Consumer Credit Act 2006: Post-contract information on arrears and default sums

Introduction

This is the second of two briefing notes looking at the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 which were laid before Parliament on 4 April 2007. This long-awaited Statutory Instrument, together with the Consumer Credit (Exempt Agreements) Order 2007, which was laid at the same time, is the final piece in the puzzle that is the Consumer Credit Act 2006.

One of the government's expressed intentions in amending the existing Consumer Credit Act 1974 was to protect consumers and to create a more transparent credit market. The 2006 Act achieves this by inserting new sections into the 1974 Act. These impose statutory obligations upon creditors and owners to provide notices and statements to their credit and hire customers. Some are completely new and some are amended versions of what we know today. The Regulations make provision about the form and content of these notices and statements.

In this note, we review the new notification requirements which credit and hire businesses need to implement in relation to accounts in arrears and the charging of default sums. In the first of the series, we looked at the requirement for annual and periodic statements of account. The implementation date is 1 October 2008, later than originally anticipated. However, although timescales may look generous, the system changes necessary to accommodate the Regulations' requirements are very significant indeed. We encourage businesses to start the ball rolling now because, if you comply and get it wrong in a material respect or if you fail to comply at all, the penalties are severe. You will not be able to enforce your agreements until the error is corrected. You will also be prohibited from charging interest or default sums for the period of non-compliance.

Requirements common to all notices/statements

In our first briefing note we highlighted the need to comply with certain general requirements in the Regulations on the use of plain language, legibility and matters of prominence. Those requirements apply equally to the notices we review in this briefing note. Remember that the requirements on prominence need to be considered carefully because even inadvertent non-compliance could render your notices/statements ineffective. Errors or omissions which do not affect the substance of the required information or form of wording will not on their own cause the notice/statement concerned to breach the Regulations. However until there is some guidance or case law on this point, this principle may be difficult to apply in practice. Applying the Regulations correctly in the first place is the only way to provide businesses with certainty.

In addition to these general requirements, there are specific details which need to be included in each of the required notices/statements, which we consider below.

Notice of sums in arrears for fixed sum credit/hire agreements

A new Section 86(B) in the 1974 Act requires notices of sums in arrears to be served on debtors/hirers under fixed sum credit or hire agreements.

Points to note in relation to this new section include:

• The first arrears notice must be sent if the debtor/hirer must have made at least two payments under the agreement and the agreement is in arrears by no less than the amount of the last two payments.
• The first arrears notice must be sent within 14 days of the above.
• After the first notice, so long as the account is in arrears, subsequent notices must be sent at least once every six months (even if further arrears accrue).
• The need to send a notice ceases when the customer is no longer in arrears or a court judgment has been given concerning the debt.

Again the Regulations contain specific requirements as to content (see below). Significantly, the requirements vary between that which must be contained in the first required notice and that required in subsequent notices. This reflects concerns expressed during the DTI consultation that it would be technically very difficult to develop systems to identify the initial trigger point requiring the arrears notice, particularly for agreements which pre-date 1 October 2008 where this may have happened some time in the past. Consequently, the first arrears notice concentrates on the amount of the arrears, whereas subsequent notices must contain more detail about the amounts of payments made and payments missed.

Each notice will require:

• A statement that the notice is given in compliance with the 1974 Act and a form of wording encouraging the debtor/hirer to discuss the state of his account with the creditor/owner. NB there is flexibility in the wording that may be used.
• Certain information giving contact details and information to identify the agreement.
• A statement notifying the debtor/hirer if default sums and interest will accrue.
• A statement that notices will be served every six months while the account is in arrears.
• For subsequent notices the Regulations require, among other things, information relating to payments in, interest or other charges accruing, and the amount and date of any other movements in the account during the period to which the notice relates together with the account balance at the end of that period.

Notice of sums in arrears for running account credit agreements.

A new Section 86(C) in the 1974 Act and the Regulations impose similar requirements to those outlined above in relation to running account credit agreements. The requirement for timing and frequency of service of such notices is, however, calculated by reference to the existing obligation to serve periodic statements. There is no 'first and subsequent' notice distinction.

Notice of default sums

A new Section 86E in the 1974 Act requires the service of notices of default sums when a default sum becomes payable. A default sum is an amount (not interest) which the debtor/hirer must pay in connection with a breach of the agreement. By way of an example, this would include charges listed in an agreement for the preparation and issue of letters chasing non-payment. The notice must be sent when a default sum becomes payable that has not already been mentioned in an earlier default sums notice.

Points to note in relation to notices of default sums:

• Must be sent within 35 days after the default sum becomes payable.
• Can be incorporated in another notice or statement sent under the 1974 Act.
• Creditor/owner cannot charge interest on a default sum before 29th day after notice is sent and then only simple interest may be charged.

The Regulations contain the detail and require that the notice includes:

• A form of wording to the effect that the statement relates to default sums and is given in compliance with the 1974 Act.
• Certain information giving contact details and information to identify the agreement.
• The amount and nature of each default sum included in the notice and the date it became payable under the agreement, together with the total amount of all default sums included. (The DTI accepted during the consultation process that by providing specific detail rather than generic information, this will result in extra cost for the creditor/owner due to the required systems changes. It felt that the benefit to the borrower of being provided with this outweighed the disadvantages for the creditors.)
• Various statutory statements giving:
  1. (a) Notification that the Default Sums Notice does not include sums the subject of a previous notice; and
  2. (b) Information about any interest that may be charged on default sums.

The Regulations also contain requirements for information on the right to end the agreement to be included in notices for hire purchase agreements.

Notice of intention to recover postjudgment interest

A new section 130A in the 1974 Act introduces a requirement for creditors/owners to give their customers notice if they want to be able to recover post-judgment interest. Notices must be served at intervals of no more than six months. This section will apply regardless of when the agreement is made.

Points to note:

• The debtor/hirer will not be required to pay interest for the period between the giving of the judgment and the giving of the first notice.
• The inability to charge interest reoccurs if the creditor/owner fails to give the second or subsequent notice within six months of the last post-judgment interest notice.
• The notice can be incorporated into any other statement issued under the 1974 Act.

The Regulations make provision about the form and content of these notices. In brief they must contain information to identify the agreement, contact details, information about the amount of post-judgment interest and various statutory statements providing the debtor with details of who to contact for help in resolving debt problems.

OFT information sheets

A new Section 86A in the 1974 Act requires the OFT to prepare and give general notice of an arrears information sheet and a default information sheet. The information sheets reflect the government's aim to ensure that all consumers receive clear concise and independent information about debt management options including debt advice. A copy of these sheets will need to be sent with every arrears notice given and every default sums notice given and at no cost to the customer.

The OFT is currently undertaking a consultation process on the form these sheets are likely to take. The OFT has indicated they are likely to be A4 size, fold horizontally into thirds (forming six pages) and be available as PDF documents from their website. Businesses will have to organize printing themselves. You are encouraged to follow the consultation and respond if this requirement poses substantial system problems or an inordinate amount of expenditure.

Summary

There is considerable work to do to ensure that businesses can implement these information giving requirements by 1 October 2008. Businesses should be:

• Reviewing the legislation to assess which provisions will apply to their agreements;
• Reviewing the Regulations so as to draft the required statements/notices correctly; and
• Implementing systems changes to ensure that the requisite statements/notices can be served correctly.

All this will need planning. Start now. If we can assist in interpreting the statutory provisions and how they apply to your business or by drafting the appropriate statements/notices for you, please contact us. We have also provided clients with bespoke training sessions, tailored to their specific requirements. If this would be of interest to you, let us know.