Proposed Changes to The Consumer Credit Regime, Including Reforms Concerning Consumer Credit On-Line

On 8th December 2003, the DTI published a White Paper entitled "Fair, Clear and Competitive--The Consumer Credit Market in the 21st Century" (the White Paper) as part of its review of the Consumer Credit Act 1974 (CCA), including proposed changes to regulate the conclusion of on-line consumer credit agreements.

The White Paper outlines the Government's proposals for reform of consumer credit under a number of headings including: (i) establishing a more transparent regime by (a) changing the advertising regulations to make credit advertisements clearer and simpler for consumers to understand, (b) providing consumers with clearer information before and after agreements are signed, (c) changing the law to prevent those who settle loans early from being penalised and (d) enabling consumers to enter into and conclude agreements on-line; (ii) creating a fairer framework that encourages competition while stamping out irresponsible and unfair lending practices by (a) strengthening the credit licensing regime to target rogue and unfair practices, (b) changing the law to end unfair selling practices, including replacing a limited extortionate test with a wider unfairness test and providing an effective dispute resolution mechanism and (c) removing the 25,000 financial limit that creates a two tier lending framework and impedes consumer protection; (iii) shaping the European agenda, particularly in the context of two draft Commission Directives in the consumer credit sector (mentioned below); and (iv) minimising over indebtedness (although we do not focus on this proposal below).

Separate consultations on the proposed draft regulations giving effect to the changes proposed on consumer credit advertising, early settlement of credit agreements, credit agreements' form and content and also on the alternative dispute resolution mechanism regarding consumer credit related disputes were published in conjunction with the White Paper. Whilst as part of these consultations, proposals on consumer credit online were put forward, no draft legislation has been published as yet.

Other Proposals

In September 2002, the European Commission published a draft Directive on consumer credit (COM (2001) 443 final), (Consumer Credit Directive). This aims to fully harmonise the laws on consumer credit in the Member States. The White Paper indicates the issues that the Consumer Credit Directive will need to address, such as fair and equal cross border data access and exchange, the adoption of an EU wide approach to regulation of consumer credit information, advertising and unfair practices, common rules on APR calculations, barriers to cross border debt collection and recovery practices, an effective out of court redress mechanism and an effective passporting regime for lenders wishing to market and sell credit products cross border.

Additionally, on 18th June 2003 the Commission published a draft Directive as a harmonisation measure, on Unfair Commercial Practices in the field of consumer protection (COM (2003) 356 final). This draft Directive contains a prohibition on Unfair Commercial Practices and highlights two principal categories of Unfair Commercial Practices: misleading commercial practices (actions as well as omissions) and aggressive commercial practices. In each case, the Directive sets out criteria to establish whether a practice is misleading or aggressive and includes an annex containing a non-exhaustive list of examples of unfair commercial practices intended to demonstrate further application of the criteria. The DTI have concerns about the possible impact of this "cross cutting measure" as they describe it, on highly regulated sectors such as financial services and are consulting separately on it.

Implementation Timetable and Impact on Existing Agreements

Of particular concern to lenders and regulated firms, will be the impact of the new regulations on existing agreements. New regulations relating to advertising, form and content rules, on-line facilitation (including cancellation/withdrawal rights), early settlement and unfair credit test rules will probably be effective from October 2004 for agreements entered into after that date. New regulations enabling consumer credit on-line will probably be implemented by an order under the Electronic Communications Act 2000. The early settlement rules will probably apply to existing loans from October 2006. Whether to apply the unfair credit test rules (indicated below) to existing agreements is also being considered. The Treasury implementation of the Directive on the Distance Marketing of Consumer Financial Services (the DMCFS), (Directive 2002/65/EC) should also be noted.

The Existing Consumer Credit Regime

The consumer credit market broadly comprises secured lending (other than those first mortgages to be regulated by the FSA from 31 October 2004), credit cards, loans, mail order, hire purchase, store cards and credit unions.

Subject to certain exceptions, the CCA currently regulates consumer credit, consumer hire and related agreements for amounts up to 25,000. Credit includes any form of financial accommodation. Its protections apply to agreements with individuals (defined to include partnerships and other unincorporated bodies, unless all the members are corporate bodies). Additionally agreements for the bailment of goods are regulated consumer hire agreements under the CCA, subject to certain conditions. The CCA lays down rules covering: the form and content of credit agreements; credit advertising; the method of calculating the Annual Percentage Rate (APR) of the Total Charge for Credit; the procedures to be adopted in the event of default, termination, or early settlement; and the provision of remedies in cases of extortionate credit bargains.

A short summary of the key provisions of the White Paper is set out below.

Consumer Credit Advertising

The White Paper's proposals relating to consumer credit advertising will apply to all forms of media used to advertise credit. The new regulations will apply where financial information is included in the advertisement, or certain statements are made regarding the credit itself or to whom it is targeted. The existing categories of simple, intermediate and full credit advertisements in the 1989 Regulations (Consumer Credit (Advertisements) Regulations 1989 SI 1989/1125, as amended) will be replaced with new requirements clarifying and simplifying credit advertisements for consumers and making the regulations easier for authorities to enforce.

Basic Information

Various changes are proposed in respect of provision of basic information to...