Gerry Sutcliffe MP

'Consumer Credit - developing a fair, clear and competitive market'

A central plank of our work of developing a fair, clear and competitive consumer credit market is ensuring responsible lending and borrowing.

In today's economy, consumer credit is increasingly important. It plays a major part in UK consumers' daily lives. It makes a vital contribution to the UK economy: driving economic activity by allowing consumers flexibility in how they choose to access the marketplace and manage their finances; and enabling resources to be put to their most efficient use.

Credit allows us to smooth our income over time, receiving goods and services now rather than in the future, matching regular income against irregular demands and the risks of modern life.

Currently, roughly half of us have some form of consumer borrowing, even without including mortgages. We have borrowed some £168 billion; £906 billion including mortgages. This is a rise of £100 billion of unsecured debt over the last ten years.

This growth in borrowing reflects the fundamental strength of the UK economy. Economic stability is delivering rising prosperity and record employment underpinning robust growth in consumer spending. Our stable macroeconomic framework has delivered sustainable economic growth - unemployment is at it lowest since the 1970s; and interest rates are at historically low levels.

In the majority of cases, consumers are using credit successfully. It is a useful tool. Manageable debt provides an immense benefit.

But, for some people, credit becomes unmanageable debt.

Various pieces of research over the last three years indicate that roughly a quarter of households have experienced financial difficulties. While the majority of those experiencing difficulties record that these are with household bills (including mortgages); the number of people experiencing difficulties in repaying consumer credit is rising.

Research by the Financial Services Authority reveals some 1.8 million families in the UK can be classed as being over-indebted. The majority of those in financial difficulties attribute it to an unexpected change in their circumstances - redundancy; job loss; long-term illness; divorce; bereavement; or having a child. In the majority of cases this change in circumstances has not had a particularly large impact on income.

The evidence suggests over-indebtedness is disproportionately concentrated among those consumers on lower incomes. This is not surprising. These consumers will obviously be at greater risk; with changes of income having a disproportionate effect on their ability to cope.

What is worrying is the growing number of cases where consumers find themselves over-extended due to their borrowing.

Unsurprisingly the growth in the number of these cases has sparked concern among consumer groups, my fellow MPs, and in the Press.

We are all aware of the - hopefully - extreme cases where pensioners have been offered credit wildly out of proportion to their income, or other consumers have felt themselves driven to tragic measures in order to deal with their debts. These cases are relatively rare and widely reported. But they are symptomatic of a wider problem. All too regularly people come to me, my colleagues in the House of Commons, and debt advisers around the country with tales of too-easy credit leading to over-indebtedness.

We all need to ensure that where consumers are lent to, they are lent to responsibly. We also need to ensure that when they borrow, they borrow responsibly. Consumers need to be able to make informed decisions on the fullest information appropriate to the lending being taken out.

It is measures aimed at achieving this which are set out in the Consumer Credit White Paper  -  “Fair, Clear and Competitive: the Consumer Credit Market in the 21st Century” - Patricia Hewitt, the Secretary of State for Trade and Industry launched in December 2003.

The White Paper sets out the most ambitious programme of reform of consumer credit law since the Consumer Credit Act came into force thirty years ago.

The White Paper delivers on our 2001 General Election Manifesto commitment to “tackle the loan sharks”. It is the culmination of the comprehensive review of the Consumer Credit Act and its regulatory regime, which we launched in July 2001; and it sets out our proposals for reforms to increase the transparency of lending; create a fairer framework; tackle over-indebtedness; and shape the European agenda on consumer credit.

During this review we have consulted extensively with the credit industry, consumer groups and regulators to ensure we reach the right conclusions; understanding the full impact of our proposals on all the different sectors of the market including small businesses.

The White Paper does not propose regulation for regulation’s sake. We are not in the business of imposing unnecessary burdens on the credit sector. Rather, we want to help the industry to meet its full potential by delivering the best deal for consumers. Better regulation will benefit fair lenders who are losing revenue to those exploiting consumer uncertainty and lack of clear information.

The reforms aim to encourage a market populated by responsible lenders - lenders who recognise that fair competition benefits not just consumers, but the industry as a whole.

The reforms aim to ensure responsible borrowers who make informed decisions about competitive products.

The reforms aim to ensure that the market delivers the right balance of choice and protection for consumers. They will deliver a fair, clear and competitive consumer credit market for the 21st Century.

While the White Paper sets out the new regulatory framework to achieve our vision of a fair, clear and competitive consumer credit market, it will need action from all players. Neither Government nor the credit industry can make these changes alone. We need each other's help, as well as the help of the regulator - the Office of Fair Trading - and that of consumer bodies such as the National Consumer Council and Citizens Advice.

We all need to work together to achieve the best results for all.

I know that Christine Wade is going to speak to you next today, to outline the valuable work that the OFT is doing to ensure fair and effective enforcement of the credit industry. I would like to take this opportunity to urge you to continue to work with the OFT to ensure responsible lending, informing their development of guidance and your own codes of practice.

