The development of the Consumer Credit Act in Chelmsford

The development of the Consumer Credit Act in Chelmsford and throughout the UK means there are various ways in which Credit Consumer Act 1974 (as amended by the Consumer Credit Act 2006) protects the debtor. Under the Act, these ways have been recognised as giving the court powers to extend the period for the payment and to make consequential orders varying aspects of the contract. A regulated agreement is any credit consumer or consumer hire agreement under the Consumer Credit Act 1974 (CCA 1974) other than an exempt agreement. Most of the provisions of the Act apply, although not all consumer credit agreements, only to regulated agreements. CCA 1974 also enables the Secretary of State to exempt other consumer-credit agreements in which the number of the total charge for credit does not exceed a specified number, the rate of connection with a country outside the UK. This report will be based on the judicial control of regulated agreements among the 1974 and 2006 Act to distinguish if the amendment of the latter Act brought about supplementary rules that courts look at when deciding on a case and whether it has improved the law as it stands today. As we will be looking at the variation between the two Acts, we will be able to perceive the new set of laws laid down.

The 1974 Act’s definition of credit is very extensive. These are a small number of common types of credit as hire purchase, credit sale, conditional sale, trading checks, overdrafts, credit cards, mortgages, and personal loans, it also includes cash loans and any form of ‘financial accommodation – which covers any circumstance in to which a customer is allowed time to pay. An agreement can be reached within the control of the Act even if it is made by word of mouth. Most types of regulated agreement must be in writing, however, and must comply with the Act’s rules on form and content. Unless it is in writing an agreement is unlikely to be enforceable in law. It should be noted that special rules apply to overdrafts on bank current accounts. The Act laid down some rules when deciding on a case, such as:

1     (a) The form and content of agreements

2     (b) The credit advertising

3     (c) The method of calculating the Annual Percentage (APR) of the Total Charge for Credit

4     (d) The procedure to be adopted in the event of default, termination, or early settlement

5     (e) Extortionate credit

A ‘consumer credit agreement’ is a personal credit agreement where a debtor is provided with credit of £25,000 or less. But some of the Act’s requirements (such as the rules on advertising and giving quotations, the need for a credit-broker to hold a licence and the powers of a court to deal with extortionate credit bargains) can apply even if an agreement exceeds the £25,000 limit. A consumer credit agreement may be either a ‘debtor-creditor’ (d-c) agreement or a ‘debtor-creditor-supplier’ (d-c-s) agreement. Some exemptions apply only to d-c agreements and others only to d-c-s agreements, so it is essential to understand how they differ. Generally, a d-c-s agreement is one where the creditor is connected in some way with the supplier of the goods or services being financed by the credit agreement. This includes cases where creditor and supplier is the same person. Consequently, shop owners who offer customers their own finance facilities or finance companies that make ‘hire-purchase’ agreements enter into d-c-s agreements. If the creditor and the supplier are different persons, the agreement is still d-c-s if there are arrangements between them under which the creditor is prepared to finance transactions between the supplier and its customers. For example, when a chain of shops has a ‘card account’ scheme which allows customers to use an ‘own-brand’ card to buy goods in any shop in the chain, but the accounts are actually operated by a separate finance company, this is a d-c-s agreement. Credit card schemes which permit customers to use the card in any shop that is a member of the scheme are another common type of d-c-s agreement. A d-c agreement is one where there are no goods or services directly involved, for example a cash loan or personal loan, or where there are no arrangements between the creditor and the supplier of any goods. Loans to refinance existing debts are always d-c agreements. The exception to the rule ‘once a regulated agreement, always a regulated agreement’ is provided by running-account credit. In this case, the status of the new agreement is determined by the combined effect of the original agreement and the variation to it. Whether an agreement is regulated cannot be affected by any variation that triggers a change automatically. For example, the interest rate charged under a bank’s credit card agreement may change because of a change in the bank’s base rate.

As S 61(1) (a) of the CCA 1974 prescribes that “… a regulated agreement is not properly executed unless a document in the prescribed form containing all the prescribed terms is signed by the debtor and the creditor or hirer” The Consumer Credit Act 1974 regulates most forms of consumer credit transactions, other than regulated mortgage contracts and other exempt transactions. The CCA requires those engaged in a consumer credit business, a consumer hire business or an ancillary credit business to be licensed by the OFT (The Office of Fair Trading) – Section 21 CCA 1974.

Where as in Section 32 regulates the form and content of consumer credit and hire arrangements, the rights and duties of the parties to consumer credit and consumer hire agreements, Parts V and VI (S60) contains the powers of courts to exercise judicial control with respect to these agreements. For example in Part IX, the courts have powers in certain circumstances to re-open and amend the provisions of consumer credit agreements, including where the relationship between the creditor and debtor arising from the agreement is unfair to the debtor.  In Section 129, it mentions the extra time the debtor is given to pay back and the return order which does not give the debtor any time to pay back the creditor.

