Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of Parallelewelten.
In recent weeks two programmes have shaken public confidence in the consumer credit industry. The first was the BBC’s ‘Real Story’ undercover documentary about the practices of Lloyds TSB in selling personal loans and the second was the ‘Whistleblower’ programme featuring undercover agents in Yes Car Credit. The attitude portrayed in both documentaries was adequately summed up by the manager in the Whistleblower documentary:
‘We are here to make money. We don’t do nice’
These two examples are particularly pertinent coming as they do in the same month as the Consumer Credit Bill 2004 was completing its second reading in the House of Commons and progressing into the Lords on the 7th March 2005. The two documentaries seem reflective of the National Consumer Council’s findings that in 2002 7.8 million consumers were forced out of mainstream credit into the sub-prime market that can charge astronomical APR’s up to 900%. Statistics such as these quite rightly fuel public outrage at the current system of regulation by the Office of Fair Trading (OFT) under the Consumer Credit Act 1974 (CCA). Consumer Credit has not been on the legislative agenda for thirty years and this article seeks to analyse both the concerns that led up to the introduction of the bill and the potential impact it is going to have on the regulation of consumer credit in the United Kingdom.
- The CCB – History
Academic writers on the subject of Consumer Credit have argued since the late 1980’s that the regulatory scheme as implemented by the CCA was inadequate and unable to cope with the explosion of social phenomena such as the increasing availability of credit, the internet as a potential site of commerce and the accelerated advances in computer technology. However the CCA is not seen as an antiquated piece of legislation, the position of the Department of Trade & Industry has been from the very outset that reformation of its provisions would always be along the lines of an amending, as opposed to a supplanting, piece of legislation. In a year where UK personal debt exceeded one trillion it is contrite to say that there is a consumer credit crisis. The problems of personal debt have been widely published and have provided pressure on government reform. This coupled in recent years with the Financial Services and Markets Act 2000 (FSMA), the Electronic Commerce Directive 2000, the proposed European Consumer Credit Directive and not to mention the recent turmoil stirred up by the Court of Appeal decision in Wilson v. First County Trust has all combined to create an atmosphere in which consumer credit reform is a top priority.
In late 1998 the DTI commissioned a report designed to give empirical answers to two key questions: ‘To what extent is extortionate credit a problem in the UK?’ And ‘Who uses alternative and non-status lenders and why?’ This report concluded that the unemployed and people on low-income living in rented property who generally had dependents were the most vulnerable demographic. The most striking conclusion of the report was that it was not only people outside the regulatory system of the CCA but also those holding a valid licence under the CCA which were carrying on practices that would be considered ‘extortionate’. The conclusions were then built on by The Task Force on Over Indebtedness’ report in 2001. The importance of these two reports on the final substance of the bill cannot be underestimated; the government’s determination to act on this area was stated in the 2001 General Election manifesto as an intention to enact ‘new laws against rogue traders, loan sharks and unfair terms in contracts’. The CCA system as a whole was not being challenged merely its ability to deal with a particular aspect of the modern consumer credit market, namely the exploitation of financially weaker members of society.
The first post-election movement on this issue was the overarching consultation paper entitled ‘Tackling Loan Sharks and more’. This consultation paper started to give real substance to the governments heretofore vague aims, the concerns mentioned above were narrowed down into specific ‘issues’. It was followed up with no less than five consultation papers during 2002 – 2003 on the more specific dimensions of the issues raised. This culminated in the White Paper in December 2003 ‘Fair, Clear and Competitive’ which promised to introduce both primary and secondary legislation on key areas as ‘soon as parliamentary time is available’.
The consultation papers covered a very wide ambit of proposed reforms however the division of the government into those provisions included in the bill and those to be included in secondary legislation is illustrative of the driving motivation behind the bill. The more technical issues such as concluding agreements online, reform of advertising regulations, early settlement and disclosure of information which were more oriented towards European law compliance and modernisation were relegated to Statutory Instruments. However, the bill embodies the politically ‘most important aspects’ of consumer credit reform which are those tied up with the governments protection of the stereo-typed poor consumer who is forced into accepting credit on less than favourable conditions because of their inability to access the mainstream market. These are namely reform of extortionate credit, the licensing system and the financial limits as outlined in Chapters 3 and 5 of the White Paper.
