Lenders who use bills of sale must radically improve their practices after the government announced a new code of practice will be brought in on February 1.The Department of Business, Innovation and Skills (BIS) said the new code of practice was designed to improve consumer protection against bills of sale, where a loan is made to a customer using an asset, such as the customerís car, as security. The guidelines stipulate that lenders using bills of sale must increase the transparency of the product by explaining to customers on a plain English information sheet how the loan agreement works and what the customer can expect from the lender.

Lenders must also disclose arrears charges before the contract is signed and cannot claim more than their costs. Alternative payment arrangements for customers in difficulty must be considered and assets can only be repossessed if these arrangements fail. When a customer surrenders an asset this must be recognised as a full debt settlement with the consumer bearing no liability for any shortfall between the outstanding debt and value of the asset. The measures are the result of a consultation by BIS, which was prompted by concerns at the "relatively high" number of complaints the Office of Fair Trading (OFT) received about the loan product and the detriment suffered by bill of sale consumers who approached the Citizens Advice Bureau.

However the government decided not to ban the practice, arguing that such a move could restrict consumer access to credit, push up prices and potentially force some consumers towards illegal lenders. Edward Davey, consumer minister, said: "Itís important that we clarify whatís involved in a bill of sale loan. There have been concerns in the past about how difficult they are to understand, so this Code of Practice and the plain English information sheet should provide more transparency on what a loan entails for both the lender and the consumer."