Importance of Conusmer Credit Act

This Assignment will look at the impact and the importance of the Consumer Credit Act 2006. As well as what had been implemented before the Act and what has changed over the years in consumer credit. This Assignment will also focus on the importance of the Amendments as well as the reason for their use and what has been brought in to create an equal market in today’s climate.

History and Overview

Over the last century or so there has been a dramatic increase of credit in the United Kingdom and other Western countries. Thus covering all aspects of area’s ranging from electrical appliances, clothing, vehicles, holidays, improvements to houses such as extensions/repairs and one of the biggest of course the purchase of a house. The Scale of Consumer credit can be seen in figures from the Crowther Report, in 1966 yet alone the amount of medium and long term credit had estimated to figures of around £3,692,000,000 (45% of this figure amounted to house purchase credit)

At the End of the same year the overall figure amounted £9,684,000,000 up to 80% had risen in houses and flats. At the end of 2006 this figure is more accurate to £1.25 trillion. The Crowther committee had realised that more and more people using the consumer credit would enjoy goods sooner than they would expect and the use of credit would increase a real chance of acquiring the goods cheaply. Consumers in result will feel they have more but within the same income. This also would also result in good news for the consumers who may find it hard to save up, but may find it easier to pay instalments with the creditors. [1]

The 1974 Act set out a framework for the regulation of the supply of credit and hiring throughout the United Kingdom to all Individuals where the credit provided or even payments for hire did not exceed £25,000. The Act provided that licence would be needed to carry on a consumer credit, hire or ancillary business defined in the 1974 act. The Act regulated the consumer credit and hire industry by a system of licensing the suppliers and the methods used by the suppliers to seek business.

In July 2001 the secretary of state for Trade and Industry announced a review of the 1974 Act which resulted in the publication of the White Paper. In December 2003 the white paper review concluded that reform was needed. This then led to the joint DTI and Department for Work and Pensions paper titled the Tackling over Indebtedness action plan 2004. The government then embarked upon a serious of legislative reforms in respect of all issued raised.

Since then, the programme has been implemented by a series of new statutory instruments and a major new Consumer Credit Act which runs to 70 sections and revolutionises the present law and practice of consumer credit [2] . The Consumer Credit Act 2006 [3] is not to replace The Consumer Credit Act 1974 [4] . But just to amend the Act, after the 1974 act had been reviewed and only focused on such areas as financial limiting, licensing, information disclosure, early settlement , consumer redress, and unfair credit transactions. Although the aspect of Primary Legislation had been needed in areas such as the financial limiting, licensing, the unfair credit relationships and consumer redress. Once the relevant legislation had been reviewed and discussed the Consumer Credit Act 2006 [5] was passed.

Purpose and Summary

The Consumer Credit Act 2006 [6] has been designed to help protect consumers and creates a fairer, more transparent and competitive credit market. (The White paper) The main provisions of the 2006 Act are brought into force in three phases. Phase 1 introduced the unfair relationships test, an alternative dispute resolution scheme and a new definition of the word individual which came into effect on the 6 April 2007. Phase 2 introduced the new licensing regime, the removal of the financial limit and the Consumer Credit Appeals Tribunal, which came into force in April 2008. The final phase brought in the post-contract transparency provisions and the new categories of business on 1 October 2008. [7]

Extended Scope of the Act 1974

The extended scope of the Consumer Credit Act 1974 Act is to create an Ombudsman scheme, and to increase the powers of the Office of Fair Trading in relation to consumer credit. In addition, it permits borrowers to challenge in court “unfair relationships between creditors and debtors” The 2006 Act gives consumers the option of using the Financial Ombudsman Service if they are unhappy with their lender’s dispute resolution service, whether the lender consents or not. Complaints may also be raised against other types of credit related companies, such as debt-collection agencies [8] .

The 2006 act However removed the £25,000 financial limit for the regulation of consumer hire agreements. Effective from the 6th of April 2008.

The Consumer Credit Act 2006 Amendments

The First Amendment to the Act is the new definition of the word “individual”. The Act does not protect lending to a partnership/s to more than 3 people. [9]

The Second Amendment was the Removal of the financial limit: The Act will apply to lending up to any amount that was £25,000 before on consumer credit or hire. Not on business lending or hire. [10]

The Third Amendment was to create Fairness for the creditor. To help impose minimum standards and implement Periodic statements for fixed sum credit and Periodic statements running account credit (e.g. health warnings) as well Arrears notices. [11]

The Rest:

Requirements relating to default notices be extended. (From 7 to 14 days) [12]

High net worth exemption: enabling wealthy individuals to opt out of regulation. [13]

The discretionary power of courts: So that the courts have full discretion to help enforce certain executed arguments, restriction on discretion, however these have now been lifted and are not now resulting in infringements.

Enhanced power of OFT: The OFT has enhanced powers as regulator under the Act, including the ability to impose civil penalties up to £50,000. [14]

Consumer Credit Appeals Tribunal: Allowing the licensee’s to confront any verdicts made by OFT and to replace any appeals of the Secretary of State.

