Andy McSmith: Hewitt targets cowboy credit card companies

Christmas is coming and we are up to our ears in consumer debt. What we owe on credit cards alone would be enough to keep the NHS going for a year, with a few billion left over.

Our total consumer debt, on cards, hire purchase and every kind of lending except mortgages, would cover everything the Government spends in a year on health, education, defence, transport, pensions and the police, with enough left over to knock a huge hole in the national debt.

Tomorrow, the Secretary of State for Trade and Industry, Patricia Hewitt, will try to bring some order to the chaos of the personal lending market. She probably won't give us a homily on extravagance, because secretly the government does not want us to stop borrowing. Consumer credit helped keep the UK out of the latest recession which swept across most of the developed world, and if all those loans were suddenly called in, the high streets and shopping centres would turn into ghost towns.

What no responsible person wants, though, is for borrowers to be outrageously ripped off by cowboy firms who are morally only a shade better than criminal loan sharks.

In the USA, a law passed 15 years ago obliged every credit card loan to include a "Schumer Box" - named after the New York Senator Charles Schumer - setting out rates, terms and conditions in a standard format, so that the borrower can easily compare one offer with another. In the UK, there is no such standard format. There is not even a proper agreement on how to calculate the APR, the interest rate a lender pays on a loan. The Office of Fair Trading, which oversees the industry, also has limited power. It can prevent convicted criminals from setting themselves up as legitimate money lenders by denying them a licence, and it can take away the licence of a firm engaged in blatant extortion - but that's about it.

Ms Hewitt and her advisers suspect that many bad lenders have got away with it because their behaviour is not quite bad enough for the OFT to take away their licence, and because there is nothing short of the "nuclear option" to keep them under control. She intends to give the OFT the power to make inspections unannounced and to issue a "yellow card" by fining offending firms.

Her White Paper will be the first attempt since the 1974 Consumer Credit Act to impose a standard set of rules on an industry which has changed out of all recognition.

In those days, Barclaycard was the only credit card in circulation. Consumers used it to borrow £3m, equivalent to £32m at today's prices. Now, there are 1,300 credit cards, and we owe them a total of £52bn. Then, 2,500 institutions were licensed to lend money, and total consumer debt, in today's money, came to £5.25bn.Today, there are 215,000 licensed lenders and consumers are in hock to them for £168bn.

A Mori survey commissioned by the DTI revealed that 59 per cent of people do not know what the initials APR stand for, and two out of five said they only read the main information on the front page of a credit agreement before signing it.

The survey also showed that the people who are most likely to be in debt to credit companies are single parents and families in which there is a baby under 12 months old. The average credit card holder owes £1,570.

Ms Hewitt said: "The UK's credit laws are long overdue for reform. Our use of credit and the amounts available have changed significantly since the rules were put in place. The DTI's review of the Consumer Credit Act will bring our regime up to date for the 21st century."