Mental capacity – lenders take care


Mental capacity is obviously important and doubly so when products are sold to someone who might lack mental capacity.

Every day we make decisions about lots of things in our lives. The ability to make decisions is called mental capacity. People may have difficulties making some decisions either all or some of the time. This could be because they have:

  • a learning disability
  • dementia
  • a mental health problem
  • a brain injury or a stroke.

The Office of Fair Trading (OFT) is taking a particular interest when credit is arranged for someone who may not have mental capacity. This is a spin off from the work of the OFT on irresponsible lending. There is a great responsibility on those dealing with customers who may not have mental capacity. The OFT are looking at credit but no doubt they will have to go further.

Guidance is to be 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, where it isn’t known that they lack capacity but there is reason to believe, or at least reasonable grounds to suspect, that this might be the case. The OFT is seeking responses to their suggested code of practice.

It also outlines the OFT’s view of 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.

Mental capacity is a person’s ability to make decisions and depends in part on their ability 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.

Lack of capacity can be permanent or temporary. Mental Capacity is not the same as mental health, as someone with mental health problems may still have the capacity to be able to make informed decisions.

In the case of consumer credit, creditors need 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.

As well as providing clarity for creditors on what the OFT expects of them in these circumstances, the guidance is also intended to help protect vulnerable consumers from taking on unsustainable or unsuitable credit commitments, while at the same time ensuring that they are not inappropriately denied credit. The draft guidance takes account of legislation in this area to the extent that it is relevant.

Ray Watson, Director of the OFT’s Consumer Credit Group, said:

‘There is a clear need to strike a balance between protecting consumers who lack the mental capacity to make informed borrowing decisions and ensuring that they are not inappropriately denied access to credit. It is very important that creditors balance borrowers’ rights to make borrowing decisions with their right to safety and protection when they can’t make decisions to protect themselves. We look forward to receiving comments from those with knowledge of and an interest in these issues.’


Following the consultation on irresponsible lending the OFT identified a need to provide further clarity on the issue of mental capacity as it impacts on borrowing decisions. Until this project, little attention had been focused on dealing with such issues at the point of the lending decision; instead the emphasis has tended to be on dealing with contractual issues and mental health. This project is not about mental health nor is it about financial capability, although the output may impinge on both.

The draft guidance seeks to clarify:

a) what the OFT would expect from creditors, in terms of identifying borrowers who might lack the mental capacity to make informed borrowing decisions, under circumstances in which it isn’t known that a borrower lacks capacity but there is reasonable cause to believe or reasonable grounds to suspect that he may do, and

b) what the OFT would expect from creditors, in terms of the practices and procedures they employ in dealing appropriately with borrowers, in particular in respect of the provision of explanations of the key features (in particular associated ‘risks’) of credit agreements and the undertaking of assessments of affordability, where it is known that – or there may be reasonable grounds for doubting whether – mental capacity is lacking at a particular time, even where it is not reasonably possible to establish that it is lacking.

The press release is dated 6 December 2010 and responses are requested by 4 March 2011.