The Consumer Credit Act 2006 starts to bite

Introduction

Although the Consumer Credit Act 2006 (the Act) has been in place since 30 March 2006, much of it is only now making an impact. Some important provisions came into effect on 6 April this year and organisations will need to have implemented procedures to ensure compliance with the new provisions. This is just the start. Significant changes will follow with the implementation of other important provisions on 6 April 2008 and again on 1 October 2008. Businesses in the credit industry need to be planning now if they are to be ready in time. In this briefing note we summarise the main changes, set out the timetable and suggest action points.

A summary of the changes and the timetable

The Act amends the existing Consumer Credit Act 1974 (the 1974 Act), the intention of the changes being to protect consumers and create a fairer, more transparent and more competitive credit market. Significant changes now taking effect are:

• Repeal of Section 127 (3) - (5) of the 1974 Act - A welcomed change affecting new agreements and giving the courts some discretion over whether a regulated agreement is enforceable where key information has not been included in an agreement. Previously the courts were precluded from enforcing even when they wanted to.
• The Act introduces a new concept of "unfair relationships" which replaces the existing but little used "extortionate credit" test with a much broader-based test giving consumers a mechanism to challenge businesses on unfairness grounds. The unfairness may exist within the terms of the agreement but equally it could relate to the way a customer has been dealt with by a business at any time during their relationship. For example, unfairness may be deemed to have arisen as a result of the way the product is marketed or perhaps if a customer is chased for arrears.
• Establishment of an alternative dispute resolution scheme by the Financial Ombudsman Service for disputes between consumers and consumer credit licence holders.
• £25,000 limit is being abolished, and will certainly bring more personal credit/hire agreements within the scope of consumer credit regulation - although the £25,000 limit will remain for some "business lending" (see below for fuller details). Other changes include exemptions from regulation for "high net worth" debtors/hirers and a new definition of "individuals" which effectively carves out partnerships with more than three partners.
• Reform of the licensing regime, extending the powers of the Office of Fair Trading and establishing a consumer credit appeals tribunal.
• New Post Contract Information provisions - The Statutory Instruments introducing these requirements were finalised just last week. The requirements are extensive, onerous and highly prescriptive, obliging businesses to provide periodic statements of account to their customers (even for fixed sum loans where statements are not currently required), arrears notices and default notices, where applicable. Businesses can be prevented from enforcing their agreements, charging interest or recovering default sums while statements/notices in the prescribed form are outstanding. Getting information to consumers is a key theme of the Act.

A full synopsis of the above proposals is beyond the scope of this briefing note but a review of the timetable for key amendments helps to identify action and reviews needed to be undertaken by consumer credit businesses.

As indicated in the above table, a few issues merit further comment.

Removal of the £25,000 limit - the effect on variations to existing agreements

The removal of the £25,000 limit will bring a greater number of loans within CCA regulation and businesses will need to review their processes to determine the extent to which new business is likely to be caught by regulation and the extent to which exemptions may apply. This will be a significant process, but there is concern that not only will the change in the limit affect new business post April 2008 but it may also impact upon existing unregulated loans/hire agreements. The key point is Section 82 of the 1974 Act which governs situations where a loan/hire agreement is varied or supplemented. The effect of Section 82 is that a new agreement is created combining the existing and modifying agreement. Agreements in excess of £25,000 entered into prior to 6 April 2008 will not have been regulated by the CCA but with the abolition of the financial limit, variation of such an agreement can create a modifying agreement under Section 82, which will be regulated. Whether variations to existing loans may trigger Section 82 and create a modifying agreement may depend on the precise terms of the documentation but such triggers may be:

• Further advances
• Interest rate switches, eg from standard variable rate to a special rate.
• Transfer of equity or transfer subject to mortgage where a borrower is removed or added.
• Arrears cases where arrears are consolidated into the existing loan.
• Release of part of the security or addition to security.
• A move from interest only to capital and interest free payments - eg when dealing with a poorly performing endowment mortgage.
• Making a one off capital repayment.
• Exercise of a payment holiday facility.

The trade bodies have been consulting with the DTI on these issues and the DTI does recognise that there is a problem and, except in relation to further advances, appears to be disposed to use its powers under transitional provisions to deal with it. Organisations will need to monitor this issue as it could impact significantly on the required system changes and future practices.

Loans for business purposes

If a loan is "wholly or predominantly" for business purposes, then the loan will be exempt if it exceeds £25,000. In other words, this exemption re-imposes a financial limit for business lending. In order for the exemption to apply, the agreement must contain a prescribed form of declaration which the customer signs indicating that the loan is for business purposes. The form of declaration is set out in schedule 3 of the Consumer Credit (Exempt Agreements) Order 2007 (the Exemption Order). Where the declaration is given, there will be a presumption that the loan is indeed for those purposes unless the lender knew or should have known that they were not to be so used. In the consultation process, concern was expressed about the need for obtaining two signatures (one for the agreement and one for the business declaration). The DTI has responded by suggesting that the declaration is placed in close proximity to the agreement signature to help ensure that the requirement to sign the document twice is not overlooked.

Industry has expressed concerns to the DTI as to how the business exemption will apply to buy-to-let lending as the policy intention of the Act was that lending over £25,000 for the purpose of buy to let would fall within the business exemption but the way that the Act has been drafted means that it is exempt only for buy to let that is wholly or predominantly for business purposes and not for investment purposes. The DTI has indicated that it intends to address this unintended consequence of the Act before the Exemption Order is brought into force.

High net worth exemption

The Act exempts loans to borrowers where the borrower has an income or assets above a particular threshold and there has been a statement to this effect made by an accountant (or employer in the case of income). In addition, the agreement itself must contain a prescribed form of statement which the borrower must sign and which indicates that the borrower is prepared to forgo the protections of consumer credit legislation. The exemption will be available to individuals with a net asset threshold (excluding the individual's main residence and pension) of £500,000 or with a net income value of £150,000.

Summary

There is much to do for all organisations but the required changes will depend on the form and content of your agreements and the type of regulated business being conducted. We can assist with interpretation and guidance on the requirements, in-house training, drafting documentation and a review of processes. If you have not previously conducted regulated business then we can help you to review whether in the future this will change and your business may require a Consumer Credit Licence and comply with the consumer credit legislation