The Department for Business Innovation and Skills (“BIS”) has now published its proposed draft regulations for implementing the Directive (the “draft Regulations”). We all have until late October to lobby BIS to sort out these draft Regulations as the final Regulations will be laid in November to come into force in June 2010. BIS’s thinking is becoming clearer but there is a long way to go before the Regulations will make full sense and be in anything like final form. What is clear is that all financial institutions before June 2010 will require to review all their current forms of regulated consumer credit agreement, produce a SECCI for each agreement and give consideration to what “adequate explanations” they intend to give in relation to each agreement.
There is, as yet, little sign of BIS taking on the vital task of reviewing wider issues of the incompatibility of the CCA with the Directive; only some specific issues are currently covered in the draft Regulations. The wider issues we are thinking of here are:-
- the continued categorisation of agreements, including their categorisation as debtor/ creditor/ supplier or debtor/ creditor and the consequences for documentation;
- whether section 18 of the CCA, which deals with multiple agreements, can continue. This has a material affect on documentation and on the SECCI;
- the amendment of section 82 of the CCA in relation to modifying agreements. There seems little realisation by BIS that creditors currently avoid modifying agreements like the plague. While, admittedly, they are making the documentation of such agreements easier for the future in the draft Regulations, they have not addressed the implications of the new rights of partial early settlement for the modifying agreement regime;
- this one is of specific interest to the asset finance industry only, namely, whether voluntary termination rights under section 99 of the CCA remain compatible with the Directive;
- there are many others; the foregoing are just the highlights.
In fairness to BIS, they have a huge job to do in implementing the Directive in the UK, and they are working hard on it and consulting widely, if briefly. But, because of their refusal to countenance a delay in the implementation date, it is very likely that vital areas will be missed and the legislation botched, with a requirement for subsequent amending regulation - as happened with the CCA 2006. One area, however, where we do not want to be fair to BIS is their insistence in some areas on gold-plating the Directive. Even in those areas where they apparently have walked back from their previous proposals of gold-plating, the same effect is likely to be achieved by the dreaded “Guidance” which the OFT will be issuing in relation to various matters, including their Guidance, already in draft form, on irresponsible lending. The point about gold-plating is this: the Directive is supposed to be what is called a maximum harmonisation directive. That is to say, each EU member state is supposed to implement it just as it is and is not supposed to impose any greater or any less obligations in relation to consumer credit agreements so there is no impediment to cross-border offerings of consumer credit. In the UK’s case, implementing the Directive is a more complex task to achieve than in other member states because of our historical legacy of the very detailed CCA. BIS don’t seem to accept, though, that by gold-plating, whether themselves or through OFT guidance, the implementation of the Directive in the UK, they open up the problem of finance companies trading into the UK from elsewhere in Europe regulating their agreements under non-UK law and using simply the Directive as it applies under the law of another member state. BIS do not think this is competent but there seems little doubt that, to some extent at least, it is. This may not be a big issue at the moment, given how little business is transacted directly into the UK from elsewhere in the EU at the consumer level, but the issues are most likely to be felt first in Northern Ireland where finance companies in the Republic have often shown appetite for simply extending their Irish state products into the North and will be encouraged even more to do so with the supposed commonality of the Directive.
Enough of the rant. What are the key or more alarming issues in the draft Regulations, as they currently stand? The following are the areas covered by the draft Regulations:-
- the scope of the Regulations;
- pre-contract information;
- adequate explanations;
- checking credit-worthiness;
- database access;
- varying extant agreements;
- open-ended agreements;
- the universal right of withdrawal;
- linked agreements;
- early repayment and partial early repayment;
- the calculation of the APR;
- the layout of credit agreements for the future.
I shall deal with the more important of these in turn.
