dti Consultation

Department of Trade & Industry (dti) consultation www.dti.gov.uk










 

Tackling loan sharks - and more:- Consultation Document on Modernising The Consumer Credit Act 1974

 
1. INTRODUCTION AND SUMMARY

PURPOSE OF CONSULTATION

1.1 This consultation seeks your views on proposals to review the Consumer Credit Act, the initial subjects to be covered and the timing of this work.

1.2 There are five main drivers that have led us to undertake a review of the Consumer Credit Act (CCA) now:

  • implementing the Government’s manifesto commitment to tackle loan sharks

  • need for improvements in the current consumer credit licensing regime
  • Financial Services Authority (FSA) regulation of mortgages from next Summer, with knock-on effects for the CCA
  • European Commission consultation on a revised Consumer Credit Directive
  • building on the report from the Task Force on tackling overindebtedness, published in July 2001[ 1 ].

1.3 In addition, the CCA is nearly 30 years old, and although some piecemeal amendments have been undertaken previously we now intend to undertake a major review to ensure it remains relevant to the modern consumer credit market and maintains appropriate consumer protection measures.

1.4 In carrying out this review our key objectives will be to develop a new consumer credit regime that:

  • targets rogue traders

  • reduces burdens on legitimate businesses
  • reflects market changes on consumer credit
  • provides timely and effective advice to consumers and greater transparency when they take out loans

1.5 While the Act has in many respects stood the test of time and continues to provide appropriate protections, we have set out in this consultation paper what we believe are the priority issues where changes are now necessary. These issues are:

  • changes to the licensing regime to target enforcement on keeping loan sharks out of the market

  • making the extortionate credit provisions more effective
  • changes to the CCA financial limit and categories of exempt agreements to increase consumer protection by bringing more credit agreements within the regulatory regime
  • enabling consumers to conclude credit agreements on-line
  • simplifying the Advertising regulations
  • amending the early settlement regulations to give consumers a fairer deal
  • recommendations by the Task Force on tackling overindebtedness

Questions:

1.6 We want your views on:

1.     Are the issues we propose the ones you want to see tackled?

2.     Are there are other issues that you would like to see covered by a review of the CCA? For example have we missed areas where the Act inhibits competition in the provision of credit, stifles innovation, or where consumer protection needs to be enhanced?

3.     What are the estimated compliance costs and benefits of each proposal in this paper

RESPONSES

1.7 You can respond to this consultation by emailing us at [email protected] or by writing to Keith Evans, Consumer Affairs Directorate, Room 407, Department of Trade & Industry, 1 Victoria Street, London SW1H 0ET. The deadline for responses is 3 October 2001.

1.8 The consultation period for this paper is slightly shorter than the norm for Government consultations. This is to permit DTI to press ahead and issue consultation papers on the substantive issues under the review from this Autumn onwards. We aim to publish a summary of the responses to this consultation and details of how we will take the review forward by November 2001.

1.9 Your response to this consultation document may be made publicly available in whole or in part at the Department’s discretion. If you do not wish all or part of your response (including your identity) to be made public, you must state in the response which parts you wish us to keep confidential. Where confidentiality is not requested, responses may be made available to any enquirer, including enquirers outside the UK, or published by any means, including on the internet.

CONSULTEES

1.10 We are sending this document to the consultees listed in the annex. It is also available by request from Peter Jones (tel no: 020 7215 3818) or by email to [email protected] Please let us know if you think others would be interested in this consultation.

 
2. CONSULTATION ON A REVIEW OF THE CONSUMER CREDIT ACT

2.1 The time is right for undertaking a review of the CCA. There is a desire for change from both business and consumers, and a real opportunity for change through a number of developments already taking place in the credit market.

2.2 The review clearly also needs to address examples of

consumer detriment, such as lenders who fail to make sure that borrowers have the ability to meet repayments on loans. For example, a retired consumer whose only income was mean-tested benefits had total outstanding debts of £34,000 spread over 11 credit card agreements.

2.3 The Government’s manifesto contained a commitment to tackle loan sharks and some preparatory work on this has already been undertaken. We commissioned research in 1999 into the effectiveness of the extortionate credit bargain provisions of the Act, and carried out an internal review of the consumer credit licensing regime. In addition, other work has been undertaken on issues that form our priorities for a review.

2.4 The European Commission published in June its proposals for a revised Consumer Credit Directive, and some of the areas covered are the same ones we propose covering; such as early settlement of loans, regulation of lenders and intermediaries, greater transparency in credit agreements, improved data sharing amongst lenders and greater use of positive and negative data when assessing a potential borrower’s ability to repay.

