Thursday, 6 November 1986
Seanad Eireann Debate
Minister of State at the Department of Industry and Commerce (Mr. R. Bruton): This motion arises because I consider it necessary to introduce a legal measure to assist consumers in assessing the true cost of credit. The order, which will relate to credit provided to consumers only, and not to traders, will:
(i) require advertisements that make reference to the availability and cost of credit to show the true cost of that credit by means of an annual percentage rate of charge known as APR. The APR may be shown by way of a representative example if no other means is practicable;
(ii) require any notice-leaflet etc., relating to loans or credit sales which are displayed at a place where a cash loan can be obtained or a cash purchase made to show the true cost of credit using APR, and
The APR can be defined as the total cost of the credit advanced as an annual percentage of the outstanding amount of the credit granted. In addition to interest, the total cost of credit will also include such items as administration costs, documentation fees, compulsory insurance and so on. In calculating APR, the interest paid on a loan is expressed as a percentage in relation to the declining principal outstanding over the term of the loan. This compares with the “flat rate” system, at present used by some financial institutions, and very frequently in shops where the interest is based on the capital sum borrowed at the outset for the full term of the loan and does not allow for the fact that the principal is constantly reducing over the period of the loan; in other words, the real cost is considerably greater than that apparently indicated by the rate of interest quoted. As a rule of thumb the APR would be double that of  the flat rate quoted in the circumstances.
For example, take a loan of £250 with charges amounting to £50 — a total of £300 — repayable in 12 monthly instalments of £25 and compare this with a similar loan repayable in a lump sum of £300 at the end of 12 months. Both of these loans have a flat rate interest charge of 20 per cent. Under the first loan, however, the borrower has the use of an average of £125 only available during the 12 month period. He is, therefore, getting less for his charges than the borrower under the second loan who has the use of the full £250 for the entire 12 month period. The effective annual rate of the 12 monthly instalments loan would in fact be 41.2 per cent, while the effective annual rate of the lump sum loan would be 20 per cent.
The basic thrust of this order is to require that in any claim made about the cost of credit consumers not be misled as to what is the rate of interest and, secondly, that there be no way in which they can conceal charges that are bound up with the credit. What is going to be achieved is there in simple layman's terms.
At present there is a serious possibility of consumers being confused, or even misled, as to the true cost of the money they are borrowing. I am introducing this order to enable consumers to compare the cost of credit offered by the different financial institutions and consequently to eliminate the possibility of consumers being confused as to the true cost of credit.
The order will also require that, if an advertisement refers to the provision of goods and services on credit, the cash price and the credit price must be also shown, for example: “£50 deposit and 12 monthly payments of £20 — APR 20 per cent, cash price £267.70, credit price £290”.
The order will not apply to free credit or to licensed banks because banks are at present exempted from the provision of the Consumer Information Act, 1978, under which this order is being made. However, at present, banks generally use  the APR system and with the co-operation of the Central Bank will continue to do so.
Mr. Fitzsimons: This order is aimed at having regulations with regard to consumer protection. In my brief contribution I want to refer to a few different areas related to this order. In the past many people have suffered because of the want of protection and we in public life are well aware of the number of people who have suffered. This might only be the tip of the iceberg. Many people we might not have heard about may have suffered deeply.
People have problems with moneylenders to which I will refer later. Advertising is a powerful medium which is geared to trap. It is very big business. Because of advertising, in many instances, the cost of a commodity is doubled. All of us who have children know the power of advertising when we go to buy a toy for Santa Claus and discover that, after a short period of advertising, the particular product is sold out. We dealt with advertising when we discussed women in the media at the Joint Committee on Women's Rights. Advertisers would not claim to have any role to play in relation to social change. It might be a very negative one. Here we have a positive turnabout which I welcome very much. From now on the price will be quoted and also the interest rate so that people will know where they stand. I thought that a cooling off period would also have been included but this does not seem to be the case. I was led to believe from publicity some time ago that people who got into an awkward situation might have some brief period during which they could change their minds. This does not appear to be the case and it is a pity. We know of the hardship that many people experience because of increases in interest rates. At present we have an unfortunate situation with the increase in interest rates by the building societies. That will not be covered by this order, but we know from television and the media  during the past few days that many families are in an impossible situation and homes have to be sold. That is wrong. Something should be done to protect people who are not able to cope with the problems due to these increases.
