Friday, 7 January 2011

Guidance for creditors on mental capacity

On December 2010, the UK Office of Fair Trading(OFT) launched a consultation on its draft guidance for creditors on mental capacity. On one hand, the draft guidance is designed to explain the steps the OFT expects creditors to take to identify borrowers who might lack the mental capacity to make informed borrowing decisions. On the other hand, it also outlines the appropriate way for creditors to deal with borrowers who do or might lack capacity, and explains the practices and procedures it considers they should put in place.

The OFT described mental capacity as ‘a person's ability to make decisions and depends in part on their cognitive abilities to: learn, remember and understand’. For many people, for reasons of illness or disability, their mental capacity can be affected in ways which may prevent them from making certain decisions that may impact on their lives.

The OFT’s guidance for creditors on mental capacity is a way to advance the principle of responsible credit. In the context of consumer credit, the principle of responsible lending concerns professional diligence in assessing creditworthiness and supporting education of consumers,warnings about the risk related to default on payment and over-indebtedness. In this particular case, the OFT expects creditors to form a view on whether the borrower is able, perhaps with support, to make an informed borrowing decision and whether they can afford to make repayments under the credit agreement in a sustainable manner.

Further, the principle of responsible lending have gained a considerable momentum in the European Consumer Credit Directive(Directive 2008/48/EC). Aimed at tailoring credit products to consumers’ needs and ability to repay. This has implications for evaluating the suitability of the product design as such and the suitability of the product for a particular borrower. The latter includes consumer’s understanding of the product and its risks and lender’s understanding of the creditworthiness.

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