2006 Chapter 14

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     These notes refer to the Consumer Credit Act 2006 (c.14) which received Royal Assent on 30 March 2006

CONSUMER CREDIT ACT 2006

     EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Consumer Credit Act 2006, which received Royal Assent on 30 March 2006. They have been prepared by the Department of Trade and Industry ("DTI") in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

3.     Because this Act 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 Act's structure.

SUMMARY

4.     For the purposes of these notes the Consumer Credit Act 2006 will be referred to as "the 2006 Act". The 2006 Act 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 2006 Act is to reform the 1974 Act to:

• provide for the regulation of all consumer credit and consumer hire agreements subject to certain exemptions;

• make provision in relation to the licensing of providers of consumer credit and consumer hire and ancillary credit services and the functions and powers of OFT in relation to licensing;

• enable debtors to challenge unfair relationships with creditors; and

• provide for an Ombudsman scheme to hear complaints in relation to businesses licensed under the 1974 Act, as amended.

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 21^st 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) required primary legislation to amend the 1974 Act and other legislation and are dealt with in this 2006 Act.

THE ACT

8.     The main areas covered by the 2006 Act are:

• the regulation of consumer credit agreements and consumer hire agreements;

• the provision of information to debtors and hirers after the agreement is made;

• unfair relationships between debtors and creditors;

• the licensing of consumer credit and hire businesses and ancillary credit businesses;

• the powers of OFT in relation to the licensing of consumer credit and hire businesses and ancillary credit businesses;

• appeals from decisions of OFT in relation to the licensing of consumer credit and hire businesses and ancillary credit businesses; and

• the extension of the jurisdiction of the Financial Ombudsman Service established under the Financial Services and Markets Act 2000.

9.     In addition to amending the 1974 Act, the 2006 Act amends:

• the Sheriff Courts (Scotland) Act 1971 and the Solicitors (Scotland) Act 1980 to allow the lay representation of debtors or hirers in applications relating to time orders in Scotland;

• the Bankruptcy (Scotland) Act 1985, the Insolvency Act 1986 and the Insolvency (Northern Ireland) Order 1989 as a consequence of the provisions in the 2006 Act dealing with unfair relationships;

• the Criminal Justice and Police Act 2001 as a consequence of the provisions in the 2006 Act concerning powers of OFT in relation to entry into premises;

• the Tribunals and Inquiries Act 1992 as a consequence of the provisions in the 2006 Act concerning the establishment of the Consumer Credit Appeals Tribunal; and

• the Financial Services and Markets Act 2000 as a consequence of the extension of the jurisdiction of the Financial Ombudsman Service.

10.     The 2006 Act has no freestanding parts, apart from the transitional and other supplementary provisions in sections 66-71. All the substantive provisions are amendments to the 1974 Act and the other Acts mentioned above.

INTERPRETATION

11.     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 14 below). The 1974 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).

12.     The 1974 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 1974 Act) and controlling the methods of seeking business (Part 4 of the 1974 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 1974 Act), matters arising during the currency of agreements (Part 6 of the 1974 Act) and default under and termination of agreements generally (Part 7 of the 1974 Act).

13.     The 1974 Act also regulates the giving of security in relation to agreements regulated under the Act and pawn broking (Part 8) and the licensing of ancillary credit businesses (Part 10).

14.     These explanatory notes use 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 1974 Act and the 2006 Act amends it, the definition below is that used in and for the purposes of the 1974 Act prior to such amendment.

• 1974 Act: Consumer Credit Act 1974. *

• 2006 Act: Consumer Credit Act 2006.*

• ancillary credit business: any business so far as it comprises or relates to credit brokerage, debt-adjusting, debt counselling, debt collecting or the operation of a credit reference agency.

• commencement: the date or dates on which a provision of the 2006 Act commences (whether for all or specific purposes) in accordance with an order made by the Secretary of State under Section 71. *

• consumer credit agreement: an agreement between an individual (the "debtor") and any other person (the "creditor") by which the creditor provides the debtor with credit not exceeding £25,000.

• consumer credit business: any business so far as it comprises or relates to the provision of credit under regulated consumer credit agreements.

• consumer hire agreement: 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 is not a hire-purchase agreement, is capable of subsisting for more than three months and does not require the hirer to make payments exceeding £25,000.

• consumer hire business: any business so far as it comprises or relates to the bailment or (in Scotland) the hiring of goods under regulated consumer hire agreements.

• exempt agreement: a consumer credit or hire agreement which is not a regulated agreement under the 1974 Act by virtue of an exemption by or under section 16 of the 1974 Act.

• FOS: the Financial Ombudsman Service. *

• FSA: the Financial Services Authority. *

• FSMA: Financial Services and Markets Act 2000. *

• fixed-sum credit: any facility under a credit agreement, other than running account credit, whereby the debtor is enabled to receive credit (whether in one amount or by instalments).

• group licence: a licence, issued by OFT (whether on an application by a person or on OFT's own motion), which during such period as OFT thinks fit or, if it thinks fit, indefinitely, covers such persons and activities as are described in the licence.

• individual: includes a partnership or any other unincorporated body of persons not consisting entirely of bodies corporate.

• licence: a licence issued by OFT under the 1974 Act to carry on a consumer credit business, a consumer hire business or an ancillary credit business.

• OFT: the Office of Fair Trading.

• regulated agreement: a consumer credit or consumer hire agreement regulated by the 1974 Act.