Even though the unpaid supplier may have reserved the ownership of the goods supplied, statute has imposed a substantial number of restrictions on his power to recover possession of them, the course of setting out the unpaid supplier’s rights. CCA 1974 adopted the restrictions that came out of the Health Protection Authority in 1938 and simply applied them to a larger range of contracts. Some of the restrictions were made applicable to regulated agreements, including credit sales, loans and consumer hiring. CCA 1974 sought to ensure that the supplier did not side-step the default notice procedure by acting under the terms of the agreement and it laid down in Part 4 general powers of judicial control over the enforcement of regulated agreements (the special rule for extortionate credit bargains and the financial relief of defaulting hirer), including enforcement orders. These orders are required for the enforcement of an improperly executed agreement though the court can instead make a declaration. Understanding the concept of judicial control of regulated agreements, in particular of enforcement and time orders, protection orders, and special powers in the case of hire purchase and condition of sale is essential when discussing the subject in question.

On the other hand, according to the Consumer Credit Bill 2004, the Bill removes the financial limit of £25,000 for the regulation of consumer credit and consumer hire agreements under the 1974 Act. In future all such agreements will be regulated by the amended Act. The removal of the financial limit has important implications for the proportionality and therefore Convention compatibility of certain other provisions of the current Act. The 1974 Act contains certain restrictions on the enforceability of regulated agreements where certain prescribed formalities are not complied with. The Bill provides that in such circumstances the agreement or security is enforceable against the debtor or hirer only on an order of the court.

The court is given a discretion whether to grant an enforcement order in those circumstances, S127 (1), (2) CCA 1974 except in certain categories of case where the current Act provides that a court shall not make an enforcement order S127 (3) – (5) CCA1974. In the recent case of Wilson v Secretary of State for Trade and Industry [2003] UKHL 40, [2003] HRLR 33, the House of Lords upheld this restriction on the enforceability of regulated agreements as being compatible with Article 1 Protocol 1, but expressly stated that this conclusion did not mean that the restriction would be proportionate if the current financial limit were removed: “an adverse consequence, acceptable for a loan of £25,000, may not be acceptable when applied to a loan of £250,000”.

It is clear from the case of Southern & District Finance Plc v Barnes [1995] [1996] 1 F.C.R. 679; (1995) 27 H.L.R. 691; [1995] C.C.L.R. 62; [1995] N.P.C. 52 where a creditor calls in a loan (such as by bringing a possession action in a case where the loan is secured on property), the outstanding balance of the loan is a sum owed and the court has power to make time orders in respect of future instalments as well as accrued arrears, but when such as order is made, the court can, under S136 of the CCA 1974. Amend the regulated agreements by reducing the rate of interest payable under it, if necessary, into nil. Where a regulated agreement is being enforced and an instalment order is made. There will be no court hearing.

This was demonstrated in the case of Heath v Southern Pacific Mortgage Ltd [2009] EWHC 103 (Ch); [2009] 5 E.G. 107 (C.S.); [2009] N.P.C. 20  where Ms Heath took out a mortgage for over £28,000, secured on her home. Of that sum, £19,000 was used to discharge an earlier mortgage and the remainder was used for other purposes. When Ms Heath defaulted on the new mortgage, and accrued arrears, the lender claimed possession. The loan appeared to escape the requirements of the Consumer Credit Act 1974 because it exceeded £25,000. Ms Heath appealed against a possession order and argued that the Act did apply because the loan in effect had two discrete parts or purposes – each valued at less than £25,000. The High Court rejected that argument and upheld the possession order. If the analysis of the case are correct, the 2002 mortgage was not properly executed under Section 61, and the Court has no power to enforce it under Section 65, as no document containing all the prescribed terms was signed by the Appellant: Section 127(3), the effectiveness of which was confirmed by the House of Lords in the above case. Section 127(3) was repealed by Section 15 of the Consumer Credit Act 2006, but not so as to affect improperly-executed agreements made before the repeal came into force. Accordingly, Section 127(3) still applies to the present case.

According to the Department of Trade and Industry (DTI) provide us with a summary of the changes that brought the CCA 2006. The intention was to protect consumers and create a fairer, more competitive credit market. It does this in three main ways. First, it enhances consumer rights by empowering consumers to challenge unfair lending, and through more effective options for resolving disputes. Second, it improves the regulation of consumer credit businesses. Finally, it makes regulation more appropriate for different types of consumer credit transaction by creating a fairer environment for businesses to operate in, and also extends protection to all consumer credit.

In order to ensure that statements and notices are as clear and easily understood as possible, and can be adapted to suit the circumstances of individual cases, they relaxed the requirement for prescribed information to be shown as a whole and without interspersion.

