Specifics of Consumer Credit Act 2006 - Essay Example

Explain the main principles of the Consumer Credit Act 2006.Consider whether the law goes too far in protecting the rights of debtors as opposed to the rights of creditors and suppliers. Table of Contents Abstract ...page no 3 Chapter 1 Introduction .. 4 1.1 Aims and Objectives ..4 Chapter 2 Literature Review 4 Chapter 3 Research Methodology9 3.1 Data requirement..9 3.2 Research Design 10 Chapter 4 Data Findings and Conclusion11 Bibliography 15 Appendix16 Abstract The Consumer Credit Act 2006 amending the original act 1974 seeks to rectify deficiencies that have led to the exploitation of consumers by the lenders and unequal or unfair relationship between them giving lenders undue advantage. The financial limit of 25,000 has been removed in keeping with the changing credit needs of the borrowers in a consumption economy. Now the borrowers can question the acts of the borrowers that make their relationship unfair in a court. They can approach now Financial Ombudsman before going to go to the court as an alternative dispute resolution measure even without the consent of the lenders. The Office of Fair Trading has been given powers of superintendence over the activities and licensing of the lenders and others involved in allied activities. The lenders have also been given the relief of approaching the court for enforcing improperly executed agreement without procedural formalities having been complied with. Overall the Consumer Credit Act 2006 is a fair measure to both parties concerned and in no way appears to give consumers any undue advantage over the creditors. Chapter 1 Introduction Consumer Credit Act 2006 is an amendment act of Consumer Credit Act of 1974 having a long history. The amendment was necessitated to provide for certain reforms in consumer credits and consumer hire agreement along with exemptions. Besides, it seeks licensing of all the related activities, empowering debtors to act against unfair relationship with the creditors and creation of an Ombudsman scheme to reddressal for complaints under the 1974 Act as amended up to date. 1. 1 Aims and Objectives This paper seeks to enquire whether the amendment act of 2006 is going too far to protect the consumers against the creditors and suppliers. Hence principles of Consumer Credit Act 2006 will be examined and whether the act gives too much leverage to the consumers who are the debtors to the detriment of creditors and suppliers. Chapter 2 .Literature Review Literature review is a part of methodology of qualitative research. It forms the secondary data required for the research. The aim of the present study will be largely facilitated by review of literature on the subject chosen for the research; that is whether consumer credit act of 2006 has gone too far in pampering the consumers/debtors with too many privileges to the disadvantage of the suppliers/creditors. Background Expananotory note to the act of 2006 state that Government mooted in 2001 review of the 1974 Act through consultations with the interested parties on the impact of the then existing rules regarding information disclosure, premature settlement, unfair credit transactions, licensing of consumer credit agencies, financial limits beyond the coverage of 1974 Act and consumer reddressal mechanism. Following this, a white paper was published in December 2003 captioned "Fair, Clear and Competitive - The Consumer Credit Market in the 21st Century". At the time Government had been seized of the problem of over-indebtedness and trying to find solution to it by consultations with the industry, representatives of the consumers and advisers, as a sequel to which Department of Trade and Industry (DTI) and Department for Work and Pensions jointly brought out paper entitled "Tackling Over-Indebtedness- Action Plan 2004". The major issues encompassed by the 2006 Act are 1) how consumer credit agreements and consumer hire agreements are to be regulated, 2) how debtors and hirers are to be provided with information after the agreement is entered into, 3) dealing with unfair relationships between the debtors and creditors, 4) licensing of consumer credit providers and hire providing agencies and related ancillary activities of the credit businesses, 5) delegation of powers to Office of Fair Trading (OFT) to issue licences to the above said credit agencies, 6) providing for appeals against the licensing decisions of the OFT, and 7) bringing the consumer credit agencies and related matters under the jurisdiction of Financial Ombudsman Service (FOS). The 2006 Act also amends suitably the following Acts to accommodate new provisions of the Consumer Credit Act of 2006 which in effect amends the 1974 Act. The Acts affected are Sheriffs Courts (Scotland) Act 1971, Solicitors (Scotland ) Act 1980 in order to enable debtors or debtors to make representations in connection with time orders in Scotland, the Bankruptcy Act 1985, the Insolvency Act 1986, and the Insolvency (Northern Ireland Order) 1989 to deal with unfair relationships, the Criminal Justice and Police Act 2001 for empowering OFT to enter in to premises, the Tribunals and Inquiries Act 1992 to deal with Consumer Credit Appeal Tribunals and the Financial Services and Markets Act 