The Office of Fair Trading (OFT) that recently took the banks to court over bank charges and, to the opinion of most observers, should have won their case, has decided to withdraw from the battle field having suffered a (dodgy?) defeat.

Whatever the tactics of the OFT and the merits of the case it led me to investigate further.

One of the main driving forces behind the push by the OFT has been the ‘Consumer Action Group’ (CAG), amongst others. Its contributors (the Caggers) are generally consumers from every walk of life that feel hard done by. They complain individually to the OFT and Trading Standards (TS) by the thousand it seems.

But one theme caught my attention. Generally, those that fall foul of the banks’ charging regimes are the poor and those that fall on hard times. They had not got into the position of paying bank charges through a definite choice. But the end result is that they get into a spiral of ever increasing debt because of it.

Before I go any further I would just like to paint some pictures.

When considering tax there are three classes of people. Firstly those that do not have to pay tax and those that just pay up when asked, they are unaffected by the tax laws. Secondly there are those that identify what taxes they can legitimately get away with not paying, these are the legal ‘tax avoiders’. Thirdly there are those that act outside the law and don’t pay tax, these are the unlawful ‘tax evaders’. ‘Tax avoidance’ is legitimate.

When considering parking fines you get the same. Those that the law does not effect because they park legally. Those that get out of fines because the parking signs or parking tickets were in law wrongly worded, these are the ‘parking fine avoiders’. And those that just don’t pay, these are the unlawful ‘parking fine evaders’. ‘Parking fine avoiders’ get applauded.

When considering speeding fines, the same again. Those that do not drive or stay within the speed limits are not affected by the law. Those that use the law to identify dodgy police practice or incorrect paperwork with respect to the speed cameras are ‘speed fine avoiders’. Those that try to get out of the fine by lying or other misrepresentation are ‘speeding fine evaders’. Again, ‘speeding fine avoiders’ get applauded and their lawyers well recompensed.

Now let’s look at debt in the same way. There are those that are not in debt and those that just pay up on time, these are unaffected by the law. Then there are those that just refuse to repay what they owe, these are the unlawful ‘debt evaders’. But then there are those that use the law (in the same way that tax, parking fine and speeding fine avoiders do) to avoid repaying their debts. These are the ‘debt avoiders’ and, according to some, are filth.

Now, the primary law with respect to debt is the Consumer Credit Act 1974. This was designed to define when a debt is enforceable so as to give clear guidance to the lender and borrower as to what constitutes a debt and when it could be reclaimed. The Act was a good move designed to protect the consumer from unsavoury usurious practices.

There will be many of the ‘righteous’ out there who will now be shouting that bad debtors should be imprisoned and flogged until they cough up, but that assumes that the lender is faultless (a bank faultless? Now let me think about that one.) And most people who enjoy free banking do so on the backs of the poor, not nice but true.

The drafter of the CCA 1974, Francis Bennion QC, when drawing up the legislation said that a lender should have the correct paperwork to enforce the debt or suffer the consequences. His thoughts were accepted by Parliament and the monarch who subsequently enacted the law. So this can be seen to be the legislature’s (Parliament’s i.e. the peoples’) will.

So it is the law that a lender must provide certain paperwork before a debt can be recovered. If the lender could not be bothered to obtain or keep the paperwork safe then it should find the debt unrecoverable. Just in the same way as tax etc. This has been upheld as far as I can see by a House of Lords decision (Wilson).

What has this to do with the recent OFT case? Well it seems from my reading of the CAG forums that when borrowers fall behind with payments, the lenders use some very medieval techniques to try and recover their money. This includes some that are well outside the industry’s own guidance on collection. Not only that, but someone who gets into financial difficulty will have their credit record tarnished for up to 6 years (12 for mortgages). Compare that with the sentences the courts hand out for dangerous driving etc. But worse their record is damaged purely on the say so of what the lender says to the credit referencing agencies (CRA). There is no proper route of redress for the borrower say in the case of a dispute, other than going to court, as the Information Commissioner does not seem to want to get involved. The lender does not have to provide proof to the CRA, they just tell them. There are also three CRAs, and the records each have may all be different so not reflect the true state of a borrowers affairs. Also, paying the debt back does not help your rating, there is no real incentive to sort the situation out. Once your record is wrecked you just have to sit back and wait for six years until it all drops off.