We are familiar with moneylenders. In the past, even in my own town, we had this problem on a very large scale. Local people apparently do business for these firms who provide credit at exorbitant rates. Credit unions have done marvellous work in my own town and throughout the country and they take on people who would not be facilitated by the banks as they do not have collateral or security. Few people let them down. We owe a great deal to the credit unions and their role should be highlighted.
The Consumer Information (Consumer Credit) Order, 1986, is written in Dickensian English as apparently it has to be. It could have been curtailed somewhat. For example, it refers to the annual percentage rate of charge in Article 2 which states:
For the purpose of this Order and whenever this Order prescribes the use of the expression “annual percentage rate of charge”, that expression shall mean the total cost of credit expressed as an annual percentage of the amount of credit granted and calculated in accordance with Article 4 of this Order.
Subject to the provisions of paragraph (2) of this Article, the annual percentage rate of charge shall be calculated in accordance with the First Schedule to this Order to one decimal place, all further decimal places being disregarded.
In connection with the hiring of a car, there is the option in some circumstances to purchase at the end of the period. I wonder if this is covered totally, or if there is some way whereby creditors could avoid the order on that account? Article 6 states that any advertisement in which it is indicated that credit may be provided or arranged by the advertiser and which purports to show the cost of credit or includes any claims in relation to the cost of credit shall also indicate further information.
I am wondering if both of those apply. For example, if an advertisement appeared in the newspaper which did not purport to show the cost of credit, would it come within the terms of the order? Subsequently, if a letter was forwarded by such a firm, would the details set out in the letter be considered as an advertisement?
Schedules 1 and 2 set out the percentage rate of charge. They take up five pages and I think they are very comprehensively dealt with. I wonder if they cover every contingency. I am not familiar with this area.
There are other areas which need protection and could possibly come within the ambit of such an order. For example, during the past few days I listened to Gay Byrne's programme and given in it was information about clubs which were set up in order to install central heating and double glazing. The people who contributed a weekly rate were formed into groups of 20 and had the works carried out at different stages. Apparently for some reason there was a problem about payment and, therefore, almost a total collapse of the clubs. The intention was good; apparently people were being helped, but through some unavoidable circumstances there is a total collapse. It is wrong that people should be in that predicament. I wonder if there is any supervision in that area? If not, there should be, because this is only one  instance but it applies generally. Perhaps the Minister would look at that area.
Mr. Howard: I congratulate Deputy Bruton on his appointment as Minister of State and welcome him back to the Chamber. It is not the same structural Chamber he was in while a distinguished Member of the Seanad and, indeed, a very regular and consistent contributor to the debates here. I congratulate him on his appointment and wish him every success.
Mr. Howard: I welcome the motion before the House. I refer to the Minister's speech in which he said that this motion arose because he considered it necessary to introduce a legal measure to assist consumers in assessing the true cost of credit. He went on to illustrate further the requirement that advertisements, notices and leaflets must include and show the true cost of credit under the annual percentage rate of charge, the APR.
I welcome the publication of the draft order. It is dealing, of course, with making further information available to consumers, specifically in relation to consumer credit. It is also a further measure of protection where consumers are concerned as it relates to goods and services and to accommodation. It relates also to another category, namely, facilities of any descriptions. That is a particularly wide definition and perhaps the Minister might comment on it. Taking that particular  category at its face value on, facilities of any description, there is nothing left as it would appear to embrace all and everything. Anything that is not included would have to be specifically excluded. I was interested to hear the Minister refer to the fact that the licensed banks are excluded from the provisions of this measure, even though apparently they do subscribe to a measure of control decided by the Central Bank. It is a very general category that covers facilities of any description. I am not objecting to it, but I am simply drawing attention to the fact that it appears to be all embracing and, in the opinion of the Minister, it is very necessary and desirable that it should be so.
