The Consumer Credit Act

The new Act is aimed at extending the scope of the Consumer Credit Act 1974, to create an Ombudsman scheme, and to enhance the powers of the Office of Fair Trading in concerning the consumer credit. In addition, it permits borrowers to challenge in court “unfair relationships between creditors and debtors”. There are many changes in the Act which not only impact on the type of consumer credit and hire agreements, but also on the lender’s support and administration systems. The purpose of the 2006 Act is to reform the 1974 Act to control all consumer credit and consumer hire agreements subject to particular exemptions. Its aim is to make provisions terms concerning the licensing the providers of consumer credit and consumer hire and ancillary credit services and the functions and powers of OFT in relation to licensing. The idea of the 2006 Act is to allow debtors to confront unfair relationship with creditor and to allow an Ombudsman scheme to attend to complaints about the businesses licensed under the 1974 Act, as amended.

Main Provision

Following the three years review of the Consumer Credit Act 1974, the Consumer Credit Act 2006 was passed in March 2006 to fulfil three purposes. Firstly, to increase consumer rights and remedies by the allowing the consumers to challenge unfair lending practices through a more competent dispute resolution system. Secondly, to develop consumer credit business regulation by making the licensing system easier by requiring information provision to consumers over their accounts and lastly, administrating correctly various credit dealings by means of balancing business industry regulation.

The Consumer Credit Act 2006 has many key provisions which includes credit businesses planned to assist quicker and inexpensive dispute resolution system, applying a harmonized standard for all consumer credit organizations, and execute a more rational system that is appropriate in case of breaches of contract. The Consumer Credit Act and its amendments affect all those who use credit to buy goods and or services, for example, on hire-purchase agreements or using a store credit card. The Act governs the licensing of, and other controls, on traders who supply credit, or goods and services on credit.

Alternative Dispute Resolution

First provision is the institution of the alternative dispute resolution system under the power of the financial services ombudsman. Section 59 of the Consumer Credit Act 2006 widen the province of the financial services ombudsman to guard consumer credit licensees and deal with complaints and parties that meet the conditions in subsections 2, 3 and 4. Subsection 2 states the requirements to establish if a complaint falls within the jurisdiction of the financial services ombudsman. The conditions are that a) the complainant qualifies and wants the scheme to deal with the complaint b) the complaint corresponds with the description given in consumer credit rules c) at respondent to the complaint is a licensed  business when the act or omission happened d) the act or omission took place during a business being carried on by the respondent, which was of a kind referred to in subsection 3 e) at the time of the act or omission that type of business was specified in an order made by the Secretary of State and f) the complaint cannot be dealt with under the compulsory jurisdiction. Subsection 3 of Section 59 lists nine types of businesses that come under the jurisdiction control of the financial services ombudsman whereas subsection 4 says that a complainant maybe an individual principally engaged in the credit agreement, a surety, or any person classified as eligible to file complaints with the ombudsman. These give both credit businesses and credit consumers guidelines in deciding whether they meet the criteria as complainants, the complaint is familiar to the ombudsman, and the business matter of the complaint falls under the authority of the ombudsman.

In the matter of businesses, before making a complaint with the financial services ombudsman, the accused should initially share the complaints with business believed to be responsible for the act omission subject of the complaint. Sometimes this process modifies the resolves the disagreement between the people concerned. Where the individuals agree to the problem but dispute on the solution or disagree with both the problem and solution that one may seek the prescribed phases of the alternative dispute resolution system of the financial services ombudsman. The formal process usually begins with an inquiry of the situation resulting to the dispute finalized with an appeal process. The reports according to the office of the financial services ombudsman, at the early stage of complaining, around 50 percent of the disputes get solved from a party to another. Whereas 40 percent make it to the formal stage to involve inspections and recommendation reports by the ombudsman, and the rest 10 percent need individual’s final decisions given by the ombudsman. The significance of this alternative dispute resolution process is characteristic to the fairness of the ombudsman services alike to the position of judges in court hearings. The financial services ombudsman deals with all the cases separately. According to existing statistics, around one third to one-half of recent cases was found in favor of customers.

According to the credit consumers, they are also in agreement with the choice of settling dispute resolution systems outside of the courts. Consumers with a complaint against lending businesses should primarily take their complaints to the credit business concerned. This represents the informal part of the dispute resolution process where it could be achieved orally by getting in touch with the people in-charge or via a written complaint for the people authorized to tackle consumer concerns. If the company is unsuccessfully in addressing the complaint or the individuals do not agree over the solution to the complaint, the consumer then has the option to take the complaint further to the office of the financial services ombudsman. As declared previously, the ombudsman is an independent body; this assures the consumers a fair, beneficial and productive alternative dispute resolution process.

