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
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
"(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
(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
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
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.