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OFT launches study into debt consolidation

PN 80/03     17 June 2003

The OFT today launched a study into the debt consolidation industry, which is worth around £8.7bn in secured loans alone.

Debt consolidation is the taking out of a single loan to consolidate a number of existing debts. It often takes the form of a second mortgage and it is estimated that 60 per cent of second mortgages are for this purpose. The second mortgage sector has grown much faster than the rest of the consumer credit market as a whole. Debt consolidation may also take the form of unsecured loans or transferring credit card balances to a new provider.

The fact-finding study will examine how much consumers know what they are committing themselves to and whether lenders are being responsible in their dealings with borrowers.

Concerns have been expressed that consumers often do not understand what they are signing up to. Problems may arise when borrowers are unaware:

• that a loan is secured on property
• what the overall cost of the loan is
• what are the consequences of default in terms of charges or repossession
• that the length of time in which the debt is paid back could increase.

The study will look at:

• how the market works, its size, number of players and developments
• borrowers' experiences of the market, identifying areas of complaint and potential detriment
• whether lenders act responsibly for example by assessing borrowers' ability to repay and follow the OFT's non-status guidelines
• issues of transparency including advertising and marketing
• the experience of other countries.

John Vickers, OFT Chairman, said:

'Debt consolidation has grown fast to become a big market. Our study will assess how well the market is working for consumers.'

The OFT has responsibility for enforcing the Consumer Credit Act. To do so effectively it needs a clear picture of the fast-growing debt consolidation market, which this study will produce.

The OFT aims to report by January next year.

NOTES

1. The debt consolidation study will be carried out under section 5 of the Enterprise Act 2002, which comes into force on 20 June 2003.

2 .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.

3. The Non-status lending guidelines revised in November 1997 apply to secured lending to non-status borrowers – those with impaired or low credit ratings and who would find it difficult generally to obtain finance from traditional sources on normal terms and conditions. The guidelines highlight some of the main practices in this market which the OFT considers to be deceitful or oppressive, or otherwise unfair or improper, and which may therefore lead to regulatory action. The OFT intends to review the guidelines later in the year. Download Non-status lending guidelines (pdf file 44 kb).

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