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| Consumer Credit Bill |
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These notes refer to the Consumer Credit Bill as brought from the House of Commons on 7th March 2005 [HL Bill 36] CONSUMER CREDIT BILL
EXPLANATORY NOTESINTRODUCTION 1. These explanatory notes relate to the Consumer Credit Bill, as brought from the House of Commons on 7th March 2005. They have been prepared by the Department of Trade and Industry ("DTI") in order to assist the reader and to help inform debate on the Bill. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given. 3. Because this Bill covers several subject areas, each of the main areas is introduced and described separately in the commentary (although a short explanation of the background is given in paragraphs 5-7). Paragraph 8 gives a brief overview of the Bill's structure. SUMMARY 4. This Bill principally amends the Consumer Credit Act 1974 (the "1974 Act"), which is the statute governing the licensing of, and other controls, on traders concerned with the provision of credit or the supply of goods on hire or hire-purchase to individuals and with the regulation of transactions concerning that provision or that supply. The purpose of the Bill is to reform the 1974 Act to:
SHORT BACKGROUND 5. In July 2001, the Secretary of State for Trade and Industry announced a review of the 1974 Act. After a process of public consultation with interested parties on the effectiveness of the existing regulation of information disclosure, early settlement, unfair credit transactions, consumer credit licensing, the financial limit above which agreements are not regulated under the 1974 Act and consumer redress, there followed the publication of the White Paper "Fair, Clear and Competitive - The Consumer Credit Market in the 21st Century" in December 2003. 6. The review also considered the problem of over-indebtedness in the United Kingdom, and the ways in which government, working with industry and consumer representatives and advisers, can tackle this issue. This led to the publication of the joint DTI and Department for Work and Pensions paper "Tackling Over-indebtedness - Action Plan 2004". 7. The Government's responses to these consultations may be found at www.dti.gov.uk/ccp/topics1/consumer_finance.htm#review. In respect of the issues of pre-contractual disclosure, advertising and early settlement, the Parliamentary Under-Secretary of State for Employment Relations, Competition and Consumers made the Consumer Credit (Advertisements) Regulations 2004, the Consumer Credit (Agreements) (Amendment) Regulations 2004, the Consumer Credit (Disclosure of Information) Regulations 2004 and the Consumer Credit (Early Settlement) Regulations 2004 in June 2004, the Consumer Credit (Miscellaneous Amendments) Regulations 2004 in October 2004 and the Consumer Credit Act 1974 (Electronic Communications) Order 2004 in December 2004. The remaining proposals for reform (relating to unfair credit relationships, consumer credit licensing, the financial limit and consumer redress) require primary legislation to amend the 1974 Act and other legislation and are dealt with in this Bill. OVERVIEW OF THE STRUCTURE 8. The main areas covered by the Bill are:
9. The Bill principally amends the 1974 Act. In addition it amends:
10. The Bill has no freestanding parts (apart from the miscellaneous provisions at the end of the Bill). TERRITORIAL APPLICATION 11. The Bill extends to the whole of the UK. 12. The responsibility for consumer credit regulation is transferred to Northern Ireland under the devolved settlement. However, as the Northern Ireland Assembly is currently suspended, Ministers have agreed that the Bill should extend to Northern Ireland. INTERPRETATION 13. The 1974 Act sets out a framework for the regulation of the supply of consumer credit and the hiring of goods in the United Kingdom and provides that a licence under the Act is necessary to carry on a consumer credit business, a consumer hire business and an ancillary credit business (for definitions of these terms, please see paragraph 15 below). The Act regulates the supply of credit and the hiring of goods throughout the United Kingdom to "individuals" (which includes natural persons, unincorporated associations and partnerships of any size) where the credit provided or payments for hire do not exceed a specified limit (currently £25,000). 14. The Act imposes a system of trading control through regulating the general business activities of those traders that constitute the consumer credit and hire industry and it does this by licensing (Part 3 of the Act) and controlling the methods of seeking business (Part 4 of the Act). Control over agreements is done through the regulation of individual consumer credit or consumer hire agreements, that is entry into agreements (Part 5 of the Act), matters arising during the currency of agreements (Part 6 of the Act) and default under and termination of agreements generally (Part 7 of the Act). The Act also regulates the giving of security in relation to agreements regulated under the Act and pawnbroking (Part 8) and the licensing of ancillary credit businesses (Part 10). 15. These explanatory notes contain key terms defined in the 1974 Act, as set out below, as well as, for convenience, certain abbreviated terms (which are marked with an asterisk). Where the term is one used in the Consumer Credit Act and the Bill amends it, the definition below is that used in and for the purposes of the Act now.