I regard this order as necessary for the protection of consumers. Senator Fitzsimons alluded to the fact that there has been widespread misrepresentation and concealment of the true cost of credit by the providers of certain services. I am satisfied that misrepresentation and concealment have been widespread and to the extent that this measure is aimed at eliminating and coping with them, this motion deserves our support. The protection being provided will apply right across the board to all types of people. There is no doubt that unscrupulous operators have abused the ignorance or the innocence of certain people and have exploited them quite seriously over the years. This order represents a means of coping with that exploitation which no doubt the less well off and the disadvantaged have suffered most in our society. People have been misled and exploited regularly. While I have referred to certain types of people, exploitation has not always been confined to that particular stratum of society. Other sections have been the victims of misinformation and concealment of the true cost of credit. The shady dealer is not the only one who is responsible for this regrettable state of affairs. Some “respectable institutions” have shown a remarkable capacity to raise the cost of credit beyond  what was originally indicated to the consumer. The Minister said the annual percentage rate of charge will take on a meaning that will be clearly and universally understood by all consumers. This protection which the order is providing is necessary. It will prevent the exploitation of those who have been exploited in the past. I welcome the order.
Mr. Smith: It would be fair to say that never in our history have there been so many people in debt. A great number of people have extreme difficulty in meeting their commitments and others have absolutely no possibility whatsoever of being able to repay debts incurred for a variety of purposes including personal purposes. The attitude towards debts down through the years has changed. Some of this is due to changing economic conditions, plus job redundancies, an expectation of life and an expectation of income which subsequent years are unable to supply. There is also the attitude of banks. Major banks are not involved in the risk area we are talking about. The only people who can supply the high risk market are moneylending and hire purchase institutions who have to operate at a level of interest which is totally uneconomic for the consumers, but enables them to deal with what they consider high risk situations. I do not know what the percentage of failure is to meet the commitments within the group who operate in this sector but I assume it is quite high. As a result the unfortunate people who actually pay and meet their commitments are paying a considerably higher percentage. In that context, there is unanimous approval of the order which the Minister is introducing here today. It will help to enlighten the public and give them a certain amount of security. However, no amount of Government orders, legislation or regulations can ever protect the public fully. Therefore, there is a compelling need for greater education and understanding amongst all of us on how we manage our domestic and financial affairs.
Many of us enter into commitments with practically no facilities to honour  them in full. If a person has not at least some spare capital — I am not talking about a high percentage — to purchase goods, consumer or otherwise, how can that person expect in later years to be able to make the kind of savings which he or she could not make prior to the time of purchase. In the context of home management, for the vulnerable groups in society who can be more readily tempted into making a commitment it would be helpful to develop a more enlightened and balanced approach towards credit as a whole. There is a trail of misery, of dread and almost devastation in some areas in all our constituencies. In some of our cities marriages have been breaking down because one spouse has not informed the other of commitments undertaken. Debts have been incurred to meet debts and interest rates have been charged which have been absolutely phenomenal. A presentation may be given indicating interest rates at 6, 7, 8 or 9 per cent but with compound interest and depending on the terms of repayment they could be four or even five times that. It is essential that we try to help as far as possible in enlightening the public in these areas.
I mentioned that the banks are not really involved in this area and I think they should be. I am not suggesting that the commercial banks should get involved in risk capital where they have no possibility of getting returns for their shareholders, but if they are not involved, and continually hesitate to become involved, the moneylending organisations or individuals and the hire purchase groups will meet that situation. In broad terms we would like to see a further widening role for the main commercial banks in this area.
Broadly, I welcome this measure. I hope it will have some effect in curing or at least reducing, some of the problems that have developed in this area. Finally, I would encourage the Minister to consider measures which would go further down the road towards education and enlightening the public as a whole in a more balanced approach towards incurring  debts in general.
