Why loan sharks still make a killing

While the government gets further involved in the political flak from the Barclays Bank decision to close 172 branches this weekend, it seems to have shelved a report it ordered more than a year ago on the scandal of extortionate interest rates on loans.

The document is a scathing attack on the lack of consumer protection for the very poorest who may be forced to borrow at annual interest rates topping 1,000%.

This lack of action comes as Barnardo's, Oxfam, the Children's Society, Help the Aged and a number of other chari ties prepare to launch a new campaign to raise awareness about the effects of debt and financial exclusion among the poorest sectors of society.

Recommendations in the unpublished report Extortionate Credit in the UK- of which Jobs & Money has seen a copy - favour toughening rules governing loans to the least well off and considering the use of an interest rate ceiling to cut out unscrupulous lenders. The report was commissioned in 1998 by the Department of Trade and Industry in response to unrest from consumer bodies and debt advisers over certain sections of the loan market.

The DTI asked Elaine Kempson of Bristol University, a respected financial services researcher, to deter- mine whether extortionate credit was a significant problem for consumers in the UK, which consumers were more vulnerable and what steps could be taken to alleviate the problem. She delivered a largely substantive draft last June - since when there has been official silence.

She faced the problem of deciding just when interest rates become extortionate - a difficulty that has also faced the courts which have never issued a workable definition.

She found that only a "few hundred thousand at most" suffered from extortionate credit - however that might be defined. These were, however, the most vulnerable people in society.

Most of the lenders in this category are illegal loan sharks but some with a Consumer Credit licence also charge annual percentage rates (APRs) which can hit 1,000%. She severely criti cises current consumer protection in this area.

She says: "These licences are easy to obtain." The report suggests that "on the whole, the Consumer Credit Act has proved inadequate to deal with many of the current extortionate practices. Few cases are brought to court because the onus rests with borr- owers to initiate proceedings."

Few borrowers are likely to do this. Both trading standards offices and the Office of Fair Trading lack the resources required to revoke a licence or to prosecute illegal lenders.

She is also concerned that the act is too imprecise and that "penalties are inadequate for dealing with extortionate bargains, with persistent offenders and with unlicenced lenders".

Her report raises concerns over the "alternative credit market". This comprises lenders who concentrate on those with a credit rating that places them outside the mainstream banks and building societies. Typical alternative credit customers include lone parents, the long term out of work, hostel dwellers and those living in high crime areas.

These customers raise loans - often for essentials such as clothing or heating - from pawnbrokers including new variants such as Cash Converters and Crazy George - two chains which buy and sell at high interest rates to the poorest.

But most use "weekly collected credit" - door-to-door loans with high interest rates from a large number of companies including the quoted Cattles Holdings which owns Shopacheck, and Provident Financial. Cattles is looking at buying some of the branch buildings being vacated by Barclays and other banks.

Kempson says the main concerns here are the high cost of loans and the practice of "rollovers" - persuading those nearing the end of one loan to take out another. One common method is to snare borrowers into a new commitment by showing them a shopping catalogue.

Legislation has so far proved impotent in dealing with rollovers.

The shelved report recommendation that there is "a need for national provision of social loans for those living on low incomes" is unlikely to impress a government determined to rein back income support related spending.

And given the preference of banks and other lenders for voluntary bodies over which they maintain control via the purse strings, the recommendation to set up "an ade quately funded national debt service that is free at the point of use" may have difficulty reaching the statute book. Other proposals include:

• Interest rate ceilings.
• Greater transparency of costs and interest rates
• Tougher laws to force lenders to be responsible for the actions of those selling loans.
• Allowing trading standards to take action on behalf of borrowers hit by extortionate terms.
• Meanwhile, some 20 charities have teamed up to launch "Debt on our doorstep - a network for fair finance" later this month.

It will be a campaigning group which will target four key areas including the reduction and eradication of extortionate lending; the reform and eventual replacement of the social fund which is used by those on income support to buy items such as furniture; the promotion of socially responsible provision by high street banks; and the promotion of credit unions.

The campaign will be chaired by Rev. Graham Blount of the Scottish Churches Parliamentary Office. He says: "One in ten households have no bank or building society account. We estimate that running a home without access to basic banking services costs an average £5 a week."

Nearly one million sought help on debt from Citizens Advice Bureaux last year.

One of the tactics of the campaign will be to offer pre-printed postcards for individual backers to send to their banks protesting at the lack of basic accounts facilities.

All the Scottish banks now offer a form of no-overdraft account which has direct debits to help reduce fuel, water and phone bills.

Debt on our Doorstep will be officially launched on April 18 at the House of Commons.