Though hire purchase is not within the scope of the Directive, BIS intends to apply the draft Regulations to hire purchase so that there will be no difference between the regulatory regime for conditional sale (which is covered by the Directive) and hire purchase. It is not clear that they can do this without primary legislation, though that is what they propose. The Directive contains no exemption for high net worth borrowers, so the exemption for such borrowers introduced by CCA 2006 will be removed for agreements within the limit set out in the Directive for consumer lending, namely, €100,000 (or £60,260). This is probably of little concern as the high net worth exemption is capable of being little used anyway. The Directive only applies to consumers and therefore does not extend to business lending. The CCA, of course, does extend to business lending but allows use of an exemption procedure for business lending under £25,000. BIS is intent on regulating by the draft Regulations business lending under £25,000 which is currently subject to the CCA. Business charge cards, for example, will therefore fall within the new Regulations too. There is currently a very useful exemption for connected loans in the CCA where they are repayable in less than a full year by four or less instalments. That exemption is disappearing. The equivalent exemption in the Directive only applies if the loan is repaid within a year without any interest. Accordingly, a trader’s regular bill will continue to be exempt (assuming that is interest free), but many current arrangements which make use of this exemption will require to be revisited.
Second mortgages will continue to be regulated by the CCA and not by the Directive.
The old Advertisements Regulations will continue only for agreements secured on land. The new draft Regulations will apply for everything else. Admittedly, though, some of BIS’s previous suggestions which were causing the most consternation have been rejected. In particular, their previous suggestion that the APR in all advertisements should be based on a representative example of credit of £1,200 has been binned. They now have the more sensible idea that the representative example will only be based on £1,200 (or less, if the credit limit will definitely be less) in running account credit agreements where the amount of the credit is not known. In all other cases, in the advertisement the creditor should now use a representative example which will be taken as being the rate at which the creditor expects the credit to be provided in at least 51% of the agreements which will be generated by the advertisement. That representative example, though, is to be a worked example and is to be more prominent than anything else in the advertisement relating to the cost of credit. The APR itself no longer has greater prominence than other features of the credit. This sounds quite complex to achieve.
Moreover, for the moment, they have stuck to their proposed position that if an advert shows an APR or an interest rate, it must include the representative example. But, on the bright side, BIS appear to have walked back from their earlier proposal that an APR (and, hence, the representative example) had to be inserted in all credit agreements.
Avid readers of this series of articles will, by now, be familiar with the SECCI, the new EU-wide form of pre-contract information introduced by the Directive. It replaces the PCI form introduced in the UK in 2005 but (a) it isn’t very userfriendly and (b) irritatingly, it is not in the same format as the agreement itself so, unlike the PCI, it cannot just be a carbon copy of the first pages of the agreement. This has systems implications.
BIS has accepted that creditors can use the SECCI or the old PCI, as they think best, for the following types of agreement falling outside the Directive: second mortgages; agreements with credit over £100,000 (curiously, not €100,000, which is the limit for the continuance of the high net worth exemption); and business lending.
They have abandoned, fortunately, their earlier proposal that loans for debt consolidation purposes should in various cases be more strictly regulated – there were various areas where this impacted and this is one of them. The SECCI still has to be supplied to the debtor “in good time” but BIS have muddied the waters by defining “in good time” to mean “at the earliest opportunity and without unreasonable delay”. It is not entirely clear what the sanction will be if the SECCI is in fact delivered but it’s all done a bit tardily.
Another thing which is unclear is what one is supposed to do with a SECCI where what is being documented is a multiple agreement in terms of section 18 of the CCA. The Directive does not contemplate multiple agreements and this is an area which BIS badly need to sort out sometime soon.
There is a requirement to give, as well as the SECCI, a copy of the draft agreement to the customer if the customer asks for it. This is part of the big changes affecting the Regulations for the supply of copy documents in relation to signed agreements which is dealt with further below.
This is probably the single biggest headache under the Directive and is probably also one of the biggest areas of potential gold-plating by BIS and the OFT in their Guidance.
Again, BIS propose to exclude from the Regulations second charge lending, lending in excess of £100,000 (sic) and hire agreements. But, unless they can be persuaded otherwise, they do intend to apply the requirement to give adequate explanations to business lending under £25,000. What the draft Regulations currently provide is, admittedly, better than what was initially proposed but this will still be a burdensome new imposition, and raises particular problems in the situation where the creditor is interfacing with the debtor through third parties, whether that be because this is in-store credit or credit offered through motor dealers or with the involvement of brokers.