2000(FSMA) to accommodate jurisdiction to Financial Ombudsman Service. Basically the Consumer Credit Act 1974 provides for regulation of consumer credit and hiring of goods through licensing of the service and hire goods providers and ancillary businesses for effective control of the consumer credit market. The Act covers all individuals, unincorporated associations and partnerships through out the U.K. availing consumer credit or hiring of goods not exceeding 25,000. Besides, the Act also regulates the method of seeking business through part 4, control over agreements through part 5, dealing with matters arising out of agreements through part 6 and dealing with default and termination of agreements through part 7. In addition, the Act of 1974 also controls regulation of securities given under agreements and pawn broking through part 8 and regulation of ancillary businesses through part 10.1 The provisions of the 2006 Act have been proposed to be implemented in three stages. In stage one, the unfair relationships test, an alternative dispute resolution scheme, and new definition of individual have already come into force from 6 April 2007. The Second stage will bring in new licensing regime, removal of financial limit and the Consumer Credit Appeals Tribunal from April 2008. The third and final stage will be from 1 October 2008 giving effect to post-contract transparency provisions. A summary of some of important pre-implementation consultations relevant to this study, with the 44 responders 6 from Consumer group, 4 from Government, 1 from individual/academic, 6 from industry/legal advice, 18 from lender and 9 from Trade association held by DTI and its reactions are examined hereunder. Responders supported the proposal to link the thresholds of FSMA 2005 as it would result in consistency of definition of high net worth individuals. In spite of there being no adverse response, DTI has recommended increasing the limit of high net worth status above 150,000 as income value or 100,000 as net assets. As for the certification of high net worth status by an independent qualified accountant, the responders from the industry felt that this will not be practicable as it would entail significant costs and will tell upon the relationship between the banks and clients. This has been accepted by DTI and it has recommended certification by the in house accountants with the creditors. The DTI has also dispensed with the requirement of reference to an employer for conforming the high net worth status. The statement of high net worth status has also been agreed to be amended to include the person making the statement to declare his connections to the creditor/owner and his (former) capacity. The requirement that copy of statement of high net worth to be given to the individuals concerned will be confirmed by taking an acknowledgment from him. Where as the new regulations required to mention actual current address of the debtors rather than the last known address in creditors' records , the lenders insisted that requirement as per section 176 (3) of 1974 Act requiring last known address should continue and this has been accepted by the DTI. As regards the start date about which the lenders had reservations, DTI has expressed the view that Government's policy is to ensure that borrowers should have an idea of their loan period and hence it has decided to retain the start date requirement which would mean either the date of agreement executed or the date on which first withdrawal of funds. The requirement of informing of amounts becoming due will be costly to the lenders as it is not at present in their system as opined by them. This was not agreed in principle by the DTI since the borrowers needed to know about the under or over payment made.2 A summary of 27 questions of DTI to the responders, is shown in the appendix 1. Few that are cited above, are only indicative. The Consumer Credit Act 2006 seeks to change the definition of the individual by including partnerships of only maximum three individuals in orders eliminate inclusion of partnerships of more than three persons which is a desirable change. Earlier partnerships of more than three also were considered as individuals since it was subjected to maximum financial limit. The financial limit of 25,000 for exemption from regulation under the Act has been removed resulting in regulation of loan of any amount now under Act of 2006. Though this may seem to be retrograde step, introduction of high net worth individual for being exempted from regulation would somewhat offset the effect of the said removal. Section 15 of 2006 Act deletes the section 173 (3)-(5) of the 1974 Act to enable the courts to enforce an improperly executed document without the required formalities being met as against the original position that courts can not enforce unless various formalities are complied with. This is a welcome measure in favour of the lenders, though the amendment has no retrospective effect. The entry of Ombudsman (FOS) by virtue of section 59 of 2006 Act will not make any impact on the Banks already authorised under FSMA. Those who did not have to comply, must now do so which will result in equal playing field when it concerns complaints from consumers. In sum, the exemption