2.5 The review of the Consumer Credit Directive is expected to be a longer process than our CCA review and so we will press ahead with those issues that will not be directly affected by the Commission’s proposals. However, on some issues, such as joint and several liability (Section 75 of the CCA), we need to await the Commission’s proposals in a revised directive before taking any action on the CCA.

2.6 With the FSA commencing mortgage regulation in summer ’02 we need to ensure that consumer borrowing currently falling outside CCA and FSA regulation is appropriately protected. The FSA will regulate 1 st charge mortgages and unless we change the CCA, 2 nd charge mortgages above £25,000 will not be regulated.

2.7 Finally, the Task Force report on tackling overindebtedness contains a number of practical solutions for tackling overindebtedness and proposes working groups for taking forward detailed work on the recommendations.

2.8 The priority issues for the review, on which we propose to consult separately, are:

Changes to the licensing regime:

2.9 Lenders require a consumer credit licence to carry out most types of lending up to £25,000. The current licensing regime has attracted some criticism from lenders and consumer groups for the ease with which licences can be obtained and concerns over a perceived lack of enforcement action against rogue traders. The Act does not provide the OFT with a wide range of weaponry to tackle rogues, confining it primarily to the revocation of a licence. Strengthening the licensing regime and giving the OFT a range of enforcement powers, such as fines etc. would be a significant step in tackling some of the ‘grey market’ lending practices.

2.10 From Autumn 2001, we will be consulting on:

  • creating a targeted, visible and proportionate licensing regime

  • greater flexibility for the OFT to take action against rogue licence holders and those undertaking business practices detrimental to consumers
  • enabling the OFT to request information from a licence holder during the lifetime of the licence if it considers bad trading practices are being undertaken.

Extortionate credit:

2.11 The manifesto contained a commitment to tackle loan sharks. The CCA provides for the court, at a debtor’s request, to consider whether an agreement is extortionate, and if so change the terms so they are fair and reasonable. The Office of Fair Trading in its reports on this issue has identified that the requirements in the CCA that a credit bargain is extortionate if payments are ‘grossly exorbitant’ may be too high a hurdle for cases coming to court, and should be lowered. The research that we commissioned on extortionate credit identified that permitting courts to initiate examination of whether an agreement was extortionate would strengthen protection for vulnerable consumers. However, it is unlikely that such an amendment to the Act, plus an alteration of the definition, would on their own result in a significant clampdown on loan sharks. We would need to take this action in conjunction with other proposals in this paper on early settlement regulations and improvements to the licensing regime.

2.12 from Autumn 2001, we will be consulting on:

  • redefining extortionate credit in the Act and reducing some of the qualifying barriers for cases to be considered by the courts

  • enabling courts on their own initiative to challenge cases they consider extortionate, and reopen the terms of that agreement
  • increasing protection for some of the most vulnerable consumers.
  • introducing a requirement for responsible lending
  • providing information to consumers on consolidation loans.

Changes to the CCA financial limit:

2.13 Currently the CCA covers most credit agreements up to £25,000 and lays down rules for the protection of consumers, such as the form and content of the agreement, the method of calculating the Annual Percentage Rate, and procedures in the event of default, termination or early settlement. With the FSA commencing regulation of 1 st charge mortgages in summer ’02 there will be a substantial wedge of consumer borrowing (loans over £25,000 and 2 nd charge mortgages) not regulated unless the financial limit is increased. We will need to consider whether any increase should continue to include business lending – the CCA covers loans to sole traders, partnerships and unincorporated businesses as well as consumers.

2.14 From Winter 2001, we will be consulting on:

  • raising the financial limit in the CCA to ensure most consumer borrowing is caught by it or the Financial Services Act

  • how business lending should be treated in any increased CCA financial limit.

Section 16 - Exempt agreements:

2.15 Some credit agreements, in particular mortgage loans, are exempt from the Act. While the FSA will regulate most mortgages there will still be some that are regulated neither by the FSA nor under the CCA. We need to consider whether it is appropriate to maintain these exemptions or bring nearly all mortgages under either the FSA or CCA regulation.

2.16 From Winter 2001, we will be consulting on:

  • removing the current exemptions on some types of credit agreement, particularly some mortgages that are not caught by FSA regulation, from needing to comply with the requirements of the CCA.

