New lending code:
Improved protection for borrowers

Most of the 43 recommendations in the revised Lending Code have been accepted by the sponsors of the Lending Standards Board. The Code’s author, Prof LORNE CRERAR, explains the difference it will make.

Customers who borrow from the UK’s major lenders will benefit from changes being introduced following the independent review of the Lending Code which I carried out for its sponsors, the British Bankers’ Association, the Building Societies Association and the UK Cards Association.

Appointed as Independent Reviewer of the Code last June, I was excited by the challenge – in fact, it proved much more challenging and detailed than I had anticipated. And now, with most of my 43 main recommendations accepted, I believe the revised Code will represent a significant improvement for customers in the UK.

I’m in no doubt customers will evidence significant benefit in the way they deal with lenders from now on. And I’m convinced, in particular, that the new provisions will provide improved protection for borrowers, especially if they face financial difficulty.

The Lending Code covers current account overdrafts, personal loans and credit cards as well as lending to small businesses and charities. It provides valuable protection for customers through best practice standards that lenders are expected to follow when dealing with customers both day-to-day and in times of financial difficulties.

The changes I have recommended to the Code aim to strengthen this protection and encourage better practices from lenders. The Code’s sponsors will be implementing more than 30 of my major recommendations – in fact, 30 have been accepted in their entirety, compromise has been reached for seven and six have been rejected.

The recommendations being adopted include:
• stronger requirements for responsible credit assessment
• new provisions on customers’ ability to opt out of unarranged overdrafts
• more support for customers who may be in, or approaching, financial difficulties
• extension of the Code’s temporary breathing space moratorium on debt collection to customers using ‘self-help’
• new standards on the appropriate use of the right of set off
• further assistance for customers in financial difficulty who have a mental health condition.

For the first time, customers will be easily able to find the key protections that lenders should offer, as plain language guides to the Code will be available in branch and online for both personal and small business customers from April. Additionally, from 1 July, all new borrowing customers will be provided with a copy of these guides.

I’m grateful to all those who made submissions to the review. I sought feedback from a range of consumer, debt advice, regulatory and governmental bodies as well as the industry. The consultation process resulted in 33 submissions from a variety of sectors. A number of round table discussions were also held with stakeholders to elaborate on the responses and to draw out any issues or obstacles. I was very pleased with the number and extensiveness of responses.

Not surprisingly, given the current economic situation, many of the submissions focused upon the support given to customers who are in or are at risk of financial difficulties and my report reflects this. I’m pleased that the majority of my substantive recommendations have been accepted by the industry and believe that the revised Code will represent a significant improvement for customers.

I am pleased to see this echoed by Eric Leenders, Executive Director of the British Bankers’ Association. He says that the Lending Code “continues to play a key role in providing customers with appropriate and timely protections” and adds that “the sponsors’ willingness to accept the majority of the reviewer’s recommendations and add to the Code’s protections, demonstrates the importance of the Code and the ability of self-regulation to respond to the needs of customers.”

My role was to invite views from stakeholders about changes they believed, from their experience of working with the Code, would be appropriate to ensure it remains fit for purpose. And I also required to assess and balance the costs and benefits of potential changes.

There were two main constraints on my review. Firstly, on competition grounds, I could not make recommendations which would restrict the ability of individual lenders to set their own prices or which would otherwise restrict competition. Secondly, I had to weigh up the costs and benefits of each change. And it was this cost-benefit analysis which determined if I considered change appropriate.

Following the consultation stage, I required to pull together a substantial volume of information and opinions to determine the recommendations I would be making. This process involved detailed analysis, cross-referencing and distillation and, with the first draft of the report prepared by the beginning of November, it allowed me to really focus in on the detailed terms of the final report.

In the meantime, over the last year, various sets of guidelines had already been agreed between the Lending Standards Board and the Code sponsors for inclusion in the new Code. These include rules for unarranged overdrafts, use of the right of set off, and interest and charges concessions.

In addition, the government had reached a joint commitment with credit card companies for new rights for credit and store card users. As well as this, the BBA have compiled six new commitments for lending to small and medium-sized enterprises (SMEs).

All of these commitments and guidance were recommended in my report for inclusion within the new Code.

In March last year, the Office of Fair Trading (OFT) issued its Irresponsible Lending Guidance. Updated in August 2010, it set out standards the OFT expects from businesses engaged in lending, and reference was made to this guidance in my report. Mention was also made to the 2010 Regulations implementing the Consumer Credit Directive as the LSB and the Code Sponsors will be required to ensure there is no conflict between the Code and the Regulations.

My report and the response of the Code Sponsors are available on the LSB website and the websites of the Code Sponsors.

Professor LORNE CRERAR is one of the founding partners and now Chairman of the Glasgow-based law firm, Harper Macleod LLP. He is the firm’s Senior Partner in the Banks & Finance Institutions and Sports Sector Groups and is an active member of the Public Sector and Social Housing department. He was appointed by The Scottish Executive to undertake an Independent Review of Regulation, Audit, Inspection and Complaints handling of public services in Scotland – The Crerar Review – in 2007.

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