High street banks have strengthened their code of practice over fears that consumers are taking on too much debt. New rules introduced on Saturday will encourage lenders to ensure that money given to customers for consolidation purposes will be used to clear existing debts.

At the same time banks should make sure that if two people's incomes are used to access the affordability of a loan, the loan should then be made in joint names.

Lenders will also have to go to greater length to ensure that the person borrowing money will be able to pay it back.

The move comes amid growing levels of individual bankruptcies and record consumer debts. UK consumers owe a massive £1.2 trillion and increasing numbers of consumers are struggling to pay their debts.

The Banking Code Standards Board had expressed concerns that lenders were not going to sufficient lengths to ensure consumers could afford repayments when they advanced them further credit.

Other measures include lenders considering two aspects of affordability to assess people's ability to repay debt.

These include looking at their income and financial commitments, considering how they have handled their finances in the past, using information from credit reference agencies, credit scoring, or, subject to permission from the customer, using information from other sources such as their employer or landlord.

Seymour Fortescue, chief executive of the Banking Code Standards Board, said: 'In the context of rising concerns about personal indebtedness, our reviews have suggested ways in which the code could be strengthened.

We are pleased that our recommendations have been accepted by the industry and believe they should encourage responsible lending and responsible borrowing.'

However, others don't think the new rules go far enough. Malcolm Hurlston, chairman of the Consumer Credit Counselling Service said: 'Self-regulation is the best way forward and this more stringent guidance is certainly a step in the right direction. There is, however, still a lot to do.'

The organisation is concerned that the information used to base credit decisions on is still scant.

The inquiry found that in some cases banks lent people money to consolidate existing debts, but did not make sure consumers used the money to repay or reduce their outstanding borrowings.

In other cases banks assessed the affordability of loans on joint incomes, but failed to ensure both parties were liable for, or even aware of, the debt.

It also found that loan terms often reflected borrowers' ability to afford the debt, rather than the purpose the loan was being taken out for, with seven-year loans taken out to pay for holidays in some cases.

Copyright © 2005 First Mortgage Trust