Daylight robbery

01-12-2000

Daylight robbery ( 180kb) - The CAB case for effective regulation of extortionate credit

Available for download only

Any queries contact: publicpolicyadmin@citizensadvice.org.uk

Executive Summary

1. The past twenty-five years have seen dramatic developments in the use of consumer credit in the United Kingdom. These developments have contributed much to the improvements in the standard of living experienced by most consumers. The downside has been the increase in the number of consumers experiencing repayment difficulties seeking advice from CABx.

2. The dynamic changes in the consumer credit sector have not been matched by changes in the legislation intended to protect consumers from abuse. Problems of extortionate credit persist. The CAB Service has not been alone in arguing for some time that several areas of the Consumer Credit Act 1974 are in urgent need of reform. Indeed, the 1999 Consumer White Paper confirmed the Government’s intention to assess whether changes are needed to the extortionate credit provisions of the Act.

3. Extortionate credit arises from either unduly high interest rates or from loans that put the borrower at a significant and unfair disadvantage against the lender. The report provides evidence of cases from all over England and Wales where extortionate credit agreements are enabling some creditors to take advantage of uninformed consumers.

4. CAB evidence shows that extortionate credit agreements exist across a range of credit products and agreements. There is a disproportionately large body of evidence associated with secured lending (particularly debt consolidation loans), lending to low income groups, lending attached to the sale of cars and home improvements, and lending attached to those with impaired credit records.

5. This report argues that the existing legislation on extortionate credit is neither effective nor accessible to consumers. The current ‘test’ that determines whether a credit agreement is extortionate is heavily weighted in favour of lenders. Moreover, the test can only be invoked if a borrower is prepared to risk heavy legal costs in taking the initiative and making an application to the court.

6. The view of the CAB Service is that the solution to the problem of extortionate credit lies in effective legislation that is accessible to the consumer and improving the ability of consumers to make more informed choices from a range of credit options.

7. The key changes recommended by the CAB Service include:

• an amendment to the extortionate credit ‘test’ in simplified legislation;
• the extension of the extortionate credit legislation to allow the courts to consider whether an agreement is extortionate without the need for an application from a borrower;
• a new power for specified third party agencies to take action on behalf of consumers;
• significant improvements in the information provided to consumers on entering into a credit agreement;
• requirement on some lenders to ensure that loans best meet the needs of the borrower and that the repayments are affordable;
• a range of changes to the Consumer Credit Act 1974, relevant court procedures and forms designed to enable consumers to obtain reviews of their credit agreements under the extortionate credit legislation more easily.

8. The report also discusses two other possible changes in legislation. We consider how an amendment to the Unfair Terms in Consumer Contracts Regulations could complement changes to the extortionate credit provisions, We also examine whether a ceiling rate of interest would be of benefit, but conclude it would not be the best way of dealing with the problem.

9. The report concludes with a brief examination of the need to provide a wider range of borrowing facilities to low income groups and the role of improved financial literacy in tackling extortionate credit.

Social Policy contact: Peter Tutton Social.policy@citizensadvice.org.uk

Daylight robbery ( 180kb) - The CAB case for effective regulation of extortionate credit