Mr. Lynch: I welcome this draft. There are two types of people who have to borrow money — one type is the person who needs the money urgently and does not seem to worry at the time of borrowing about the terms of repayment of the loan. When such a person secures the loan to relieve his financial crisis he then has to pay back the loan at high interest rates.
Senator Smith referred to the banks. The banking system in Ireland have a case to answer. As vice-Chairman of the All-Party Committee on Small Businesses I have been increasingly disturbed at the effect massive increases in bank charges are having on small firms. Moreover, the arbitrary manner in which these increases are being applied show total insensitivity on the part of the banks to the difficulties of small traders at a time of deep and prolonged recession in Ireland. Although our committee had several meetings with the banks over the past three years, their attitude towards small firms has disimproved. Bank charges are higher than ever, and still climbing rapidly. Interest rates on loans to small firms have increased relative to other categories of borrowers. Government action alone can redress the balance between small firms and the banks. I ask the Minister to take note of today's discussion and to try to do something about it.
As a small trader and as a public representative, I feel I have a duty to continue in my endeavours to ensure that the banks become a service to small firms rather than a burden which they are at present. An urgent Government initiative to break the stranglehold of the main banking groups on small firms, on the farming community and on the manufacturing services sector is needed. The banks are abusing their monopoly position by imposing extortionate increases in handling charges on their small business customers. The typical retail business has suffered increases in handling charges ranging from three fold to twelve fold during the past two years. The result of this is that bank charges have become a  major cost burden to these firms. I can quote instances of small business people who have had to lodge their money twice weekly and whose handling charges have increased from £30 last year to £800 this year. That is an alarming statistic. Most of the banks have installed computerisation systems and I know who is paying for these systems. We are paying for them, bank charges are a crippling and insensitively applied burden on small firms at a time of deep recession.
There is widespread anger at the charge of 12p for each cheque lodged and the additional charge of £3.50 for each stolen or void cheque presented as part of a lodgment. It is hard to accept a cheque from someone in good faith and then when it comes back he is charged an extra £3.50 because the cheque bounced. There is also a charge of 35p for each £100 cash lodged or withdrawn. I am very critical of the 12p handling charge for each cheque presented to the bank. Small traders would have to cash fewer cheques for their customers if banks branches had similar opening hours to those of every other business, rather than the present ridiculous average of 22 hours per week. In rural areas in particular local shopkeepers are often obliged to accept cheques from their customers due to the lack of banking facilities and the limited bank opening hours. Shopkeepers, members of the licensed trade and other retailers are incensed when they are charged 12p for each social welfare cheque cashed by them for their own customers, although the banks impose no charge when these cheques are cashed directly by the recipients at a branch. The banks are operating a double standard in this situation.
The so-called end of the cartel announced last year has not resulted in any improvement. The differential in interest rates to “AAA” customers, such as Government and large firms, and “AA” customers, which include most small firms has doubled. I would like to refer to the contrast between the penalty of ½ per cent per month interest charged on hard-pressed small firms who have  exceeded their borrowing limits and the lack of interest on current accounts in credit. That rate is 6 per cent per annum.
We have had many complaints from dairy farmers regarding the restrictive terms attached to the Euro-money loans by the banks. The lending restrictions imposed by the banks for these loans were such that one had to ask if the banks had a vested interest in keeping our recession battered farmers on expensive overdrafts.
One of my fears is that the treatment of small firms and farmers by the banks will give an impetus to cash transactions which will by-pass the banking system and some of these businesses will ultimately be forced into the black economy. With banking charges increasing from £30 in 1985 to £800 in 1986 people are being forced into the black economy. They are buying for cash and selling for cash and not returning their VAT. It is a serious, intolerable situation.
