-contractual stage in this regard. To our mind this is completely inadequate and there needs to be a significant strengthening of the concept of responsible lending to include a requirement that borrowers properly take into account the means of the borrower at the time of making the loan and their long term ability to repay. It is of note that such a concept is also currently absent from the UK Consumer Credit Bill.

  1.24  For example, on other EU countries the concept of responsible lending incorporates "reckless lending" "unconscionable credit extension", "sittenwidrige Überschuldung" etc as they are now combined in the notion of "responsible lending" of Swiss law.

8 June 2005

LIST OF MEMBERS OF DEBT ON OUR DOORSTEP AS AT 8 JUNE 2005

—  All Saint's Church, Kings Heath, Birmingham

—  Association of British Credit Unions Ltd

—  ATD Fourth World

—  Barnardo's

—  Barnardo's Candl Project

—  Barnsley Credit Union

—  Birmingham Money Advice & Grants

—  Blackpool Moneyline

—  Bristol Debt Advice Centre

—  Bulwell Credit Union Limited

—  Cambridge Housing Society

—  Cheltenham Community Support Centre

—  Church Action on Poverty

—  Church in Society, Maidstone

—  Clwyd Coast Credit Union Ltd

—  Conference of Religious

—  Credcer Credit Union

—  Daughters of Mary & Joseph, Kent

—  Diocese of Llandaff BSR

—  East Bristol Advice Centre

—  East End Reinvestment Trust

—  Exchange House National Traveller Mabs

—  Five Lamps Organisation

—  Foxhill and Parson Cross Advice Service

—  Glasgow Taxi Trade Credit Union

—  Halifax Citizens Advice Bureau

—  Hartlepool Credit Union

—  Help the Aged

—  Housing Justice

—  Hull East of the River Credit Union

—  Hull Northern Credit Union

—  Hykeham Team Ministry

—  Justice and Peace, Scotland

—  Kendray Laying the Foundations

—  Kirby Unemployed Centre

—  Landsker Community Credit Union Ltd

—  Lea Road URC, Wolverhampton

—  Leicester City Council Advice Services

—  Merseyside Region Church Action on Poverty

—  Methodist Church

—  Millom and District Credit Union

—  Money Go Round Bristol Inner City Credit Union

—  Money Tree Credit Union

—  Moneywise Newcastle Credit Union

—  National Association of Bank and Insurance Customers

—  National Energy Action

—  National Housing Federation

—  No1 Copperpot Credit Union

—  Our Lady of England, RC Church, Reigate

—  Oxfam UK Poverty Programme

—  Oxford Credit Union

—  P & P Regeneration

—  Penwith Credit Union Limited

—  People for Action

—  Pilch Lane and District Credit Union

—  Plymouth Focus

—  Pollock Credit Union

—  Radcliffe Resource Centre, Manchester

—  Sandwell Advice & Moneylink

—  Single Parent Action Network

—  Springfield Community

—  South West Lancashire TUC Centre

—  St Aidan Project

—  Student Christian Movement

—  Tower View Community Credit Union

—  Trading Standards Team Hartlepool

—  Unitarian Social Responsibility

—  United Reform Church Responsibility

—  UVP Advice in the Community, Barnsley

—  Vos Amis

—  Walsall Money Advice Project

—  Wansbeck Citizens Advice Bureau

—  Welfare Rights & Money Advice Service, Bristol City Council

—  Worcester Black Pear Credit Union

—  York Credit Union Study Group

—  Yorkshire Chapter of Credit Unions

—  YMCA England