At the end of last month the OFT issued a consultation on its proposed guidance on the duty to give information to debtors, under sections 77-79, of the Consumer Credit Act 1974 ('CCA'). The paper also comments on the consequences of non-compliance on the enforceability of fixed-sum, running-account and hire agreements It also sets out the OFT's views of practices which would be unfair under section 25 of the CCA - the 'fitness test'.

This consultation follows the guidance which the courts have recently given including in the leading cases of Carey v HSBC Bank plc [2009] EWHC 3417 (QB), and McGuffick v The Royal Bank of Scotland plc (2009) EWHC 2386 (Comm).

Claims management companies ('CMCs') and solicitors instructed by them have been arguing that courts should find credit agreements unenforceable where lenders cannot produce original photocopies in response to requests under sections 77-79. Volume claims are the essence of CMCs' business models and it is the significant numbers of cases relating to unenforceable agreements, the lack of clarity of the law, and real concern about the actions of some CMCs, viewed as damaging to both consumers and businesses, that have brought about the OFT consultation.

Section 77-79 require creditors (or owners) to give debtors (or hirers) a copy of the executed agreement, other copy documents and statements of account on request. The consequence of non-compliance with such a request for information is that a creditor cannot enforce the credit agreement for so long as the creditor fails to comply with his duty. Where such a failure exists, the courts have no discretion to allow the agreement to be enforced by the creditor.

The consultation reinforces guidance offered in the recent High Court test case decision in Carey v HSBC Bank plc, which clarified a number of aspects of compliance with information requests. Much of this has been incorporated into the OFT guidance.

The OFT proposed guidance sets out the steps businesses should take to comply with their obligations under sections 77-79. The following summarises key points from the guidance:

The duty to give the debtor a copy of the agreement and other documents

The creditor

  • Valid requests must be made to the "creditor" and the duty to comply with the request lies with the creditor. Where novation or assignment has taken place and the recipient of the information request is not the creditor, the recipient should either inform the debtor of the correct recipient or pass the request on to that person. Assignment arrangements should allow each of the assignor and assignee to respond appropriately to information requests, particularly where put-back clauses exist, allowing for unrecovered debts to be returned to the assignor.

Request from the debtor

  • Where a request for information is made by a third party on behalf of the debtor (eg a solicitor or CMC), creditors need to observe obligation under the Data Protection Act 1998 and ensure the third party has proper authority from the debtor.
  • Where there are 2 or more debtors and the request comes from one only, it must be complied with and be given to all debtors.

£1 fee

  • No more than £1 may be asked for even though this may not cover the administrative costs of complying. One difficulty with the legislation, which is not addressed in the guidance, is the fact that provided one month has passed since a previous request was complied with, a debtor (or CMC on his behalf) is free to make a further information request, and can diarise to do so on a monthly basis. On each occasion the creditor can charge no more than £1 for an administrative task which in many if not most instances will cost the creditor considerably more than that.

Give the copy to the debtor

  • Posting the copy documents by second class post is sufficient. The response should be sent to the address given in the request. Retention of a record of posting is advised.
  • Where the request comes from an unlicensed CMC it must be complied with (although a response sent directly to the debtor with an explanation of why the information is being sent directly to him, is acceptable) but the creditor should notify the OFT and Ministry of Justice of the fact that an unlicensed CMC is acting.

A copy of the executed agreement

  • Importantly, the copy need not be an exact copy - a reconstituted copy is sufficient. Re-population of a template of the agreement form with the details of the specific agreement taken from the creditor's records is allowed. Where a reconstituted copy is sent to the borrower, the creditor should explain this and that this is satisfactory under the CCA.
  • A reconstituted copy must be a "true copy" of the executed agreement. It must set out the terms and conditions applicable at the time the contract was signed. The name and address at the time of signing must be included.
  • Certain items (such as the signature box, signature and date of signature) can be excluded from the copy (see section 180(i)(b) CCA and Regulation 3(2) of the Consumer Credit (Cancellation Notices and Copies of Documents) Regulations 1983).

Where the agreement has been varied

  • Where the agreement has been varied under s.82(i) of the CCA the creditor must provide a copy of the agreement as originally signed and also either (a) a copy of the latest variation relating to each varied term of the agreement, or (b) a clear statement of the terms of the agreement as varied.

Legibility of any copy

  • If the quality of any photocopy or microfiche is poor, the creditor should re-type it or repopulate a template, and should send a copy of the photocopy or microfiche as well.

Statements of Account

  • Provided the creditor provides a statement representing the state of the account as held by it, the creditor will have complied with its obligations and the agreement will remain enforceable even if the account turns out to be inaccurate when judged against the terms of the agreement.

Consequences of non-compliance

As mentioned above, failure to comply with information requests prevents the creditor from enforcing the agreement while the failure to comply continues.

The recent judgement in McGuffick v The Royal Bank of Scotland plc held that passing details of a debt to a credit reference agency and related activities do not constitute enforcement. The OFT guidance clarifies what does and what does not amount to enforcement as follows:.

Not enforcementEnforcement
Passing details to a credit reference agencyObtaining judgement against the debtor
Demanding paymentDemanding earlier payment
Issuing a default noticeRecovering possession of goods/land
Threatening legal actionTreating any right conferred on the debtor by the agreement as terminated, restricted or deferred
Bringing of proceedingsEnforcing any security
Terminating the agreement

Importantly, the OFT guidance emphasises that if the creditor is aware that it will not be entitled to enforce an agreement because it cannot comply with an information request, no communications or requests for payment should threaten court action or other enforcement of the debt. Moreover, the communications must make clear that the debt is unenforceable. Creditors can, however, register default with credit reference agencies where they are satisfied that the debt in question exists, and inform debtors of the intention to do this (but should not so inform debtors unless the intention to register default is genuine).

Next steps

Responses to the consultation can be made up to 21 April 2010.

If it retains they key messages of the consultation version, the finalised guidance will prove very useful to lenders for two main reasons. First, it will set out clearly what lenders should do when an information request is received and what they can do where an agreement cannot be enforced due to inability to comply with an information request. Internal processes and communications with debtors will need to be reviewed in the light of the finalised guidance to ensure lenders are complying fully with the guidance, and to remove margin for argument by CMCs and their panel solicitors on these points of detail.

Secondly, in its guidance the OFT is effectively endorsing key aspects of the decisions in Carey and McGuffick. While decisions on the actual interpretation and meaning of the law in this area is a matter for the courts, against the background of the Carey and McGuffick decisions, provided lenders follow the letter and spirit of the guidance it will not be an easy task for CMCs, their panel solicitors or consumers to argue that sections 77-79 should be given a different meaning.

CMCs will have to change strategy as these particular avenues of argument on enforceability are effectively closed, and non-payment is likely to have an adverse impact on the debtor's credit rating. As is made abundantly clear in the OFT proposed guidance, the importance of sections 77-79 is to provide information to the consumer not to "provide a method for consumers to avoid paying their debts".