The Consumer Credit Bill
The Consumer Credit Bill (the “Bill”) will significantly modernise the UK consumer credit regime to provide further protection for consumers and create a fairer more competitive market. The Bill was introduced into the House of Commons on 16 December 2004 and a House of Commons Standing Committee commenced consideration of the Bill on 25 January 2005. The Department of Trade and Industry is currently consulting the market regarding the implementation of the Bill, but it is intended that on receiving Royal Assent it will be implemented in stages.
Consumer credit agreements and consumer hire agreements are principally regulated under the Consumer Credit Act 1974 (the “Act”). Since the enactment of this legislation the credit market has been transformed as the range and complexity of credit products and the sales strategies adopted by credit providers have rapidly developed. Much secondary legislation has been implemented under the Act and under related enactments to keep apace with developments in the credit market and to comply with new European legislation. However, the Bill will make more substantial amendments to the Act to provide a more up to date and reliable regulatory framework and licensing system. In particular, the Bill aims to enhance consumer rights and redress by empowering consumers to challenge unfair lending and by providing them with more options for resolving disputes. It is also intended to strengthen the licensing regime by ensuring fair practices and driving out rogue credit providers. Proposed amendments to existing regulations are described in more detail below.
Application
The Act currently applies to consumer credit and consumer hire agreements for amounts up to £25,000. It is proposed under the Bill to extend the application of the regulation to all consumer credit unless it is specifically exempted. Consumer credit business will also include credit information services and debt administration. Business lending will continue to not be regulated except in very limited circumstances involving the lending of loans of up to £25,000 to small businesses; sole traders, unincorporated associations and partnerships of three or fewer members. The Secretary of State is given a power under the Act to exempt credit agreements with high net worth individuals from the provisions of the Act.
The enhancement of consumer rights and redress
The Act currently enables consumers to challenge “extortionate credit” bargains in court. However a new unfair credit relationships test is proposed under the Bill. This new test will enhance consumer rights of redress in court by providing consumers with a broad right to challenge unfair practises and terms imposed by credit providers. Creditors will have the burden of proving that their relationship with a consumer is not unfair in the event of a challenge by a consumer on this basis. Courts are to be given a wide range of powers under the Bill if it determines that there is an unfair credit relationship, for example they will be empowered to reopen the credit agreement or even set it aside.
The Bill provides for the introduction of an alternative dispute mechanism to be run by the Financial Ombudsman Service. Consumers will be entitled to make complaints to the ombudsman scheme, which it is intended will provide consumers with a quicker, cheaper and less burdensome method of challenging creditor terms and practises than going to court. Credit providers are likely to be required to make financial contributions towards the running of the scheme from time to time.
The strengthening of the licensing regime
The Office of Fair Trading will be granted wider powers under the Bill to investigate and regulate credit providers with the intention of driving rogue providers out of the market. The Office of Fair Trading will, for example, be granted a general power to request information and documentation from licensees and will be able to access premises to observe how a credit provider’s business is run. The Office of Fair Trading will be additionally given a broad right to impose requirements on licensees in relation to the carrying on of their business when dissatisfied about the way such business is being conducted, and it will be empowered to impose a penalty of up to £50,000 on licensees failing to comply with such requirements.
Consumers will be provided with more information regarding the state of their accounts throughout the lifetime of their credit agreements under provisions of the Bill. Credit providers will be required to provide a statement to consumers with fixed sum credit agreements on a yearly basis. If credit providers fail to provide such statements they will be prevented from enforcing the credit agreement during the period of non-compliance or charging interest or requiring payment of default sums during or in relation to such period.
Credit providers will also be required to provide regular statements and information when consumers go into arrears or become liable to make default payments under the proposed new regime. If a consumer fails to make required payments under the terms of their agreement, the credit provider will be obliged to give notices to the consumer at stipulated intervals in order enforce the agreement, charge interest or impose default payments during the period of non-compliance. Such notices are to include an arrears information sheet produced by the Office of Fair Trading. Similarly, where a default sum becomes payable under an agreement, the credit provider will be required to provide notice to the consumer together with a default information sheet provided by the Office of Fair Trading, The credit provider will not be entitled to charge interest on outstanding default sums payable until 28 days after the notice was given. Furthermore credit providers will only be permitted to charge simple interest on outstanding default sums.
The Bill will provide much needed amendments to the existing outdated consumer credit regime. The UK consumer credit market has developed into an innovative and sophisticated market since the Consumer Credit Act was first enacted. As credit has become a more familiar tool for managing finances it has become increasingly important to further protect vulnerable consumers from unfair credit mechanisms such as hidden charges, large early settlements and other hidden surprises. Reputable lenders are likely to benefit from a stronger, more competitive credit market as rogue providers are driven from the market. However, the transition to the new regulatory framework and on going compliance will result in additional financial costs.
Published 13/01/2005.