- The CCB – Impact
The CCB was introduced into the House of Commons on the 16th December 2004 by the minister for trade & industry Patricia Hewitt. It had its second reading on the 13th January 2005 and was sent to Standing Committee E, which sat four times. In committee there were a number of notable amendments to key provisions such as the extension of Clause 38, which purports to give OFT powers to impose requirements on licensees under the CCA, to cover the behaviour of former associate’s rather than just existing associates. It was sent back to the Commons by the Standing Committee who went through the final debate and passed the bill in its amended form on the 3rd March 2005. Four days later it was presented to the House of Lords who at the time of writing have scheduled the second reading for the 12th April 2005. However, as was reported by the Scotsman the 13th April is the expected date for the dissolution of parliament in expectation of a general election on May 5th. If the Bill isn’t passed before then it will automatically fail and will have to be reintroduced in the next session. There is therefore no guarantee that this will ever become law but in this section we discuss the impact it would have if implemented on the 12th April. The Bill in its current form has 71 Clauses and Four schedules so due to the limitations of space we cannot review every single change to the CCA but will give outlines of the most important ones.
- Licensing Framework
The 2003 White Paper identified reform of the licensing powers of the OFT as key to their primary legislation proposals. They drew primarily on the results of the earlier consultation paper and the suggestions contained have produced what is currently constituted as Clause’s 27 – 54. These clauses significantly extend the jurisdiction of the OFT in many different ways. They give the OFT much more discretion at the license application stage in particular it includes a complete overhaul of the evidential requirements and guidelines currently contained in s.25 (2) of the CCA. Previously the OFT only had to ‘have regard to any circumstances appearing to it to be relevant’, the government’s white paper identified the retrospective nature of the OFT’s fitness test as limiting its effectiveness hence the introduction of a test to establish the ‘skills, knowledge and experience’ of any person who would be carrying on a consumer credit business. The second major deficiency that consultation identified was the ability of the OFT to monitor the ongoing behaviour of a licensee and demand production of documents linked to suspected ‘undesirable’ behaviour. The CCB has introduced provisions which not only extend the right of the OFT to demand documents from consumer credit bodies to include a wide range of potential information such as criminal convictions and county court judgements but they positively require the licensee to notify the OFT of such information. As well as augmenting the regulatory side of licensing there have been a number of provisions aimed at the punitive strength of the OFT. The primary ones are the reform of the OFT’s power to vary suspend or revoke a licence currently contained in s.30. The bill allows for some more medium sized powers such as imposition of certain licensing conditions or financial penalties up to £50,000 on the licensee which allow the OFT to more effectively control those who exploit the consumer credit market. The previous situation was very black and white, use of any of the powers effectively forced the company out of business and these new powers are seen as a defter regulatory tool for the job. The OFT also has new powers to seek warrants to enter the premises of businesses to find the requisite documents under clause 45 as mentioned above.
- Extortionate Credit
As was mentioned in section 1 of this essay a major driving factor motivating this legislation was the exploitation of those consumers on a low-income who were reliant on the sub-prime credit market. The tightening up of the licensing regime and the extension of really vast new powers to the OFT are but part of the government’s plans. Another major concern was to make it easier for consumers to challenge extortionate credit deals. The Bill has delivered this promise and really gives consumers some extensive powers to challenge ‘unfair’ agreements, these repealing the ‘extortionate’ credit provisions under the CCA, and goes so far as to give consumers a right to challenge agreements on the basis of ‘any…thing done…by, or on behalf of, the creditor’. The courts can consider anything they feel is relevant in considering whether an agreement falls foul of these provisions. These provisions will hopefully be widely publicised because they are a significant advance on the old laws on extortionate credit which focused on the exorbitant nature of the credit, this was notoriously hard to prove and it is hoped that as the expressed intention of the government is to protect consumers that the courts will re-interpret the thresholds as lower and use its various powers of repayment, variation and modification to address the problems that the NCC and others have been highlighting for decades.
