I move:
That Seanad Éireann approves the following Order in draft:
Consumer Information (Consumer Credit) Order, 1987
a copy of which Order in draft was laid before Seanad Éireann on 7th May, 1987.
Consumer Information (Consumer Credit) Order, 1987: Motion.
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, 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 (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 credit purchase made to show the true cost of credit using APR,
(iii) set out legally binding definitions relating, in the main, to consumer credit.
While an earlier draft of this order was approved by the Seanad on 6 November 1986, it was not approved by the previous Dáil before its dissolution. I have availed of the intervening period, in association with the Attorney General, to examine the wording of the schedules to the order. Technical adjustments have been made to these and as a consequence it is now necessary to re-submit it to this House for positive approval.
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 etc. 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, where the interest is based on the capital sum borrowed 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.
Generally a rate of interest expressed under the flat rate system will only be about half the APR. 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.
Consequently, there is at present a serious possibility of consumers being confused — or even misled by hidden charges — 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 from different sources 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 or services on credit then 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 a present exempted from the provision of the Consumer Information Act, 1978, under which the 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.
This side of the House welcomes the order the Minister has made. There has been in recent years an abuse of credit facilities, especially by some of the major financial institutions. People have not always been fully in command of all of the relevant facts and this order will go a certain way to alleviating this problem. It is something which is non-controversial and is welcomed by all sides of the House.
I am confident that this order, entitled Consumer Information Order, 1987, will be greatly welcomed by all parties because it will inform the consumer about the true cost of credit referred to in the order as the APR and defined as the total cost of credit advanced as an annual percentage of the outstanding amount of credit granted, which, in addition to interest, will also include sundry items such as collection charges, administration costs, insurance and so on.
APR, which is the annual percentage rate of charge, can be expressed as the true rate of interest. In calculating the 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. Many financial institutions use the flat rate system where the interest is charged on the capital borrowed over the full term of the loan and does not allow for the fact that the principal is reducing over the term of the loan. In this case the APR, or true rate of interest, is normally twice the flat rate but in some lending agreements can amount to astronomical levels, which I will comment on later on.
The banks or the building societies will not be greatly affected by this order because they calculate the interest on a regular basis. Therefore, the APR is very close to the true rate of interest. However, it is interesting to note that finance houses charge a flat rate of interest and the true rate of interest can be double the flat rate. In addition, holders of Visa, Access, American Express Cards and other users of plastic money are paying a very high rate for that privilege. It also begs the question whether banks are being true and honest when they refuse a customer a personal loan to buy a car and direct him to an associate finance company where he pays a much higher premium for the money borrowed. The order also refers to any advertisement relating to loans or credit sales which are displayed at a place where a cash loan can be obtained.
I would also point out that some companies operating in the Irish credit market already indicate in their advertising literature what the APR is. Perhaps it is not always highlighted as demanded by the order, in so far as the order requires that the APR must have greater prominence than any other reference to interest rates in that advertisement. I would suggest that the reason some companies are showing this at present is because they are linked to companies in the UK, where this is already a legal requirement.
Irish legislation is weak in comparison with that in other countries in the field of consumer credit. While this order is a step in the right direction, which will greatly improve the situation, it deals only with one aspect of lending. The order does not affect money lenders in so far as they cannot advertise, as dictated by the Money Lending Act. I would consider it desirable that any person borrowing from any source, and especially from money lenders, should be told what the real cost of credit is. In the case of loans from money lenders the true cost can be astronomical. At a first glance of the Money Lending Act the interest rate seems to be limited to 39 per cent, but that is a flat rate. By the time other charges are added on, such as collection, administration and the fact that the loan may be for a short period of time, the APR can be many times higher. The lender should be obliged to hand out to the borrower a personalised written statement of the amount borrowed, the date on which it is borrowed, the true rate of interest charged and the method of repayment. The reason for this is to supply the borrower with proof that the transaction was as he or she stated in the event of court proceedings or other investigations. The abuse of money lending has not yet gained the notoriety of drugs and so on, although it can create great hardship, the destruction of family life, the starvation of children and the breakup of homes. There are other things I would like to say about money lending, but because the time is short I will commend the Minister for his prompt action in this matter and I fully support the order.
I want to thank the Seanad for the speedy approval of this order. The need for reform goes back to 1981. The advisory council advised the Minister to have a look at it, and in 1981 the Consumers Association of Ireland stated that the practice of finance houses in quoting interest rates needed to be tackled. This order will make it more transparent. It will be a help to the consumer and it is in response to many parliamentary questions and media coverage over the last number of years. The reason it was not done earlier was that they were awaiting the publication of an EC directive in this regard.
Question put and agreed to.
I suggest that because of uncertainty about the presence of Ministers because of Divisions in the Dáil and to make for a smoother operation of the House this morning we should adjourn for 20 minutes or half an hour.
I would be pleased to move the Adjournment.
Sitting suspended at 11.15 a.m. and resumed at 11.45 a.m.