at 25,000 or less will have little significance on the impact of regulations while for loans above 25,000, impact will be considerable from the regulations. The removal of partnerships of more than 3 persons is valuable.3 Role of Financial Ombudsman From 6 April 2007 the Financial Ombudsman Service (FOS) could step in to resolve disputes with those having consumer-credit licence issued by the Office of Fair Trading (OFT). The OFS having been already involved in resolving disputes of the banks, building societies and credit unions authorised by FSA., it can play a constructive role under Consumer Credit Act 2006 also. The rules set by the FOS for the Consumer Credit Act disputes are the same meant for FSA related disputes. Thus businesses that come under its purview are those with activity of lending or hiring, ancillary businesses for consumer-credit business related activities such as debts collection, credit brokerages and businesses such as motor dealers and furniture retailers where consumer credit is secondary to their main businesses. From October 2008, it will cover debt administration and credit information related activities. By virtue of this compulsory jurisdiction conferred on OFS over consumer credit businesses, the in-house complaints will have to be referred for OFS' disposal. However the business coming under both FSA and CCA need not pay two levies to OFS. 4 Under section 19 of the Act of 2006, the borrowers can challenge credit agreements before a court for the reasons of unfair relationship. This in effect replaces the present practice of extortionate credit bargains. The OFT and other consumer bodies can also enforce under part 8 of the Enterprise Act 2002 in case of unfair relationships are detrimental to the common interests of consumers.5 The National Audit Office of Great Britain in its review of the economy has stated that the Consumer Credit Act 2006 will lead to sharing of information since OFT will be gaining new supervisory functions and as a result, it can exchange information with FSA Consumer Minister McCartney has expressed that implementation of Consumer Credit Act 2006 will be a big boost to the rights of the consumers in rooting out rouges in the industry.6 Chapter 3 Research Methodology Research Methodology is the frame work within the confines of which a study is conducted. It lays down approach to a problem to be applied in a research programme. It serves as a tool to find answers to the problem probed. It can also be called a tool to acquire new knowledge. Its utility will be evidenced by how it helps solve the issues. This chapter discusses choosing an appropriate method. The aim of this study is to examine implications of Consumer Credit Act 2006 and to arrive at conclusions whether the act gives too many privileges to consumers/debtors and making it unequal relationship with suppliers /creditors which was in fact was the reverse earlier. For the purpose, it becomes necessary to apply appropriate research methods. This section includes research design and justification of the methods selected and also narrates how the research has to be conducted to achieve the object of this study. Chapter 3.1 Data requirement Studies are conducted by either the quantitative or qualitative research approaches.7 The secondary data collected will be subject to the qualitative assumptions. Secondary information and data will be the support base for this study which includes the following These are mainly discussed in literature review A review of the history and current position of Consumer Credit Act 1974 & 2006. Identification of current studies on the concepts Consumer Credit regulations. Justification of the study of different aspects of Consumer Credit. A few case studies Further, the object of this research will be achieved by secondary data supported by primary research methods originally found therein. This research will be mainly of qualitative character though quantitative surveys used to collect opinion will be involved. As it does not involve quantitative techniques along with qualitative techniques, it need not be called hybrid. Opinions variables record how respondents feel about being part of consumer credit market..8 Saunders et al 9 label the research process as 'onion' having five different layers. Our research design will follow the onion strategy subject to limitations of interviews and questionnaires not of researcher's own. See figure 1 below. Figure 1 (above) Top down development of the research is adopted i.e. starting with the outside layer of Research philosophy, and by peeling one layer after another until the fifth layer of defining of data collection methods. Similar approach is also suggested by Remenyi et al 10 Chapter 3.2 Research Design It will be ensured that researchers quoted in the literature review had designed the questionnaire keeping in mind the following principles as may be applicable.11 Questions should be straightforward, considered a very efficient way of fact gathering. Questionnaire answering evokes data amenable to quantification by simple counting of boxes or content analysis of written responses as the case may be. It must be the rule rather than exception to ask only few essential questions so that respondents are not annoyed