FSA code cracks down on rogue lenders

Britain's £520 billion-a-year lending industry faces a crackdown starting today aimed at protecting borrowers from extortionate interest rates, unfair contracts and mis-selling on everything from mortgages to back-street loans.

Consumer groups hope the reforms will drive unfair lenders out of business or force them to treat consumers fairly. Observers fear some lenders may not be able to trade tomorrow because they cannot comply with new rules for selling home loans.

Campaigners hope the reforms will lead to the end of contracts such as the one highlighted last week by a judgment in the Liverpool County Court that cancelled the debt of a couple who saw their £5,750 home improvement loan spiral to a debt of £384,000 after they fell into arrears. Interest at an annual rate of nearly 35 per cent was applied, with the compounding effect leading to the massive increase in the debt.

Laurence Baxter, senior policy adviser at Which?, formerly the Consumers' Association, said the judgment in the couple's favour was a clear shot across the bows for lenders. 'It is a signal,' he said.

Baxter welcomed the measures, which tackle mounting concern about practices across the industry.

Mortgages are to be regulated from today by the Financial Services Authority, putting them on the same regulatory footing as investments. Borrowers who receive misleading advice will be able to take their complaints to the Financial Services Ombudsman.

Lenders face fines for contravening the new regulations, which will apply to loans taken out from this week. In some cases, aggrieved borrowers may be able to seek redress for older loans.

Britons take out 2.75 million mortgages each year. Bank of England figures show that more than £520bn of new home loans, credit card borrowing and personal loans was taken out over the past 12 months, and consumers now owe more than £1 trillion to banks and other lenders. Borrowers have become vulnerable to complex contracts, high rates of interest and one-off charges.

Moneyfacts, the mortgage and savings data service, predicted that lenders who cannot fulfil all the criteria for operating under the new regime - such as providing key fact illustrations for individual products - will not be able to trade tomorrow.