This is the third in a series of updates we are producing on the process of implementation in the UK of the Consumer Credit Directive. To understand the picture to date, you can click on the following previous commentaries, the first of which is a general overview whereas the second focuses on some specific problem areas:
In this update again we are looking only at specific problem areas. This note is not intended as a comprehensive review of every issue arising from the CCD. It considers the consequences of some of the issues dealt with in BERR’s Stakeholder Bulletin covering the period November 08 to January 09, together with some feedback from subsequent stakeholder meetings with BERR.
It is becoming clearer that BERR is now aware of just how complex the implementation of the CCD is going to be, in particular in respect of its interface with the CCA.
As a consequence, BERR’s timetable is slipping. Contrary to previous assurances, we might now not get BERR’s Consultation Paper until April 2009 (or even later) nor the draft CCD Regulations until July. BERR would intend then to make the final Regulations in November, giving seven months before the effective implementation date in June 2010.
The finance industry is unanimous that this is not long enough and, in fact, is simply impossible to meet. With the CCD there is every bit as much for banks and finance companies (and, specifically, their IT departments) to do in the way of implementation as there was for the 2004/5 CCA Regulations or the CCA 2006. Notwithstanding that, BERR is adamant that it is hemmed in by the EU timetable with regard to the effective date. Continued lobbying is therefore vital to keep up the pressure on the Government and to emphasise that the finance industry is not being difficult but, rather, just cannot comply.
One of the opportunities to do something about this arises in connection with the impact assessment which BERR need to produce as part of the implementation process. BERR want the industry’s input on that. It will be important to produce figures showing just how much this will cost.
But, another aspect of this is what does the industry, as a whole, say it will do if the fears come true and internal implementation of systems etc cannot be completed in time for the effective date of June 2010? There are really only two possibilities, namely, (a) lenders stop advancing credit until the date when they can comply with the requirements or (b) lenders keep advancing credit but do not comply with the legal requirements. Whether the latter is an option or not, of course, depends on what the sanctions are for non-compliance. That is a big unanswered issue at present, BERR’s views on which are eagerly awaited. If the sanctions do not involve the unenforceability of resulting agreements nor a criminal offence nor doubts being cast on fitness to hold a licence, then the latter response may be possible. Without such comfort, there may be a large scale hiatus in the availability of credit.
We now know a little more about BERR’s thinking on how to deal with the interaction between the CCD and the CCA. Remember that the following are the key areas where the CCD and the CCA differ:-
- the CCD only applies to consumers in the true sense;
- the CCD only applies to financing of up to €75,000;
- the CCD does not regulate hire agreements;
- the CCD regulates conditional sale agreements but not hire purchase agreements. (BERR initially took the view that conditional sale agreements were not within the scope of the CCD but it seems they are now coming to accept our contention that they are within the scope of the CCD, so they are then left with the problem of whether conditional sale agreements and hire purchase agreements, which look like the same thing to the consumer, should or should not be regulated differently.)
So, apart from hire agreements which are not regulated by the CCD at all, there will be different lending regimes applicable to the following:-
- any business lending to “consumers” as defined in the CCA whether the lending is under or over £25,000;
- there is no high net worth exemption under the CCD and, therefore, the CCA 2006 high net worth exemption cannot apply to lending to true consumers under €75,000;
- all agreements regulated by the CCA over €75,000 are outwith the CCD.
It will be obvious that there are going to be some complex decision trees that will have to be followed in determining what sort of documentation has to be used and what regime will apply to agreements in the future. BERR’s tentative proposals for dealing with some of these issues are as follows:-
- They intend to keep the high net worth exemption but only for transactions over €75,000.
- They suggest that they will amend the CCA so that hire purchase is treated as if it were subject to the CCD and can thus be documented and come under the same regime as conditional sale agreements. There are swings and roundabouts here for the finance industry. On the one hand, it may be good news with regard to voluntary terminations (see below) but it may be bad news in that (a) systems and documentation for a very large sector of the credit market will have to be amended in short order before June 2010 and (b) it will make such agreements subject to the new early settlement regime under the CCD (see below).
- Remember, there is no distinction in the CCD between different categories of agreement on which so much time is spent in the CCA, for example, restricted use credit or debtor-creditor-supplier as opposed to debtor-creditor agreements. It follows that exemptions under the CCA which depend upon the category of agreement in question need to be reviewed where the agreements will now be governed by the CCD. Thus, for example, BERR is proposing that the existing debtor-creditor-supplier exemption where an agreement is for no more than twelve months and has no more than four repayments will be abolished. Thoughts on some of the other exemptions are yet to be expressed.
- Notwithstanding the types of agreement regulated by the CCA which are outwith the scope of the CCD, BERR is considering whether or not to extend the CCD’s regime on the requirement to give adequate explanations to consumers to such other agreements.
