A Consumer Credit Revolution

February 27, 2014

For obvious reasons trading law often involves consumer credit and consumer credit law is undergoing very many changes.

When the Consumer Credit Act 1974 combined a great deal of the older legislations such as the Moneylenders’ Acts and the Hire Purchase Acts, the law became fairly consolidated and to some extent stagnated.  The Office of Fair Trading had the responsibility of administering the Act and, together with Trading Standards Departments, enforcing it.  On the civil side the set of 1983 Regulations introduced an extensive and complex regime built upon the Act.  Little of major significance happened thereafter until changes were made to some of the Regulations in 2004.  This was, however, a form of domestic law updating.

A similar exercise occurred with the Consumer Credit Act 2006.  This made a number of changes.  First, it enabled the Court to enforce an improperly executed agreement in its discretion, no matter how significant the defect in documentation or procedure.  The old regime of extortionate credit bargains was replaced by unfair relationships.  A new system was introduced for post-contract information so that periodic statements had to be given and customers notified if they had gone into default.

The next, and very substantial, change occurred because the United Kingdom had to implement Directive 2008/48/EC on consumer credit.  This was (in general) a maximum harmonisation Directive but it did not encompass the entirety of consumer credit.  In particular, it did not deal with agreements secured on land or consumer hire agreements.  It made significant changes to agreements which were exempt from regulation.  New rules for the APR were introduced and new forms of advanced disclosure and contractual documentation had to be introduced.

The result was, broadly, a two-tier situation where some consumer credit agreements were subject to the original 1983 Regulations (with the major 2004 changes) and some subject to the 2010 Regulations implementing the Directive.  However, it was not that straightforward as, in some cases, creditors could opt in to the 2010 Regulations. Where the 2010 Regulations applied, a new requirement was that there should be an adequate explanation as well as advance disclosure.  The disclosure had to be given by way of a Standard European Consumer Credit Information Sheet (a SECCI) rather than under the 2004 Disclosure Regulations.

The latest upheaval results from the abolition of the Office of Fair Trading on 1st April 2014.  Leaving aside the OFT’s competition role, the consumer side will divide roughly into two with consumer credit regulation going to the Financial Conduct Authority (the former Financial Services Authority), with enforcement also remaining with Trading Standards Departments, and most of the other trading law being the province of Trading Standards Departments and other organisations such as the Citizens’ Advice Bureau.

In addition however, another new body, the Competition and Markets Authority (CMA) has indicated that it will also have a role in acting where consumer enforcement supports competition and that the CMA’s statutory function of promoting competition for the benefit of consumers would include enforcing unfair terms legislation and the Consumer Protection from Unfair Trading Regulations 2008.

As far as consumer credit is concerned, the system of licensing by the OFT will be replaced by authorisation under the Financial Services and Markets Act 2000.  There is a scheme to passport over by way of interim permission those who have consumer credit licences.  This will last for a period of two years whilst full authorisation is obtained.

There are many pitfalls and credit and hire businesses need to have their licensing position reviewed as a matter of urgency.  If the consumer credit licence does not cover the activities which will (or may) be undertaken from April 2014, interim permission will not cover the business and the activities will have to cease until full authorisation has been obtained. In particular, one needs to look at the reshaped categorisation of the various credit and hire related activities introduced into the Regulated Activities Order 2001 by the Amendment Order of 2013.  The regulation of consumer credit falls within the FSMA 2000 by virtue of the Consumer Credit Order 2013.

The extent to which the FCA can re-write consumer credit law is constrained by the fact that the requirements of the Consumer Credit Directive have to be complied with but, subject to that, much of the consumer credit legislation will be reworked into a sourcebook which will also adopt much of OFT guidance on consumer credit.

The FCA has produced a draft Consumer Credit Sourcebook (CONC). This deals in particular with seeking business, information, post contract matters and debt collecting.  There is a strong emphasis on payday lending, debt management, and peer to peer (P2P) lending.

The entire system is to be reviewed in 2019.