Select Committee on Regulatory Reform Third Report

Appendix 1

Response to letter from the Clerk of the Committee to the Department for Business, Enterprise and Regulatory Reform: Draft Legislative Reform (Consumer Credit) Order 2008: request for information

Q 1  Q1. How are a) regulated loans and b) unregulated loans formally defined?

Section 189(1) of the Consumer Credit Act 1974 (the 1974 Act) defines a "regulated agreement" to mean "a consumer credit agreement or a consumer hire agreement, other than an exempt agreement, and "regulated" and "unregulated" shall be construed accordingly".

A "consumer credit agreement" is defined in section 8 of the 1974 Act (as amended by the 2006 Act) as follows

"(1) A consumer credit agreement is 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.

(3) A consumer credit agreement is a regulated agreement within the meaning of this Act if it is not an agreement (an "exempt agreement") specified in or under section 16, 16A or 16B."

A "consumer hire agreement" is defined in section 15 of the 1974 Act (as amended by the 2006 Act) as follows

"(1) A consumer hire agreement is an agreement made by a person with an individual (the "hirer") for the bailment or (in Scotland) the hiring of goods to the hirer, being an agreement which -

(a) is not a hire purchase agreement, and

(b) is capable of subsisting for more than three months.

(2) A consumer hire agreement is a regulated agreement if it is not an exempt agreement."

Q 2  The Consumer Credit Act 2006 received Royal Assent on 30 March 2006. During consultations on the Consumer Credit (Exempt Agreements) Order 2007 (made under the Consumer Credit Act 1974 as amended by the Consumer Credit Act 2006) in the Summer of 2006 'creditors expressed their concern about the practical implications of this approach as this would not achieve a comprehensive exemption for buy-to-let spending' (ED page 3, paragraph 8). Why was this concern not identified during the passage of the Consumer Credit Bill in 2006?

During the passage of the Consumer Credit Bill the issue of an exemption for buy-to-let lending was considered at length and both Government and industry were confident that the proposed business exemption was sufficient to provide an exemption for loans for the purpose of buy-to-let. Industry first raised concerns about the practicalities of this approach in summer 2006 when they scrutinised the detail of the business exemption in the context of the draft Consumer Credit (Exempt Agreements) Order 2007. It was only at this point that lenders felt that they could not rely totally on the business exemption to exempt buy-to-let lending as such lending for the purpose of the purchase of one or only a small number of properties could not always be said to be wholly or predominantly for business purposes. After looking at this again the Department agreed.

Q 3  The Consumer Credit Act 2006 introduced compliance costs related to the giving of statements for fixed-sum credit agreements and the giving of notices of sums in arrears. To what extent did the affected part of the credit industry carry out an evaluation of the likely extent of such costs when the legislation was being considered?

A full Regulatory Impact Assessment (RIA) for the Consumer Credit Bill was prepared and published by the (then) Department of Trade and Industry on 18 May 2005. This included an assessment of the indirect and direct costs to business (including IT costs) of implementing the provisions in the Bill including the post-contract information requirements.

The Department worked closely with industry when preparing the full RIA. The RIA therefore presents the best estimates at the time of the likely compliance costs associated with these new provisions.

The 2006 Act set out the framework for the new requirements with much of the detail being added by secondary legislation. The Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 (the 2007 Regulations) set out the detail of the post-contract information requirements. During the drafting of the 2007 Regulations a more detailed assessment of the costs to industry of the post-contract information requirements was carried out by PricewaterhouseCoopers, in consultation with industry, in 2006 in the light of the emerging detail.

Q 4  Given that some compliance costs would occur in both cases as things stand, why was the undue impact (and two of the reasons for the Legislative Reform (Consumer Credit) Order) not picked up until 2007?

There are necessary compliance costs associated with the provisions on statements for fixed-sum credit agreements and notices of sums in arrears for both fixed sum and running-account credit agreements. However, it was not until industry began to look in detail at these requirements in 2007 in the context of starting to build their IT systems that they realised that the ambiguity and lack of clarity in these provisions was a problem. In particular trying to comply with the legislation as it currently exists would require more detailed (and unnecessary) systems changes than were intended which would have added significantly to the already identified (and necessary) compliance costs.