COMMENTARY ON CLAUSES AGREEMENTS REGULATED UNDER THE 1974 ACT Clause 1: Definition of "individual"
Clause 2: Removal of financial limits etc. 17. Clause 2 removes the financial limit for the regulation of consumer credit and consumer hire agreements under the 1974 Act. The 1974 Act currently applies only to agreements where credit provided or the hire payments to be made do not exceed £25,000. In future, all consumer credit and consumer hire agreements will be regulated by the 1974 Act unless specifically exempted, regardless of the amount of the credit or the amount of the hire payments. Clause 2(3) extends the application of the provisions regulating credit advertisements to advertisements offering credit regardless of the sum involved, and regardless of whether the creditor requires security. Clause 3: Exemption relating to high net worth debtors and hirers 18. Clause 3 inserts a new section 16A after section 16 of the 1974 Act. Section 16A gives the Secretary of State power by order to provide for the exemption of consumer credit agreements or consumer hire agreements from regulation under the 1974 Act where the debtor or hirer has a "high net worth". The provisions relating to unfair relationships will continue to apply to such agreements (i.e. the new sections 140A to 140C, inserted by clauses 19-22 (see below)), as will the existing provisions relating to extortionate credit bargains (i.e. sections 137-140) to the extent they continue to have effect after commencement of new sections 140A-140C (see the note in respect of Schedule 3 below). 19. In order that an agreement may be exempted under section 16A, the debtor or hirer must be a natural person (i.e. not a partnership, unincorporated association or body corporate) and it must include a declaration, in the specified form, that the debtor or hirer agrees to forgo the protection and remedies that would be available under the 1974 Act if the agreement were a regulated agreement. The debtor or hirer must also provide the creditor or owner with a statement of "high net worth", again in the specified form, which has been made in relation to him by a specified type of person (e.g. an accountant or a solicitor). "Specified" in this case means specified by order of the Secretary of State. 20. A statement of "high net worth" must be current in relation to the agreement, i.e. made no more than one year before the date of the making of the agreement. The statement should state that the debtor or hirer, in respect of the previous financial year (being the year ending 31st March preceding the current financial year in which the statement is made), either:
"Specified" in this case means specified by order of the Secretary of State. Clause 4: Exemption relating to businesses 21. Clause 4 inserts a new section 16B after the new section 16A (inserted into the 1974 Act by clause 3). Section 16B exempts from regulation those consumer credit and hire agreements entered into wholly or predominantly for the debtor's or hirer's business purposes where the credit provided or hire payments to be made exceed £25,000, although the provisions relating to unfair relationships will continue to apply (i.e. the new sections 140A to 140C inserted by clauses 19-22 (see below)) as will the existing provisions relating to extortionate credit bargains (i.e. sections 137-140 of the 1974 Act) as they will in relation to section 16A (see the notes in respect of Schedule 3 below). 22. Whether an agreement is for a business purpose will depend on the circumstances of the proposed transaction. A credit or hire agreement will be presumed to be wholly or predominantly for business purposes where it includes a declaration by the debtor or hirer to that effect, unless at the time the agreement was made, the creditor or owner, or any person acting on his behalf in relation to the agreement, knows or has reasonable cause to suspect that the declaration is not true. Clause 5: Consequential amendments relating to ss. 1 to 4 23. Clause 5 provides for amendments to the 1974 Act arising as a consequence of clauses 1 to 4. Clause 5(7) provides that the Secretary of State has power by order to alter the amount of £25,000 under the new section 16B inserted in the 1974 Act by clause 4 of the Bill. That power is subject to the affirmative resolution procedure. STATEMENTS TO BE PROVIDED IN RELATION TO REGULATED AGREEMENTS Clause 6: Statements to be provided in relation to fixed-sum credit agreements 24. Clause 6 inserts a new section 77A after section 77 of the 1974 Act. Section 77A will require creditors in regulated fixed-sum credit agreements to provide debtors with annual statements in the specified form, the first of which is required within one year of the day after the date on which the agreement was made. 25. If a creditor does not give the debtor an annual statement when required to do so, then he is not entitled to enforce the agreement during the period of his non-compliance and the debtor is not liable to pay any interest during this period. The debtor is also not liable to pay any default sum (see note in respect of clause 18 below) that would have become payable during the period of non-compliance or would have become payable after the end of that period in connection with a breach of the agreement occurring during that period. A creditor will not be required to give the debtor an annual statement if there are no further sums payable under the agreement. Clause 7: Further provision relating to statements 26. Clause 7 inserts a new section 78(4A) after section 78(4) of the 1974 Act. Section 78 of the 1974 Act requires creditors to issue statements to debtors setting our specified information in respect of running account credit agreements at intervals of not more than 12 months. Regulations made by the Secretary of State may require creditors to include specified information, e.g. about the consequence of failing to make repayments or only making minimum repayments, in statements issued under section 78 of the 1974 Act. Subsection (3) makes provision for