Consumer Credit Act 2006

01.01.06

Consumer Credit Act 2006

Described as the biggest shake up of the consumer credit market in 30 years, the Consumer Credit Act 2006 (the "Act") presents lenders with enormous challenges as well as some interesting opportunities.

Originally introduced on December 2004 by the Trade and Industry Secretary, the Consumer Credit Bill was designed to create a 'fairer, clearer and more competitive credit market, by bringing in new rules to give consumers better protection and more rights'. The Bill completed its Commons stages before running out of time when the 2005 General Election was called. In May 2005 the Bill was reintroduced into the Commons and on 30 March 2006 it received Royal Assent. A commencement date, or even several commencement dates for different parts of the Act, will be set by separate statutory instrument. Trade and Industry Secretary, Alan Johnson has stated that the Act will "extend protection for consumers, improve regulation of businesses and encourage a diverse credit market fit for the twenty-first century".

Responsible lenders will welcome the sentiments behind this statement but may be less pleased about the extent of the changes this will entail to existing documents, systems and procedures. At a time when banks and mortgage lenders are still recovering from mortgage regulation, a further major project involving change and systems development seems inevitable. Added to that, the European Directive on Consumer Credit promises even more change, despite the level of criticism it has provoked both in the European Parliament and within member states.

This note is intended only as a brief summary of some of the main amendments which the Act will make to the existing Consumer Credit Act 1974 ('the CCA') and to highlight some areas where detailed consideration of the changes will be required. As with the existing CCA regime the devil is in the detail. Consequently an in depth examination of the underlying regulations, which will provide much of the detail behind the new structure, will be required in due course.

The 'Good' News

As promised in the White Paper entitled 'Fair Clear and Competitive' the government have introduced:

  • A new definition of an 'individual' which means that firms with four or more partners will no longer be subject to the documentation requirements of the CCA.
  • The financial limit, presently £25,000, will be removed so that all facilities granted to individuals will be caught by either the CCA, or by mortgage regulation. This at least provides some degree of certainty where previously doubts existed over how some types of facilities should be documented.
  • Business lending for sums in excess of £25,000 will be exempt from the CCA. In order to invoke the presumption that an agreement is entered into "wholly or predominantly" for the purposes of the debtor's business, lenders are likely to include a declaration to this effect in the agreement. The form, content and signing of such declarations might be the subject of regulations still to be published.

High Net Worth Debtors

In addition, a new feature is the proposal to introduce a facility for high net worth debtors to opt out of the protections afforded by the CCA. This provision may afford banks with an opportunity to deal with such high value customers in a more flexible way than the CCA currently allows. The niceties of how this proposal will work in practice will be the subject of detailed regulations still to be published. It is to be hoped that these regulations do not make the process more cumbersome than actual compliance with the CCA regime!

The 'Not So Good News'

Statements

Changes to the existing arrangements for the issue of statements for both fixed sum credit and running account credit are proposed. Once again the details will emerge through regulations still to be published but the clear implication is that borrowers will be entitled to 'better information' in future.

Arrears and Default

Important changes include:

  • A requirement to issue new forms of notices to customers in arrears both at the outset and then at six monthly intervals. This will apply for both fixed sum and running account credit.
  • A requirement to issue notices of 'default sums' to customers where such an additional payment is due on default.
  • The need for an OFT information sheet on arrears and default to be sent to customers in default situations. The OFT information sheets have yet to be published.
  • The period in default notices being changed from 7 to 14 days.

Serious consequences will flow if these new requirements are not respected. These include a stipulation that creditors will not be able to enforce agreements during any period of non-compliance. It also appears that the debtor will have no liability to pay interest or default sums in respect of the period of non-compliance.

Where lenders seek to recover interest on a judgement debt they will, in future, in many cases have to issue special notices after the giving of the judgement and then at six monthly intervals in order to recover that post judgement interest.

Unfair Relationships

This part of the Act is potentially the most worrying element, even for the most responsible of lenders, as it contains wide ranging powers to allow the Court to determine that a credit agreement is 'unfair' to the debtor because of one or more of the following:

'(a) any of the terms of the agreement or of any related agreement;
(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).'

These far reaching provisions intended, among other things, to replace the existing arrangements for dealing with 'extortionate credit bargains' appear to give almost unlimited scope for disgruntled individuals to challenge the fairness of a credit agreement, and to give the Courts a very broad range of remedies which may be imposed to address the unfairness.

Unlike the Unfair Contract Terms legislation, no helpful guidance seems to have been included to illustrate the kind of things which might be regarded as being unfair. Consequently, lenders will need to review not only their agreements and related documents but also their operational procedures to ensure that, so far as possible, they are at all times treating their customers fairly.

It is also worth bearing in mind the "unfair relationships" provisions will apply to business lending for sums in excess of £25,000 and to arrangements with high net worth debtors, as will the extortionate credit bargain provisions to the extent that they continue to have effect after commencement of the unfair relationships regime.

Licences

Radical changes to the licensing regime will see the introduction of licensing requirements for those providing 'debt administration' and 'credit information services'. The OFT will also be granted very considerable discretion and powers to investigate the fitness of any applicant and will be able to place restrictions on the extent of any licence granted. These powers include the right to demand information and even to enter premises under warrant. The OFT will in due course publish guidance on how it will determine the fitness of applicants. One benefit to emerge from this review is the intention to differentiate between responsible lenders and the small minority who have tended to sail rather closer to the wind. As a result, in certain circumstances, the OFT will be able to issue licences for an indefinite duration to responsible lenders. Before celebrating this reform too enthusiastically, however, readers should note that periodic charges (the level of which will be set out by general notice by the OFT) will still be levied for the privilege of holding an indefinite licence!

Those aggrieved by OFT rulings on the subject of licence determinations will have the opportunity to appeal to a newly created Consumer Credit Appeals Tribunal and ultimately to the Court.


Financial Services Ombudsman Scheme

Complainants with grievance against holders of Consumer Credit licences will, in the future, be able to take their complaints up through the Financial Services Ombudsman Scheme even where the licence holder is not currently subject to the Scheme.

Transitional Provisions

One key point to note is that some of the new requirements, for example in relation to statements and default provisions will apply to agreements no matter when they were made. Other provisions such as those dealing with Unfair Relationships may, in some limited circumstances, also have some retrospective effect. For these reasons careful scrutiny of the transitional provisions may reap benefits.

Systems Changes

Inevitably the introduction of legislation on this scale will necessitate detailed systems changes to allow lenders to cope with the myriad of new documentation, information provision and notice requirements. The time available for planning and implementing the changes arising from the Act is likely to be less than ideal so early action is strongly recommended.

For further information, please contact Brodies' Banking Team:

Derek Arnott, on 0131 656 0224 or e-mail:derek.arnott@brodies.com
Lindsay Lee, on 0131 656 0298 or e-mail: lindsay.lee@brodies.com