• running-account credit: a facility under a credit agreement whereby the debtor is enabled to receive from time to time (whether in his own person, or by another person) from the creditor or a third party, cash, good and services (or any of them) to an amount or value such that, taking into account payments made by or to the credit of the debtor, the credit limit (if any) is not exceeded (e.g. a credit card).

• standard licence: a licence issued by OFT to a person named in the licence on an application made by that person, which, during the period of the licence's duration, covers such activities as are described in the licence.

COMMENTARY ON SECTIONS

AGREEMENTS REGULATED UNDER THE 1974 ACT

Section 1: Definition of "individual"

• 15.     Section 1 amends section 189(1) of the 1974 Act to provide a new definition of "individual". This restricts the partnerships that are to be regarded as "individuals" to those consisting of two or three partners, not all of whom are bodies corporate. This means that in future borrowing or hire by partnerships of more than three members will not be covered by the 1974 Act, i.e. these partnerships will be treated in the same way as bodies corporate.

Section 2: Removal of financial limits etc.

16.     Section 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. Section 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.

Section 3: Exemption relating to high net worth debtors and hirers

17.     Section 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 sections 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) if, for example, the high net worth exemption comes into force before the unfair relationships provisions.

18.     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.

19.     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 31^st March preceding the current financial year in which the statement is made), either:

• received income of a specified description of the specified amount or more during that period; or

• had net assets of a specified description which were of a value not less than the specified amount during the whole of that period.

     "Specified" in this case means specified by order of the Secretary of State.

Section 4: Exemption relating to businesses

     20.     Section 4 inserts a new section 16B before section 17 of the 1974 Act. 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 sections 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).

21.     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 who has acted on his behalf in connection with the entering into of the agreement, knows or has reasonable cause to suspect that the declaration is not true.

Section 5: Consequential amendments relating to ss. 1 to 4

22.     Section 5 provides for amendments to the 1974 Act arising as a consequence of sections 1 to 4. Section 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 section 4 of the 2006 Act. That power is subject to the affirmative resolution procedure.

STATEMENTS TO BE PROVIDED IN RELATION TO REGULATED AGREEMENTS

Section 6: Statements to be provided in relation to fixed-sum credit agreements

23     Section 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.

24.     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 section 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.

Section 7: Further provision relating to statements

25.     Section 7 inserts a new section 78(4A) after section 78(4) of the 1974 Act. Section 78(4) of the 1974 Act requires creditors to issue statements to debtors setting out specified information in respect of running account credit agreements at intervals of not more than 12 months. Regulations made by the Secretary of State under the new section 78(4A) may require creditors to include specified information about the consequence of failing to make repayments, or only making minimum repayments, in statements issued under section 78(4) of the 1974 Act. The new subsection (3) makes provision for the giving of statements under sections 77A (inserted by section 6 of the 2006 Act) and 78(4) of the 1974 Act where there is more than one debtor to whom credit is provided. If there are two or more debtors, a debtor 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. However, dispensing notices will not be effective if that would mean that no debtor will receive a statement under section 77A or 78.

DEFAULT UNDER REGULATED AGREEMENTS

Section 8: OFT to prepare information sheets on arrears and default

26.     Section 8 inserts a new section 86A at the beginning of Part 7 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 sections 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).

27.     The information sheets will set out 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).

Section 9: Notice of sums in arrears under fixed-sum credit agreements etc.

28.     Section 9 inserts a new section 86B after the new section 86A (inserted into the 1974 Act by section 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:

• the debtor or hirer is required to have made two (in the case of agreements with a repayment interval of more than one week) or four (in the case of agreements with a repayment interval of one week or less) payments under the agreement before that time;

• the total sum that has been paid by the debtor or hirer under the agreement up to that time is less than the amount that he is required to have paid at that time;

• the amount of the debtor's or hirer's shortfall is no less than the total of the last two (in the case of agreements with a repayment interval of more than one week) or four (in the case of agreements with a repayment interval of one week or less) payments required to have been paid under the agreement before that time subject as set out below;

• the creditor or owner is not already required to provide the debtor or hirer with a notice of sums in arrears in relation to that agreement; and

• there is no sum payable by the debtor or hirer under a judgment given before that time in relation to the credit or hire agreement.

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 and has paid all sums of interest or default sums that are payable in relation to his arrears, or a judgment is made in relation to the sums payable under that agreement.

29.     In the case of agreements with repayment intervals of one week or less made more than 20 weeks before the day on which the debtor or hirer is required to have made the most recent payment under the agreement, the amount of the debtor's or hirer's shortfall is calculated on the basis only of payments missed in the period of 20 weeks ending with that day.

Section 10: Notice of sums in arrears under running-account credit agreements

30.     Section 10 inserts a new section 86C after the new section 86B inserted into the 1974 Act by section 9 of the 2006 Act. 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:

• the debtor should have made at least two repayments before that time;

• the last two payments required before that time have not been made;

• the creditor has not already been required to provide the debtor with a notice of sums in arrears in relation to either of those payments; and

• there is no sum payable by the debtor under a judgment given before the time in relation to the credit agreement.

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.

Section 11: Failure to give notice of sums in arrears

32.     Section 11 inserts a new section 86D after the new section 86C (inserted into the 1974 Act by section 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 section 18 below) which becomes payable during that period.

Section 12: Notice of default sums

33.     Section 12 inserts a new section 86E after the new section 86D (inserted into the 1974 Act by section 11). Section 86E applies to situations where a debtor or hirer under a regulated agreement incurs a default sum (as defined by section 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.

Section 13: Interest on default sums

35.     Section 13 inserts a new section 86F after the new section 86E (inserted into the 1974 Act by section 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 section 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).