the giving of statements where there is more than one debtor or hirer. If there are two or more debtors or hirers, a debtor or hirer may provide a dispensing notice to the creditor so as to mean that the creditor is not obliged to provide a statement to that debtor or hirer. However, a dispensing notice will not be effective if it means that no debtor or hirer will receive a notice under sections 77A (inserted by clause 6 of the Bill) and 78 of the 1974 Act. DEFAULT UNDER REGULATED AGREEMENTS Clause 8: OFT to prepare information sheets on arrears and default 27. Clause 8 inserts a new section 86A after section 86 of the 1974 Act. Section 86A requires OFT to prepare and publish information sheets for debtors and hirers about arrears and default. A creditor or owner must give a debtor or hirer an arrears information sheet at the same time as a notice of sums in arrears (in accordance with new sections 86B and 86C (inserted by clauses 9 and 10 (see below) and a default information sheet at the same time as a default notice (in accordance with section 87 of the 1974 Act). 28. The information sheets will set out specified information to help debtors and hirers who are in arrears or default (e.g. information about the legal consequences of the debtor's or hirer's general situation, debt management options and the contact details of advice providers). Clause 9: Notice of sums in arrears under fixed-sum credit agreements etc. 29. Clause 9 inserts a new section 86B after the new section 86A (inserted into the 1974 Act by clause 8). Section 86B provides that creditors and owners must give to debtors and hirers notices of sums in arrears in respect of regulated agreements that are fixed sum credit agreements or hire agreements. A creditor or owner must give a notice in the specified form, including an arrears information sheet, to a debtor or hirer 14 days after a point in time where:
Thereafter the creditor or owner will be required to give to the debtor or hirer a notice of sums in arrears at intervals of six months until he ceases to be in arrears, has paid all sums of interest or default sums that are payable, or a judgment is made in relation to the sums payable under that agreement. Clause 10: Notice of sums in arrears under running-account credit agreements 30. Clause 10 inserts a new section 86C after the new section 86B inserted into the 1974 Act by clause 9 of the Bill. Section 86C requires that a creditor must give to the debtor notices of sums in arrears in respect of regulated agreements that are running account agreements. A creditor must give to a debtor a notice in the specified form, including an arrears information sheet after a point in time where:
31. The creditor must give the notice at a time no later than the time that he is required to give the debtor the next regular statement due under section 78(4) of the 1974 Act. Clause 11: Failure to give notice of sums in arrears 32. Clause 11 inserts a new section 86D after the new section 86C (inserted into the 1974 Act by clause 10). Section 86D sets out the consequences for a creditor or owner if he fails to give a notice as required by sections 86B or 86C. If the creditor or owner fails to provide a notice of sums in arrears when required to do so, then during the period of his failure to provide the notice (i.e. from the date that it was required to be given until the end of the day on which it is eventually provided), he is not entitled to enforce the agreement. In addition, the debtor or hirer is not liable to pay any interest that relates to the period of the creditor or owner's failure, nor is the debtor or hirer liable to pay any default sum (see the notes in respect of clause 18 below) that:
Clause 12: Notice of default sums 33. Clause 12 inserts a new section 86E after the new section 86D (inserted into the 1974 Act by clause 11). Section 86E applies to situations where a debtor or hirer under a regulated agreement incurs a default sum (as defined by clause 18). A creditor or owner must give the debtor or hirer a notice in the specified form when a default sum becomes payable as a consequence of a breach of the agreement. The Secretary of State has the power to provide that this only applies where the default sum exceeds a specified amount. 34. A creditor or owner may only require a debtor or hirer to pay interest in connection with a default sum 28 days after the day the notice was given to the debtor or hirer. If the creditor or owner fails to give a notice to the debtor or hirer then he is not entitled to enforce the agreement until he gives the notice to the debtor or hirer. Clause 13: Interest on default sums 35. Clause 13 inserts a new section 86F after the new section 86E (inserted into the 1974 Act by clause 12). Section 86F provides that a creditor or owner may only require simple interest to be paid in respect of default sums (see notes in respect of clause 18 below) payable by the debtor or hirer, including sums payable under non-commercial or small agreements (see definitions in section 189(1) of the 1974 Act). Clause 14: Default notices 36. Clause 14 amends section 88 of the 1974 Act to extend from seven to 14 days the minimum period after which a creditor or owner may take action in respect of the agreement after having issued a default notice. Section 88 of the 1974 Act requires a creditor or owner to give the debtor or hirer a default notice in the prescribed form if he wishes to terminate the agreement, demand earlier payment of a sum, recover possession of any goods or land, treat any right conferred on the debtor or hirer by the agreement as terminated, restricted or deferred, or to enforce any security. Section 88 is also amended to allow the Secretary of State to prescribe information in the default notice to include any matters relating to the agreement (e.g. information about whether the agreement includes a term providing for the charging of post-judgment interest). |
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| © Parliamentary copyright 2005 | Prepared: 8 March 2005 |