After a few months of chasing things get really nasty. The bank makes an assessment. Will we get our money back if we go to court? ‘Yes’ and County Court Judgment or bankruptcy proceedings start, more debt for the borrower. In court, unless the borrower knows the law the court will find against them. If the assessment is ‘no’, the debt can be sold on to a Debt Collection Agency (DCA), who buy these debts by the truckload in job lots for a mere fraction of the amount owed. They then hound the debtor for the full amount. The profits are potentially vast. The overall cost to the original lender is factored into the interest payments other borrowers make and depositors take.

Reading through the CAG forums about some DCAs antics made me quite angry. The law is the law, if the lender/DCA cannot produce the paperwork the matter should be dropped, even according to their own guidelines. But the (unlawful) hounding continues. There have also been a few cases of suicide over debt as well as vulnerable people handing over money they do not owe just to stop the harassment. Around the whole debt process an industry of ‘debt busters’, liquidators and bailiffs has also been born.

The stumbling block for the lenders and DCAs though is the CCA 1974. Under the Act the borrower can legally ask for a copy of the credit agreement from any person claiming they owe them money. That actually protects everyone in the country from fraud. If the company cannot produce the ‘correctly executed’ paperwork then the borrower does not have to pay, the debt becomes ‘unenforceable’. Very reasonable I would say.

But the banks have been very lax with paperwork over the years, which has led to many debtors to actually get away without paying. But if the banks cannot be bothered to keep their books correctly ….. ? But what the banks did do was, according to the OFT and CAG, use bank charges to grab what they could while they could with the charges far outweighing what was needed under contract law to redress the balance.

The OFT and the Supreme Court had the chance to sort out the bank charges piece, which would have allowed the OFT to then move logically on to general debt and loans practices. But now I fear it will be business as usual.

But maybe market forces are already at work. The Internet has taken many people to sites like CAG where, with some guidance and simple template letters, the DCAs and banks are getting tied up in knots. In fact according to some reports there are DCAs who are now suffering considerable losses as opposed to the gains they made in previous years.

But it seems to me that the Internet is not the medium that should be addressing this, it is the courts, lending practices and relevant bodies that should be amended.

Let’s start with a rolling three year credit reference, not six as at present. Every loan that is taken should be accompanied with a detailed explanation of both parties’ rights, showing a legally binding route to redress. The CRAs should have proof of the debt prior to amending records, not just on the lender’s say-so. Courts to have the original paperwork before they can enforce a debt. If proceedings have not started within a year then the debt becomes unenforceable, this protects consumers from prolonged harassment – ‘put up or shut up’ you could say. And lastly, make it unlawful to sell debts on, this just encourages bad lending. The original lender should deal with the problem.

Whatever we do the end result should be to aim for sensible lending and sensible borrowing. Consider, would you loan money to a stranger with no proper paperwork? With public sector cuts coupled with rising unemployment and tax in 2010, I foresee many more families who may well fall foul of the archaic system I have outlined above.

Sorting this system out benefits us all. Better and less risky lending practice, fewer defaults, reduced court workload, better information kept on loans and less cost to the other bank users who pick up the eventual tab for all that bad lending.

To some (especially banks and DCAs) I will have given a very long and one-sided view of the issue. But tax avoidance forces better tax law, speeding fine and parking fine avoidance forces better traffic law, so maybe debt avoidance (not evasion) should be seen as forcing better banking laws and practices.

------ Other articles of interest ------

• FSA cracks down on mortgage arrears fees
• Use factoring to protect your cash flow
• The UK is recovering, but not rebalancing
• Icy Bank Debt

Tags: bank charges, cag, consumer action group, debt, News, oft, trading standards

This entry was posted on Tuesday, December 29th, 2009 at 1:35 pm and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.