Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of Parallelewelten.
1. Introduction and Aim
This thesis will consider the Consumer Credit Act 1974 and preceding regulations that have been passed, together with proposed legislation and the Human Rights Act. It will consider these in some detail and consider whether or not the protection that is offered to the debtor is at the detriment, always, of the creditor. It will be concluded that because of the misbehaviour of a few the entire credit industry is detrimentally effected by this act. The new regulation on more stringent licensing is welcome, as this will rid the county of the “sharks” and perhaps pave the way for fairer legislation. However it would seem that the situation is unlikely to change dramatically and that the tide will continue to fall in favour of the debtor.
2. Aims of the Consumer Credit Act 1974
The 1974 Act was the product of the Crowther Committee Report of 1971. There was in fact already legislation in place governing aspects of the supply of credit to consumers, and there had been such legislation for some time. However the pattern of control was incomplete, with different types of credit arrangement subject to different rules. The Crowther Committee considered that the existing law was deficient in the following respects:
- It lacked any functional basis, distinctions between different types of transaction being drawn on the basis of legal abstractions rather than on the basis of commercial reality.
- The law did not distinguish consumer from commercial transactions.
- There was an artificial separation between the law relating to lending and the law relating to security for loans .
- There was no rational policy relating to the rights of third parties
- Many statutes were excessively technical
- There was no consistent policy in relation to sanctions for infringement
- “The fact is that the present law relating to credit, based largely on legislation enacted in the last century, is unsuited to modern commercial requirements and fails to tackle everyday problems in a realistic manner”
In essence, the Act seeks to control trading malpractices, readdress bargaining inequality between consumers and traders and regulate the remedies for default. To this end the Act imposes two levels of control:
- Over the credit industry generally, by the issues of licences, restrictions on advertising and canvassing and wide supervisory powers of the Director General of Fair Trading; and
- Over individual agreements in relation to such matters as formalities, termination, cancellation and default.
It has been said that one of the strengths of the Act –
“is that it does not seek to meet its objectives through interventionist action such as interest rate capping or direct control of the substance of contracts. Rather, it explicitly endorses freedom of contract within a framework of rules designed to ensure openness: consumer protection is attained in large part through measures to ensure that full and truthful information about credit contracts is available to consumers”
3. Who & What Does the Consumer Credit Agreement Protect?
Unlike other consumer protection statutes, the 1974 Act makes no clear-cut distinction between consumer and business transactions. A consumer credit agreement is “a personal credit agreement by which the creditor provides the debtor with credit not exceeding £25,000.” A “personal credit agreement” consists of “an agreement between an individual (the debtor) and any other person (the creditor) by which the creditor provides the debtor with credit of any amount.” “Individual” is defined as including a partnership or other unincorporated body of persons not consisting entirely of bodies corporate.” The Act therefore regulates certain business credit transactions provided that the debtor is not a corporate body.
Credit is defined in very broad terms as including “a cash loan and any other form of financial accommodation”. The Act therefore applies to many different categories of finance. The three common forms of instalment credit – hire purchase, conditional sale and credit sale – are specifically defined. A hire purchase agreement is one where goods are bailed in return for periodical payments and the property in the goods will not pass until one or more of the following occurs: (a) the exercise of an option to purchase; (b) the doing of any other specified act by any party to the agreement; or (c) the happening of any other specified event. A conditional sale agreement is an agreement for the sale of goods or land under which the price is payable by instalments and the property is to remain in the seller until the required conditions are fulfilled. A credit sale is defined on the same terms as a conditional sale except that property passes to the buyer immediately.
In order to decide if an agreement is regulated, the amount of credit supplied must be calculated. It is important to distinguish between the credit provided and the total charge for credit which includes interest and other charges. The latter is not treated as credit and must therefore be excluded when calculating the amount of credit supplied under the agreement.
4. The Power of the Courts
In the case of London North Securities v Meadowsa liability of £5,750 (the amount advanced in 1989) rose to £ 300,000 by the date of the trial. The money was due pursuant to an agreement regulated under the Consumer Credit Act 1974 and was secured by a charge over the home of Mr and Mrs Meadows. Judge Howarth’s principal finding was that the amount of credit had been misstated and, therefore, the agreement was unenforceable. However, he went on to make findings on the other defences raised.
Regulated agreements do not have the protection of section 36 of the Administration of Justice Act 1970, which permits the court to adjourn, stay, suspend or postpone the date for delivery of possession of a mortgaged property where it appears that the mortgagor is likely to be able to pay the sums due within a ‘reasonable period’. Section 38A of the Act provides that section 36 shall not apply to regulated agreements.
