The Consumer Credit legislation is designed to support people's access to credit, ensure fair treatment for consumers from lenders, and provide safeguards to help prevent people from getting into unsustainable levels of debt. The Consumer Credit Act 1974 established a fairer, clearer and more competitive market for consumer credit.
Consumer Credit Regulation now with the Financial Conduct Authority
The Financial Conduct Authority's (FCA) aim is to provide stronger protection and better outcomes for consumers. FCA regulation now applies to any firm or individual offering credit cards and personal loans, selling goods or services on credit, offering goods for hire, or providing debt counselling or debt adjusting services to consumers.
The legislative changes see the FCA take on responsibility for more than 50,000 firms who have existing credit licences. The FCA wants to ensure that consumers are given enough information to make informed choices, that the market is competitive and offers loans that meet customer needs, and that those in difficulty are treated fairly. The key elements of the proposed consumer credit regime are:
- Affordability checks for every credit agreement to ensure that only consumers that can afford a loan can get a loan.
- All advertisements and other promotions must be clear, fair and not misleading. The FCA will be able to ban misleading adverts.
- Firms that do higher risk business and pose a greater risk to consumers will face a tougher supervisory approach. Specific rules for the payday sector have been proposed and include:
- Limiting loan rollovers to two;
- Limiting the number of attempts by a payday lender to use CPAs to pay off a loan, to two;
- Information on where to get free debt advice will be given to every borrower that rolls over a loan; and
- Clear risk warnings to be displayed on all adverts and promotions along with more information about debt advice.
- Consumers will continue to have access to the Financial Ombudsman Service, but there are currently no plans to include consumer credit in the scope of the Financial Services Compensation Scheme. The FCA will keep this under review.
- A robust authorisation gateway to ensure that any firm or individual authorised to do consumer credit business is fit and proper, and that firms have suitable and sustainable business models.
- Dedicated supervision and enforcement teams will crack down on poor practice, money laundering and unauthorised business. Firms that break the rules may face detailed investigations and tough fines.
Peer to peer lending platforms must give borrowers explanations of the key features of the loan - including the key risks - before an agreement is made, and assess the creditworthiness of borrowers before granting them credit. A 14 day cooling off period will allow the borrower to withdraw if they have a change of heart.
Want to know more? There is more information about the changes and how they will affect businesses on the FCA website, where businesses can also sign up for email updates.
On the 11 November 2014 the Financial Conduct Authority (FCA) confirmed that consumers using payday lenders will be protected by a price cap. The proposals are that:
Initial cost cap of 0.8% per day - Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
Fixed default fees capped at £15 - Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
Total cost cap of 100% - Protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed.
From 2 January 2015, no borrower will ever pay back more than twice what they borrowed, and someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.
Guidance on the Power To Suspend Credit Licences
On the 22 February 2012 the OFT published guidance which sets out how and when it can use its new power to suspend consumer credit licences. Under the provisions of the Financial Services Act 2012, the OFT can only use the new power where there is an urgent need to protect consumers from harm.
The guidance establishes that in the most serious cases, which include those where there is evidence of public harm, the OFT will suspend a credit licence with immediate effect. In other circumstances, businesses will be given an opportunity to make its case to an adjudicator before the suspension takes effect.
The OFT will use the power where there is evidence that the business has engaged in practices that cause, or have the potential to cause, physical, economic or other harm to consumers. These practices may involve violence, fraud or other forms of dishonesty or the targeting of vulnerable consumers with harmful practices. View a full copy of the guidance (pdf 328 kb).
Code of Practice: Bills of Sale
The Government announced in 2011 that the 'Bills of Sale' money lending industry is now working under a new Code of Practice. Lenders will also provide customers with a plain English information sheet explaining how bills of sale work, and what the customer can expect from the lender.
A bill of sale is used to secure a loan on a consumer's personal property, typically a car. Concerns were raised that this form of loan could lead to consumer harm. As a result, the Government consulted on whether any action was necessary.
Added consumer protections from the new Consumer Credit Act came into force on the 1 February 2011, and the OFT will monitor the industry under the Irresponsible Lending Guidance, which will have a positive impact on consumer rights for bills of sale loans. In summary, the Code of Practice says:
- borrowers who are in arrears will be able to hand over the car in full settlement of their debt and will not be liable for any shortfall between the outstanding debt and the value of the vehicle;
- the option of making balloon payments* will only be available to business customers who can provide evidence that they will have funds to make the final repayment;
- the bill of sale must be registered with an asset finance register so that the public can check whether a vehicle has a bill of sale registered against it;
- charges to be imposed on borrowers in arrears must be disclosed at the pre-contractual stage and must only cover the lender's costs;
- if a borrower gets into difficulty, lenders must consider proposals for alternative payment arrangements and will repossess the car only if attempts to arrange alternative payment arrangements fail; and
- lenders will take all reasonable steps to ensure that repossessed cars are sold for the highest obtainable market price.
Balloon payments are small initial repayments covering only the interest, with the capital to be repaid in a single final payment.
New regulations implementing the Consumer Credit Directive will apply to a loan taken out under a bill of sale. They will give consumers new rights and impose new requirements on lenders:
- Lenders will have to make a reasonable assessment of whether a borrower can afford to meet repayments in a sustainable manner.
- Lenders will have to explain the key features of the credit agreement to enable the borrower to make an informed choice.
- Prospective borrowers will be given an information sheet setting out all the relevant information about the credit agreement.
The information sheet will be in a standard format for all lenders so borrowers can easily compare the costs of different loans. (The proposed new information sheet for bills of sale will complement this by setting out the key features of a bill of sale).
Consumers will have an absolute right to withdraw from a credit agreement within 14 days, paying back only the money lent and any interest accrued over that time.
Consumer Credit Act 2006
The Consumer Credit Act 2006 updates and amends the Consumer Credit Act 1974, establishing a fairer, more transparent and competitive credit market. It does this by:
- Strengthening consumer rights by enabling consumers to challenge unfair lending agreements and making it possible for disputes to be resolved more easily;
- Improving consumer credit regulation by strengthening and improving the licensing system fo consumer credit businesses, requiring consumers to be provided with minimum standards of information, and through targeted action to tackle unfair practices; and
- Increasing the effectiveness of regulation by extending protection to all types of consumer credit and creating a more suitable regime for business.
Please note: This information has no legal force and is not an authoritative interpretation of the law, which is a matter for the Courts. It is intended to help businesses to understand in general terms, the main features of the legislation. The information is not a substitute for the legislation and you should refer to the text of the legislation for a full statement of legal requirements and obligations. Where appropriate, you should seek your own independent legal advice.
For further detailed information go to the Financial Conduct Authority's website.
Alternatively contact the Trading Standards Service, Public Safety and Regulation, City of Newcastle upon Tyne, Room 703 Civic Centre, Newcastle upon Tyne, NE1 8QH.
Phone: 0191 2116121