which will result either in non-return of the questionnaire or inaccurate or incomplete answers. Avoid open-ended questions The question requiring personal or confidential information must be at the end of the questionnaire so that the responders are not forced to discontinue and fail to return the questionnaire. It is necessary to have the identity of the responders who can be promised confidentiality but not anonymity. If questionnaires are mailed, it should be stamped or post paid. This section is for the purpose of informing the readers as to how the methods employed would justify the arriving at answers to the research questions. The research question being enquiry into the impact of Consumer Credit Act 2006, the methods namely literature review, case studies as secondary data have been selected for research. Chapter 4 Data Findings and Conclusion The literature review above shows that Consumer Credit Act of 2006 extends the scope of Consumer Credit Act of 1974 with two major changes concerning Ombudsman Scheme and giving of more powers to the Office of Fair Trading in respect of consumer credit. The new act also enables consumers to challenge in court as borrowers on matters giving rise to unfair relationship with the creditors. The removal of the limit of 25,000 as a ceiling on borrowing to come under the purview of consumer credit act only reflect current trends on increased borrowing needs of the middle class people. Besides, the removal of partnerships of more than 3 persons from the scope of consumer credit act has also been lauded as a welcome change. Financial Ombudsman Service can be approached by the borrowers for reddressal of disputes with creditors even without their consent unlike in Arbitration scheme wherein both disputing parties should agree for arbitration at the time of contract. The Office of the Fair Trading can now investigate applications for consumer credit licences. It can impose fines upto 50,000 for any violation of licence conditions. There is also provision for appeal against its orders in the Consumer Credit Appeals Tribunals and then to Court of Appeal. The object of this paper is to examine the impact of these aforesaid new provisions to Act of 1974 through amending Act of 2006 on both the Consumers and Lenders. The fact that the OFT has been brought into the domain of consumer credit would show that it is meant for tightening controls on the lenders. The vigilance on the lenders would of course prevent exploitation of consumers by them. Besides what consumers get out of the new regulations is only relaxation of procedural formalities. They do not in any way provide for giving instant loans without merits. Neither can the borrowers go scot free without repaying loans availed. .The provision that lenders can now approach court to enforce improperly executed documents without procedural formalities would only help the lenders to proceed against the defaulting borrowers who may try to avoid liability under some pretext or other. The original act was brought only to give protection to the consumers as stated in chapter 39 of Act of 1974. Basically the Consumer Credit Act of 1974 controls all those offering credit. In order to prevent the lenders from luring consumers through attractive rates of interest and free schemes, the Act of 1974 helps consumers to make an informed choice in their best interests. The reforms are aimed at protecting the consumers and to creating more conducive credit market. Consumers' rights are enhanced by redress mechanisms especially by replacing the hitherto applied 'extortionate test' by alternate dispute resolution procedures. By improving the licensing regime through the vigilance of OFT, regulation of consumer credit business is sought be achieved and also to drive out rogue lenders out of the market as a result. The new regulation is now more appropriate in that different types of credit transactions are provided for such as extension of protection of consumer credit to all loans by removing the ceiling for protection at 25,000 level and introduction of more conducive approach by facilitating enforceability of faulty agreements. Another significant feature is that OFT will hereafter i.e from 6 April 2008, be assessing the lender companies' capability to be fir for running the lending business in future and it will also assess the companies' track record and watch their conduct on an ongoing basis. It will also look for lender businesses operating in high consumer detriment segments such as home credit market for subjecting them to more in-depth scrutiny. The changes will entails additional costs to lending businesses but should be viewed in the context of improved credit market. Besides the consumer can bring action before Financial Ombudsman Service (OFS)without incurring any cost or payment of fees. The complaint to the OFS arises only after the consumer exhausts the remedy of approaching the credit business itself for reddressal and not getting a satisfactory result. To recapitulate the significance of Consumer Credit Act of 2006, it removes financial limit of 25,000, changes the definition of individual to include maximum three persons under partnerships, retains the 25,000 as limit for business lending besides exemption of new