- Miscellaneous Provisions
The other major changes that this bill will effect is to bring a whole swathe of new consumer credit businesses under the regulatory scheme by virtue of Clause 2 that gets rid of all the financial restrictions, this will bring thousands under the new regulatory scheme. The Act also sets up two new avenues for review of OFT and it’s decisions. It creates a new tribunal known as the Consumer Credit Appeals Tribunal; this will replace the previous law that had appeals going to the Secretary of State and certainly seems sensible given, as mentioned, the planned enlargement of consumer credit regulation. Furthermore the Financial Services Ombudsman has had his jurisdiction extended to cover the Consumer Credit market. This has given rise to exciting speculation about the use of ADR as a more user friendly credit complaints system
This bill may never become law however if it does it is going to make a very large impact on the current regulatory system. The nature of the bill in devolving so much discretion on the three main regulators of the industry i.e. the OFT, Ombudsman and courts means the exact impact of the bill cannot be fully anticipated. The operation in practice will depend a lot less on the word of the law and more on the guidelines and precedents laid down by these bodies. It is to be hoped that these will reflect contemporary views and recognise the pressures as outlined in section 1 and identified by government consultation that led to the production of this bill.
Marshall, EScots Mercantile LawW.Green / Sweet & Maxwell, 3rd ed.
Journals / Articles / Reports
Cooper, SimonThe Consumer Debt Crisis1988 Butterworth &Co
Ltd. Vol 138 No. 6370 p. 589
DTIConsultation on the Licensing DTI Consultation Paper
Regime under the Consumer 13th April 2003 Credit Act 1974
DTI“Fair, Clear and Competitive – DTI White Paper
The Consumer Credit Market in 18th December 2003
the 21st Century”.
DTITackling Loan Sharks – & More2001 DTI Consultation
EditorialConsumer Credit Whitepaper2004 CLT 27.2
Johnson, HowardConsumer Credit: A New Age 2004 F&CL 6.1 (1)
But Old Problems
Johnson, HowardConsumer Credit: Familiar Tales 2002 F & CL 4.2
Kempson, E &Extortionate Credit in the UK –1999 DTI Report
Whyley, CA Report To The DTI
Lomnicka, EvaThe Reform of Consumer Credit 2004 JBL 129
in the UK
NCCBriefing: Putting consumers first – 18th September 2003
The credit white paper
NCCHassle-free credit complaints
Stokes, PaulA Call For Regulatory Caution2004 NLJ 154
In Consumer Credit
Stokes, PaulNew OFT Powes in the credit-2005 NLJ 155
In this essay I have endeavoured to follow the research trail to its very extent on a subject on which there is very little writing. I did this by using both the DTI consultation papers and the textbook to build up my general knowledge of this area of law. This enabled me to be more efficient in my research because I knew what I was looking for; I knew the terms associated with the area of law which made it easier to identify relevant articles. Once I had found one or two articles I was then able to trace other writers from the footnotes. The writing was sparse and in any case I concentrated on a careful reading of the bill and an understanding of the subtle differences in the changing law as I was unable to find a comprehensive review of the bill in its presented format.
The lack of material in this subject matter meant that it was a lot less likely that I would plagiarise other people’s work. If I had based all my work on Lomnicka’s article or on Stokes’ article it would have both led to me being misdirected as to the final details of the bill and along the path of academic misconduct. This would involve plagiarising the ideas and format of those writers and trying to pass it off as my own. The essay again was not a critical evaluation and this therefore limited the scope to which I could plagiarise ideas. I avoided accepting any of the conclusions these articles presented or trying to re-use they’re ideas except where they gave added weight to my points.
The protection of ideas and copyright in academic pieces of work is a highly important issue and one that no-one, no matter the pressures, should ever stoop to breaking.
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