Where credit’s due

Will the new consumer credit regulations help the customer or just lead to more confusion? asks Jonathan Guest

This year and next will be bumpy for the UK’s consumer credit market given the changes that are underway in the arena.

While the original Consumer Credit Act was passed in 1974, it only came into effect fully on 19 May 1985. The introduction of the current changes is going to be somewhat more rapid. The White Paper was issued on 9 June and changes are to take effect on 31 October 2004 and 31 May 2005.

There is more to come. Mortgage lenders must comply with the new mortgage regime from 31 October 2004. The second attempt at an EU Consumer Credit Directive has just passed through the EU Parliament on its first reading. The Office of Fair Trading (OFT) referred the supply of store card services to the Competition Commission in March 2004 while the National Consumer Council has made a ‘super-complaint’, triggering an investigation into the home credit market.

UK consumer debt recently topped £1tr for the first time. Is this a problem? The Department of Trade and Industry (DTI) accepts that “for most, credit cards and other secured/unsecured lending provides people with greater control and flexibility when managing their finances – collectively benefiting the economy”.

However, they also note that 20 per cent of households that have credit experience financial difficulties, and 7 per cent of households have levels of credit usually associated with severe over-indebtedness.

So will the new arrangements help consumers? Doug Taylor, campaign team leader for the Consumers’ Association, is not convinced. He says: “We’re concerned that the proposed laws may not go far enough to address confusion in this market. We also fear that there will still be loopholes, particularly with the advertising regulations, which may be open to misinterpretation.”

On the other hand, market analyst Datamonitor says the tight implementation schedule, a lack of adequate preparation, and fears of increased bureaucracy and cost are a major worry for the credit industry. Lenders are likely to try to recoup some of the additional costs associated with the changes through higher charges for consumers.

Consumer minister Gerry Sutcliffe is more positive. “This is all about transparency, enabling and empowering customers to make informed choices,” he says. However, Ed Mayo, chief executive of the National Consumer Council, still has concerns. “Borrowers will still be penalised for settling their loans early. This is just not good enough,” he says.

So, what impact will the changes have?

From 31 October the current unwieldy, simple, intermediate and full advertisement requirements will be replaced with a set of simpler rules. There is to be a new standard calculation for APRs (annual percentage rates of charge). ‘Typical APRs’ must cover 66 per cent of the agreements to be entered into and ‘from APR’ rates can only be quoted if the full range of APRs is cited.

Disclosure of information regulations
Specific information must be given to a prospective consumer before a credit or hire agreement is entered into. The information has to be set out in a prescribed manner. This ‘pre-contract information’ applies to all contracts entered into excluding distance contracts – those regulated agreements where no physical contact occurs as part of the marketing signing process.

The Government has announced new regulations this summer implementing the new EU Distance Marketing Directive. The likely result is a compulsory 14-day cancellation period, together with the provision of specific information.

Online agreements
Legislation is proposed in the autumn that from 31 October would permit entry into consumer credit agreements over the internet. While this will be a step forward in recognising the reality of today’s trading, when combined with the distance marketing rules it will not in fact provide a quicker turnaround for customers seeking credit efficiently.

Agreement formats
From 31 May 2005 credit agreements will have to set out far more information of a prescribed nature in the agreed format under specific headings of ‘Key Financial Information’, ‘Other Financial Information’ and ‘Key Information’. Terms and conditions must be in the same size text, the content of the statutory notices will change, and where insurance is financed by the credit, there must be a separate signature box.

These requirements will necessitate a fundamental reworking of all credit and hire agreements. Given the need to follow a prescribed order of inserting information that may or may not be readily capable of incorporation within existing automated systems, this will have considerable systems implications. In addition, because there is a requirement to show them in the same size print as the remainder of the form, there is real pressure to shorten and simplify copy.

One observes that few consumers read the detail in their agreements. Given the amount of additional information that will feature, the position will get worse. While the intent might be laudable, in reality it is likely that there will be little chance of consumers reading the detailed legal print, whatever size it is set out in.

Rebate on early settlement
Under the new agreement regulations, fixed-amount credit agreements will include three examples of the amount payable to settle early, calculated at a quarter, half and three-quarters of the way through the agreement.

Financial limits
In the autumn, the DTI proposes to bring forward legislation to abolish the £25,000 limit on regulated consumer loans for both credit and hire. The limit will be retained for business lending, but restricted to sole traders, unincorporated bodies and partnerships of three or fewer partners.

Most residential mortgages will fall under the mortgage regime rather than the Consumer Credit Act and it is not clear how much additional benefit and consumer protection this will bring. There may be a self-certification opt-out for wealthy individuals so they can waive the need to comply with all these detailed requirements – the so-called Elton John helicopter clause.

Extortionate credit
The current extortionate credit provisions, which are intended to allow the reopening of credit agreements that are excessive in rate, is recognised to be unworkable. The Government intends to bring in legislation in the autumn, to take effect next year, giving the courts a greater discretion to open up credit bargains after looking at the manner of sale and whether any form of pressured sale has been made. A dispute resolution system is also proposed as an alternative to the courts.

Total unenforceability
Under the current law, a certain degree of non-compliance can mean that a regulated agreement is totally unenforceable. These provisions are to be repealed by primary legislation. This is a sensible step given the increase in complexity of compliance.

EC Consumer Credit Directive
As if the above changes were not sufficient in their overhaul of the UK credit market, the proposed EC Consumer Credit Directive is now back on track. The directive proposed by the European Commission in 2003 was vilified by the European Parliament in April as they made more than 150 amendments. The amended form of directive is now making progress. While optimum rather than total harmonisation is now the driving force behind the legislation, there are still two areas that could have a fundamental impact on the UK credit market.

Fourteen-day automatic withdrawal periods
It is proposed that all credit should be subject to this withdrawal period. It is unclear how this will sit with the point-of-sale finance houses funding items such as cars and retail goods. The proposals could mean that these goods could be returned after 14 days’ usage leaving the lender/retailer with goods that, in effect, are 14 days’ old, second-hand, and, therefore, of considerably less value.

Responsible lending
Creditors will be under a duty to provide responsible lending. Could this impose a duty to provide advice to the consumer on the most appropriate type of credit for the customer, taking into account the advantages and disadvantages of the particular product that particular finance house is trying to sell to the consumer?

Whatever its final form, the directive is going to have further fundamental impacts and cost implications on the UK credit industry. And where does this leave the consumer? There is an argument that by increasing the volume of paper, it will also increase the level of confusion for consumers.

Jonathan Guest is head of the consumer credit team at Eversheds