business, interest on defaulting loans, dealing with unfair relationships, licensing of consumer credit businesses, introduction of Financial Ombudsman Service, enforcement of credit agreements and establishment of consumer credit appeals tribunals. As more and more people are turning out to avail of loans in a consumption economy, it has become imperative for the Government to safeguard their interests. As the lenders are always in a commanding position vis--vis borrowers, the provisions of Consumers Credit Act 1974 were found inadequate to protect the interest of the consumers. Hence changes brought in by the 2006 Act are inevitable under the present changed conditions of borrowing as a way of life. Since consumption is encouraged at any cost to keep the production levels at maximum and in turn an ever increasing GDP, loans are offered. Almost all employed people are in debt trap because of this consumption-led economy. The reliefs offered to consumers are only to give some comfort in their sufferings and they are intended to relieve the consumers to be relived of their debt burden. Hence it can not be gainsaid that these measures of the Act of 2006 go too far in favour of Consumers as against the Lenders. What should have been in place at the time of coming into effect of 1974 Act, only have now been provided for by the 2006 Act. Any impartial review would only show that the new measures have treated both debtors and creditors on an equal footing and the creditors also get some reliefs from enforceability of otherwise invalid agreements. It in effect reduces the risk of technical breaches of the act by the lenders which the consumers can not take advantage of. It is probably as a sequel to the decision in Wilson v Secretary of State for Trade and Authority 12 wherein creditors were restrained from claiming restitution against borrowers for technical breaches. Though court had acknowledged the injustice being meted out to the lenders, it still held that burden should be on the lender as a matter of public policy in allocating risks. 13 The new law is not applicable for agreements entered into before 6 April 2007. and for completed agreements before 6 April 2008. The most significant of all is the watch on unfair relationships between the parties due to obvious reaons of supremacy of the lender. A court can therefore make an order if it finds that there remains an unfair relationship between the supplier/creditor and consumer/debtor owing to any terms of the agreement, due to the manner in which the creditor has enforced his rights under the agreement and any due to other thing done or failed be done by the creditor or any one on his behalf both before and after making of the agreement. The court can also ask the creditor to refund any money paid by the debtor or guarantor to the creditor as a result of exploitation by the creditor, order the creditor to do or abstain from doing any thing mentioned in the order related to the agreement, and reduce or waive any money payable, ask the creditor to return any security furnished, set aside any condition imposed by the creditor on the debtor, alter the terms of agreements and give directions for furnishing of accounts. But these new conditions on the lenders do not appear strange. What should have been present at the beginning of the act in 1974 are now sought to be given and these very reliefs are not going to give borrowers any supremacy over the lenders. At the most, these bring in parity of relationship between them and no more. Hence the conclusion of this study is that the measures of 2006 Act are only what have been denied to the consumers all these years and therefore the new Act does not make them superior to the creditors. The fact that even in consultation exercise held by the DTI discussed in this paper, the lenders themselves have not raised any objections of supremacy being accorded to the consumers to the their detriment will itself vindicate the conclusion arrived at by this study. Bibliography Books 1) Creswell, J. W. (1994) Research Design: Qualitative and Quantitative Approaches, USA: Sage Publications, Inc 2) Mead Larry 2008 "Fundamentals of Ethics, Corporate Governance and Business Law CO5 (CIMA Certificate Level 2008" page 72 Butterworth-Heinemann 3) Saunders, M., Lewis, P. and Thornhill, A. (2003). 3rd. Research Methods for Business Students, Prentice Hall. 4) Remenyi, D., Money, A., Sherwood-Smith, M., and Irani, Z. 2000 The Effective Measurement and Management of IT Costs and Benefits (2nd ed.), Butterworth Heinemann, London, 2000. Articles 1) Berwin S.J. LLP 2007 "Consumer Credit Act 2006: Worth the wait" Finance Matters February Accessed 25 April 2008 2) DTI Response March 2007 Consumer Credit Act 2006 'Consultation on Draft Statutory Instruments' URN 07/698 3) Explanatory Notes to Consumer Credit Act 2006 Chapter 14 Accessed 25 April 2008 http://www.opsi.gov.uk/acts/acts2006/en/06en14-a.htm 4) Financial Ombudsman Service Ltd January 2008 "our role in settling consumer credit disputes" 5) Legal changes that threaten credit card yield " The 2006 guide to structured finace''Accessed 25 April 2008 http://www.iflr.com/Page=17&ISS=22108&SID=641882 6) M2 PRESSWIRE-25 May 2006-UK Government: Minister presses 'go' on Consumer Credit