- There is a number of areas of overlap between the two sets of statutory provisions which have not yet been addressed, though we understand that BERR now has legal advice on what the areas of overlap are. This is something which is awaited with interest.
Early settlement and partial early settlement
Under the CCA a debtor can settle his agreement at any time before the expiry date. In doing so, he may get a rebate to reduce what would otherwise have been the cost of the payments not yet due. The relevant regulations under the CCA set out an actuarial formula to calculate the rebate.
The CCD also has an early settlement regime but, this time, it allows not just early settlement in full of the amount due under the agreement but, also, partial early settlement of the sums due under the agreement and, it would appear, any number of such partial early settlements. What is not clear is how a lender is supposed to understand whether in any given case a customer has simply made an overpayment or has purported to make a partial early settlement. We do not know the final answer to that yet.
However, we do now know BERR’s proposals in relation to two things, namely, what the remaining payments will be after a partial early settlement and how the early settlement calculation is to be made with regard to any applicable rebate on both full and partial settlement.
Taking these in turn:-
- It appears that on a partial early settlement lenders are to be given the choice, working with the debtor, of either recomputing the remaining payments over the original period of the agreement or of recomputing the original period but keeping the same payments. That appears to be both sensible and useful.
- BERR has produced a variation of the actuarial formula for computing early settlements and has asked representatives of the finance industry to help it by checking the maths. In producing this new formula, they are moving away from the current permitted one month deferred settlement date and replacing it with a right to charge one month’s interest. The effect appears to be the same.
They are also telling us that they intend that the same formula and the same calculation should be applied in respect of partial early settlements, as should the provision for one month’s interest on the amount partially repaid.
So far, so good. There is a problem, however. BERR takes the view that their proposal fits with Article 16.1 of the CCD. In their view, Article 16.2 of the CCD, which, on the face of it, deals with compensation for early settlement, is not relevant to the current UK legislation.
This bears further investigation. What Article 16.1 says is that there can be full or partial repayment at any time and, where there is, the debtor is entitled to a reduction in the total cost of the credit, “such reduction consisting of the interest and the costs for the remaining duration of the contract”. Article 16.2 then says that the creditor is entitled to fair compensation for his costs linked to the early repayment but such compensation may not exceed 1% of the amount repaid early or, where there is less than one year until the end of the agreement, 0.5% of the amount repaid early. There is also a provision for the creditor exceptionally claiming higher compensation if he can prove greater loss.
On the face of it, BERR’s proposal offers a more satisfactory outcome to the financee industry than the compensation provisions in Article 16.2 of the CCD. However, it is not as simple as that:-
- If Article 16.2 of the CCD is actually supposed to explain the only compensation which the creditor gets for the early settlement, then while the 1% and 0.5% figures may look derisory, it should be borne in mind that nothing in Articles 16.1 or 16.2, on this interpretation, require any advance fees to be taken into account. The way would therefore be open for creditors under the new regime to charge substantial set up fees which would not be lost or taken into account when calculating a rebate on early settlement.
- Under BERR’s formula, the same charges making up the APR would be taken into account in calculating the rebate as they are at present, so up-front fees, if not rebatable themselves, will affect the percentage used to calculate the rebate.
- BERR’s view on Article 16.2 is that it only relates to compensation for changes in interest rates for a period in which the borrowing rate is fixed where a fixed rate loan is repaid early and interest rates have fallen in the meantime. We struggle to see how they reach that conclusion.
- The worst case scenario would be to follow BERR’s proposal, find out that they are right but that the additional one month’s interest is not permissible so that neither can up front fees be removed from the APR in calculating the rebate nor can any extra deferment of settlement be taken into account, whether as a deferment, or as interest, or whatever.
The resolution of this difficulty will be crucial.
As mentioned in previous updates, our friend from 2004/2005, the PCI, is to be replaced where agreements fall within the CCD by a new form of pre-contract information which is generally being known as the SECCI. Unlike PCI, the SECCI does not follow the format of the agreement and will, therefore, have to be prepared separately with different wording from the agreement itself.
We can see what the importance of the decision tree is going to be in relation to choosing between the giving of PCI and the giving of SECCI. BERR propose to ameliorate this by allowing the giving of a SECCI instead of a PCI in the case of agreements which are outwith the scope of the CCD but otherwise would require PCI under the CCA. However, the decision may not be as simple as that because the CCD is much more flexible than the CCA in its requirements as to how the agreement itself is documented. As previously mentioned, for example, the CCD does not distinguish between debtor-creditor-supplier and debtor-creditor agreements, nor does it contemplate multiple category agreements requiring documented separately within the same agreement. It is quite possible, therefore, that, for example, an agreement involving what would be in CCA terms an ordinary debtor-creditor loan but with funded payment protection insurance (a debtor-creditor- supplier loan) could be documented very simply as a unitary arrangement under the CCD but would still require the tendentious layout of such a document under the CCA if the amount involved were over €75,000 or the agreement was for some other reason outwith the CCD.