Enabling consumers to conclude credit agreements on-line:

2.17 The CCA currently requires all credit agreements to be in writing and signed by both the lender and borrower. This is a consumer protection measure to ensure consumers have the opportunity to read the terms and conditions of the agreement before signing it. In addition, a number of actions that can arise during the lifetime of an agreement must be undertaken in writing, such as default notices. We need to consult on how far we should roll back the ‘in writing’ requirements to facilitate electronic loan transactions, while ensuring appropriate consumer protection measures are maintained. Finally, we will need to ensure that any proposals are in line with the UK’s implementation of the E-Commerce directive.

2.18 From Autumn 2001, we will be consulting on:

  • removing the requirement for all credit agreements to be concluded in writing

  • ensuring that appropriate consumer protection measures are maintained
  • facilitating the development of the e.credit market.

Amendments to the Early Settlement Regulations:

2.19 Consumers have a right to settle a credit agreement early and many lenders use a formula, set out in regulations made under the CCA, called the ‘Rule of 78’, for determining the settlement figure. This method tends to favour the lender and although the bias is not significant for some loans, for those of a high value and long term nature it imposes high penalties on the consumer.

2.20 We will be consulting on:

  • amending the rules on early settlement of loans so they are fair and equitable to both lender and consumer

  • the provision of illustrative, up-front information on early settlement terms.

Amendments to the Advertising regulations:

2.21 It is recognised that these regulations are long overdue for reform. The FSA is also making changes to the mortgage regime. We need to ensure that the CCA regulations reflect today’s advertising climate while also ensuring consistency with FSA rules. The FSA is currently consulting on its detailed mortgage rules, including those for mortgage advertisements and, although in some respects these will be similar to the CCA rules, the FSA will be taking a different approach on some issues, such as the presentation of the APR. Lenders will be advertising FSA and OFT regulated products together and consistency in the advertising rules is essential. Currently the CCA rules are complex and cumbersome, resulting in misinterpretation by both lenders and Trading Standards Officers (TSOs). We want to create a regime that simplifies the advertising rules and focuses on the essential information that lenders want to get across and that consumers need.

2.22 From Autumn 2001, we will be consulting further on:

  • simplifying the current regime, which places unnecessarily high compliance costs on business and TSOs.

  • ensuring advertisements are clearer and enable consumers to make easier comparisons with other providers
  • creating regulations that enable suppliers to get over key messages.

Task Force recommendations:

2.23 The Task Force set up in October ’00 by the then Consumer Affairs Minister, Dr Howells, submitted its report in April. It focused on identifying practical ways of achieving more responsible lending and borrowing. Its recommendations propose greater transparency in the credit transaction, as well as encouraging lenders to share and make use of both positive and negative data when assessing an application for credit. The Task Force report has now been published and in taking forward its recommendations we propose to:

  • commission research to look at the cause, effect and extent of overindebtedness in the UK

  • achieve better co-ordinated and targeted education for consumers
  • increase access to Consumer Support Networks (CSNs) for consumers seeking advice on taking out loans
  • increase data sharing among lenders and the end of instant unchecked credit
  • set up working groups to deal with specific recommendations such as improving the content of credit agreements, increased transparency of consumer information, etc.

 
3. REGULATORY IMPACT ASSESSMENT

3.1 It is inappropriate to make a Regulatory Impact Assessment on this consultation, which solely seeks views on areas for a review of the Consumer Credit Act and on a proposed timetable. However, in order to help us evaluate any compliance costs and estimated benefits from the areas to be covered in the review, it would be helpful to gain some initial indications on our outline proposals.

3.2 If some costs and benefits cannot be quantified but can be identified, please list them and give an indication of the importance you attach to them. You should identify and quantify recurring and non-recurring costs and benefits separately.

 
4. WHO TO CONTACT ABOUT THIS CONSULTATION

RESPONSES TO THIS CONSULTATION should be sent by email to [email protected] or by writing to Keith Evans, Consumer Affairs Directorate, Room 407, Department of Trade & Industry, 1 Victoria Street, London SW1H 0ET. The deadline for responses is 3 October 2001.

HELP WITH QUERIES. If you would like help with queries or further information about this consultation please contact Peter Jones (tel no: 020 7215 3818) or email [email protected] .

OTHER COMMENTS OR COMPLAINTS. If you wish to comment on the conduct of this consultation or make a complaint about the way this consultation has been conducted, please write to Mr A Dobbie, DTI consultation coordinator, Room 550, 1 Victoria Street, London SW1H 0ET or telephone him on 020 7215 6509 or email [email protected] .