The simple basic rule is that before the agreement “is made” the creditor has to provide the debtor with adequate explanations of a list of matters set out in the draft Regulations together with an opportunity for the debtor to ask questions. If the adequate explanations and the answering of questions has been done by a “credit intermediary” (a very widely defined term) the creditor doesn’t need to do it too. The industry must have a concern with the more complex products that explanations will be challenging to give. There is very little appreciation in BIS of the complexity of some products regulated by the CCA and by the Directive, as most of their understanding is of simple vanilla lending and hire purchase. Clearly, there will now be a cost to creditors in preparing standard explanations to be given for each product. What is not yet clear is how creditors are going to deal with the opportunity which has to be made available for questions to be asked. We should also bear in mind that in face-to-face and telephone transactions the opportunity is supposed to be dealt with orally. Much anguish has been expressed in lobbying about what happens in a busy store on a Saturday afternoon with a harassed shop assistant whose expertise on credit products is limited. Is the answer to set up a helpline? Does that helpline need to be manned 24 hours a day? This may not be practicable for smaller finance companies (a group which tends to be ignored by BIS). What about the motor dealer?
There is little doubt, going forward, that creditors will want to have controls in place about what their intermediaries say. We should also brace ourselves for future litigation and ombudsman complaints as customers try to aver what misleading answers were given to their questions. The list of the matters which have to be covered by the adequate explanations is:-
- the type of transaction for which the credit to be provided is suitable;
- the cost to the debtor of the credit;
- the special or unusual features of the agreement, or any features which carry a particular risk and the effect they might have on the debtor;
- the consequences for the debtor from failing to make payments on time;
- the likelihood of legal proceedings for repossession of the debtor’s home in the event of a failure;
- the debtor’s ability to take away and consider the information which has to be disclosed (the SECCI);
- the existence and nature of any right to withdraw from the agreement; and
- the particulars of bodies which can provide further explanation or information.
BIS has moved back considerably from its previous proposals. They do not apply to hire agreements.
The rule is now very simply expressed in the draft Regulations. Before the agreement “ is made” the creditor is to assess the debtor’s creditworthiness on the basis of “sufficient information”. That sufficient information is to be obtained from the debtor “where in the circumstances this is appropriate” and a credit reference agency is to be checked “where in the circumstances this is necessary”.
It is not clear what either of these quoted phrases means. There will not likely be many cases where it is not appropriate to question the debtor.
Before creditors get too relieved at the apparent simplicity of this, there is a big cloud on the horizon, namely, the OFT’s current draft paper on Irresponsible Lending. It currently comes up with some very intrusive suggestions. We should therefore reserve judgment on what the requirement to establish creditworthiness is going to involve until that draft paper has been progressed. The real problem here and elsewhere is that this OFT Guidance will be gold-plating of the Directive by the back door. The potential impact on consumer credit licences held by creditors of the proposed Guidance on Irresponsible Lending is so severe that it will place UK lenders at a real disadvantage compared with their counterparts in other member states. The only good thing is that it appears to be accepted by BIS that the effect of failing adequately to check creditworthiness will not be that the agreement is unenforceable but simply will relate to suitability to hold a licence, and the same appears to be true of any alleged failure to give adequate explanations.
The format of credit agreements
If a creditor wants to do so, it can stick with its current forms of agreement for business agreements, agreements for credit of more than £100,000 (sic) and agreements secured on land. In other respects, however, the draft Regulations replace the Regulations which came into effect in 2005 with regard to the form of consumer credit agreements. There is a new schedule of issues which must be in the agreement. While, in many cases, these are very similar to what we are used to there are some quite material changes and there is no requirement to have separate headings for Key Financial Information, Other Financial Information and Key Information. There is also a much simpler list of the applicable statements of protection and remedies which will help remove many traps for the unwary in the current regulations.
Having said all that, some of the current list of items depend on a retention of some of the categorisations of agreements under the CCA, of which I have misgivings about the validity under the Directive, and they also beg questions about the continuation of multiple agreements and how they are to be documented as mentioned at the beginning of this note.
The prominence requirements are to be much less rigid.
It is proposed still to have signature boxes. An opportunity to facilitate the electronic completion of agreement has been missed.
The strict rule forbidding non-interspersal of information within the key information sections disappears.
Again, there is much simplification of the rules with regard to the provision of copy documents, largely because of the removal of the previous intensely prescriptive regime for cancellable agreements. The rule now will simply be that in all cases a copy of the executed agreement (and any document referred to in it) is to be given to the debtor unless (i) a copy of the unexecuted agreement has already been given to the debtor and (ii) the creditor then notifies the debtor in writing that the agreement has been executed and is in identical terms to the unexecuted version.
