Credit where credit is due

Julia Smith examines whether the Consumer Credit Act 2006 clarifies current legislation and looks at the problem of 'unfair relationships'

The Consumer Credit Act 2006 is intended to establish a 'fair, clear and competitive... consumer credit market in the 21st century', according to the White Paper published in December 2003.


Fairness for debtors and hirers is to be achieved by removing financial limits on regulated agreements; re-writing credit agreements when the 'relationship' between creditor and debtor is 'unfair' to the debtor; and providing free alternative dispute resolution by the Financial Ombudsman Service (FOS).


There is no definition of 'unfair relationship' and no indicative list of unfair practices, because of fears of encouraging a narrow construction of the provisions or stigmatising conduct that may be fair in some cases but not in others. However, the courts will have regard to the meaning attributed to 'unfair' in other legislation.


If the approach of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) is adopted, a relationship will not be unfair solely by reason of an extortionate rate of interest, provided that the rate and the manner in which it is to be calculated and applied to the account are stated in plain intelligible language (regulation 6(2)).


The courts will not only look at the terms of the agreement, but may find that a relationship is unfair as a result of any conduct on the part of the creditor or an associate of the creditor, before or after the making of the agreement. Nonetheless, as with the UTCCR, key factors are likely to be the absence of good faith on the part of the creditor or his associates, and the inability of the debtor to make informed choices.


Those terms that may be challenged under the UTCCR will be unfair if, contrary to the requirement of good faith, they cause a significant imbalance in the rights of the parties, to the detriment of the consumer. Good faith involves fair and open dealing: openness requiring full and clear expression, with no concealed pitfalls or traps; and fair dealing that advantage is not taken, even unconsciously, of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, or weak bargaining position (DGOFT v First National Bank Plc [2002] 1 AC 481).


The Unfair Commercial Practices Directive 2005/29/EC provides that a commercial practice will be unfair if:

It is contrary to the requirement of good faith or does not meet the standard of skill and care commensurate with honest market practice; and

It appreciably impairs the consumer's ability to make an informed decision, causing him to take a decision that he would not otherwise have taken as to whether, how and on what terms to make a purchase or a payment, retain or dispose of a product, or exercise a contractual right (article 5, read together with the definitions in article 2(e), (h) and (k)).

If decisions on unfair relationships are to be consistent with existing legislation, the test may be whether conduct on the part of the creditor or any associate, which is contrary to good faith or generally accepted standards of market practice, has appreciably impaired the debtor's ability to make an informed decision. Failure to meet statutory obligations not to use certain expressions in advertising, to allow certain cooling off periods, and to provide certain information before and after entering into an agreement, would be relevant.


Moreover, if the creditor was aware that some particular characteristic of the debtor, such as illiteracy, made him peculiarly unable to make informed decisions on the basis of standard communications, the creditor might be at risk of an unfair relationship unless it took steps to ensure that that particular debtor understood his options.



However, the 2006 Act does not impose any duty to ascertain whether a debtor has such characteristics and, although the Office of Fair Trading (OFT) will now be required, when making licensing decisions, to have regard to what it considers to be irresponsible lending, it is doubtful that a relationship would be unfair simply by reason of the creditor's agreeing to lend money without first satisfying itself of the debtor's ability to afford the repayments.


The more clearly creditors express themselves in advertising, in agreement forms, and in otherwise keeping debtors informed, the less risk there will be of an unfair relationship. Strict requirements are imposed by the Consumer Credit Act 1974 as to the manner in which agreements, notices and other information are to be expressed. There are to be further requirements for periodical statements and arrears notices.


However, the shortcomings of the existing requirements were summed up by Lord Justice Clarke in McGinn v Grangewood Securities Ltd [2002] EWCA Civ 522: 'Simplification of a part of the law which is intended to protect consumers is surely long overdue so as to make it comprehensible to layman and lawyer alike. At present, it is certainly not comprehensible to the former and is scarcely comprehensible to the latter.'


The 2006 Act does nothing at all to clarify the 1974 Act. No new assistance is given, for example, on the meaning of 'charges' which are to enter into the total charge for credit, or the correct analysis and required treatment of 'multiple agreements'. Difficulties of interpretation may disqualify many disputes from alternative dispute resolution. The FOS may decide not to specify certain descriptions of dispute and of complainant as falling within its consumer credit jurisdiction; individual ombudsmen may dismiss complaints that turn on important or novel points of law.


Moreover, the form and contents requirements might have been simplified to make agreements easier to read. Instead, the amendments that have been made by the Consumer Credit (Agreements) (Amendment) Regulations 2004, SI 2004/1482, increase the information that must be contained in each agreement form and impose a new equal prominence requirement that diminishes the impact of the statutory warnings and makes it less likely that a customer will read any of the document.


The 'unfair relationship' and 'requirements' provisions create serious uncertainties that may deter new business and impede the sale or securitisation of credit portfolios until there is judicial authority on their proper interpretation. However, the failure to define what businesses should or should not do also gives rise to the prospect that the courts, when deciding whether a relationship is unfair, when reviewing a decision of an ombudsman, or when hearing an appeal from the new Consumer Credit Appeals Tribunal against the imposition of a requirement, may interpret the new powers as circumscribed by the need for businesses to enjoy wide freedoms to develop different products, encourage overseas investment, and maximise their profits.


Parliament's decision not to establish or define a duty not to lend irresponsibly and not to impose any ceiling on interest rates, any restrictions on the methods of calculating or applying interest (apart from interest on default charges), or any restrictions on the way in which creditors, such as card issuers, allocate repayments between higher and lower interest-bearing balances could be said to justify the conclusion that, provided businesses sell their products honestly and keep their customers well informed, the OFT should not be dissatisfied with their conduct and their conduct should not be found to give rise to unfair relationships.


Julia Smith is a barrister at Gough Square Chambers, London, specialising in consumer credit. She is co-author of Consumer Credit Act 2006: A Guide to the New Law, to be published in August by Law Society Publishing. The book can be ordered direct from Marston Book Services for £44.95 plus £3.50 p&p, tel: 01235 465 656