Unfair Relationships Test

Another provision influencing consumer credit businesses is the exercising of the unfair relationships test planned to launch a solitary standard of behavior for all consumer credit businesses coherent to the standards of the industry and those forced by the Financial Services Authority (FSA). Section 28 to 31 of the Consumer Credit Act 2006 offers the usual standard applicable to consumer credit businesses in being eligible for licenses. The Office of Fair Trade (OFT) is compelled by the law to hand out guidelines in deciding choosing certified candidates for license issuances. However, the law also grants the OFT with the authority to change a license obeying certain stated situations in section 31. This balances the necessity for an unvarying licensing standard while bearing in mind the differences in the business environment of different consumer credit businesses. Attaining balance between these two elements guarantees a standard, although flexible to unstable business circumstances, easily reached for consumers wanting information and credit businesses so that the ordinary knowledge makes credit organization aware of their dealings with consumers and consumers having a level of security in knowing that some legal standards apply to credit businesses.

Concerning the unfair relationships test on the part of consumers, credit consumers are positioned on the same grounds with consumer credit businesses about the credit agreement. Sections 19 to 22 let the courts to decide cases affecting unfair relationships between parties to a credit agreement. Consumers are entitled to object to so-called unfair practices of credit firms in court. The court may execute or force a remedy to the unfair relationship by rendering the agreement unenforceable upon acknowledging the existence of an unfair relationship between the creditor and debtor. So that competition is enhanced and standards are implemented, the unfair relationships test determinable in courts discourages credit businesses in engaging in unfair agreements. Simultaneously, consumers are certain of their legal standing and juridical site for processing complaints against any unfair practices of credit businesses.

Providing Information to OFT & Consumers

Third provision regarding the functions of consumer credit businesses is the legal authorization for consumer information provision. Section 44 of the Consumer Credit Act allows the OFT to entail a license applicant to show specific documents relevant to the license. On one hand this permits the OFT to agree on the qualifications of the applicant but on the other hand the requirement of information provision ensures the OFT that the business holds a record of information in meeting the requirements for consumers information. Through the consumer Credit Act 2006, lenders are forced the necessary action in making sure that consumers are regularly informed of the status of their accounts with the firm, especially in relation to debts and non-payments. Lenders hold the duty to supply annual statements to all consumers with fixed-sum credit accounts, other annual statements including the effects of minimum payments, and debts notification within 14 days after the customer gets behind in paying credit which includes the added payments for delayed sum. Furthermore, lenders must also give notifications of non-payment along with added default charges that should be wrote to the consumer beforehand to the application of default charges. This legal provision means that businesses understand the duties to stay in contact with their customers to make sure full consciousness on the part of consumers to verify that the achievement of additional charges for debts and non-payment become legal.

According to consumers, those with existing accounts with credit firms should be entitled to obtain information on their accounts from the lending institutions the whole of the credit agreement period. Section 8 of the Consumer Credit Act 2006 instructs the OFT to arrange information sheets on arrears and defaults to function as guides to lenders and borrowers in understanding and abiding by with the procedures and law implicated in the event of delayed or default payments. Credit companies are to provide information to consumers for the application of the duty under. Section 9 and 10 provides the requirements and Section 12 to 14 considers to provide consumers with information on defaults, together with the conditions for the application of this duty.

Concurrent with the duty to inform by credit firms, consumers are allowed to receive annual information listing the status and changes in the status of their credit accounts with the lending firms to give them with adequate information in concluding a matter. Information is especially important to consumers in case of arrears and defaults to inform them of the arrangement of payment, the amount to be paid, and the added charges requested by the lending firm specified be paid in case of delay or default in payment. As a result, the significance of information is as a necessary to the implementation of additional charges. Consumers hold the right to challenge the application of charges without the credit firm acquainting the borrower about the existing of arrears or defaults with the additional charges. In other words, by law, if the consumers are not informed about the existing of debt or additional charges on their account, are under no obligation to pay the added charges the credit companies are seeking.

Enhanced Licensing System

Fourth provision includes consumer credit businesses is the enhanced licensing system under the Office for Fair Trade. Sections 23 to 43 of the Consumer Credit Act 2006 manage the licensing system, which contain the qualifications, requirements, duration and renewal of licenses, procedure, and fines. The law gives the OFT the responsibility along with the essential regulatory powers to enforce a licensing system more efficiently and effectively. The OFT abides by its duty by using the standards given by law ensure that all license applicants have the required qualifications and obligations to function a license and supervise the business performance and conduct of license holders. At the same time, OFT possess stronger powers in examining cases of misconduct and enforcing the suitable penalty s to non-compliant consumer credit businesses. Sanctions may vary from fines summing up to as much as £50,000 to suspension for license breaches. In addition, the Consumer Credit Appeals Tribunal was also created the law, where an independent body handles appeals made by the licensing decision of the body.

Although, the licensing system is affected by the new regime that the licensed credit businesses with whom they transact qualified as valid credit firms on the requirements outlined by the Credit Consumer Act 2006 and OFT regulations, even though it does not directly affect the rights of consumers. Licensed credit companies become aware of maintaining fair business to keep their license and expect renewal after it expires.

