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The OFT yesterday launched a consultation on draft guidance setting out practices the OFT considers constitute irresponsible lending.

Download Irresponsible lending guidance (pdf 395 kb)

The proposed guidance clarifies minimum standards required from businesses engaged in lending which, if breached, could lead to the OFT taking enforcement action against the lenders.

The guidance covers each stage of the lending process and a range of potential issues in a credit transaction including advertising, account management and handling of arrears.

The draft guidance identifies types of policies and procedures that the OFT would expect lenders to put into practice. These include:

• Ensuring all key information provided to prospective borrowers is clear and easily understandable and properly explained to them.
• Assessing a prospective borrower's ability, in the context of their overall financial circumstances, to afford to meet repayments in a sustainable manner.
• Dealing with borrowers in default or arrears in a fair and proportionate manner, seeking to repossess a borrower's property only as a last resort.

The document also sets out some specific practices that the OFT considers to constitute irresponsible lending. These include:

• Encouraging borrowers to increase existing debt when borrowers may face difficulties clearing their debts.
• Targeting specific groups of vulnerable borrowers with credit products that are likely to be inappropriate for them.
• Using high-pressure selling techniques or inappropriate inducements.

The final guidance will complement existing OFT guidance for the consumer credit sector.

Ray Watson, OFT Director of Consumer Credit, said:

'It is important that consumers are protected from lenders acting irresponsibly, especially in tough economic times. We believe that clearly setting out minimum standards expected from the industry will help to achieve this.

'Businesses and consumer groups have asked for clarity on what we view as irresponsible practices. We have drafted this guidance to give that clarity and we will take careful account of responses to our consultation in finalising it.'

Consumer Affairs Minister Kevin Brennan said:

'We are determined to tackle irresponsible lending. Lenders which fail to follow the OFT's guidance face being stripped of their credit licences.'

'Once finalised, this guidance will protect consumers by making it clear to lenders the standards expected of them at all stages of the lending process. It also complements measures in our recent Consumer White Paper to help consumers take control of their personal finances.'

NOTES
1. The OFT consulted on the scope of the irresponsible lending guidance on 1 August 2008 and published a response to that consultation on 19 December 2008, saying it would look at all stages of a credit transaction as part of this project.
 
2. The Consumer Credit Act 1974 (the Act) requires businesses that offer goods or services on credit and/or are involved in activities relating to credit or hire to be licensed by the OFT.

3. 2006 reforms to the Act include a new provision, section 25 (2B), which makes explicit that amongst the business practices which the OFT may consider to be deceitful or oppressive or otherwise unfair or improper, for the purposes of considering fitness to hold a consumer credit licence, are practices that appear to the OFT to involve irresponsible lending. This also came into effect on 6 April 2008.

4. Under the 1974 Act, the OFT has a range of enforcement powers that include the imposition of 'requirements' and financial penalties and the refusal or revocation of consumer credit licences. The OFT can take into account any circumstances which appear to it to be relevant when considering the fitness of an applicant or licensee, including evidence that the company has contravened guidance published by the OFT.

5. Other examples of OFT guidance can be found on the Consumer Credit Act section of the OFT website.