Financial institutions are to be banned from offering unsolicited pre-approved loans to consumers under new regulations to tighten up borrowing practices, writes Laura Slattery.
The Irish Financial Services Regulatory Authority (IFSRA) yesterday issued a new draft consumer protection code intended to curb misleading advertising, ensure that consumers are treated fairly by financial institutions and improve access to financial services.
The code, if implemented in its current form, will prevent credit card providers from increasing a customer's credit limit unless the customer requests an increase.
For the first time, all regulated firms, including mortgage lenders, will be required to explain in writing why they are recommending a certain product to customers.
In a bid to curb fraudulent applications for home loans, intermediaries must confirm that they have seen original documents such as bank statements or P60s that support applicants' assertions of their ability to repay a loan.
"We believe it is in the customer's interest to supply full and correct information. Without it, the lenders cannot assess the suitability of a loan," said IFSRA's consumer director, Ms Mary O'Dea.
New advertising rules will require lenders offering refinancing loans - where consumers roll credit card or other debts into their mortgage - to warn customers that the new consolidated loan could cost them more over the long term, despite being repaid at lower interest rates.
Lenders will also be prohibited from including the cost of payment protection insurance in the initial repayment figures they quote. Consumers will be asked to sign a form declaring that they are aware this insurance is optional.
Under the code, consumers will be given 15 days notice before their insurance policies expire to give them time to shop around for alternative cover. At the moment, this rule only applies to motor insurance.
IFSRA has the power to fine financial institutions in breach of the code up to €5 million. It plans to implement the final version of the code by the end of 2005.
The publication of the draft code follows the Central Bank's announcement earlier this month that Irish people now have more debt than they are able to pay back out of their disposable income.
IFSRA's crackdown on lending practices also follows its research into consumer attitudes to unsolicited pre-approved credit, which revealed that 86 per cent of people believed that unsolicited pre-approved loans encouraged them to borrow more than they needed.
"People can still ring up and get approval straight away. It's the unsolicited element that we are taking out," Ms O'Dea said.