Removal of Automatic Unenforceability of Non-Compliant Credit Agreements

Fifth provision involving consumer credit businesses deals with the earlier provision on automatic unenforceability. Section 15 of the Consumer Credit Act 2006 makes section 127 of the Consumer Credit Act 1974 ineffective covering the enforceability of orders in cases of a breach. Prior to this, agreements were rendered unenforceable as it did not comply with the legal requirements. With modern law, courts have agreed to carefully decide on the enforceability of agreements making the decision in proportion with the determined detriment experienced by the aggrieved party, usually the consumer. The removal of automatic unenforceability of defective consumer credit agreements under s.127 (3) of the Act offers business significant advantages in terms of better assurance and also removing the risk of consumers using the current power opportunistically. This should be balanced with the possibility of increased doubt relative to unfair credit.

Provision on Credit Agreement Protection

Sixth provision that affects consumer credit businesses deals with large credit agreements. Small businesses are given similar protection as given to consumers when managing credit agreements consisting of an amount not more than £25,000. Furthermore, the new law also simplified the definition of ‘consumer borrowing’ to ensure that larger organizations do not experience the unbalanced effect of the regulation. This allows small businesses with a more or less equal balance in the consumer credit market, allowing them to develop and run alongside with large credit companies. This increases competition that uplifts the industry to provide to the economy.

On the part of consumers, who may not be directly affected by the provision on industry credit agreements, the creation of a competitive credit market makes sure that the customers are provided with a wide range of choices of the credit company that looks after a credit agreement with the guarantee that all firms are evenly promising the industry survival. With many options, consumers can look into various companies then decide which credit offers and company values look more appeal to their value needs.

The new consumer credit law also widens protection to consumers participating in large credit agreements totalling to as much as £25,000. This means that consumers wishing to borrow a sum greater than £25,000 are offered protection by law. Section 2 states the cancellation of the provision in the Consumer Credit Act 1974 limiting protection to credit borrowing amounts equal to or less than £25,000. Section 3 states the exemption in cases of consumers established to hold a high net worth provided this is established and the consumer is allowed the waiver. While the protection directly accrues to credit consumers, this has the effect of improving the vibrancy of the credit industry by encouraging more people to engage in licensed credit firms to obtain funding for different economic activities that creates income resulting to a cyclical pattern of growth.

Conclusion

The Consumer Credit Act 2006 serves as an important statutory contribution for both lenders and borrowers in the credit market. The provisions of the new law may be classified into six major provisions including 1) alternative dispute resolution; 2) unfair relationships test; 3) provision of information by credit businesses to the Office for Fair Trade and consumers; 4) enhanced licensing system; 5) removal of automatic unenforceability of non-compliant credit agreements; and 6) provision on credit agreements protection. These provisions work to ensure that credit firms are encouraged to practice fair dealing and consumers are secured in obtaining credit from licensed credit firms. This results to the vibrancy of the consumer credit industry allowing these firms to contribute to the overall economy.

However, some of these provisions are yet to take effect particularly the new unfair relationships test. Since the implementation of the law happens in increments, the full benefit of these provisions cannot be accurately determined at present. Moreover, there are several successive periods of transition from the application of the amended provisions indicating periods of adjustments and instability in the implementation of the new law. Nonetheless, like any new law, the consumer market and the credit industry need to contribute towards the establishment of practice-based but statute-founded best practices governing a fair creditor-debtor relationship.

Interpretation

1974 Act: Consumer Credit Act 1974. *

2006 Act: Consumer Credit Act 2006.*

ancillary credit business: any business so far as it comprises or relates to credit brokerage, debt-adjusting, debt counselling, debt collecting or the operation of a credit reference agency.

consumer credit agreement: an agreement between an individual (the “debtor”) and any other person (the “creditor”) by which the creditor provides the debtor with credit not exceeding £25,000.

consumer credit business: any business so far as it comprises or relates to the provision of credit under regulated consumer credit agreements.

consumer hire agreement: an agreement made by a person with an individual (the “hirer”) for the bailment or (in Scotland) the hiring of goods to the hirer, being an agreement which is not a hire-purchase agreement, is capable of subsisting for more than three months and does not require the hirer to make payments exceeding £25,000.

consumer hire business: any business so far as it comprises or relates to the bailment or (in Scotland) the hiring of goods under regulated consumer hire agreements.

individual: includes a partnership or any other unincorporated body of persons not consisting entirely of bodies corporate.

licence: a licence issued by OFT under the 1974 Act to carry on a consumer credit business, a consumer hire business or an ancillary credit business.

OFT: the Office of Fair Trading.

Ombudsman Scheme: 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.

regulated agreement: a consumer credit or consumer hire agreement regulated by the 1974 Act.

standard licence: a licence issued by OFT to a person named in the licence on an application made by that person, which, during the period of the licence’s duration, covers such activities as are described in the licence.