Though it is not yet adequately made clear, it is believed that BIS is amenable to amending the provisions of the CCA relating to later supplies of copy agreements at the debtor’s request. This is currently a favourite ploy of claims management companies who hope that the creditor would be unable to supply an exact copy of the agreement. The CCA almost certainly does not currently require that, but the new rules should put that beyond doubt – though they do not do so yet.
Right of withdrawal
From June 2010 all consumer credit (but not consumer hire) agreements are to give the debtor a right of withdrawal. This will not apply to bridging loans (as cancellation rights do not apply to bridging loans at present), nor will it apply to agreements to finance the purchase of land, nor to overdrafts. But, BIS do propose to apply it, bizarrely, to small business loans.
The period allowed for withdrawal will be 14 days from the date the agreement is “concluded” (though it is not clear whether BIS mean anything by using that word here instead of “made” as they use elsewhere). On withdrawal, the debtor has to pay the capital and interest accrued a the borrowing rate in the agreement. There is complex interaction with any agreement for the supply of goods which has been financed by the agreement from which the withdrawal is made; that supply agreement is unaffected by the withdrawal, so the withdrawing debtor will have to fund the supply in another way. There remain unresolved issues about when and to whom title to goods passes in cancelled conditional sale or hire purchase agreements.
This is one of the most complex areas in the draft Regulations, not in relation to early repayment itself, but in relation to the new right of partial early repayment which can be exercised as often as the customer wants. BIS admit that the partial early repayment provisions are still at an early stage of development and we can expect significant further changes here.
BIS have a blind spot in respect of the inter-relation between this right of early repayment and section 82. They assume that the OFT will be producing guidance explaining how the creditor is to calculate the rescheduling of payments after the partial early repayment has been made. But, that is to assume that rescheduling is what is intended rather than continuing payments at the same level but for a shorter period. If they are rescheduled, then a modifying agreement appears to be required to set out what the rescheduled payments are. Given the industry’s horror of modifying agreements that is not an attractive prospect, even if BERR has proposed simplification of the regime for the documentation of modifying agreements.
One possibility, of course, is for creditors to amend their documentation so that they reserve to themselves the right to vary agreements where a debtor has exercised his right of partial early repayment as the exercise of such a right does not involve a modifying agreement.
There are various problems in addition:-
- There is provision for compensation being claimed by the creditor over and above his ability to defer the settlement date to which a rebate is calculated. That compensation, however, cannot be claimed if the debtor pays his repayment from the proceeds of payment protection insurance but, unless the creditor has participated in the arrangement of that payment protection insurance, it is unclear how he is supposed to know this is the case.
- It is far from clear if BIS’s admittedly welcome proposal to allow the one month deferral of the settlement date for calculating the rebate is fully in accordance with the provisions of the Directive. • The draft Regulations provide that notice by the debtor of his intention to make partial early repayment can be given in any form. That, presumably, would mean that the debtor could telephone the branch in Shetland of the bank whose agreement is run through its computerised systems in Basingstoke. It could also possibly mean that a simple overpayment could be deemed notice. This simply will not do.
- There is a bizarre provision about the effect on partial early repayment on linked transactions. This attempts to say that the liability under the linked transaction will be reduced by the same proportion as the early repayment under the credit agreement reduces the obligations under the credit agreement. Presumably, BIS has in mind things like payment protection insurance. As I said earlier, they don’t understand more complex parts of the market. As a maintenance agreement, for example, in relation to the supply of a car under a hire purchase or conditional sale agreement could be a linked transaction, it is clearly nonsense to reduce the future maintenance obligations by the proportion by which the capital outstanding on the loan has been reduced.
- The creditor has to give the debtor a statement of the effect of the partial repayment if the debtor wants it. This rather pre-supposes that a modifying agreement is not required in relation to the effect of the early repayment. It would simplify things and make this workable if the statement had contractual effect and modified the partly repaid agreement without the need for a modifying agreement. But it all begs the question as to who has the power to decide the effect of the partial repayment on the number and amount of the future payments.
- The rebate calculation on the partial early repayment will be done in the same way as the rebate calculation on early settlement of the whole agreement.
Watch this space, there will, I am afraid, be more of this to come as the Regulations move towards finality.