OFT warns credit card providers off 'charging orders'

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The financial regulator has ordered amendments to the use of charging orders by card companies seeking to force consumers into paying off debt.

The OFT singled out both Alliance & Leicester Personal Finance Limited and American Express Services Europe Limited as companies that needed to "address concerns" about the way they enforced some consumer debts.

Changing charging orders

A charging order is one of the more frightening enforcement methods available to creditors seeking to reclaim outstanding debt.

Financial companies can apply to a court for a charging order when a consumer has failed to keep up payments on their credit card or other form of unsecured debt.

The alchemical order turns these unsecured debts into secured debt by placing a charge on the debtor's property or other asset. When the debtor sells the property, the debt is paid off using the proceeds.

While the charge order in itself doesn't require that the debtor immediately sell, a creditor can apply for an order for sale to force them into selling.

The number of charging orders granted by UK courts has risen from 45,000 to 164,000 over the last five years. The investigation by the OFT found a number of problems relating to the use of charging orders by major creditors.

These include failing to consider the consumer's circumstances before seeking a charging order and applying hefty charges for referring individual cases to debt collection agencies.

The OFT's Director of Consumer Credit, Ray Watson, said: "Our investigation uncovered instances of charging orders being used to secure debts of less than £600.

"Lenders are entitled to use charging orders but must do so proportionately. Where we consider the use of charging orders to be unfair or oppressive we will take action to protect consumers."

What should change?

Both American Express and Alliance and Leicester have subsequently made numerous changes to their policies as directed by the OFT.

Before seeking a charging order, American Express will now need to demonstrably take account of the personal and financial circumstances of the customer, the amount that is owed and whether it can be obtained by less drastic measures.

The OFT's actions have prompted praise from consumer protection groups.

The Citizens Advice Bureau's Head of Consumer Policy, Sue Edwards, said: "We are pleased to see the OFT take action today against companies' overzealous use of charging orders."

"It is vital that people who are doing their best to repay their debts should be protected from further debt collection, enforcement action and from enforcement related costs that are disproportionate to the size of the debt. Placing requirements on companies is a good start, but the current law on charging orders urgently needs reviewing and appropriate protection for people put in place."