Act 2006(C)1994-2006 M2 COMMUNICATIONS LTD 7) Hannan Andrew 2006 Questionnaire in education research Legal 1) Wilson v Secretary of State for Trade and Industry [2003] CCLR 14 Appendix 1 SUMMARY OF QUESTIONS (DTI Response March 2007 Consumer Credit Act 2006 'Consultation on Draft Statutory Instruments' URN 07/698) The questions posed by the consultation were: CHAPTER 2 - THE REQUIREMENTS FOR THE EXEMPTION FOR HIGH NET WORTH INDIVIDUALS Question 1: Are you content with our proposal to link the threshold of what constitutes high net worth to the Financial Services and Markets Act 2000 (Financial Promotions Order) 2005 Question 2: Do you have any comments on the proposed categories of persons who may make a statement of high net worth Question 3: Do you have any comments on the proposed form of a statement of high net worth Question 4: Do you have any comments on the proposed form of a declaration of high net worth CHAPTER 3 - THE REQUIREMENTS FOR THE EXEMPTION FOR BUSINESS LENDING Question 5: Do you have any comments on the proposed form of a declaration of a business purpose CHAPTER 4 - ANNUAL STATEMENTS FOR FIXED-SUM CREDIT ACCOUNT AGREEMENTS Question 6: Do you have any comments on the information we are proposing to include in periodic statements, including comments on any additional information Question 7: Do you have any comments on our proposals for the way in which we propose to deal with agreements covered by one aggregated payment CHAPTER 5 - ADDITIONAL STATEMENTS FOR FIXED-SUM CREDIT ACCOUNT AGREEMENTS Question 8: Do you have any comments on the proposed warning in relation to a failure to make a required payment Question 9: Do you have any comments on the proposed warning in relation to the making of minimum repayments Question 10: Do you think that the allocation of statements should be displayed more prominently in cases where the balance is not paid off in full, or is our proposal to include it somewhere in the statement sufficient CHAPTER 6 - NOTICES OF SUMS IN ARREARS FOR FIXED-SUM CREDIT AGREEMENTS Question 11: Do you have any comments on the proposed information to be included in a notice of sums in arrears for fixed-sum credit agreements, including comments about any additional information CHAPTER 7 - NOTICES OF SUMS IN ARREARS FOR RUNNING-ACCOUNT CREDIT AGREEMENTS Question 12: Do you have any comments on the proposed information to be included in a notice of sums in arrears for running-account credit agreements, including comments about any additional information CHAPTER 8 - NOTICES OF DEFAULT SUMS Question 13: Do you have any comments on our proposed way forward for the requirement to provide notices of default sums Question 14: Do you have any comments on the proposed period for the giving of notices of default sums Question 15: Do you have any comments on the proposed information to be included in a notice of default sums, including comments about any additional information CHAPTER 9 - ADDDITIONAL INFORMATION IN SECTION 87 DEFAULT NOTICES Question 16: Do you have any comments on the proposed requirement for the inclusion of s.87 default notices of information about the right to end HP and conditional sale agreements Question 17: Do you consider that the generic description of liabilities for the debtor under s.100(1) would be more appropriate than a specific figure of the amount the debtor would have to pay as at the date of the notice, or vice versa, and why Question 18: Do you have any comments on the proposed requirement for the inclusion in s.87 default notices of information about interest payable after judgement Question 19: Do you have any comments on the proposed requirement for the inclusion in s.87 default notices of a reference to the OFT information sheet on default Question 20: Do you consider that any other information not already proposed should be included in s.87 default notices CHAPTER 10 - NOTICES IN RELATION TO POST-JUDGEMENT INTEREST Question 21: Do you have any comments on the proposed content of the first notice in relation to interest after judgement Question 22: Do you have any comment on the proposed content of the second and subsequent notices in relation to interest after judgement CHAPTER 11 - FORM OF POST-CONTRACT INFORMATION AND NOTICES Question 23: Do you have comment on out proposals in Chapter 11 on the form of the various post-contract information notices and statements Question 24: Do you think that that there are any notices or statements that would benefit from the information appearing in a particular order, or linked to any other specific item of information CHAPTER 12 - OFT LICENSING Question 25: Do you have any comments on the proposed 5-year period for the maximum duration of time-limited licences Question 26: Do you have any comments on the proposed 5-year period for payment of the periodic licence fee in respect of indefinite licences EXTRA QUESTION Question 27: In addition to any comments you may already have made on questions 1-26, do you have any comments on the draft Statutory Instruments included at Annex A Please give references to any specific parts of the draft Statutory Instruments that you comment on. Source : ( DTI Response March 2007 Consumer Credit Act 2006 'Consultation on Draft Statutory Instruments' URN 07/698) Read More