Consumer credit — overviewConsumer credit regime

The principal legislation governing consumer credit, lending and hire in the UK is the Consumer Credit Act 1974 (CCA) and the Consumer Credit Act 2006 (CCA 2006). The CCA 2006 came fully into force on 31 October 2008 and supplements but does not override the CCA. UK bodies involved in the consumer credit regime are:

• The Department for Business, Innovation and Skills (BIS)

• The Office of Fair Trading (OFT)

• The Financial Ombudsman Service (FOS)

Since 6 April 2008 most consumer lending falls under the CCA. Previously lending had to be for less than £25,000. This limit has now been removed. Lending to incorporated entities and partnerships of more than four individuals falls outside the CCA. As well as individuals the CCA applies to sole traders, small partnerships and lending in a non-business capacity. The CCA also applies to persons carrying out ancillary business:

• credit brokerage

• debt adjusting

• debt counselling

• credit referencing

• debt collecting

• debt administration

• credit information services

Credit

'Credit' is not precisely defined in the legislation and 'includes a cash loan, and any other form of financial arrangement'. Credit includes the concept of deferment of a debt as well as:

• payment 'on demand'

• instalment payments

• hire-purchase agreements

• pawn agreements

Regulated agreements

There are three types of regulated agreement under the CCA:

• debtor - creditor - supplier

• debtor - creditor

• hire

Certain agreements, such as overdrafts, non-commercial and small value agreements are subject to less stringent requirements than fully regulated agreements (the 'light touch' regime).

Despite not providing credit, hire agreements fall within the CCA and apply where a hirer bails goods to an individual (sole trader and small partnership) for more than three months. The £25,000 limit has been removed. The light touch regime applies to non-commercial hire agreements.

Exempt agreements

There is now a long list of exempt agreements. These include:

• FSA regulated mortgages

• certain loans secured on land

• four payments in less than 12 months

• charge cards where the balance has to be paid in full each month excluding cash advances

• home equity release

• high net worth individuals

• loans for business purposes

The last three items have come into force since 6 April 2007. The boundaries between different types of exempt agreements can be blurred and so categorisation requires care and attention.

Licensing and supervision

Persons, who in the course of their business, lend, provide credit, enter into hire agreements or conduct ancillary business need a consumer credit licence. Failure to have the correct licence can render that product or the entire portfolio unenforceable. Licences are issued by the OFT on an individual or group basis. Appeals against a refusal to grant a licence lie to the Consumer Credit Appeals Tribunal.

Advertisements

An advertisement can be any form of advertising in any medium. Publication occurs every time an advertisement is made available to the public. Advertisements must comply with the Consumer Credit (Advertisements) Regulations 2004 unless exempt under the Consumer Credit (Exempt Advertisements) Order 1985.

An advertiser is widely defined, and may include:

• sellers of goods

• providers of credit

• credit brokers

• publishers

False or misleading advertisements carry criminal sanctions that apply not only for the advertiser but for anyone involved in the advertising process. Defences are available but their effectiveness is limited.

The 2004 Regulations address four key areas for credit related advertisements:

• content

• warnings in relation to secured loans

• annual percentage rates

• prohibited words

Drafting agreements

The form and content of credit agreements are closely controlled. If a regulated agreement fails to comply with the requirements, it may be unenforceable. It is therefore crucial to appreciate what information is required for which category of agreement. Generally, such information includes:

• the nature of the agreement

• the parties

• the goods to which the credit relates

• the cash price (individual and total)

• advance payments

• amount of credit

Different drafting considerations apply to each category of regulated agreement.

Creditors are obliged to provide debtors with unexecuted and executed copies of agreements. Again, failure to do so can affect enforceability.

Variation

There are three ways in which a regulated agreement can be varied:

• automatic variation

• unilateral variation

• modification

Regardless of any right to vary an agreement other restrictions may prevent variation. The requirements concerning cancellation notices and copies of the agreement are, again, mandatory and failure to comply can make the variation and the original agreement unenforceable. In some cases it may be preferable to terminate the original agreement and enter into a new agreement.

Unfair relationships

Borrowers can challenge unfair relationships in court and seek redress if the overall relationship between the borrower and the lender is unfair to the borrower. The provisions apply to credit agreements which includes exempt agreements other than land mortgages and house purchase plans as they are regulated elsewhere.

If a court deems a relationship to be unfair it can:

• alter the terms of the agreement

• reduce the amount payable

• order the lender to make a refund

• remove the borrowers duties

• impose additional obligations on the lender

As the regulator of the CCA, the OFT is responsible for enforcing compliance with the CCA.

Enforcement

Given the current economic climate default is relatively common. In order to recover from defaulting borrowers, lenders may have to commence proceedings through the courts. Where recovery is not achieved before judgment lenders may have to enforce the judgment debt or order.

Introduction to enforcement

There are a number of enforcement methods available to judgment creditors:

• seizing goods

• charges

• third party interception

• salary interception

• receipt of income from assets

Judgment creditors are advised to obtain as much information as possible about the debtor prior to issuing enforcement proceedings.

Charging orders

A charging order is an indirect method of enforcement of a debt. It does not result in immediate recovery but creates a security against property. Although recovery is delayed, it can be an effective method of securing future recovery as debtors are unlikely to have the means of meeting the judgment debt in any event.

Securities

Lenders can obtain enforce their debt over the debtors securities in one of three ways:

• charging orders

• stop orders, and

• stop notices.

The procedure for obtaining any of the above is covered in Dispute Resolution.

Orders for sale

Rather than waiting for the debtor to sell the property that is secured by a charging order, lenders can apply for an order for sale in order to satisfy the judgment debt. Orders for sale can be applied for over the following assets:

• land

• securities

• funds in court

The courts give serious consideration to the granting of an order for sale, especially in relation to land and domestic property.