The government has announced plans for a significant shake-up of consumer credit laws.

The move follows recent reports that personal debt in the UK has reached the £1 trillion mark for the first time.

Announced in the Queen's Speech, the Consumer Credit Bill will create a new "unfair credit" test, making it easier to take lenders to court if the terms of the loan are considered unjust. 

Alternative dispute resolution schemes will also be available through the Financial Ombudsman.

Lenders will be required to provide consumers with annual statements outlining their credit agreements.

Those with arrears will be provided with an arrears notice by the business concerned, together with an information sheet on what to do from the Office of Fair Trading (OFT), which will also be granted new powers to regulate licensed consumer credit businesses.

Sanctions

These powers will include the ability to take intermediate sanctions against lenders before removing their licenses. 

When deciding whether to grant a licence, the OFT will, for the first time, consider a lender's credit competence, as well as their previous track record.

The move comes as part of a targeting of the licensing system, with businesses only needing to satisfy the OFT about their fitness within the particular sector they operate in.

"The Consumer Credit Bill marks the final stage in the most significant reform of domestic consumer credit law in almost 30 years," said the Department of Trade and Industry.

"It would improve consumer protection in a fair and competitive, modern credit market.

"The bill would enhance consumer rights and redress, improve the regulation of consumer credit businesses, and make regulation more appropriate for different types of consumer credit transaction."

However, as predicted, the bill does not include a ceiling on interest rates. 

The decision follows research suggesting that those on lower incomes would be directed towards less transparent and fair financial products, or to illegal loan sharks.

Reaction

Today's legislation was given a warm welcome from groups representing consumers.

Teresa Perchard, the director of policy at Citizens Advice said: "The law in this area has failed to keep pace with a rapidly changing credit market, and it is low income consumers who can least afford it who have paid the price of inadequate controls. 

"This bill gives us the once-in-a-generation opportunity to prevent more people becoming trapped in grossly unfair credit deals from which there is no escape.

"Credit providers who treat their customers fairly should have nothing to fear from this long-overdue reform, but abuse should no longer be able to shelter behind bad law."