Credit reform by instalments

Major reforms to consumer credit law are coming, but in the author's view perhaps not in the best order

The Journal, February 2004, page 46

The DTI published its White Paper on Consumer Credit Act reform in December (www.dti.gov.uk/ccp/ topics1). Regulations in April/June will implement some reforms from October 2004. This period is too short for lenders to upgrade their IT systems (and lawyers to amend all current forms of regulated agreement!). There will be no parliamentary time for reforms requiring primary legislation until 2005, and this divergence will cause difficulties. Much remains to be resolved subsequent to the White Paper; so what follows could change.

The financial limit

The £25,000 limit is to be abolished. This requires primary legislation. However, the limit will be retained for business lending to sole traders, unincorporated bodies and partnerships of three partners or less. Leaving aside lenders’ problems establishing the number of partners, this raises practical issues.

What is “business lending”? Apparently, limited business use of a hired asset will not count. But, for example, could the letting of a car to a trader on HP terms ever be business lending, given the inevitable substantial private use?

Secondly, the rule that a hirer under an HP agreement, who has paid half the total amount payable, can return the car without further obligation, has caused substantial losses to creditors. Without the limit, creditors may discontinue HP facilities for costly goods, if the financing might not be business lending.

Variable rate HP terms will no longer be available to consumers where the finance exceeds £25,000. It remains to be seen what other limits may be reviewed. There may be issues with personal contract hire agreements, which will disappear as a product if the current £1,500 annual rental, below which the hirer has a right of early termination, is increased; and with section 75, as creditors may shun connected finance agreements if they become jointly and severally liable with suppliers for defects in goods whose price exceeds the current £30,000 upper limit.

Early settlement

Consumers have a right to settle a consumer credit agreement early and may then be entitled to a rebate. Currently, that is calculated using the “Rule of 78”, but, to allow lenders to recoup administrative costs, the lender can postpone settlement for 28 days, then further defer it to the next repayment date and (usually) charge a further two months’ interest.  

Three changes are proposed. The rebate formula is replaced by an actuarial formula; the deferment period is shortened to 28 days from the date the borrower asks to settle and the lender may only charge one month’s interest; and lenders must provide examples of early settlement costs before the agreement is signed.

Forms of agreement

The creditor is to provide the debtor with core information “prior to the debtor being bound by any agreement”, including the APR, interest charges, repayments, duration, total charge for credit and whether credit is secured. We need clarification of whether there is to be a mandatory cooling-off period.

Further, the main financial details, and statements as to the consumer’s rights and responsibilities, are to be set out prominently, immediately after the parties’ names and the heading to the agreement, and in a prescribed order. Other changes include a warning of the consequences of missing payments under unsecured agreements, and clarification that payment protection insurance financial details must be shown and signed separately.

Despite these additional complexities, effective from October, the accompanying relaxation of section 127 of the CCA, which restricts the courts’ discretion to enforce incorrect agreements, will only come with the primary legislation.

Online agreements

Regulated agreements currently cannot be concluded online. Signatures on paper are required and certain copy documents must be posted. Online completion will be enabled by statutory instrument under the Electronic Communications Act. There are no draft regulations yet. The issues to be dealt with include ensuring consumers can read and store the agreement and evidencing their consent to be bound. Default notices will still be sent by post.

Advertising regulations

The current categorisation of advertisements as simple, intermediate or full is considered unworkable and will be abolished. Apart from showing the lender’s name, if no financial information is given an advertisement will only require to be clear, fair and not misleading. If any interest rate is given, or an amount or range of credit is described, the APR must also be given, at twice the size of any other financial information. If any one of a list of key financial indicators is given, all must be given, together, with equal prominence.

Many other issues are dealt with: credit licensing; lowering the barrier at which an agreement is classed extortionate; amending the impossible provisions regarding multiple and modifying agreements; making some exemptions more logical. Overall, one is left feeling that this is a missed opportunity: consumers and creditors alike need a simpler regime, but that is as far away as ever.

Bruce Wood, Chairman, Morton Fraser, Edinburgh, and Head of the Asset Finance Team