This year sees the implementation of some notable changes to the regulation of consumer credit agreements and consumer hire agreements. The Consumer Credit Act 2006 (the Act), amends the Consumer Credit Act 1974, which is still the main legislation in this area, and is being implemented in two stages: 6 April and 1 October 2008.
The main objectives of the changes introduced by the Act are to increase consumer protection, in particular with regard to greater transparency after the inception of arrangements, new rights on default and remedies for unfair relationships, and to increase the enforcement powers of the OFT and Financial Services Ombudsman. There are no changes to the categories of regulated agreements; these are consumer credit or consumer hire agreements which may be either secured or unsecured for fixed sums or running accounts.
The Act applies to “any agreement between a creditor and an individual for credit of any amount”.
This is a key provision and contains two important changes that came into force on 6 April 2008.
- New definition of ‘individual’ – An individual includes a natural person, a sole trader, a partnership of 2 or 3 people (this takes larger partnerships outside the scope of the Act, previously a partnership of any size was an individual) and an unincorporated body.
- There is no financial limit – The Act abolished the former £25,000 limit on regulated agreements. All agreements with individuals are now regulated by the Act.
There are two exceptions to this rule:
- Loans for business purposes – An agreement is not regulated by the Act if the debtor is acting in the course of a business and the credit exceeds £25,000. For this exception to apply the debtor MUST complete a declaration “for exemption relating to business” in the prescribed form.
- High net worth individual – The agreement does not have to comply with the Act where the debtor is a natural person and BEFORE the agreement is entered into he makes a declaration, in the prescribed form, that he is willing to forego the protection of the Act. This declaration must be accompanied by a statement in the prescribed form in relation to the debtor’s high net worth (ie, a net income in the previous year of not less than £150,000 or net assets in that year of not less than £500,000) made not more than a year before the date of the agreement.
The effect of these changes is that certain agreements not previously regulated now fall within the scope of the Act, namely all agreements with individuals in excess of £25,000 (unless the exemptions apply AND the prescribed declarations are made where required, but note that any declaration not in the prescribed form will be ineffective). On the other hand, agreements for credit of any amount with partnerships of 4 or more people or with high net worth individuals are now outside the regulation of the Act.
There are two key practical points for financiers to note here:
- Where a financier is entering into a credit agreement with an individual who is acting in the course of his business ALWAYS obtain a ‘declaration for exemption relating to business’ or the agreement will be a regulated agreement under the Act.
- There are strict rules relating to adverts for credit in the Act. To avoid committing a criminal offence by any breach of these rules, financiers must make it clear on any of their websites that EITHER they do not lend to individuals OR that they only lend for business purposes.
Further changes will come into force on 1 October 2008 relating to the conduct of the relationship during the agreement and the new information that must be supplied to the debtor. As the implementation of these rules has been deferred in order to allow creditors more time to put in place the necessary systems, it can be anticipated that little clemency will be shown to creditors who fail to comply with the rules when they come into force.
The main areas of change are:
1. Supply of information to debtor – the Act provides for greater transparency of agreements, placing considerable importance on the supply of specific information to the debtor during the running of the agreement. The new information required includes:
- Periodic statements – creditors in regulated fixed-sum credit agreements must provide debtors with annual statements in the specified form. The first of these must be within one year of the day after the date on which the agreement was made. In respect of running account agreements, statements of specified information about the consequences of not making payments or only paying minimum amounts must be provided to debtors at not less than 12 month intervals.
- Notice of sums in arrears – creditors must give notice to the debtor when he fails to make at least two payments under the agreement or does not pay the amount due in full. In the case of a fixed-sum agreement, the notice must be given within 14 days of the non-payment conditions under the Act being satisfied.
- Notice of default sums – creditors must give notice to the debtor after a prescribed period if a default sum becomes payable. Note here that the Act only permits the charging of simple interest and this will have to be shown separately from other charges.
- Notice of arrears on judgment debts – creditors must notify and provide information to the debtor in the specified form of any interest payable on any judgment debt, with further notices and information to be provided at not more than 6 month intervals.
The consequences for financiers of non-compliance with these documentary requirements are severe:
- The credit agreement will be unenforceable during the period of non-compliance without a court order.
- The debtor will not be liable to pay any interest or default sums that would have been payable under the agreement during this period of non-compliance by the creditor.
- There may be further adverse consequences for the maintenance or renewal of consumer credit licences, reputational damage and further FSA investigations into the entire business.
2. Unfair relationships
New provisions replace the ‘extortionate credit bargain’ sections of the 1974 Act. Under this new regime, the court may be able to take into account all matters it considers relevant to the creditor and debtor in assessing whether the relationship between them arising out of the credit agreement, separately or in conjunction with any related agreement, is unfair to the debtor because of:
- The terms of the agreement or any related agreement,
- The way in which the agreement is operated or the creditor has exercised or enforced any rights under the agreement or any related agreement.
- Anything done or not done by or on behalf of the creditor before or after the agreement (or any related agreement) was made.
The court will have a wide range of remedies against the creditor wherever it determines there has been unfairness. These include ordering the creditor:
(i) to repay in whole or part the sums paid to the creditor or any associate by the debtor or any surety under the agreement or related agreement,
(ii) to reduce or discharge any sum paid by the debtor or any surety under the agreement or any related agreement,
(iii) to return to the surety any property provided as security,
(iv) to alter the terms of the agreement or any related agreement.
The important point for financiers to note here is that the new unfair relationship provisions apply to any agreement providing credit of any amount to an individual. The rules will apply to regulated and unregulated agreements, whenever entered into as this part of the Act has retrospective effect, as well as all related agreements and references to the creditor and debtor include any assignee or transferee.
3. Licences and enforcement
The Act provides for a number of new categories of ancillary credit business that will need to be licensed. These include debt administration (performing the duties of creditor and enforcing rights, other than debt collection, under a credit agreement) and the provision of credit information services. Any person not licensed to carry on consumer credit cannot enforce any credit agreement.
Additional powers are being given to the OFT in connection with the issue and regulation of licences. These will include imposing requirements on the conduct of the business, requesting information either in connection with a licence application or generally having permission to enter the creditor’s premises, on notice or under warrant, to observe the conduct of the business and to inspect documents. The civil penalty for failing to satisfy any requirements imposed or to supply any requested information is a fine of up to £50,000.
The key practical points for financiers to note with regard to the further changes coming into force are:
- Any agreement that is subject to the Act MUST comply with the additional information requirements. The consequences for a creditor who does not comply are severe.
- All agreements will be subject to the ‘unfair relationships’ regime with its wide remedies against any creditor where the court finds unfairness.
- Failure to hold the required licences for consumer credit business will be a criminal offence.