Assuming the agreement is properly executed, what powers does the court have? First, the court may re-open an extortionate credit bargain, and has a wide power to vary the terms of the agreement to reduce the amount payable to that which is ‘fairly due and reasonable‘ To be ‘extortionate’, the agreement must require payments that are ‘grossly exorbitant’, or ‘otherwise grossly contravene ordinary principles of fair dealing‘
The court will have regard to interest rates prevailing at the time the agreement was made and factors including the age, experience, business capacity and state of health of the borrower, any financial pressure suffered by the borrower at the time the agreement was made, the lender’s relationship to the borrower, and the degree of risk accepted by the lender having regard to the value of the security.
In London North Securities, Judge Howarth described the appropriate test as being ‘very high’, saying ‘if the agreement is simply exorbitant but not grossly exorbitant, it is not extortionate’. Having heard expert evidence, he concluded that 34.9% APR was not unusual in the non-status market in 1989. However, he went on to consider the terms of the agreement entitling the lender to charge the same rate of interest on costs and charges, and to compound the interest. He concluded that this combination of factors meant that the agreement was extortionate.
In Paragon Finance plc v Nash, the court made clear that it will consider the circumstances at the time the agreement was made, and so will not take into consideration changes that may occur later, such as a variation in the interest rate. Thus the charging of a concessionary rate may not prevent the agreement from being extortionate, but it may affect the remedy (if any) that the court gives.
The court may order the lender to repay monies paid under the agreement, although this is subject to a six-year limitation period. Otherwise, the limitation period for re-opening the agreement is 12 years from the date of the agreement. The borrower must make an application in proceedings brought by the lender or by separate proceedings; the court has no power to make an order in the absence of an application.
The court may also make a ‘time order’ pursuant to section 129 of the Consumer Credit Act, providing for ‘the payment of sums owed by such instalments and at such times as the court thinks reasonable having regard to the borrower’s means’.
This power however is not without restrictions. It can only relate to sums ‘owed.’ The power to include sums that fall due later is restricted to hire purchase and conditional sale agreements.
The court has a wide power under section 135 to make conditional or suspended orders. It appears that this includes the power to suspend beyond the original period of the agreement (except in the case of possession of goods under a consumer hire agreement).
5. Extortionate Credit Bargaining
Whilst this has been touched on in other sections, so important is it to the relationship between creditor and debtor that it deserves a section of its own. As has been demonstrated the Consumer credit Act 1974 allows the court to reopen a credit agreement where it finds the bargain extortionate. These powers may be exercised even in respect of unregulated agreements, since a “credit bargain” is defined as an agreement where credit of any amount is provided to an individual together with any other transaction which must be taken into account in computing the total charge for credit.
If a bargain is extortionate the court can effectively rewrite it. It may extinguish liabilities, order repayment of sums pains and order accounts to be taken. An order can be made which adversely effects the creditor (and often is!) even though it was not the creditor but a party to a linked transaction which received an unfair advantage under the original credit bargain.
These provisions are intended to give the courts wide powers to relieve consumer debtors. Decided cases are of little precedent value, since each case will depend on the facts. In Ketley Ltd v Scott a lender advanced £20,500 to a prospective house purchaser at only a few hours notice at a nominal annual rate of interest of 48%. The court rejected the borrower’s argument that the bargain was extortionate, largely on the grounds of the borrowers conduct. In Falco Finance Ltd v Gough a mortgage agreement permitted to the debtor to pay a discounted rate of interest, but provided that, in the event of any default in payment, the right to the discount would be permanently forfeited. The full contractual rate would then be payable. The court held that this was an extortionate credit bargain emphasising that the disproportionate increase in the interest rate was not connected with any loss suffered by the creditor.
A credit bargain that is not an extortionate credit bargain could equally be an unjust transaction: It would clearly be easier to show that a transaction requires “excessive payments” than it requires grossly exorbitant payments. The report further recommended that in order to relieve the debtor of the onus of applying for a transaction to be reopened, the OFT should have power to apply for a transaction to be reopened and the court should be given power to reopen a transaction of its own motion. That said the implications for the creditor would be huge as they would not know at any given time whether or not a credit agreement could be reopened placing them in a rather precarious position.
6. The Impact of the Human Rights Act
The most important decision under the Human Rights Act is that of Wilson v Secretary of State for Trade and Industry. In January 1999, Mrs Wilson borrowed £ 5,000 from First County Trust Ltd (FCT). FCT are described in the law report as a pawnbroker and the transaction is described as a pledge. In due course, Mrs Wilson failed to repay the loan and FCT intimated that failing repayment they would proceed to sell the car. Mrs Wilson took proceedings in the Kingston County Court claiming that the transaction was invalid under the Consumer Credit Act 1974.
