Banks 'to blame' for debt crisis

BANKS must face new laws to prevent them from encouraging customers to take on too much debt, a major report into the UK's mounting personal debt crisis will recommend today.

More than 15m people struggle to make debt repayments on loans and credit agreements and the report, by the Tory peer Lord Griffiths of Fforestfach, accuses banks and credit card companies of marketing credit too aggressively and not being sufficiently responsible in their lending practices.

The report was commissioned by Shadow Chancellor Oliver Letwin and calls for banks to be subject to a statutory charter governing their marketing of loans in an attempt to defuse the 'timebomb' of personal debt.

Lord Griffiths, a vice-chairman of City bank Goldman Sachs and a former head of the Downing Street policy unit in the 1980s, said Britons now owe collectively more than £1 trillion in unsecured personal loans and other debts. Any external shock, such as a sharp rise in oil prices or even further modest rises in interest rates, could see millions of people default on their loans and prompt an economic crisis.

The report's key recommendation is that the voluntary Banking Code should be replaced by a statutory Bank Customers Charter, which would outlaw aggressive marketing practices, and increase the transparency of credit charges to customers.

Lord Griffiths' report says that credit is far too easily available in the UK. 'Banks market credit too aggressively and protect their own risks but not those of their customers. Face to face banking has been replaced by technology, with computerised models to assess credit risk rather than face to face meetings between borrowers and bank manager. The impersonal nature of modern lending has encouraged distrust between the banks and their customers.'

Welcoming the report, Letwin said today: 'The Griffiths commission has undertaken a very serious piece of work which reveals equally serious social problems. A Conservative Government would certainly consider this report and its implications.'

Lord Griffiths said that the scale of Britain's debt problem was overwhelming those who work in the field. He added: 'Everyone we have talked to in the field of debt counselling cannot cope with the demands that they have. And for charities that have started new debt counselling, they say that they are overwhelmed.

'I think there has been an un-level playing field between the banks and their customers. I am all in favour of the free market. But I also believe that there are areas of the free market where consumers need a degree of protection, and this is one.'