Julie Exton examines the changes outlined in the Consumer Credit Act 2006 and how they affect business


The Consumer Credit Act 2006 received the Royal Assent on 30 March 2006. It has been hailed as the culmination of a wide-ranging programme of reform - outlined in the 2003 Consumer Credit White Paper - and by consumer minister Ian McCartney as a 'huge boost' to the rights of consumers. Its key changes include:



Removal of the £25,000 upper financial limit. In future, all consumer credit and consumer hire agreements made by individuals will be regulated, save for mortgage lending transactions regulated by the Financial Services and Markets Act 2000; transactions where the borrower is a natural person and of certified high net worth; and exempt agreements. 'High net worth' in this context is likely to follow the definition in the Financial Services and Markets Act (Financial Promotion) Order 2001, as someone who has an annual income of not less than £100,000, or net assets of not less than £250,000.



A new and wider definition of 'individual' protected by the 2006 Act. 'Individual' will now include a sole trader, a small partnership (having three or fewer partners), or an unincorporated association.



Extension of protection to business lending where the borrower is an 'individual' and the amount concerned is £25,000 or less. There is a rebuttable presumption that an agreement is made for business purposes if it contains declarations made by the individual that the credit is being advanced solely or mainly for business purposes.



A new alternative dispute resolution mechanism involving the Financial Services Ombudsman, which provides a right of redress for borrowers who are unhappy with their lenders' dispute resolution procedures.



The strengthening of powers of the Office of Fair Trading (OFT) in relation to licensing consumer credit lenders, including: the ability to assess applicants to determine whether they are 'fit' to hold credit licences (one factor the OFT will consider is whether the creditor's business appears to involve irresponsible lending); investigatory powers, including the right to require information and access to premises; the ability to impose requirements on licence holders if dissatisfied with, for example, how a business is being carried out; the ability to levy penalties (including fines of up to £50,000).



The OFT is to prepare and publish guidance on the fitness test. And, to reflect the fact that now an application will be for an unlimited licence or for one limited to business of a particular description, an agreement made by an unlicensed trader is unenforceable, in the absence of an order from the OFT, if he is not licensed to carry out business of a description which covers the enforcement of the agreement.



New information provisions and health warnings in a specified form must be included in running account credit statements.



Borrowers under fixed sum credit agreements will be entitled to receive an annual statement of account in a prescribed format. New information sheets, again in a specified format, must accompany any arrears information and default notices sent to borrowers.



Lenders must also comply with new requirements relating to the content, timing and delivery of arrears information and default notices under both running account and fixed-sum credit and hire agreements. It is hoped that this will enable potential problems to be identified before it is too late.



Other changes include recovery of simple interest-only on default sums and a new 'unfair relationship' test, replacing extortionate credit bargains. Significantly, the test will apply to all consumer lending transactions and not just regulated agreements. It is intentionally wide and there is no definition as to what is to be interpreted as 'unfair'. And, following a finding of 'unfairness', the court has a range of powers available to it, including: requiring the lender to repay any sum paid by the debtor/surety; altering the terms of the 'unfair' agreement or any related agreement; setting aside any duty paid by the debtor/surety; reducing or discharging any sum payable by the debtor/surety; directing the return to a surety of any property provided by him by way of security.



The court also has the power to determine that a relationship that has already ended was unfair, so a lender's risk will not end when the agreement does. And, if all that were not bad enough for the lender, once a debtor or creditor alleges that an unfair relationship exists, it is for the creditor to prove otherwise, so reversing the usual burden of proof.



However, it is not all bad news for lenders. Section 127(3)-(5) of the Consumer Credit Act 1974 (which automatically renders agreements unenforceable if, for example, certain prescribed information has not been included in the agreement) is repealed. Now the courts will retain a discretion as to whether or not such agreements should be deemed unenforceable.



Lenders will also benefit from a more flexible licensing system with licences targeted at their particular area of business, a new indefinite licence removing the need for renewal and accompanied by more proportionate monitoring of their activity, and a reformed appeals system where lenders can challenge decisions of the OFT.



Guidance will be published at least three months before the enforcement date to give business and those affected time to understand what they need to do to comply. Deadline dates will be the usual Department of Trade and Industry (DTI) culprits: either 6 April or 1 October.



The stated aim is to implement the 2006 Act as soon as is practicable. However, no firm timetable has yet been fixed, although it is anticipated that the Act's provisions will be rolled out over the next two years. Consultation continues and, to this end, two working groups, the IT and technical discussion groups, have been created.



The DTI is also currently seeking views on draft statutory instruments that deal with: exemptions from the provisions of the Act for lending to high net worth borrowers and businesses; the form and content of statements and notices lenders will have to provide to customers, as well as the maximum duration of limited licences and the period for which periodic fees for indefinite licences must be paid.



The consultation ends on 24 November 2006. Both statutory instruments are scheduled to be finalised by April 2007 and to come into force from April 2008. The consultation paper can be downloaded from the DTI's Web site at www.dti.gov.uk, where full details of the Act and the current position on implementation can also be found.



District Judge Julie Exton sits at Bristol County Court