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OFT supports proposals to tackle extortionate credit

PN 76/03     12 June 2003

Government plans to make it easier to challenge extortionate credit agreements have been welcomed by the OFT today.

The OFT has pushed for reform for a number of years – publishing a report on 'Unjust Credit Transactions' in 1991 – and in its response to the Department for Business, Enterprise and Regulatory Reform's consultation supports proposals to redefine the law covering extortionate loans and provide consumers with greater protection and means of redress.

Download summary of our response to the Department for Business, Enterprise and Regulatory Reform's consultation document on extortionate credit in pdf format (86 kb).

The current provisions under the Consumer Credit Act 1974 which allow consumers to challenge an extortionate agreement in court have been interpreted narrowly and have failed to protect vulnerable consumers. The OFT agrees that changes are needed to make it easier for consumers to contest extortionate terms and practices either through the courts or through alternative dispute resolution mechanisms.

Proposals welcomed include:

• replacing the current 'grossly exorbitant' test by one that encompasses 'excessive' payments
• allowing the courts to consider matters arising after the agreement was entered into, including interest rate variations
• including as one of the factors to be taken into account by the courts whether the transaction involved business activity which was 'deceitful or oppressive or other unfair or improper' - in line with the consumer credit licensing fitness test
• encouraging greater use of time orders where the courts consider that the borrower should be allowed more time to repay, or that the length of the loan or the interest rate needs to be changed
• requiring the courts to notify the OFT of extortionate credit cases, so that the OFT can provide a public record and issue guidance
• the power for the OFT and other qualified entities to seek a declaration that a particular credit transaction is unjust where it affects a number of consumers
• giving the OFT the power to make restitution orders as a means of compensating consumers affected by extortionate credit deals
• an obligation on lenders to lend responsibly and with proper regard to the borrower's ability to repay
• the extension of the Financial Services Ombudsman's jurisdiction to all consumer credit, as part of a range of mechanisms to enable consumers to complain about unfair terms and practices and seek redress.

The OFT also argues that the court should be able to re-open an agreement of its own motion. This would be a valuable additional protection for consumers who are unrepresented in court action.

Penny Boys, OFT Executive Director, said:

'Extortionate credit operates on the margins of the market where vulnerable consumers are susceptible to exploitation. The current provisions are not working. We wholeheartedly welcome the Department for Business, Enterprise and Regulatory Reform review and its proposals for reform, which we have been calling for since 1991.'

NOTES

1. A summary of the OFT's response to Department for Business, Enterprise and Regulatory Reform is available to download in pdf format (86 kb).

2. The OFT's report 'Unjust Credit Transactions - a report by the Director General of Fair Trading on the provisions of sections 137-140 of the Consumer Credit Act', published September 1991, is available from the OFT, PO Box 366, Hayes UB3 1XB or 0870 60 60 321.

3. 'Tackling loan sharks - and more! A consultation document on making the extortionate credit provisions within the Consumer Credit Act 1974 more effective' was published by the Department for Business, Enterprise and Regulatory Reform on 6 March 2003. See Department for Business, Enterprise and Regulatory Reform press notice.

4. The Consumer Credit Act 1974 requires most businesses that offer goods or services on credit or lend money or are involved in activities relating to credit or hire to be licensed by the OFT. The OFT can refuse or revoke a licence if it decides that a trader is not fit to hold one.

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