I have a few proposals for the Minister. I call on the Government to investigate the possibility of authorising An Post and the building societies to provide full money transmission services to bring about some sorely needed, real competition in this area. Any necessary legislation should have Government priority. The Government should request the Examiner of Restrictive Practices to carry out an investigation of the present operation of the money transmission service by the banks to include an assessment of the banks own efficiency and cost structures. Although the Central Bank have statutory responsibility here, the low level of business confidence in the banking system requires that such an investigation would come from outside the banking area. The banks have to face the fact that they have a severe image problem at present, especially among small businesses. They need to take immediate steps to put their house in order.
Mr. Fallon: I would like to welcome this draft. The purpose of the draft, as the Minister has said, is to assist consumers in assessing the true cost of credit. We all  know what the Minister has in mind. He is talking about the element of moneylending that operates in this country and in particular within the areas of large cities and bigger towns. There is a rampant amount of moneylending. It is right and proper that people who use moneylenders are made aware of the terms of repayments. Unfortunately, they are tied to the moneylender and do not care what they have to pay back as long as they get the money such as £200 or £300 to pay a bill. They know they must pay back the money over a certain period. They will take it at any cost. That is wrong.
I would support the view that the banks might have a role to play in this. Most of the people who become involved with moneylenders are people on social welfare. Perhaps these people could be facilitated at their local bank branch. They should be encouraged to get into the habit of saving. The habit of saving has died, unfortunately, to some extent. This is a pity. It is a habit that everybody should have from the cradle to the grave. If one saves then the opportunities exist for further finances, whether it be banking or otherwise. I believe that the banks have a role to play. They should be more flexible with these unfortunate people who have to borrow small sums.
I would like to congratulate the credit unions for the great work they do. Could they extend their services? They like people to invest with them for a time. If a person then wants money later on, they readily get the appropriate loan at a reasonable rate. The advantage of the moneylender is that they call to the borrower's home on a weekly or two-weekly basis. There can be harassment, which we all deplore. It would be a good thing if credit unions could extend their activities. If they could have a weekly collection system that would eliminate once and for all the type of thing the Minister has in mind. Credit unions are a wonderful organisation who deserve credit. Perhaps the Minister could make an approach to them and ask if they could possibly extend their activities to include a weekly collection. Obviously they would have to charge extra because they  would have to employ extra staff.
I would like to comment briefly on the points raised by Senators in the course of the debate. Senator Fitzsimons raised the issue of why there was not a cooling off period in this order. This order is essentially dealing with advertisements and claims about cost in advertisements. We are drafting another order which will deal with a cooling off period in certain types of credit agreement. That is a separate job and that is why it is not here. The Senator suggested that the building societies might not be covered by this order. They are in fact covered by this order. Building societies will have to conform wherever they have advertisements. He mentioned that the English was not eloquent in the Bill and that it was complicated with the definition of APR. One had to pursue deeper and deeper into the Bill to find it. I understand the frustration but the way in which orders of this nature are set out is that they always have a section with initial opening definitions. Then the following section nominated particular things that must be included, not just as interest but other charges. The following section that he referred to specified particular exclusions. For instance, free credit and hiring agreements are excluded. The final section went into the technical way of calculating it. While I can understand the Senator's frustration, each of the different sections to which he referred was dealing with different aspects. We believed this was the best way to assemble it. Naturally, it has to be legally tight.
Senator Fitzsimons also queried whether the exclusion of hiring could possibly exclude hire purchase agreements.  This is not the case. The only hiring agreements that are excluded are those where the property and the goods do not pass. It is strictly hiring that is excluded, not hire purchase as is commonly known where, at the end of the hiring period, the goods pass to the person who is paying. The Senator asked whether advertisements not purporting to show cost would be included. This is confined solely to anything that purports to make a claim about costs. In other words, a shop that is saying that credit terms are available for certain goods would not be forced to quote APR's in such a general advertisement. But where inside it had specific claims about cost, either the cash price or the credit price, they would have to show the true rate of interest.