I also urge you to listen to the views of the consumer bodies - represented here today by Deidre Hutton of the National Consumer Council. All too often they are at the sharp end and see the effects of irresponsible lending or borrowing, and have a valuable input to make about how to remedy these mistakes.

We all have something valuable to bring to this debate.

In recognition of this fact myself and Chris Pond, Parliamentary Under-Secretary of State for Work and Pensions, have formed the Over-indebtedness Advisory Group. This Group builds on the work of my department's Task Force on Tackling Over-indebtedness which did much valuable work on responsible lending in the past. The Advisory Group will ensure that initiatives from the credit industry and the voluntary sector are linked into Government policy and I would urge you to feed any comments you have to industry representatives such as BBA and FLA.

My department's task in this work is to develop the framework to encourage responsible lending and borrowing.

Responsible lending and borrowing depends upon understanding. Consumers need to understand the products they are taking out, and the industry needs to understand the circumstances of their consumers.

The issue of transparency in the credit industry is at the very top of our agenda to promote understanding. I hasten to assure you, that this is not just because I have had the pleasure of several appearances before the Treasury Select Committee to impress upon me the importance of this.

Transparency is all about a fairer deal for consumers. In practice, it means providing consumers with the quality and quantity of information that they need. In advertisements. In other pre-contractual material. And on the face of agreements themselves. It is important to allow consumers to choose the product that best suits their needs and circumstances.

I believe consumers need the information to allow them to answer three key questions. How much will it cost me? How much will it cost me if it goes wrong? And can I afford it? They need to be able to take responsibility for their borrowing.

Key elements of our review seek to provide ways to answer these questions. There will be proposals to reform the credit advertising rules to make them simpler and easier to interpret and enforce. On the form and content of credit agreements to make them more user-friendly. And on making the rules governing the charges levied for the early settlement of loans more equitable.

Consumers need to know up front what they can expect to repay.

All of these reforms are part of this drive towards greater openness and clarity and ensuring responsible lending and borrowing.

We are all aware of the need for greater clarity. For example 77% of people say they find the language in credit advertising misleading.

The current rules on consumer credit advertising are too complex and too technical. They confuse both advertisers and those who enforce the law, let alone the consumer who needs to make sense of them. Lenders, enforcers and consumer groups have all recognised the need for greater clarity. You should not need an advanced degree to understand your borrowing.

Changes to the Consumer Credit Advertising Regulations will include new requirements for advertisements to be clear, fair and not misleading. Lenders will have to provide standard information  -  including on APRs  -  when advertising financial products so consumers can compare like-for-like and find the best deal.

No longer will the key information that a consumer needs be lost in the dense jungle of the small print. Lenders will need to provide clear, upfront pre-contractual information on the lines of US style ‘honesty boxes’.

The current regulations on the form and content of credit agreements are also too detailed - with 84% of consumers saying they found the language used in paper work confusing, and 56% do not understand the terms used in credit agreements.

Again, everyone agrees that reform is needed to ensure that consumers are presented clearly with the key information they need to understand what they are signing up to.

So changes to the Form and Content of Credit Agreements will increase transparency, enabling consumers to compare the interest, charges and penalties associated with any type of loan. Consumers will be able to use pre-contractual information to compare prices and get the best deal before they sign on the dotted line.

From my conversations with a number of credit industry representatives I know that you all realise the importance and the benefits of these reforms - and I strongly welcome all of the positive steps that you have already taken towards implementing them.

Merely making sure that agreements are transparent is not enough. Consumers need the skills and the knowledge with which to make sensible decisions about their borrowing in the first place. In other words they need the financial capability to understand the products. We need to create confident consumers who can make sensible and informed choices throughout their lives.

Improving financial capability, is not - unfortunately - going to have an effect overnight. While some benefits of the work which the Financial Services Authority has been doing with the Adult Basic Skills Agency, the Department for Education and Skills and others is beginning to be seen, the real benefits will be the creation of future generations that are more financially aware and capable.

As you should be aware last year the FSA published an initial prospectus document charting the way towards a Financial Capability Strategy. A Steering Group was established to take the work forward, including Ruth Kelly MP - the financial Secretary - and others from industry, consumer groups etc.

The Steering Group is supported by an Advisory Group bringing together officials from several key Government departments, including DTI, as well as wider representation from industry etc.

The objective is to provide consumers with the education, information and generic advice needed to make their financial decisions in a number of priority areas with confidence.

I would strongly urge you to take an active part in this work, and especially to contribute to the Working Group looking at Borrowing, which will be chaired by Michael Coogan.

But we cannot expect informed, demanding consumers to do the job of creating a fair market on their own. We also need to level the playing field for mainstream lenders by creating a modern regulatory framework that encourages and rewards innovation, choice and enterprise.

And one that has enough teeth to drive out the unfair competition that results from irresponsible and unfair lending practices.