When Mrs Wilson signed her agreement, she was charged a ‘document fee’ of £ 250 which was added to the amount of her loan. In the agreement, the amount of the loan was stated as £ 5,250; the amount payable on redemption was £ 7,327, made up of £ 5,250 and interest of £ 1,827 and the annual percentage rate of interest was stated to be 94.78%.
A regulated agreement under section 8 of the Consumer Credit Act 1974 is not properly executed unless the document signed contains all the prescribed terms. One of the prescribed terms is the “amount of the credit.”
On 24 September 1999, the circuit judge held that the fee of £ 250 was part of the credit and that the agreement was therefore enforceable. He reopened the agreement as an extortionate credit bargain and reduced the amount of interest payable by one half. Mrs Wilson appealed to the Court of Appeal but, pending the hearing of the appeal, she paid FCT £ 6,900 to redeem the car in December 1999.
The appeal was heard in November 2000, shortly after the Human Rights Act 1998 had come into force. The Court of Appeal disagreed with the circuit judge on the application of the Consumer Credit Act and held that the £ 250 was not credit for the purposes of the Act so that one of the prescribed terms was not correctly stated and in consequence the agreement was unenforceable. FCT was ordered to repay the £ 6,900 which Mrs Wilson had paid after the first instance judgment, together with interest amounting to £ 662. The end result of this was that Mrs Wilson recovered her car, had to pay no interest and was entitled to keep the whole of the original loan.
On 2 May 2001, the Court of Appeal gave judgment declaring that Section 127(3) of Consumer Credit Act was incompatible with the rights guaranteed to the creditor by Article 6(1) of the Convention and Article (1) of the First Protocol to the Convention of Human Rights.
The Secretary of State appealed to the House of Lords. FCT did not. The Secretary of State accepted that the initial decision on the Consumer Credit Act was correct and the hearing before the House of Lords was therefore confined to the human rights questions.
All of their Lordships were agreed that the Court of Appeal were wrong to give the Human Rights Act retrospective effect on the particular facts of this particular case. They were also agreed, however, that the Human Rights Act would have retrospective effect in some circumstances.
Considering whether or not the outcome would have been different if the original decision had come before the Human Rights Act the House of Lords held that the Human Rights Act did not justify any declaration of incompatibility of this section of the Consumer Credit Act.
7. The New Consumer Credit Regulations
In 2003 the Department of Trade and Industry published a White Paper, Fair, Clear and Competitive, The Consumer Credit Market in the 21st Century, in which it proposed plans for the reform of consumer credit legislation. At the same time, the DTI also published a consultation paper entitled Establishing a Transparent Market, which sought comments on proposals for those changes that could be achieved through secondary legislation.
These changes have now been incorporated into four regulations, each of which was laid before Parliament on 9 June 2004. The first of these is the Consumer Credit (Disclosure of Information) Regulations 2004 (SI 2004/1481) which come into effect on 31 May 2005. In general terms, the Disclosure of Information Regulations create an obligation to provide a potential debtor or hirer with prescribed information about the agreement they are to enter into before the agreement is concluded. These new regulations impose a pre-disclosure obligation on the creditor. The pre-disclosure document must be provided before a regulated agreement is made. This may be immediately before that happens, and therefore the provision of the pre-disclosure document and the presentation of the agreement for signature can all take place during the course of a single engagement with the consumer. The information to be included almost (but not entirely) duplicates the information to be contained in the agreement itself, and therefore it remains to be seen whether many more consumers will read the pre-disclosure document than currently read the agreement.
The Consumer Credit (Agreements) (Amendment) Regulations 2004 (SI 2004/1482) also comes into effect on 31 May 2005 and make amendments to the Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553), as already previously amended.
The principal alteration is that the regulations prescribe a strict order in which information must be included in the agreement (previously restricted to the financial particulars).
The third new regulation is the Consumer Credit (Early Settlement) Regulations 2004 (SI 2004/1483) also come into effect on 31 May 2005. They revoke the Consumer Credit (Rebate on Early Settlement) Regulations 1983 (SI 1983/1562) and amend the Consumer Credit (Settlement Information) Regulations 1983 (SI 1983/1564). The regulations replace the ‘rule of 78’ formula with a new actuarially based formula, and make changes to the calculation of the settlement date.
The new formula has been prepared by the government actuaries and, it is claimed, will make the amount due on early settlement easier to understand for the average consumer.
These regulations therefore will make major reforms to significant sections of the current regulatory structure. Some of the changes are complex. Some, like those to the agreements regulations, are detailed and require careful understanding.
