BACKGROUND

  The CSFI report ("the Report") is a piece of case study research that seeks to gain a greater understanding of why borrowers are becoming over-indebted in the UK. It uses this understanding together with corroborative data to make recommendations for action that would enable borrowers to make better choices when deciding to borrow and lenders to make better decisions when lending to people with substantial existing unsecured debts.

  This submission relates to consumer protection measures for unsecured consumer credit.

1.   Does the UK have sufficient consumer protection for unsecured credit?

  This Report and others are very clear in identifying that at present in the UK there is insufficient consumer protection in this area. The large amount of consumer credit in the UK relative to other European countries would not be a problem if it was spread more evenly in the population. This report notes that for most income groups the average amount of unsecured debt is in the region of 20 per cent of gross household income; a very manageable level. The Report highlights evidence from research undertaken by the Bank of England and the DTI that shows that in recent years, the increase in the debt level has been concentrated among a section of the population that has been increasing its level of borrowing. Survey research data is presented that shows that for households in the income range £8,000 to £40,000 there are a troubling number with a high ratio of debt to gross household income. This is linked with changes in the consumer credit market in the last 10 years that have made credit extremely easy to obtain. The Report argues that, in the UK, it has become too easy to obtain consumer credit and that this acts against the interests of many consumers. The UK does not currently have enough consumer protection for unsecured consumer credit.

2.   Will taking any action in the UK damage the economic benefits from consumer spending?

  The UK appears to have benefited economically from the easy availability of consumer credit to enable consumer spending. Unfortunately, the facilitating of competition has not been balanced with progressive regulation to ensure that the industry does not act against the consumers' interests when lending to a sizeable minority.

  It is a question of striking the right balance. In the UK there are many understandable complaints from the financial services industry in respect of expensive and intrusive regulation. These complaints need to be considered on a case-by-case basis and an excessive regime in one are, for example money laundering, has little relevance to the appropriateness of the regulatory framework for consumer credit.

  Unfortunately, the initial benefits of easy consumer credit in the UK are now being out-weighed by the many examples of households that will struggle as a result of excessive borrowing. Many would agree that following a laissez faire attitude in consumer credit, the time has arrived for more protection. This answer is not definitive since it is difficult to measure the costs and benefits of the easy availability of consumer credit.

3.   Are some other countries in the EU more concerned about the consumer?

  Certainly this is the case. The Report highlights France and Belgium, although in under-taking the research it was clear that Germany was also concerned about over-indebtedness. The Report does not comment on the cultural differences in continental Europe that lead to a different attitude to consumer credit. The Belgium situation is particularly interesting where there is legislation that requires lenders not to knowingly over-indebt somebody and puts some onus, arguably too much, on the lender to ensure that they could defend the decision to lend in court if necessary. In Belgium the credit reference agency has become a state body that means that all data must be shared and lenders are required to access the credit reference agency prior to advancing further credit. It is also noteworthy that in Belgium there is a specific organisation established to undertake research into over-indebtedness. In France, there has been a recent change in the law (January 2005: loi Chatel) to make it illegal to increase a credit facility without the agreement of the borrower.

  The Report has a recommendation that it should be illegal to increase the credit limit on a credit card without the agreement of the borrower. If this were to be included in European legislation it would be good for the UK.

4.   Why does the UK borrower need consumer protection in respect of unsecured consumer credit?

  The Report maintains that a significant number of households are over-borrowing. The pattern identified is that borrowers are under a financial pressure, they are naive or foolhardy in financial management and that they are tempted by lending practices. A substantial number of households in the UK when under pressure are vulnerable to excessive borrowing and lenders encourage them to borrow when they are in this position. Sophisticated credit scoring systems are intended to protect a lender from incurring excessive levels of default that would damage profitability, but they do not assist consumers to determine whether a loan is in their best interests.

  The UK borrower needs to be encouraged to consider whether a loan is in his or her best interests. The UK lender needs to be put under an obligation to ensure that lending to individual borrowers is not excessive and when high multiples of household income is leant unsecured, that there is some evidence that the borrower could repay at the time of lending.

5.   Are credit reference agencies in Europe in a better position than those in the UK?

  The Report argues strongly that credit reference agencies should be in a position to provide lenders with the total amount of debt outstanding across all creditors. It is clear that for many borrowers they do not have a clear understanding of debt levels and are not able to provide this to a new lender, even if asked. Borrowers assume that lenders are provided with this information by the credit reference agencies. In some European countries the credit reference agency is a state entity. The Report does not argue that this is preferable to the UK system of three competing credit reference agencies. The Report maintains that the UK credit reference agencies should be in an equivalent position to the state entities in other countries. This would mean that all lenders are obliged to provide positive information on amounts out-standing and the reference agency database must be consulted prior to advancing further credit lines to a borrower.

6.   Conclusions

  The Report relates to the actions of borrowers and lenders of unsecured consumer credit in the UK and draws on some examples of European and US experience in order to consider appropriate recommendations in the current environment.

  It will be important that any new entrants to the consumer credit market in the UK should be required to operate responsibly and be put into a position in which they are able to do so as far as possible. Specific examples where EU-wide minimum standards would be useful are as follows:

  Credit Reference Agencies—the EU should ensure that via the approved credit reference agencies of the country concerned, sufficient data is collected to enable lenders to have a reasonably current view of a borrower's total out-standing consumer credit at the time of making further credit available. The lender should be required to access the information, although any decision that results would be for the lender to determine.

  Not knowingly over-indebt—within the context of a fair consumer credit agreement it should not be legal for a lender to advance money to a borrower when it is clear that the individual has too much debt.

  Aggressive marketing practices—there should be a requirement that these are assessed in the context of the national environment and that appropriate action is taken. Flexibility will be required to ensure that new practices that are not in the consumer interest can be restricted before they become too widespread. A major example in the UK is the unsolicited increase in credit card increases that is used as a marketing tactic to discourage customers from changing credit card, but has the effect of tempting many into excessive debt. No justification for the practice has been produced by the industry and a European standard could be very helpful.

  Transparency—the EU will no doubt require this, but it is particularly important that credit products make clear the penalties that can be incurred for late payment or exceeding limits. In the UK these can quickly mount up and form a substantial component of the debt level. The Report makes clear that in the UK, consumers do not appreciate the consequences of becoming over-indebted and this point to a requirement to make this more transparent on the part of the lender.

  The consumer credit market can change rapidly, certainly over a period of two years. It is important to maintain national flexibility to identify practices that are not in the consumer interest and respond. For example, if a new form of unjustifiable fees are being charged as a penalty; this may cause a significant increase in the debt of some customers; this could be dealt with through local regulation.

  The culture for consumer credit appears to vary in different countries in Europe. The UK is the most accepting and has the greatest availability and competition. This should mean that the UK would be the most receptive to proposing the flexibility to identify aggressive practices soon after they have started to be used and identify actions through local regulation or the industry code.

  In the UK, the Consumer Credit Act should have been updated some three to four years ago in order to enhance consumer protection in an increasingly competitive market. The EU cannot necessarily look to local legislation to respond to local needs in order to address the concerns of the consumer. The minimum standard should involve a formal review of local legislation with an independent view as to its adequacy. The local legislation should give enough flexibility to the relevant regulator to respond to developments. Self-regulation in the UK has had the benefit of flexible up-dating of an industry code ("the Banking Code"); unfortunately the enforcement has been poor.

  This is such an important area in terms of the effect on a significant minority of borrowers that EU legislation should not expect countries to operate under self-regulation and make clear which part of government is responsible for ensuring that any self-regulation is being diligently implemented.

June 2005