More business activities which need license: Debt Administration and credit information services will become activities requiring a consumer credit license. [15]

Ombudsmen Scheme

The Financial Ombudsman Service (Also an amendment in the 2006 Act) (“FOS”) this is where a new consumer’s credit jurisdiction is added to the FOS’ existing mandate. Customers will be entitled to refer complaints (after the 6 April 2007) to FOS after they have raised the matter with the licence. The 2006 Act gives consumers the option of using the Financial Ombudsman Service if they are unhappy with their lender’s dispute resolution service, whether the lender consents or not. Complaints may also be raised against other types of credit related companies, such as debt-collection agencies. [16]

Businesses must ensure they have an complaints handling policy and that it meets the minimum standards set out by the DISP Sourcebook, part of the Financial Service Authority’s Handbook. Businesses should also ensure that relevant changes are made to agreements/other documents to include a reference to FO.

The Financial Ombudsman Service was set up by law as an independent public body. Their job is to help settle individual disputes between consumers and businesses providing financial services – fairly, reasonably, quickly and informally. [17] The ombudsman scheme deals with banking, insurance, mortgages, pensions, savings, investments, credit cards, store cards, loans, credit hire purchase, pawn broking, money transfer, financial advice, stocks, shares, unit trusts and bonds.

The Ombudsmen Scheme also co-operate and communicate constructively with a number of organisations, including official bodies like the Financial Services Authority (FSA) and the Office of Fair Trading (OFT), as well as other ombudsman schemes. This is done to help consumers effectively and efficiently with their complaints.

Powers of OFT

The Act also empowers the Office of Fair Trading (OFT) to investigate applicants for consumer credit licences, to impose conditions on licences, and to impose civil penalties of up to £50,000 (as mentioned earlier) on companies which fail to comply with its conditions, appeals from which lie to the Consumer Credit Appeals Tribunal and to the Court of Appeal. [18] However The OFT must publish guidance notes and how the propositions exercise its powers under the Section 33A to 33C and issued a statement on civil penalties.

Also mentioned earlier in the essay, the white paper expressed that the OFT would be more effective if it divert resources into monitoring compliance rather than dealing applications for licenses. The old regime did not address the more vulnerable consumers. However the express policy was that the Amended Act focuses on the monitoring and licensing regime. Aiming to target the small percentage of lenders who may pose any risk to consumers. Also allowing responsible lenders to continue business without interruption from the OFT. However The OFT has the power to Charge different licences fees to different licences as well to introduce indefinite standard licences removing the 5 year renewal process. (Not group licences these are still renewable)

Other Powers of the OFT are to Offer and Issue time limited standard licences. To impose requirements on licenses and supervisory bodies, require applicants to gain and obtain information; require access premises under warrant and the power of seizure. The OFT will also delegate the power to local trading Standard Officers if necessary in certain circumstances. The OFT also have the power to request information to be in a specified form authenticated verified and accompanied by an explanation. As well as Identifying location and other details like time of release.

Other powers include to Intermediate Sanctions, require information, access premises and to impose requirements on licenses.

The Department of Trade and industry had been conducting major revisions in consumer credit and its law. The White paper mentioned earlier in this assignment had contained changes to the existing law to make the consumer credit market fairer, clearer and competitive within the 21st century.

Unfair Relationship between the creditor and debtor,

Unfair relationships: This test replaces the extortionate credit bargain provisions. These provisions will apply to all consumers lending except FSA regulated mortgage contracts. [19]

Under the unfairness relationship regime a court may find a credit agreement unfair if the debtor due to any one of the following if the terms of the agreement are of any related agreement. The way the creditor has exercised or enforced any of the rights under the agreement. Or even anything else done by the creditor (or on his behalf) before or after the agreements. [20]

The courts have a wide range of powers where a credit relationship is found to be unfair. This includes altering the terms of the credit agreement or a related agreement, the reducing amount payable by the borrower, requiring the lender to refund money to the borrower, removing any duty placed on the borrower under an agreement and Imposing requirements on the lender or their associate.

In addition, where unfair relationships harm the collective interests of consumers, the OFT and other enforcers (including local authority trading standards services) can take enforcement action under Part 8 of the Enterprise Act 2002 [21] .

Section 129 of the 1974 Act provides that a court can make a time order, giving the consumer more time to repay a debt under a regulated consumer credit or consumer hire agreement, if the court considers it ‘just’ to do so. In addition, section 136 provides that an agreement may be amended as a consequence of a time order – for example, by reducing the rate of interest or extending the term of the agreement. [22]

However in certain circumstances the consumer can apply for a time order following receipt of a default notice, or a notice of enforcement action under the Act. The court can also make a time order as part of proceedings brought by the lender for enforcement of the agreement or to recover possession of goods or land (for example, mortgage repossession) [23] .

The 2006 Act also enables the consumer to apply for a time order following receipt of an arrears notice provided that he first gives notice to the lender and submits an alternative payment proposal, and at least 14 days elapse before an application is made to the court. [24]

Conclusion

This Assignment has assessed the impacts and the importance of 2006 Act. The changes and Amendments brought in have changed and evolved around the Market. However as time will pass the markets will change with new products arriving. New legislation will be more than likely follow for all consumers. Although the 2006 act has made a number of aspects clearer and fairer for consumers via the credit market. There will be more Amendments to come as the market constantly grows and the economy changes.