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Update from Expert Working Groups

This update sets out the position following the expert working groups and consultation of Ministers -- in other words the basis on which BERR will be formally consulting, but it goes without saying that the position could change significantly as a result of the formal consultation.

Scope (Article 2)

• We are proposing to apply the requirements of the Directive to all agreements currently caught by the Consumer Credit Act with the exception of second charge mortgages, which are already subject to review.  Our proposal is to leave these subject to existing CCA rules pending the final outcome of the review.
   
• However, there are some exceptions to this general rule:
       Business loans currently caught by the CCA - we are not proposing to apply: the advertising requirements, the requirement for the standard pre-contractual information sheet (although lenders would be free to use it), the requirement to provide amortisation tables on demand and the requirement to notify changes to interest rates in so far as these would be caught by the Payment Services Directive. On the other hand Ministers want to consult on whether or not the requirement to provide adequate explanations and the right of withdrawal should apply to such loans before making recommendations.
       Loans above €75,000 – except where these loans are for consolidation purposes, we are proposing that the requirement to use the standard pre-contractual information sheet (although lenders could choose to use it), the right of withdrawal and the requirement to provide amortisation tables on demand should not apply. On the other hand Ministers want to consult on whether or not the requirement to provide adequate explanations should apply to such loans before making recommendations.
  
  
• The exemption for high net worth individuals introduced in the 2006 Consumer Credit Act would be amended so that it could only apply to credit agreements over €75,000. Loans below €200 would continue to be subject to the CCA including changes resulting from the Directive, although we would retain the existing light touch treatment for loans below £50.
  
  
• To avoid consumer confusion, we are proposing to apply the same rules to hire purchase as to other consumer credit products, including the new provisions in the Directive.
  
  
• We intend to preserve the status quo with regard to charge cards -- i.e. continue to regulate them as credit products only in so far as they are used for cash advances -- subject to confirming that only "insignificant" charges apply where charge cards are used to purchase goods and services.
  
  
• We intend to amend the existing exemption for credit which has to be repaid within 12 months in not more than four instalments so that it only applies to such arrangements which are free of charge or where only insignificant charges are payable.
  
  
• We do not intend to take advantage of the exemption of overdrafts which have to be paid within one month.
  
  
• We are not proposing to take advantage of the exemptions in Article 2(2)(i) or 2(2)(j) for credit agreements which are the outcome of a court settlement or relate to deferred payment free of charge of an existing debt. Nor are we planning to take advantage of the light touch treatment in Article 2(6), which concerns credit agreements providing for deferred payment where a consumer is already in default. Instead, we intend to retain the existing distinction between credit agreements on the one hand and unilateral concessions or court orders on the other.
  
  
• We propose to continue to apply the same rules to Pawnbroking as to other credit products, although the information requirements could be better tailored to match the way in which Pawnbroking works.

Advertising (Article 4)

• In relation to recital 18, we have clarified with the Commission that the Directive is only intended to regulate the way financial information about credit products must be given and that Member States can continue to regulate aspects of advertising other than information regarding the cost of credit.
  
  
• We do not intend to require an APR in all advertisements but we will consult on whether an APR should be required for some specific categories of loan even if the standard information is not triggered.
  
  
• The Commission has clarified that the representative example is intended to comprise of one over-arching example of a particular offer, which would include all of the relevant pieces of standard information.
  
  
• Where the amount of credit being offered is not known, we propose that the figure of 1500 EUR should be assumed when calculating what the representative APR is in respect of the advertised agreement.
  
  
• We will make clear that lenders can display further examples of credit offers that were not based on the 1500 EUR assumption (provided these are, however, representative of that particular product -- see definition of "representative" below). However, the quoting of further financial information would mean the rest of the standard information set out in Article 4.2 would be required in each case.
  
  
• To be representative we are proposing that at least 50% of consumers should receive the terms as good as or better than those set out in the advertisement. Where an additional example is supplied – i.e. one not based on 1500 EUR, the requirement for 50% of consumers to benefit from those terms would still apply.

Adequate explanations (Article 5.6)

• The requirements of 5.6 along with Article 8 (the duty to check creditworthiness -- see below) may present an opportunity to tackle the issues of consumer understanding and over-indebtedness. BERR Ministers would therefore prefer to consult further on options before proposing a way forward.
  
  
• There will be a new obligation to provide adequate explanations to consumers on the face of the implementing legislation, but at this stage it is not possible to propose in any detail the extent to which lenders should be responsible for ensuring that consumers have understood the key features of a product.
  
  
• BERR/OFT guidance is likely to play a key role in filling in the details, and, following discussion in the adequate explanations working group, a standard pro forma listing specific information to be explained to consumers -- either orally or in writing -- is likely to provide one means of complying with the requirement, although at this stage BERR does not have a view on whether this should be sufficient on its own or in all cases.
  