It follows that creditors are going to have to be decisive as to what sort of agreement they are dealing with and how they wish to document it before they turn to the other issue of whether, outwith the CCD, they intend to use PCI under the CCA or a SECCI under the CCD.
Another issue here, is that the CCD is much less prescriptive about copy documents than is the CCA. Certainly, under the CCD a copy of a credit agreement has to be given to the debtor but the complex requirements relating to executed and unexecuted agreements and the different forms of cancellation notice which have to be given in different cases are not a feature of the CCD. Again, therefore, the decision tree and getting it right, will be vital.
On a more minor point, but one very important for credit card providers, the CCD requires that the amount of credit is stated in the SECCI. BERR are suggesting in implementing this requirement that, where the amount of credit is not known at the time the SECCI is given, it will be sufficient to say that the amount of credit is to be confirmed. Again, we consider that the justification for this in terms of the wording of the CCD is questionable.
One of the great disappointments to the asset finance industry in the implementation of CCA 2006 was that the regime for voluntary terminations of hire purchase and conditional sale agreements was kept, despite the abolition of the £25,000 limit. (This, to recap, is the regime under section 99 of the CCA whereby under any hire purchase or conditional sale transaction a debtor can hand back the goods which he has acquired under the agreement without having any liability to pay any more money, provided he pays half of the total amount payable under the agreement. That total amount payable includes any deposit at the beginning of the agreement and that deposit includes any allowance given on a part exchange, say of a motor vehicle, at the start of the agreement.) This has been a major source of losses for the asset finance industry over the last few years.
The CCD is a maximum harmonisation Directive. That is to say, member countries of the EU in implementing it, cannot stray outwith its terms. What the CCD says is supposed to apply without variation across all member states. The FLA is seeking legal advice whether, given that the CCD makes no reference to the voluntary termination issue, it follows that BERR cannot continue to insist on the section 99 voluntary termination regime for agreements which are within the scope of the CCD. If that is right, then, as we are clear (and BERR probably also now is) that conditional sale agreements are within the scope of the CCD, it would appear that voluntary terminations cannot be insisted upon where the agreement is a conditional sale agreement. It would also follow that if BERR goes down its currently proposed path to include HP agreements within the CCD voluntarily, then voluntary terminations will not be permitted with hire purchase agreements either. It may be, of course, that, if the FLA wins this argument with BERR on voluntary terminations, then BERR will change its mind and not harmonise hire purchase with conditional sale for the purposes of the CCD, or it may be that in harmonising it, they exclude voluntary terminations from the harmonisation. We need to wait and see – but we do, at least, face the possibility that we will be able to write conditional sale agreements which are free from the voluntary termination regime. In rejoicing at that, of course, we have to remember that the CCD only applies to true consumers, and only under €75,000; and we may or may not be less happy with the early settlement regime under the CCD.
Other areas of conflict
I have already mentioned that the CCD has no place for some of the categorisations which the CCA imposes on us, such as restricted use and unrestricted use credit, debtor-creditor-supplier/debtor-creditor agreements, and so forth. So far, though, I have only mentioned this issue in relation to the documentation of agreements. But, these types of categorisation within the CCA have other ramifications too. For example, who is treated as a negotiator for the purposes of section 56 differs according to the type of agreement in question. And, crucially, joint and several liability for non-performance of goods under section 75 of the CCA only arises in relation to a debtor-creditor-supplier agreement. Currently, BERR is proposing that this joint and several liability continue to apply to agreements under the CCD if it would apply to them at present. Section 75 has a limit of liability of £30,000, however. Over £30,000 the similar lender liability under Article 15.2 of the CCD will apply. It is quite hard to see the legal justification for this approach on the basis of the wording of the CCD.
Likewise, as already mentioned, the concept of a multiple agreement does not arise under the CCD and, therefore, the CCA’s requirements for documenting different parts of the agreement separately, it seems, cannot apply where the CCD applies.
Modifying agreements constitute an area of breathtaking complexity under the CCA, to the extent that modifying agreements are, in practical terms, impossible and hardly anyone ever does them. Despite this, the opportunity to abolish them was not taken when CCA 2006 was put through. However, there is nothing in the CCD relating to modifying agreements - so, will they disappear too where an agreement is within the scope of the CCD? A regime dealing with unfair relationships was brought in by CCA 2006. The CCD is silent on that too. Again, given that it is a maximum harmonisation directive, can such a regime continue to exist?
There is a long list of items where the CCA has prescriptive requirements and the CCD is silent. How BERR hopes to deal with these issues prior to June 2010 is anyone’s guess.