Will the new Consumer Credit Act affect your business?
We have already seen parts of the Consumer Credit Act 2006 (the “2006 Act”) come into force and more are set for implementation over the next twelve months.
The Government has pledged that the 2006 Act will: -
(i) help consumers to challenge unfair lending practices;
(ii) improve the powers of the Office of Fair Trading (OFT) against dishonest companies;
(iii) establish an independent Ombudsman scheme to avoid lengthy and costly Court battles;
(iv) require lenders to provide consumers with information about their credit position with them; and
(v) introduce a target licensing system so the OFT can spend more time investigating companies that they believe are acting dishonestly.
DEFINITION OF INDIVIDUALS
Since 6 April 2007, the 2006 Act has restricted the meaning of "individuals" (so far as partnerships are concerned) to a partnership consisting of two or three persons not all of whom are bodies corporate and an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership. This amendment has therefore limited the eligibility of partnerships for cover under the 1974 Act. However, it still applies to all other sorts of “individuals” i.e. individual people and sole traders.
Also on 6 April 2007 the unfair relationships provisions came into force and repealed the extortionate bargain provisions of the 1974 Act. Any agreements with an individual entered into on or after 6 April 2007 attract this new provision. These unfair relationship provisions allow a Court to consider whether the relationship between an individual and a creditor/hirer is unfair to the individual due to the terms contained within that agreement. It also allows the Court to look into how the agreement is operated by the creditor/hirer and other actions done, or not done, by the creditor/hirer before (or even after) the agreement was actually made. These new unfair relationship provisions grant the Court very wide powers where an unfair relationship is established, for example, the Court could argue that the agreement must be changed and any sums already paid by the individual to the creditor/hirer be repaid. Due to this development, businesses that deal with “individuals” need to be aware, more than ever, of their conduct, both before and during their agreements with individuals and, most importantly, regardless of whether they are exempt agreements.
ABOLITION OF FINANCIAL LIMIT
Historically any credit or hire agreement in excess of the financial limit, currently £25,000, with an individual avoided the procedural requirements of 1974 Act. From 6 April 2008 this is all set to change as the 2006 Act will repeal the financial limit and potentially make all consumer credit and hire agreements involving "individuals", of whatever value, a regulated agreement. This change is clearly going to have a major impact on lenders who previously did not need to comply with the 1974 Act if they only dealt with individuals on transactions in excess of the £25,000 financial limit.
Under the 2006 Act an agreement to lend to a partnership of three partners or less as well as individuals and sole traders will be a regulated agreement unless it falls into one of the exemptions contained in s.16 of the 1974 Act. In addition, from April 2008 there are to be further exemptions implemented. The first of these is an exemption for high net worth individuals. To qualify for this exemption the individual must: -
(i) be a natural person
(ii) agree to forgo the protection and remedies available under a regulated agreement; and
(iii) issue the creditor/hirer with a current statement of high net worth. (This must be for an entire year ending on the day in which they wish to enter into the agreement and must be compiled by a specified source.)
The second new exemption is for business agreements exceeding the financial limit of £25,000, contained in the 1974 Act. In order for an agreement to be exempt under this, the hire or credit agreement must be in excess of £25,000 and the individual must have entered into it “wholly or predominantly for the purposes of a business that he/she carries on or intends to carry on”. There is no clarification given as to what element of personal usage, if any, would prevent this exemption from being applicable. However, if a creditor or hirer knows that any asset is not a business asset (to fulfil this requirement) then this exemption will not apply.
An agreement for less than £25,000 can also come under the business exemption if it is “wholly or predominantly for the purposes of a business that he/she carries on or intends to carry on” and a declaration from the individual is obtained confirming this is the case and that he/she agrees to waive rights under the Act. Therefore, all legitimate business assets would be able to attract the business exemption whether the transaction is under or over £25,000 providing a declaration of "wholly or predominantly" is issued in the case of business assets under £25,000 and they genuinely are for business use.
Further sections of the 2006 Act are to be implemented in October 2008. For example businesses that create regulated agreements have a duty to provide their individual counterparties with annual statements in a specified format and failure to comply with this requirement will render the agreement unenforceable.
This is just a summary of some of the changes which are being made by the 2006 Act and is designed to illustrate the further obligations which could potentially fall onto creditors/hirers who deal with individuals.