Why is the Consumer Credit Bill being introduced?

The UK's credit laws are in need of radical reform to match the credit culture which has become part of the fabric of people's lives.

When the previous Consumer Credit Act came into force in 1974, Barclaycard's 2.8 million customers gave it a near stranglehold over the UK market. There are now 71 million credit cards in circulation with UK borrowers' appetite for credit pushing the banks to dream up ever more innovative credit products, which include flexible mortgages, overdrafts and a raft of personal loans deals.

The legislation is designed to match the sophistication of the credit market while giving consumers protection against the loan sharks which operate on the fringes.

The Bill is expected to become law by the end of 2006.

What is in the Bill?

An Alternative Dispute Resolution (ADR) service will enable borrowers to launch fast-track complaints against lenders. The ADR is expected to come into force in April 2006, falling under the remit of the Financial Ombudsman Service, a self-regulatory industry body that is responsible for savings, investments and loans.

The ADR will be designed to protect consumers from extortionate high-cost loan and credit card deals and also allow people to make a speedy complaint if a loan product has been mis-sold.

The Office of Fair Trading, the consumer watchdog, will have its teeth sharpened with powers to make more rigorous checks on people who apply for a consumer credit licence. New investigative powers will also enable it to question business associates of a broker or lender being probed by the watchdog. The OFT will also have powers to fine banks and credit card companies up to £50,000.

The Bill will remove the £25,000 limit on loans regulated under the Consumer Credit Act to reflect the greater sums people are borrowing, especially when taking out loan consolidation deals.

Is everybody happy with the new measures?

Banks and credit card companies privately raise doubts that the increasing regulatory burden will actually make consumers better off. They also fear the bill will increase the costs of lending.

Which?, formerly known as the Consumers' Association, welcomed the return of the Consumer Credit Bill, but called for the inclusion of measures to make lenders more responsible by sharing more information about borrowers. Which? also wants the Government to use the Bill to force credit card companies to use one method of interest calculation so that borrowers can easily compare the price of different cards.

To read more on the business measures in the Queen's Speech, click here