The OECD demands lenders simplify the process for the general public and not offer credit to those already in debt

Most consumers have little understanding of basic financial concepts and must be given increased protection and guidance when they take out loans, the Organisation for Economic Cooperation and Develop-ment (OECD) said.

New guidelines by the OECD, intended to prevent a repeat of the sub-prime loan crisis and its fallout, also recom-mends that lenders should be legally responsible for check-ing how much money a? cust-omer needs to borrow and whether borrowers “will be able to meet their payments.”

The OECD, a research and policy forum for the 30 most advanced economies, said that even discounting the global economic crisis, it was evident that consumer protection in financial ser-vices should be strengthened.

“Financial services firms must make sure their cust-omers understand what they are letting themselves in for when they sign up for? mort-gages, consumer loans and other products,” the OECD has recommended.

These had been designed to try and avoid a repetition “of the sub-prime mortgage crisis and ensuing credit crunch that sent the world economy into recession.”

This was a reference to the collapse of the so-called US sub-prime home-loan market,which saw loans been given to people on low wages and poor credit ratings stand-ing to buy homes.

It is widely held that many of these borrowers were sold loans they did not understand and even on the basis of mis-leading income assumptions, and that borrowers thought there was little risk because property prices would go on rising, generating latent cap-ital gain which would then cover the outstanding debt.

But the market collapsed when interest rates rose and property prices fell.

Many of these home mort-gages had been repackaged and sold around the world as high-quality income gener-ating bonds.

As borrowers defaulted and their homes were seized, investors around the world were unable to work out which repackaged bonds were “toxic” and which were not. This fed into a massive loss of confidence in credit markets.

The head of the financial affairs division at the OECD, Andre Laboul, said: “Surveys of financial literacy continue to show that consumers in virtually every country lack adequate financial back-grounds or understanding and that they underestimate their needs for education in the financial area.”

The OECD urged govern-ments to put in place a legal obligation on those selling financial services “to provide clear language in all mortgage agreements.”

Lenders should offer a clear summary of terms and cond-itions, explain the implica-tions of missing a payment deadline, spell out the interest rate and fees charged and the total cost of the credit.

Governments should also improve protection of con-sumers and help them to understand credit and com-plex financial products.

This meant informing people of their rights and respon-sibilities, and trying to clamp down on unethical practices.

Laboul said that the guide-lines “address a central issue that has been largely and surprisngly overlooked” in discussions on solving the crisis, “namely the protection and empowerment of con-sumers in an increasingly complex and volatile financial environment.”

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