Review of consumer credit - questions and answers

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1. What has prompted this review?

The OFT keeps key markets under review. The consumer credit sector is large and underpins a significant amount of consumption that contributes to economic growth.

The timing of the review has been prompted by the turbulence in global financial markets. This turbulence has affected the availability of credit, lending criteria, patterns of demand, consumer risk ratings and sector segmentation – the OFT wishes to examine the nature and extent of these changes, their impact on the market and how consumers are affected.

Against this dynamic background, we want to undertake a broad evidence-based review looking at the overall operation and interaction between the different elements of the credit sector (excluding mortgages). The review will consider the offerings of suppliers, the role of intermediaries and the behaviour of and decisions made by consumers.

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2. What is the size of the sector in the UK?

Gross loan advances for unsecured consumer credit were around £200 billion in 2007.

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3. Why is the OFT doing it now?

The OFT has a duty to fulfil its responsibilities as a consumer and competition authority, and as a licensing authority of credit providers and intermediaries. Given the current turbulence, it is appropriate now to investigate the impact of the changes, both in terms of the competitive landscape and lending practices. This will allow the OFT to establish whether action is needed now to address the effects of the downturn. It will also inform the OFT's future policy thinking on the regulation of consumer credit.

The OFT is aware that this industry is going through a very difficult period. The OFT always tries to minimise burdens on business in line with the principles of better regulation but we also have a responsibility to take account of the interests of consumers.

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4. What will be the scope of the review?

We are proposing that the review should focus on the unsecured credit sector but we may also look at secured loans that act as substitutes for unsecured loans such as second charge mortgage loans.  See the proposed scope of the review.

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5. How does this review fit in with the work of the FSA?

The review is designed to run in parallel with the ongoing regulatory activities of the OFT and FSA

The OFT and FSA both have regulatory oversight in this sector. The OFT is responsible for licensing most businesses that offer credit or lend money to consumers. The FSA regulates most financial services markets, exchanges and firms other than those where the OFT grants licences under the Consumer Credit Act 1974 (as amended). In particular, the FSA is responsible for first charge mortgages.

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6. Are mortgages covered by this review?

Secured lending, such as a first charge mortgage, is outside the scope of this review unless it is seen as a substitute for unsecured lending (which may be the case in respect of second charge mortgage loans).

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7. Is this review going to look at debt collection?

We propose not to examine debt collection as part of this review. The OFT is already doing significant work in this area and there have been several examples recently of the OFT taking enforcement action against debt collection agencies that have breached its guidance.

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8. When will the OFT formally going to launch the review?

We plan to launch the review formally in summer 2009.

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9. From whom does the OFT want to invite comments prior to formal launch?

We will welcome comments from a wide range of stakeholders including consumer bodies, individual lenders, intermediaries and their associations, debt collection firms, credit reference agencies and the Local Authority Trading Standards community amongst others.,

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10. How long does the OFT expect the review to take?

We plan to launch the review in the summer 2009, and to publish interim findings in autumn 2009 and final recommendations by the end of the year. If this timetable changes we will publish an update on our website.

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11. What might be the possible outcomes of the review?

There are a number of outcomes from this review including informing future enforcement action by the OFT, consumer information and education programmes, and recommendations to government concerning the sector.

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12. What statutory powers does the OFT have in this area?

The OFT has specific statutory duties in this sector under the Consumer Credit Act 1974 (as amended), including an obligation under section 1(2) of the Act to keep the credit sector under review.

The OFT has, under Section 5 of the Enterprise Act 2002, a function of obtaining, compiling, and keeping under review information relating to the carrying out of its functions.

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