Stephen Byers outlines plans to improve information in mortgages and other credit marketing

Recent proposals made by Stephen Byers include measures to:

• Specify the way in which the Annual Percentage Rate (APR) for low start and discount mortgages is calculated, requiring it to reflect the interest and total charges throughout the entire life of the loan;
• Implementing an EC Directive which requires a single formula for calculating the APR across the European Union. This means that UK consumers will be able to easily compare the rates of UK lenders with those from countries such as France and Germany;
• Limit the circumstances in which interest rates other than the APR can be shown in advertising and information material;
• Give powers to the Financial Services Authority and consumer bodies to take action under the Unfair Terms in Consumer Contracts Regulations;
• Requiring statutory warnings such as “Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it” to be shown in all pre-contractual information on mortgage offers.

Over the next year DTI will consult on proposals to improve consumer protection including:

• Making provision on the early settlement of loans clearer and fairer for consumers;
• Improving protection for vulnerable consumers on extortionate credit;
• Simplifying credit advertisement regulations and making them more sharply focused on requiring information and truthful advertising.

Proposals on APRs for low-start mortgages and health warnings were contained in the 1998 consultation paper “Clarification and Simplification of United Kingdom Consumer Credit Law”. In light of the responses, DTI is now consulting on the proposal for health warnings to be included in pre-contractual information. These proposals will require changes to the Consumer Credit (Advertisements) Regulations 1989 and the Consumer Credit (Total Charge for Credit) Regulations 1980. These changes were expected to be implemented in Spring 1999 but we are still awaiting the draft regulations.

A proposal on the formula for calculation of the APR was contained in the consultation paper “The Annual Percentage Rate and Total Charge for Credit Regulations” (August 1998). This change will require deletion of the three formulae for calculating the APR currently contained in the Consumer Credit (Total Charge for Credit) Regulations 1980 and their replacement with the formula specified in the latest EC Consumer Credit Directive (98/7). As well as the new formula, the new legislation will also require the APR to be shown to an accuracy of one decimal place and provide several options for expressing the length of a year in the APR calculation. The new regulations are expected to be made in the Summer.

The Unfair Terms in Consumer Contracts Regulations permit the Director General of Fair Trading to seek injunctions to stop the use of unfair trading terms in standard contracts. DTI issued a consultation paper “Widening the scope for action under the Unfair Terms in Consumer Contracts Regulations” in January 1998 proposing to allow other public bodies, including regulators, trading standards departments and consumer bodies, to take such action. This amendment is expected later on this Summer.

The Consumer Credit (Advertisements) Regulations 1989 currently permit some forms of credit advertisement to include other rates of interest as well as the APR, as long as the APR is the most prominent. The Consumer Credit (Agreements) Regulations 1983 set out the form and content of credit agreements, including the APR. Section 52 of the Consumer Credit Act 1974 gives the Secretary of State powers to specify the contents of pre-contractual information. DTI is to issue a consultation paper proposing to prescribe the circumstances in which interest rates other than the APR can be included in advertisements, regulated agreements and pre-contractual information.

Sections 137-140 of the Consumer Credit Act 1974 contain provisions on extortionate credit bargains. These allow the courts to re-open extortionate credit bargains so as to do justice between the parties. An extortionate bargain is one which requires payments which are grossly extortionate or otherwise grossly contravenes ordinary principles of fair trading, taking into account prevailing rates of interest, the capacity of the debtor and various other factors. The DTI has commissioned research on this issue and expects to publish a consultation paper on new proposals in the Summer.

Debtors are entitled to end regulated credit agreements early by paying all the sums due to the creditor under the agreement, less the amount of any rebate. The most common method of calculating the rebate, the rule of 78, is set out in the Consumer Credit (Rebate on Early Settlement) Regulations 1983. In his Non-status Lending Guidelines for lenders and brokers (November 1997) the Director General of Fair Trading said the inappropriate application of the rule of 78 to early settlement of mortgage loans was unfair and oppressive as it could result in a borrower paying a disproportionately high sum to redeem a mortgage.

The form and content of credit advertisements is prescribed by the Consumer Credit (Advertising) Regulations 1989. These cover adverts in newspapers, radio and TV as well as brochures. They currently provide for three types of credit advertisement - simple, intermediate and full. Which rules apply depends upon the amount of information in the advert. The Office of Fair Trading and DTI will consult at the end of this year on fresh proposals to clarify and simplify this approach.

There is a lot of meat in these proposals and highlights a closer working relationship between the OFT and the DTI together with a renewed political will to focus on consumers and to put in place measures which centre on transparency for consumers.