Finally, the Senator mentioned a particular case about central heating clubs that was recently discussed on the Gay Byrne Hour. I am aware of this matter. I have asked my Department to look into the specifics of this particular arrangement. At this stage I cannot comment on this matter. There is the possibility of a breach or misleading information which would come under the Director of Consumer Affairs. I do not know if there was a further suggestion of fraud in this case. Obviously, I am not in a position to comment on it in detail. Under the Sale of Goods and Supply of Services Act and under the Consumer Information Act there are certain powers to control agreements such as this. We will have to see whether a breach occurred in this case.
Senator Howard and a number of other Senators mentioned the banks and their exclusion from this order. While the banks are excluded at present from this order, because they are excluded from the Consumer Information Act, under a new Bill being introduced which is reforming the whole restrictive practices legislation and changing the role of the Director of Consumer Affairs, the banks will be included in future. The same point refers to Senator Lynch's proposal that a restrictive practices examination of the banks should be carried out. Under  present legislation it would not be possible for the Restrictive Practices Commission to do that. When the proposed legislation, which was announced last week by the Government, comes into the House and is passed, it will be possible to apply this order and to have examinations of the banks under the Restrictive Practices Act. However, I would reiterate that the banks subscribe to the use of APR and have agreed in co-operation with the Central Bank to comply with this order.
Senator Smith developed the question of the banks' role, particularly in relation to the problems of moneylending, as did Senator Fallon. I agree wholeheartedly that there is scope for more activity by the well-regulated credit institutions in dealing with the problems of low income families. I am concerned that people who are on low income are put off by the formality applied by the banks. The banks are not always sympathetic to the sort of items people need to spend money on. As I announced last week, I am approaching the banks and urging them to become more involved. I am convinced that this is commercial business. As a number of Senators have pointed out, people are successfully paying very, very high rates of interest on alternative sources. It is not a question of people being unwilling or unable to meet payments. Very much of this business is commercial. Obviously, no one can ask a bank, or a credit union, or anybody else who is providing credit to become a charity.
The objective must be that a number of agencies who are involved in the credit business must see the special difficulty of low income families in gaining credit as a priority which needs to be tackled in a systematic way. While much of the discussion today was centred on moneylending, this measure is essentially aimed at consumer protection in the broadest possible sense. We are not just talking about moneylenders. We are talking about ordinary credit sale agreements in shops. We are talking about credit cards, Visas and so on that people have in their pockets.
 This is an important measure to give information to everyone about the cost and availability of credit. It is a step towards tackling the other problem, in low income areas, of moneylending. When people have access to more information, and when the people who are close to them and who advise them have access to more information, they can be gradually weaned off reliance on sources of credit that are subject to abuse and to very high levels of interest.
Senator Lynch dealt at considerable length with the banks. He is aware that the Department of Industry and Commerce do not deal with the regulation of banks. All these issues, such as allowing new competitors into the banking area, are essentially covered under the Central Bank Acts. While our orders deal with all credit — in time when the banks come under the Consumer Information Act this order will require them to use the APRs in their quotations of credit — my Department do not have detailed supervision powers over the banks.
Finally, Senator Fallon raised the question of reform in the credit unions and, generally, the role of credit unions in relation to credit. I agree wholeheartedly with the thrust of Senator Fitzsimons and various other speakers on the great role which credit unions are playing in this area. I know of their success in dealing with moneylending problems in the past in particular areas. They have the scope and ability to contribute greatly to the remaining problem.
However, Senators should be aware that credit unions too have to protect their members' savings. They are also bound by a legal requirement in their legislation of not being able to charge more than 1 per cent per month. A detailed weekly collection system that might imply heavy collection costs might put undue strain on the credit unions. Their presence in areas where they are not now present sufficiently strongly would be a great step forward. I do not know whether Senator Fallon's suggestion is one they could take on board but I  will certainly bear it in mind in discussions which I hope to have with the credit union sector in the near future.
In conclusion, I should like to thank Senators for their very constructive approach to this. Letting the borrower know is the first step in getting a much fairer deal for borrowers and for protecting borrowers.
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