So creating a more equitable framework is about targeting our efforts on ensuring that only those who are fit  -  and continue to be fit  -  to conduct credit business with consumers are authorised to do so. It also means ensuring that those who are not authorised are kept out of the market.

And we need to ensure that those who are authorised to lend do so in a fair and responsible way.

In practical terms, a fair framework means ensuring that protection is offered wherever and to the extent it is required. So, for example, we have already announced our intention to remove the current £25,000 limit in the Consumer Credit Act  -  because it confuses everyone by creating a two-tier lending framework and curtailing consumer protection.

But we also need to balance protections offered to consumers with the burdens that these might impose on businesses. We are committed to keeping the administrative burdens on industry to a minimum.

So we will be strengthening the credit-licensing regime to make sure only responsible companies become credit businesses. If any of these companies step out of line, the OFT will be given much wider powers  -  like fines, or imposing conditions on licences  -  before it comes to removing a licence.

The OFT will have the power to require that lenders satisfy them as to the lender's competence and good business practices. It will also allow the OFT greater powers to obtain information form lenders, to prevent unfair practices and to penalise those lenders who act unfairly towards consumers

The changes will generate confidence in the credit market, empowering consumers to take action when they believe they have entered into an unfair credit transaction. It will also greatly improve the reputation of honest lenders who comply with the system.

Responsible lending is also a fundamental part of the Consumer Credit Directive, which is currently going through the EU Parliament. We have been lobbying the Commission and the Parliament to ensure that UK views are represented in the text of the directive.

A number of you may be aware, we anticipate that the EU Parliament will complete the first reading of the Consumer Credit Directive this week.

The EU Parliament has introduced two notable changes to the Directive as a result of its work. These are that:

· the scope of the Directive has been reduced, with mortgages, credit unions, overdrafts and retail intermediaries being removed; and a financial limit has been included;and

· the Directive has been changed from a maximised harmonisation to minimum, with the exception of APR calculations.

We understand from the Commission that they will be rewriting the Directive in line with the Parliament's redrafting, and they will be issuing the redraft in the not too distant future. We - at the DTI - will then formally consult on the new redraft put forward by the Commission during the summer/early autumn.

We also understand from the Commission that while they agree with the Parliament on the changes to the scope of the Directive, they may revert to maximum harmonisation.

This would be of equal concern to the credit industry, consumer bodies and the UK Government, and we will obviously continue to lobby actively, putting the UK position forward through the work of the Council.

However, it is equally important that the industry lobby the Commission through their own channel to influence the redrafting.

Up until now I have talked mainly about the external regulation of the industry. Equally important is for the credit industry to regulate itself through Codes of Practice etc. Responsible lending ultimately depends on the actions of the credit industry.

I know that the Banking Code is being reviewed at present. I want to see the Code strengthened as a result, so that it is really effective in encouraging and underpinning responsible lending.

The major concerns that I am keen to see addressed, are the need for the industry to make lending decisions based on the fullest possible information available, checking the consumer's ability to repay before offering credit; and ensuring that they market their products responsibly. .

Currently, in a large number of cases only negative data is recorded against a consumer, and decisions are taking on the grounds that consumers have not defaulted. As we all know, this can mean that consumers who are in trouble but paying the minimum payment are not always picked up, and are able to get more credit, increasing the likelihood they will get into greater difficulties and become over-indebted.

I look forward to hearing the results of work being undertaken by the industry to include positive data on consumers' records, allowing fuller sharing of data across the industry and more responsible decision making.

While responsible lending and borrowing should go a long way towards reducing the number of consumers who get into difficulties, it will never be able to totally eliminate over-indebtedness. There will always be consumers who fall into difficulties. Where this occurs, it is important that they are able to access timely and appropriate debt advice.

The Government, credit industry and free debt advice sector are working together to address the under-capacity issues in the free debt advice sector; and develop stronger working relationships between the different providers of debt advice - encouraging them to focus on providing a better and more comprehensive debt advice service that will empower all consumers to the benefit of all of us.

The major thing that needs to be done is to ensure sustainable funding of the sector. I thank those members of the credit industry who contribute generously every year - alongside the government - to supporting the free debt advice sector. However, we need to widen and deepen the contributor base. All of those who profit from lending should pay their share of the costs of the free debt advice sector. This is the only way in which we can assure efficient and sustainable growth for the sector. I therefore expect all lenders to consider carefully the approaches you will receive from the free debt advice sector for funding.

In conclusion I would like to reiterate that the reforms we have set out in the Consumer Credit White Paper will mean a market where consumers are empowered by access to the information that they require to choose the products that best suit their needs.

That we have a market characterised by fairness. Not just fairness between borrowers and lenders, but also in terms of fair competition between lenders on the basis of best practice.

A market populated by responsible lenders  -  lenders who recognise that fair competition benefits not just consumers, but the industry as a whole.

I know that we all wish to see this realised, and my department will continue to work - with your help - towards this goal.

Thank you for your attention.