Select Committee on Regulatory Reform Third Report

2  What the draft Order proposes

3.  The Consumer Credit Act 1974 introduced a system for licensing and otherwise controlling traders involved with providing credit or the supply of goods on hire or hire-purchase. The Consumer Credit Act 2006 amended and updated the 1974 Act, in particular, by ensuring consumers were given clear information on the state of their credit accounts, improving consumers' rights and access to redress and establishing a more targeted licensing regime for the regulation of consumer credit and hire businesses.

4.  The draft Order makes three proposals:

  • exemption from regulation for buy-to-let lending;
  • clarification on the giving of statements for fixed-sum credit agreements; and
  • inclusion of definitions of 'payments' for the purpose of issuing notices of sums in arrears.

Exemption from regulation for buy-to-let lending

5.  The Consumer Credit Act 1974 as it currently stands, that is, as amended by the Consumer Credit Act 2006, does not achieve the original policy intentions for exempting buy-to-let lending. The Government never intended to regulate buy-to-let lending where the loan is secured as a first charge on the property in question and the owner or relative occupies or intends to occupy 40 per cent or more of the property.

6.  Prior to April 2008 the majority of buy-to-let loans were exempt from regulation under the 1974 Act, which provided that an agreement was not a consumer credit agreement[4] if, amongst other things, the credit provided exceeded £25,000. Section 2 of the Consumer Credit Act 2006 removed this limit with effect from April 2008, bringing all consumer credit agreements, regardless of value, into regulation unless specifically exempt. This potentially would include buy-to-let mortgages secured by a charge on the property. Section 16 of the 1974 Act does make provision for exempt agreements which are not regulated by that Act, but these exemptions are not comprehensive with regard to all buy-to-let lending (except where the loan is secured as a first charge on the debtor's own home, in which case that home would be at risk if difficulties with repayment arose).

7.  During the passage of the Consumer Credit Act 2006 the Government believed that the new business exemption introduced by that Act would apply to buy-to-let lending. This exemption excludes from regulation under the 1974 Act consumer credit agreements where the credit provided exceeds £25,000 and the agreement relates to the purposes of a business. But an agreement financing a one-off or small-scale purchase of property is a transaction more accurately described as an investment deal. As such it would not pass muster in terms of the definition of 'business' in section 189(1) of the 1974 Act. Section 189(2) of the Act provides that a person should not be treated as carrying on a business merely because he or she occasionally enters into transactions belonging to a business of that type. As the Explanatory Document points out:

"This would effectively exclude from the business exemption those investors who buy just one or a small number of buy-to-let properties".[5]

8.  Concerns about incorporating investment agreements within the business exemption were first raised by the credit industry when the latter was considered in detail during preparation of the draft Consumer Credit (Exempt Agreements) Order 2007. On re-examining the matter the Government agreed with the industry's assessment.

9.  The Government's view is that buy-to-let is inherently a commercial venture which contains an element of risk. Such risks are no different to those incurred by other types of business and should be treated accordingly. [6] We believe this is a reasonable position to take.

10.  There is currently a transitional arrangement in place which keeps buy-to-let lending over £25,000, which is secured on the property and satisfies the less than 40 per cent occupancy test, out of regulation until the final Order is made. Buy-to-let loans at or below £25,000 taken out before the proposals in the draft Order come into effect (should the House approve) will continue to be regulated as now, regardless of exemption. There are today very few, if any, loans for buy-to-let purposes of £25,000 or less.

11.  The draft Order proposes inserting a new section 16C into the 1974 Act which would create an exemption from regulation under that Act for consumer credit agreements for buy-to-let purposes of any value meeting specified conditions (this would bring about equality in the buy-to-let market, since the existing land purchase exemption in section 16 of the 1974 Act is not subject to a financial limit). Certain consequential amendments to section 82 of the 1974 Act would also be required. Section 82 deals with situations where an existing agreement is varied or supplemented by a later agreement. The Explanatory Document says:

"It is existing Government policy that such loans should be unregulated and there is no evidence at the present time to suggest otherwise. The vast majority of buy-to-let loans are already exempt from regulation under or by virtue of existing exemptions in section 16, 16A and 16B of the 1974 Act, including the new business exemption which came into force in April 2008. This proposal therefore aims to provide consistency in the regulatory treatment of buy-to-let loans".[7]

12.  An exemption for buy-to-let lending does not mean that the debtors involved are unprotected, since the relevant agreements come within section 140A of the 1974 Act which allows for credit agreements to be challenged in the courts on the grounds that the relationship between the creditor and debtor is unfair.

Clarification on the giving of statements for fixed-sum credit agreements

13.  One of the intentions behind the Consumer Credit Act 2006 was to ensure that a creditor under a regulated agreement for fixed-sum credit[8] gives a debtor regular statements each covering a period of up to one year. These should be given within 30 days of the end of the period to which they relate and should run consecutively. However, the requirements of the 2006 Act (which amends the 1974 Act) when taken together with regulation 11 of the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 (which themselves were made under an amendment to the 1974 Act introduced by the 2006 Act) defeats the policy intention. The existing wording in the 2006 Act does not allow for the provision in the 2007 Regulations which gives the creditor 30 days to send the statements.

14.  The draft Order therefore proposes to revoke regulation 11 of the 2007 Regulations and amend section 77A of the 1974 Act (as amended by the 2006 Act) by providing that a creditor under a regulated fixed-sum credit agreement should give the debtor statements covering consecutive periods of not more than one year and that such statements must be given within 30 days of the end of the period to which they relate. The intention is to remove the ambiguity which currently exists and provide clarity to creditors about the period to be covered by the statements and the time within which they must be given to debtors.

Inclusion of definitions of 'payments' for the purpose of issuing notices of sums in arrears

15.  The Consumer Credit Act 2006 required creditors to provide for debtors under certain regulated fixed-sum and running-account credit agreements, and certain regulated consumer hire agreements, specific information about credit agreements at given points in time, in particular notices of sums in arrears. A number of conditions need to be met before this obligation arises, some of which include the word 'payments'.

16.  The original policy intention was that 'payments' should cover only those scheduled instalments or repayment sums and hire payments as provided for under the agreement. However, the word 'payments' was not defined in the 2006 Act. This omission means that 'payments' could be interpreted more widely than was meant and include ad hoc payments which might trigger first notices of arrears more quickly than would otherwise be the case.

17.  The draft Order proposes that 'payments' for the purpose of issuing notices of sums in arrears be defined as those payments made at 'predetermined intervals provided for under the terms of the agreement'.[9] In the case of applicable regulated consumer hire agreements the definition is 'any payments to be made by the hirer in relation to any period in consideration of the hiring to him of goods under the agreement'.[10]

4   Defined as 'An agreement between a debtor and a creditor by which the creditor provides the debtor with credit of any amount'. See ED p1. Back

5   ED, Annex A, p13, para9. Back

6   ED, p7, para23. Back

7   ED, p7, para22. Back

8   Fixed sum credit agreement means any other facility under a consumer credit agreement (other than under running account credit agreements) whereby the debtor can receive credit whether in one amount or in instalments. The most common example is a single loan advance.  Back

9   ED, p8, para17. Back

10   Ibid. Back

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