The Consumer Credit Act 2006 (“CCA 2006”) introduces significant reforms to the CCA 1974 to offer wider protection to consumers from unscrupulous lenders and create a fairer and more competitive credit market. 

The key provisions of the CCA 2006, which received Royal Assent on 30 March 2006, will be brought into force from April 2007 and the Act will be fully implemented over a two-year period.

Anyone who currently holds a consumer credit licence will be affected by the reforms introduced by the CCA 2006. In addition, all creditors, credit information services and debt administrators, including those that only enforce credit agreements, will require a licence.

KEY CHANGES INTRODUCED BY CCA 2006

1. The current £25,000 financial limit on all consumer credit and hire agreements will be removed so that all consumer credit and hire agreements made by ‘individuals’ (as defined) will be regulated by the CCA 2006, save for the following:-

a) mortgage lending transactions regulated by the Financial Services and Markets Act 2000;
b) transactions where the borrower is a natural person & of certified high net worth (the definition in the Financial Services and Markets Act (Financial Promotion) Order 2001 is likely be followed here so that ‘high net worth’ shall mean someone who has an annual income of not less than £100,000 or net assets of not less than £250,000);
c) exempt agreements.

2. The £25,000 threshold will remain, however, for ‘business lending’ where the borrower is an ‘individual’ (as defined) and the amount in question is £25,000 or less. Where the agreement contains representations made by the individual that the agreement is solely or mainly for business purposes, there is a rebuttable presumption that this will be sufficient to show that the agreement is for business purposes.

3. The CCA 2006 provides a new and much wider definition of an ‘individual’ who is protected by the Act. ‘Individual’ shall now include a sole trader, a small partnership (3 partners or less), or an unincorporated association.

4. An improved system of redress is introduced by the CCA 2006 which provides for the use of the Financial Services Ombudsman scheme to hear complaints from borrowers who are unhappy with lenders’ dispute resolution procedures.

5. The powers of the Office of Fair Trading in respect of licensing consumer credit lenders are strengthened by the CCA 2006. These powers include investigatory powers, monitoring functions and the ability to impose penalties and/or specific requirements on licence holders. The OFT will be able to assess applicants for a consumer credit licence and decide whether they are ‘fit’ to hold credit licences.

6. Borrowers will now be able to challenge ‘unfair relationships’, with this test replacing the ‘extortionate credit bargains’ rules. The new test will apply to all consumer lending transactions and not just those regulated by the CCA 2006. No definition has been provided for what will constitute ‘unfairness’, but the courts will be given various powers to deal with creditors who have been found to act unfairly, including reopening the agreement or even setting it aside.

7. The new ‘unfairness’ test is intended to have retrospective effect, applying to all new credit agreements immediately upon implementation, and to existing credit agreements from a specified date (likely to be 8th April 2008).

8. Under the CCA 2006, lenders must provide much more information to borrowers, including:-

a) borrowers under fixed-sum credit agreements will be entitled to receive an annual statement of account, in a prescribed format;
b) new information sheets, in a prescribed format, must accompany any arrears information and default notices sent to borrowers;
c) lenders will have to comply with new requirements relating to content, timing and delivery of such arrears information and default notices; and
d) ‘health warnings’, also in a prescribed format, must be included in running account credit statements.

EFFECT OF CCA 2006 ON LENDERS

1. More lenders are likely to fall within consumer credit regulated lending.

2. The powers given to the courts under the new ‘unfair relationship’ test mean that a lender’s risk will not end when the agreement does, and once a borrower alleges that an unfair relationship exists, the burden of proof will be on the lender to show that the relationship was not ‘unfair’.

3. As lenders must provide greater information to borrowers, there is likely to be an increase in the costs of compliance with the CCA provisions – e.g. lenders must arrange for annual statements of account under fixed-sum credit agreements.

4. Consumer credit and hire agreements should be amended to include references to the improved system of redress and the Ombudsman Service.

5. Default and arrears notices will need to be amended to comply with the reforms. Lenders might also wish to include a clear representation of ‘business purposes’ in their terms and conditions, where relevant.

6. Section 127, subsections (3)-(5) of CCA 1974 have been repealed so as to give courts a discretion as to whether agreements should be deemed unenforceable. The CCA 1974 automatically renders agreements unenforceable where, for example, certain prescribed information has not been included in the agreement. This discretion will certainly be helpful to lenders in light of the increased prescribed information to be provided under the CCA 2006.

7. Licences will be limited to a particular area of business, or will be unlimited licences, which will mean that lenders do not have to be concerned with renewal issues.

8. The new system of redress will most likely mean that lenders will be open to more regular challenges by borrowers to their terms and conditions. However, the CCA 2006 does also provide lenders with the ability to challenge OFT decisions.

The introduction of the Consumer Credit Act 2006 reforms will be the biggest overhaul of consumer credit legislation since 1974. It is vital, therefore, for all business affected to be aware of the changes that will be made and to make the necessary adjustments prior to the implementation of the reforms.

Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.

 

For further information, please contact Edward Vaughan at