Q 5  Section 77A(1) of the Consumer Credit Act 1974 was introduced by the Consumer Credit Act 2006. The Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 were made under powers conferred, amongst others, by section 77A. Paragraph 7 of Annex B in the Explanatory Document (page 23) says: 'The effect of section 77A(1) and regulation 11 [of the 2007 Regulations], when taken together, is that [the] underlying policy intention has been defeated'. Further, the final sentence in the first bullet point of paragraph 10 of the Explanatory Document (page 4) states: ' The existing wording in the 2006 Act does not allow for the provision in the 2007 Regulations...'. How did this contradiction between the Consumer Credit Act 2006 and Regulations made under powers conferred by it arise?

The error in the 2006 Act was only realised at the point at which the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 were being drafted in 2006. At the time it was thought that the inclusion of Regulation 11 in the 2007 Regulations would resolve the situation but unfortunately this further complicated the issue and created the existing ambiguity between the 2006 Act and the 2007 Regulations.

Q 6  Since the term 'payments' can be open to wide interpretation, why was a formal definition of exactly what was meant in terms of the giving of notices and sums in arrears not provided in the Consumer Credit Act 2006?

The focus during the passage of the Bill was on providing a definition of "arrears" and, in policy instructions to Counsel, officials set out their proposal to adopt the same definition of "arrears" as that used in the Financial Services Authority Handbook in relation to mortgages. This defines "arrears" to mean where there is a shortfall to the account which is equivalent to two or more regular payments or remaining in breach for more than one month of any agreed borrowing limit or of any obligation to repay where the loan does not have a regular repayment plan. In his response Parliamentary Counsel commented that having to define what a "regular" payment was seemed an "unnecessary complication" and that, in his opinion, it was sufficient to say that a person misses two payments. The Department agreed.

As stated in the Explanatory Document it was always the intention that "payments" was meant to cover regular instalments/repayments and this was how the legislation was intended to be read. It was not until industry came to look at this in detail in the context of building its systems to accommodate the new requirements that the ambiguity around the word "payments" was raised with the Department.

Q 7  In Annex E of the Explanatory Document, the Yorkshire Building Society is cited as an 'additional respondent' in the list of consultees. Why were building societies not formally included in the consultation exercise?

The vast majority of building societies are members of the Council of Mortgage Lenders (CML) who represent their interests in relation to their lending activities (predominantly mortgages). CML membership represents 98% of all mortgage lending in the UK and, as such, they have been one of the key stakeholders involved in developing the draft Legislative Reform Order. CML's response to the formal consultation and general stakeholder engagement has been on behalf of its whole membership. As stated in BERR's response to the consultation, many individual organisations chose not to respond individually to the consultation preferring to channel their views through their trade association in view of the common concerns across the industry. CML has made all information and correspondence (including the consultation document) on the draft Order available to its full membership for comment. Whilst CML's main concern has been on the buy-to-let issue, any issues raised with them on the post-contract information requirements have been channelled through the British Bankers Association.

Q 8  Have all the distortions imposed on the Consumer Credit Act 1974 by the Consumer Credit Act 2006 now been dealt with?

We believe that all the distortions imposed by provisions introduced into the 1974 Act by the 2006 Act are addressed in this draft Order.

However, there are a couple of further issues that we are considering that have been raised with us by industry and which both arise as a consequence of the post-contract transparency provisions. They are not issues that arise as a consequence of errors in the legislation but are issues where industry is seeking a relaxation of the requirements in certain circumstances as follows:

  • where a customer has "gone away" i.e left their previous address and not notified their lender of their new address. In such cases industry is concerned that the legal requirement to continue to send post-contract information containing sensitive personal details could facilitate identity fraud and be damaging to their reputation. However, the sanctions for not doing so are financially severe; and

  • where a debtor and their creditors have agreed to an individual voluntary agreement (IVA) which replaces the original credit agreements. Industry is concerned that the requirement to continue to send post-contract information in such cases is detrimental to the consumer. Furthermore, should the IVA fail and the lender be required to revert to the original credit agreement they would be unable to enforce that agreement or charge interest for the period of the IVA if they had failed to comply with the post-contract information requirements.

The "gone away" issue was raised during the passage of the Bill but Ministers at the time took the view that a solution could not be identified that would not either create a loophole in the legislation or undermine the original consumer protection intended behind this measure. However, industry continued to lobby very hard and it was agreed last year that the Department would look again at this issue. We are currently considering all the options (legislative and non-legislative) with a view to putting proposals to the Minister for a decision on the way forward.

The IVA issue was raised with us in mid-2007 and again we are in the process of identifying and considering with all interested stakeholders all the possible options. As with the "gone away" issue, we will be putting proposals to the Minister for a decision on the way forward.

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