8. The Consumer Credit Bill
The Consumer Credit Bill was introduced to the House of Commons on 16 December 2004, following three years of consultation and discussion with industry, regulators and consumer groups. The Bill seeks to reform the Consumer Credit Act 1974 by modernising the consumer credit regime through enhancing consumer rights and redress; improving the regulation of consumer credit; and making regulation more appropriate for different types of consumer credit. Thus enhancing further the rights of the consumer and as will be demonstrating placing much more stringent control over those who hold or seek to hold a licence.
The Consumer Credit Bill sets out new powers for the Office of Fair Trading who will have a much wider duty to monitor the activities and management of those businesses that hold a consumer credit licence. Furthermore more information will be have to be supplied to OFT if a business requires such a licence. Applicants for a consumer credit licence will be required to provide information to enable their fitness to hold a licence to be continually monitored. Upon notice, the OFT will be able to require individual licensees, and certain persons connected with licensees, to provide it with information of any description, failure to do so will allow the OFT to apply for a warrant to enter the licensee’s premises and seize documentation .
The Bill will grant the OFT the ability to impose conditions (“requirements”) on a licence where the OFT is “dissatisfied” with the way a business is being carried on or is proposed to be carried on, or with the conduct of the licensee or its business associate. A failure of licensees to provide updated business information may expose defaulting licensees to a civil fine of up to £ 50,000.
When its new powers to impose conditions on licences are available for use, there may be situations where the OFT might be tempted to exercise those powers to uphold its view of the law. Where the OFT is in disagreement with industry or a business over the interpretation of law, might there be a temptation to avoid the risk, cost and delay of a court decision? Why not express ‘dissatisfaction’ with the particular business conduct arising from the interpretation of the law, then eradicate the conduct by adding conditions to licences? The provisions of the Bill as presently drafted may make it difficult for an aggrieved party to successfully challenge the OFT if it did take this route.
According to the DTI, the Bill will benefit business by improving the way the consumer credit market works:
(a)Quick, cheap dispute resolution: The Bill will introduce an ADR system to allow for the resolution of consumer disputes, at considerably less cost than court action for debtors, although creditors will still face investigation, representation and ADR funding costs.
(b) A single standard: A new test of an unfair relationship is to provide a single standard for all consumer credit business, consistent with industry codes and FSA regulation. However, until a definition is reached, this will create more problems.
(c) Fairness for business and consumer: Parts of s 127 of CCA 1974, which render agreements unenforceable if certain requirements of the Act are breached, will be repealed. Instead, courts will be given discretion in relation to enforceability in all cases when provisions are not complied with, allowing courts to make a judgment proportionate to the detriment caused to the consumer.
It has been demonstrated through case law and amendments to the Consumer Credit Act 1974 that the act most certainly favours the individual debtor as opposed to the Creditor. Whilst it is conceivable that such regulations should be in place and that the individual should be protected, it is argued that the tide has turned too far in the favour of the consumer and often to the detriment of the debtor. Whilst the reason in the London Securities case was sound, press reports, whether or not true, indicated that the couple involved borrowed the money to get a new bathroom; this was not essentially a necessity. The have now had this loan written off and interest returned due to a technicality. The real reason for their application to the court was to side step the debt and they succeeded. Two adults, both with jobs, not in dire financial straits enter into an agreement that has a particular high interest rate – it seems incredulous that they can then escape liability – surely this defies public policy? This paper has demonstrated that the debtor does often receive a very raw deal and that the situation is not going to change in a hurry.
- Administration of Justice Act 1970
- Consumer Credit Act 1974
- Human Rights Act 1998
- Dimond v Lovell  2 ALL ER 897
- Falco Finance Ltd v Gough  CCLR 16
- Ketley Ltd v Scott  ICR 241
- London North Securities v Meadows Lawtel, 25 November 2004
- Paragon Finance plc v Nash  EWCA Civ 1466;  1 WLR 685
- Rahman v Sterling Credit Ltd  1 WLR 496
- Wilson v Secretary of State for Trade and Industry  UKHL 40
- See Author Unknown (2003) “Human Rights and The Consumer Credit Act”, Consumer Law Today 26. 9(1)
- Furmston M, (2003) “Retrospectivey, The Consumer Credit And The Human Rights Act” , Finance and Credit Law 5.9 (1)
- Johnson H, (2004) “Credit Hire Agreements – Future Peace and Past Battles”, Finance and Credit Law 6.3 (1)
- Judge Graeme Smith, (2005) “Benchmarks: Coming to Terms with Credit Agreements”, Law Society Gazette 102.12 (27)
- Mather K, (2004) “Consumer Credit Reform”, New Law Journal 154.7142 (1294)
- Stokes P, (2005) “ New Oft Power in the Credit Clamp Down” , New Law Journal 155.7164 (236)
- Bradgate R, (2003) “Commercial Law”, Butterworhs Lexis Nexis, Third Edition
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