In order to take account of industry concern that some of the required information for existing periodic fixed-sum statements was not currently available on their IT systems, the amended Act allows lenders to indicate where certain elements are not included in the actual statement, but will be available on request. In addition, it removed the requirement that statements and notices cannot show information relating to the period before commencement of the transparency provisions in arrears statements. This is to ensure consumers are aware of their overall arrears situation and to simplify the arrangements for lenders.

In periodic fixed-sum statements, the requirement to estimate a new end date for the agreement where payments had been missed or reduced was likely to prove difficult (or impossible in some cases) to implement in practice . This requirement has now been removed, and instead the requirement is a general warning on the effect of paying less than the agreed sum and what debtors should do in those circumstances.

As a result of discussions with the industry, backed up by independent evidence, it was decided to extend the implementation period by six months in order to reduce the risks for both lenders and consumers, which was implemented in the 1st October 2008. However, the removal of the £25,000 financial limit will came into force at the earlier date of 6th April 2008 to ensure this important consumer protection measure is brought in at the earliest possible date. The 6th April 2008 also brought in the business and high net worth exemptions.

Arrangements were made for the certification of an individual’s high net worth status more flexible, and balanced this by an increase in the relevant income and asset thresholds.

1 The discretionary power of courts: Courts will now have discretion to enforce all invalidly executed agreements; the restrictions on this discretion, which applied in respect of certain infringements, have now been lifted;

v   The enhanced power of OFT: OFT has been given enhanced powers as regulator under the Act, including the ability (in certain circumstances) to impose civil penalties up to £50,000;

v   Consumer Credit Appeals Tribunal: This will allow licensees to challenge decisions taken by the OFT, and replaces the existing regime of appeals to the Secretary of State;

v   More business activities which need license: Debt administration and credit information services will become activities requiring a consumer credit license.

v   The unfair relationship which replaced the extortionate credits

The Consumer Credit Directive was adopted by the European Commission in May 2008, with an ensuing date for completing the transposition set for June 2010 for all member states. This Directive replaces the 1986 Consumer Credit Directive and amendments made to this Directive. The new CCD takes a maximum harmonisation approach and is intended to harmonise key aspects of consumer credit legislation in Member States as part of the objective of creating a common credit market across the European Union. At the same time, the Directive is also intended to maintain high levels of consumer protection. The provisions of the Consumer Credit Act 2006 which affect private individuals and credit agreements will be aware of the Unfair Commercial Practices Directive 2005/29/EC as well as the Consumer Credit (Agreements) Amendment Regulations 1983 which was amended in 2004.

(www.oft.gov.uk)

In the case of credit agreements, the required information is:

1 nature of the agreement

2  parties to the agreement

3  key financial information (including the amount of credit or the credit limit, the duration of the agreement, the APR, the total amount payable, and the amounts and timing of repayments)

4  other financial information (including a description and cash price of goods or services, any advance payments, the total charge for credit, the rate of interest, how and when interest charges are calculated and applied, the order of allocation of payments, and variable rates and charges)

5  key information (including default or other charges, any security provided by the borrower, and prescribed statements of the protection and remedies available to the borrower), and

6  a signature box, and other form of consent where applicable.

Both the borrower and the lender must sign the agreement. A copy of the executed agreement must be given to the borrower, either when he signs it or within seven days. A further copy of the unexecuted agreement may also need to be provided. If the agreement is cancellable (because it was signed off trade premises), notice of cancellation rights must be included in the copy agreement, and must also generally be sent by post or email to the borrower within seven days.

To conclude this report, the author would like to indicate that the new set of rules implemented last year have improved the law by allowing borrowers to take complaints about any accredited lender to the Financial Ombudsman Service, the free and independent disputes resolution body. The Ombudsman can examine if a lender has acted negligently in giving credit or advice, and can order lenders to pay compensation, repay interest and charges or even write off a debt. This means that for those people that have been charged unlawfully or mis-sold loans will be able to an appropriate structure of rectifying their rights. Borrowers will also be competent to defy unfair credit agreements in court, subsequent to the introduction of an “unfair relationships test” which will compose it easier to have a complaint heard. On the other hand, there would still be the scope for development where OFT is concerned as this is the foremost governing body for the Consumer Credit Act 2006. With the new provisions of CCA 2006, the Consumer Credit Appeals Tribunal was created which hears appeals arising from licensing decisions of the OFT including decisions to suspend or revoke a consumer credit licence. Given that the implementation only took place last year, we will have to linger and see what the outcome will be.

Contact Andrew Douglas Wills and Legal Services today via www.andrewdouglaswills.co.uk to see how we could help you develop a better understanding of the Consumer Credit Act in Chelmsford and throughout Essex.

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