Government sets out next steps on credit card practices and responsible lending

Government has set out details of the next steps it will be taking to make lending practice more responsible, including five new 'rights' for credit card borrowers, and more detail of the likely content of the OFT's forthcoming irresponsible lending guidance.

The next steps are:

Credit card reform

• A right to repay: An agreement has been reached with the credit card industry that repayments will be used to repay debts with the highest interest rates first, reversing the industry practice that prevented consumers clearing their most expensive debt until after they had paid off debt at lower rates, including 0 per cent balance transfers. This measure will be introduced by agreement 'this year' and will be given statutory force 'as soon as possible'. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus one per cent of the principal to encourage better repayment practice.
• A right to control: Consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time; and consumers will have better automated payment options. Consumers will be able to do both of these online
• A right to reject: consumers will be given more time to reject increases in their interest rate or their credit limit
• A right to information: consumers 'at risk of financial difficulties' will be given guidance on the consequences of paying back too little; and all consumers will be given clear information on increases in their interest rate or their credit limit including the right to reject
• A right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers.

In addition, consumers who are 'at risk of financial difficulties' will be protected through a ban on increases in their credit limit as well as a ban on increases in their interest rate, and card companies will work with debt advice agencies to agree new ways they will provide targeted support to consumers at risk. The credit and store card industry will work with consumer groups and debt advice agencies to agree how they will identify at risk consumers who will be protected from increases in their credit limit or interest rate and to ensure communications are clear and easy to understand. This detail will be agreed by June. The UK Cards Association, which represents credit and store card lenders, estimates that the combined cost to industry of the package will be in the region of £533 million over the first two years.

Other responsible lending measures

The announcement also flags up a number of additional measures that are currently in progress to promote more responsible lending. These are:

• New Consumer Credit Directive regulations and OFT Irresponsible Lending Guidance will be implemented before the summer, (the OFT guidance is reported as being due 'shortly'), requiring lenders to check customers can afford a loan, give clear information on new loans and give a 14-day cooling off period during which new loans can be cancelled. Lenders who fail to comply run the risk of having their licence to lend withdrawn
• Stronger protections under the Lending Code have been agreed between the British Bankers Association and the Ministry of Justice, so that lenders consider reducing or freezing interest and charges, and accepting token payments, from people who suffer a sudden income shock such as redundancy, reduced hours or illness
• Consumers will have access to their credit records online for £2 or free of charge from June 2010, under a new agreement with the three main credit reference agencies secured by the Department for Business, Innovation and Skills. Access will be free for victims of ID fraud and people receiving debt advice
• The Government is also working with targeted retail sectors to encourage them to adopt pre-payment protection for consumers. The Department also intends to consult on specific regulation in the area of pre-payments

Whilst the actions set out today are welcome they fall some way short of the ban on unsolicited increases in credit card limits called for by consumer groups, including Citizens Advice, which also called for the urgent implementation of statutory debt management plans, provision for which is contained in the Tribunals, Courts and Enforcement Act in order to ensure all creditors, not just those covered by the Lending Code, treat people who are trying to pay their debts off fairly.