Consumer Credit Review

Ed Davey Excerpts

Monday 21st November 2011 Written Statements

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Mr Edward Davey)]

I have, together with the Financial Secretary to the Treasury, published the Government’s response to the consumer credit aspects of the consumer credit and personal insolvency review, “Managing Borrowing and Dealing with Debt”, launched jointly by BIS and HM Treasury. My statement of 19 July, Official Report, columns 89-90WS, provided the Government’s response on the insolvency aspects of the review.

The response builds on a number of coalition commitments to help consumers make better financial decisions when borrowing money and deals specifically with:

unfair bank charges;

introductory discounts when taking out a store card;

interest rate caps on credit and store cards; and other consumer credit issues, including high-cost credit.

Our vision is twofold. First, we want all consumers to be empowered to make better choices for themselves. Consumers should be free to borrow if that is what they decide is in their best interest. It is not for the Government to pass judgment on whether a particular product is good or bad but, in line with the coalition principles of freedom, fairness and responsibility, we want to provide consumers with the tools they need to make informed decisions. Secondly, we want to ensure there is a safe and fair regulatory framework for both credit and personal insolvency. These frameworks must protect vulnerable consumers, particularly those at risk of falling into or those already in financial difficulty and drive rogue companies out of the market. Responding to consumer concerns about the lack of control and transparency over bank charges, the Government have driven forward a voluntary agreement which will apply to all full-facility current accounts offered by the major personal current account providers. Under the new agreement, over 85% of personal current account customers will benefit from measures to make charges for unarranged overdrafts clearer, fairer and more manageable.

This will include an option for consumers to receive alerts when their balance is low so that they can take action to avoid a charge; consumers will know by what time they need to make a payment into their account to avoid charges; and they will no longer be charged for going over their limit by a small amount. Balance alerts will be available from March 2012, with full implementation of the other measures by March 2013 at the latest.

These measures come in addition to commitments already made by the industry to increase transparency, including annual statements detailing charges incurred so that consumers can see how much their account costs them over the year, and from September 2013 a new guaranteed switching service which will give customers the confidence to switch accounts quickly, safely and without hassle. This will mean that consumers can make sure that they are getting a good deal from their bank. Together, all these measures will provide a powerful way for consumers to hold their banks to account.

On store cards, respondents to the review were most concerned about customers being tempted into expensive credit by retailers offering discounts on their purchases at the time they take out a store card. Following negotiations with the Government, industry has agreed to end this practice as well as introducing other measures to improve the way store cards are offered, including a good practice training scheme and a ban on direct commission for sales staff.

The Government will not be introducing a cap on interest rates on credit and store cards. Following the review, the evidence showed that a cap would not be in the best interest of consumers as pricing some consumers out of the market could force individuals to seek unregulated or high-cost credit.

What was clear from the review were the real concerns around the high-cost credit market and the impact that using this type of credit can have on vulnerable consumers. To address these concerns, the Government are pleased to have appointed Bristol university’s Personal Finance Research Centre (PFRC) to carry out research into the impact of introducing a variable cap on the total cost of high-cost credit that can be charged in the short to medium-term high-cost credit market. The Government have also started negotiations with industry to introduce improved consumer protections in codes of practice for payday lenders and other instant credit providers. In addition, the Government are working to improve access to credit unions which can provide a real alternative to high-cost credit.

Positive action from industry to address real consumer concerns has wider-reaching benefits. By working with industry we can make changes that improve things for consumers far more quickly than legislating. As we stated in the call for evidence, we will regulate where necessary but our strong preference is to promote more responsible corporate and consumer behaviour through greater transparency, competition and by harnessing the insights of behavioural economics.

Finally this response completes the announcement we made in July when we set out additional measures to assist consumers in difficulty, including a consultation on improving access for bankrupts to basic bank accounts (published on 17 November) and working with industry to improve standards in debt management plans. In addition, on 7 November we published a consultation seeking views on reforms to the route into bankruptcy (and compulsory winding up) to streamline the process and to ensure that the court focuses on dispute resolution.

The package of measures announced in this response will deliver real benefits for consumers that can be achieved while minimising the regulatory burdens on business. We are placing copies of the document in the Libraries of both Houses.