Four Cures For Rip-off Britain

With the government keen to keep the electorate happy, these four clean-ups would be a good start...

Over the past year, the government's popularity has taken a beating. Food and energy prices have soared, while mortgage lending has plunged. And, of course, house prices are down -- 14.6% drop in a year, according to the latest survey from Nationwide BS. Thus, disposable incomes are under pressure, leaving most of us feeling worse off.

In addition, banks have collapsed and saving is no longer considered safe. As a result, many Brits blame Gordon Brown and his government for this crunch. So, as our leaders desperately look around for ways to please the electorate, how about tackling these four rip-offs? Doing so would benefit millions of people -- most of the adult population, in fact...

1. Legally lower lending rates

Retailer Argos was in the firing line from The Fool this week, after launching its Easy Shop Card, a payment card which charges an interest rate of up to 222.7% APR on borrowing of £100 to £500. In my view, any company which preys on low-income borrowers in this way doesn't deserve any customers, so I shall be boycotting Argos this Christmas.

Yet again, this reinforces my view that it's high time we had an interest-rate cap in this country. Many other industrialised countries have a `usury interest rate' above which lending is prohibited by law. By introducing a ceiling on the rate which can be legally charged to borrowers (say, base rate plus 25%), the government would take a bold step towards stamp out predatory lending and loan sharking in the UK.

2. Closing down `Be a millionaire' courses

In recent years, I've seen dozens -- perhaps hundreds -- of advertisements for `get rich quick' seminars. Most of these wealth workshops promise to show you how to make a fortune by investing in property or shares. However, the catch is that access to their `inside' advice and support incurs fees running into thousands of pounds.

One bit of good news to come out of the housing crash is the collapse of buy-to-let promoter Inside Track, which went into administration in late April. Although the owners and directors of this firm made themselves very, very rich, I've yet to meet anyone who "gave up work and became a property millionaire" with the help of Inside Track!

In my view, firms which make such bold promises should be made to stump up some solid proof. These organisations should be registered, regulated and monitored by a financial watchdog, probably the Financial Services Authority (FSA). Otherwise, they are marketing nothing but pipe dreams.

3. A curb on insurance

At the turn of the century, I worked for a UK insurer with a significant presence in Australia. At this time, I discovered that, in common with many other developed nations, Oz regulates insurance very closely. Down Under, regulations prevent insurance companies, brokers and introducers from taking more than a fifth (20%) of insurance premiums as commission. In other words, four-fifths (80%) of premiums must be used to benefit policyholders.

A similar situation exists in the US, where each state's Insurance Commissioner decides on the appropriate payout level. This approach works in other Anglo-Saxon economies, so why not introduce it here? At a stroke, it would put an end to multi-billion-pound rip-offs such as payment protection insurance.

4. Ending `negative payment hierarchy'

Let's say that you have a £500 0% balance transfer on your credit card, which charges no interest for a year. Later, you spend £250 on the same card while shopping, which attracts an interest rate of 18% APR.

You then pay £250 onto your card - in order to pay off the new £250 debt you have incurred and ensure you continue to pay no interest. But unless your card is issued by Nationwide BS, then all repayments are deducted from your cheap 0% £500 debt first. This means you will have to pay 18% APR on that extra £250 debt you have run up.

This sneaky trick (repaying the cheapest debt before the most expensive) is known as a `negative payment hierarchy'. It's used by almost every card issuer in the UK, with the noble exception of Nationwide BS, which reckons that it costs cardholders £500 million a year in extra interest.

I firmly believe that all card issuers should be forced to adopt positive payment hierarchies, where repayments chip away at your most expensive debt first. This would be a popular move with borrowers, although it could backfire by leading to higher interest rates overall.

Finally, if you'd like to suggest new financial laws to improve our lot, then please leave your comments below. The best ideas will be included in a follow-up article...

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