British Banks Get Told Off!

The Financial Ombudsman Service wrote an open letter to the banks about its Banking Code. The gentle tone does little to disguise the scathing content.

If Tony Blair is looking for something to do in the last few months of his regime, he should force lenders to introduce tougher lending criteria.

After all, virtually everyone agrees that lenders are irresponsible. Last month, The Financial Ombudsman Service sent a letter to the British Bankers' Association with its recommendations to improve the Banking Code, which exists to help consumers.

Whilst the letter is, in my opinion, written in far too soft a tone, it is full of damning criticisms. The biggest of these is about the section in the Banking Code that is meant to ensure responsible lending.

The Ombudsman highlights one section of The Banking Code which says: "Before we lend you any money or increase your overdraft, or other borrowing, we will assess whether we feel you will be able to repay it."

The Ombudsman then reveals that complying with the above need only entail checking on the customer's identity and finding out what he wants to borrow the money for! Any good Fool will recognise that this is dreadfully loose. If banks were serious about lending responsibly, they would assess prospective borrowers' income and outgoings. They would not allow people to go over their agreed overdraft limits and they wouldn't lend money at 30%+ interest.

However, if the banks will not lend responsibly, then we must all work harder to become more responsible borrowers. Here are some tips:

1. Be disciplined. Don't borrow unless you have to. I mean really have to. Save up for foreseeable expenses, such as holidays, cars, weddings and university fees. You've got two choices: a) save up and earn interest, or b) borrow the money and pay interest (at a much higher rate). To us, it's a very easy decision.
2. Don't borrow so much that you have no leeway in case of emergencies. (This shouldn't happen anyway if you follow tip 1.)
3. It's exceptionally rare that borrowing in order to meet repayments on other debts is a sensible decision, no matter how small your debt is. If you find yourself in this position, you should get some perspective on this and consider how to start Living Below Your Means.
4. If the only loan you can get charges you 30-200%APR, you should be looking at other solutions to get out of debt.
5. If you have got to the stage where you are even considering taking out a secured loan, you are in deep enough already. Discuss these nasty loans anonymously on our Dealing with Debt discussion board, and get some free tips specific to your circumstances.

> You might be interested in reading some money-saving tips.
> Provided you're not over-stretching yourself(!) you're welcome to compare credit cards and personal loans through The Motley Fool.