Daily Research News Online no. 3189 - Consumer Credit Regulation Arrives in UK

Consumer Credit Regulation Arrives in UK

June 10 2004

With the long-awaited overhaul of the UK's consumer credit laws is fast approaching its October 31st deadline, a new report from market analyst Datamonitor warns that one effect could be higher cost of credit and greater difficulty in obtaining credit for those consumers with adverse credit histories.

Tight implementation schedule, lack of adequate preparation, fears of increased bureaucracy and cost of compliance present a major worry for the credit industry, and could even end up driving smaller specialist lenders out of business all together, leaving room for more unscrupulous providers. 'Consumers with adverse credit histories could potentially be faced with higher cost of credit and less protection. It is also likely that mainstream providers will attempt to compensate for lost revenue streams and additional expenses in relation to compliance efforts and pass some of the costs to their clients', says Oksana Selezeneva, Financial Analyst at Datamonitor and author of the report.

The consumer credit market in the UK is one of the most developed in the world and its current regulatory structure is widely regarded as outdated. The rising levels of personal debt present the greatest worry for the Government. Borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans at the end of 2003 had risen to £4,426 per adult in the UK. While Datamonitor's panel research finds that the majority of credit providers are optimistic about the effect of new regulations on the industry, many are worried about the tight schedule, the cost of the implementation, and the lack of adequate preparation. Only 5% of respondents admitted they were totally prepared for the forthcoming changes.

Another concern for credit providers is the compliance costs. The government has infamously commented that credit providers' compliance costs would be in the region of £1m - a figure that was judged to be far too low by many lenders. Almost 6 in 10 do not consider the government's estimation of compliance costs to be valid, and expect the total cost to be significantly higher. In addition to costs, fears about excessive bureaucracy are widespread among smaller credit providers. The increased paperwork requirement could have a detrimental impact on niche industries such as home collected credit.

The Consumer Credit White Paper, published in December 2003, introduced the concept of responsible lending. For example, the government has urged credit card issuers to carry out appropriate internal and external credit checks before raising credit limits and to recognize that in some cases a higher limit may be inappropriate. 'Automatic raising of credit limits is unlikely to have a major impact on the level of overindebtedness in the UK. It is in the interest of credit providers not to stimulate bad debt and they are unlikely to offer it to customer whose previous repayment pattern indicates any level of personal indebtedness', comments Selezvena. 'Obviously, it is up to the industry to ensure that they maintain their rigorous checks in order to make sure that they remain responsible in their lending practices'.

More transparency in credit advertisements is one of the priorities in the review of the Consumer Credit Act. Among the proposals set out in the White Paper are the requirements to use plain and intelligible language and make sure that the APR figure is at least twice the size of the rest of advertisement. This regulation should have a minimal impact on the costs of larger lenders because they have considerable in-house resources. Already, the majority of players in the credit card industry have adopted the proposal of a 'summary box', designed to present important information in a clear and concise format. However, Datamonitor warns that the cost implications for smaller credit providers could be considerable, as they will have to seek advice from a limited number of external experts.

Almost two-third of leading unsecured personal loan providers currently charge early settlement fees. The new regulation will cap the amount of interest a lender can charge to one month(some providers currently charge two months interest), which will result in falling revenue for these lenders while giving competitive advantage to providers not charging the fees. Over half of respondents on the panel agreed that the changes will result in higher loan rates to compensate for the lost income.

In addition, new rules will require lenders to provide examples of early settlements scenarios before the signing of the contact. While this may work for large companies with sophisticated computer systems, it will result in an enormous increase in workload for smaller lenders and sole traders. 'Some of them may even go out of business, leaving their customers with little choice but to seek credit from less reputable providers' comments Selezneva.

The existing Consumer Credit Act allows customer redress only if a credit agreement is deemed 'extortionate'. The proposed changes will widen the concept of 'extortionate credit' to encompass 'unfair credit transactions', enabling consumers to challenge lenders more readily. However, this could result in the rising cost of credit for consumers. In Datamonitor's view, this would particularly affect non-standard providers lending to individuals with adverse credit histories. Such providers will face a greater number of challenges simply due to the riskier nature of their customers and will consequently increase their prices to cover the costs. Higher prices can, in turn, make these lenders more vulnerable to claims of 'unfair' credit provision, creating a kind of a 'vicious circle'for sub-prime providers.