Boost for victims of extortionate fees

Victims of Britain's antiquated consumer credit laws last week welcomed a commitment from the government to tackle extortionate interest rates and fees that hike the cost of loans.

Last week the consultation period closed on government proposals to prevent lenders charging excessive rates of interest, with organisations representing people on low incomes saying the government was right to change to the law.

Ministers will now consider a wide range of proposals from groups keen to prevent legitimate lenders from charging anything over 30% a year. Provident Financial, one of Britain's top 100 companies, has been charging its customers, most of them on extremely low incomes, up to 200% a year.

John Vickers, director general of the Office of Fair Trading, has been urged to crack down on firms that exploit people on low incomes, but the law has not been on his side.

The Act says, somewhat vaguely, a credit agreement is extortionate as if it requires payments that are "grossly exorbitant".

The Financial Lenders Association says the provision may be used more than is commonly thought. It points out that once a consumer alleges the rate is extortionate, the onus is on the lender to prove it is not. Because of that, the association suggests, many lenders are prepared to renegotiate interest rates rather than fight cases in the court.

In a case involving Broadwick Financial Services, the Court of Appeal ruled last year that 29% was not too high. It was influenced by the fact that the loan had been granted in 1990 when prevailing interest rates were higher than they are now, and the lender could show some companies were asking over 60%. The amount lent was 61% of the value of the mortgaged property, which may have exposed the company to some risk of default. With so few reported cases, this decision will have become something of a benchmark making it very hard to argue that rates of 30% even for secured loans are currently unenforcable.

One of the lenders that fell foul of the existing law is itself awaiting a law lords ruling on whether its human rights are violated by the present Consumer Credit Act. The company alleges that its human rights were ignored despite charging a customer sky high rates of interest.

When Penelope Wilson borrowed £5,000 from First County Trust to buy a convertible BMW, the lender added a £250 "document fee". The rate of interest charged was effectively 95%. She persuaded the county court to exercise its power to reduce the interest rate on the ground it was extortionate. She also argued that the entire agreement was unenforcable because the lender had described the loan for £5,250. It failed to follow regulations that specified such charges must be itemised separately. As a result the company would be entitled to neither the money nor the car which had been security for the loan. While the judge rejected that argument, the Court of Appeal subsequently decided the drafting error had exactly that effect.

The House of Lords is to rule on the appeal against that decision. Even if it succeeds, a question mark will remain over much of the present consumer credit law, which is likely to be overhauled as a result of a long-running review.

The National Association of Citizens' Advice Bureaux, welcoming the government's proposals, cites an example of a 99% rate charged on a gym membership. The borrower had been told by a trading standards officer that this was unlikely to be regarded as extortionate. While such advice is almost certainly wrong in the light of the ruling on the First County Trust interest rate, it may reflect a realistic fear that the courts are reluctant to overturn agreements.

Bodies such as Church Action on Poverty and Oxfam's UK Poverty programme have called for a specific cap on interest rates. While a ban on higher rates might be deprive a few people of the opportunity to take out a loan they would benefit from, far more would gain from clear easily understood restrictions, rather than leaving the interpretation of "extortionate" to the whim of judges.

· Richard Colbey is a barrister