  
• Key areas to be considered include: the extent to which lenders should set out the comparative advantages and disadvantages of alternative products where these are offered, the impact which the proposed credit commitment would have on a consumer's economic situation and the consequences of default. The implementing legislation and/or the guidance would describe the variables which would determine the approach to be taken: for example, the type of credit product, the amount of the proposed credit, the channel through which the credit product is sold and the nature of the consumer.
  
  
• BERR is working on more detailed options to put to Ministers and we will keep you up-to-date on the position.

Pre-Contractual Information (Article 5)

• We propose that the implementing provisions would continue to apply to the areas currently covered by the existing legislation. In respect of business lending (except where this was for consolidation purposes), secured lending and for regulated agreements worth more than E75K, we propose that it should be permissible for the pre-contractual information to be given either via the SECCI or in the form currently required under the Disclosure regulations.
  
  
• The term “in good time” does not preclude the consumer from proceeding straight to the conclusion of the agreement following provision of the pre-contractual information if that is what they want to do, provided they are given adequate opportunity to pause and reflect and that consumers are not subjected to undue pressure to conclude a credit agreement.
  
  
• We do not intend to require the pre-contractual information to be binding for a period.
  
  
• The Commission has said that Member States can be flexible with the language used in the SECCI. Subject to a final l legal view, we therefore intend to allow lenders to use alternative language provided that they comply with the requirement to provide the relevant information in the prescribed order and format and in a clear and manner.
  
  
• On the requirement to stipulate the amount of credit being offered, we propose that where it is not possible to state a particular amount of credit at the pre-contractual stage, the duty to provide this information can be fulfilled by stating that the amount is to be confirmed and the manner by which the consumer will be informed.

Information to be included in credit agreements (Article 10)

• We recommend the legislation in this field, as amended by the Directive, would continue to apply to all areas currently regulated. Unlike pre-contractual information, we do not propose to legislate to allow lenders offering products outside of scope to use the existing regime in respect of contractual information (except in the case of second charge mortgages) because the requirements of the Directive are generally less prescriptive, although the requirement to provide amortisation tables would not apply to business lending and loans over €75,000 except where these were for the purpose of consolidating existing debts.
  
  
• We propose to retain the need for a signature on a credit agreement.
  
  
• In the context of the Directive obligation that contracting parties receive a copy of the agreement, we are considering options to refine the Act’s provisions relating to the requirements to supply copies of executed and unexecuted agreements.
  
  
• We propose to repeal the section 64 notice of cancellation rights
  
  
• Where the amount of credit being offered is not clear at the time the agreement is being concluded, we propose that it will be permissible for the creditor, as at the pre-contractual stage, to state that the total amount of credit is subject to confirmation (or to state a minimum amount if known) and then follow-this up in writing when it is clear what the total amount of credit actually is.

Overdrafts and overrunning

• From a stakeholder perspective, we do not believe any significant issues were identified during the WG stages last year.
  
  
• As previously advised, we will be consulting on the basis of not requiring APRs to be shown for Overdrafts (A4, A6, A10); however, Total Charge for Credit will require to be shown in Contractual Information (A10).
  
  
• We would also remind stakeholders that borrowing rates will require to be shown in periodic statements which include overdraft interest amounts. Further we plan to use the term “regular” for the timing of issue of statements to overdrawn consumers which will allow creditors to continue to issue statements on the present basis (where there is a balance) between monthly and 6 monthly (as prescribed by CCA S78 (4)(a) & CC Regs 1983/1570, complemented by the Banking Code’s recommendations) (A12).
  
  
• Finally, we are proposing to draft the overrunning information requirements as being triggered when the overrunning (tacitly approved overdraft) level exceeds £100 (in place of the Directive’s word “significant”) and the frequency of such periodic reporting may be quarterly after the initial statement of overrunning which must be issued immediately after 1 month of overrunning (A18).
  
  
• We are recommending that the overdraft requirements are applied across all the products currently regulated by the CCA, including business overdrafts

Creditworthiness checks (Article 8)

• Our informal consultation in 2008 was based on a light touch implementation of the creditworthiness assessment requirements, given the CCA 2006 changes with respect to Irresponsible Lending.
  
  
• Guidance received from the Commission indicates MS can provide greater clarity on the definition of creditworthiness and associated processes and, given concerns over the indebtedness levels of consumers in the UK, the Minister wants to consider a range of options for implementing this requirement, particularly with respect to the assessment of whether consumers can afford to make repayments over the duration of any credit agreement.
  
  
• We plan to elaborate on what “best practice” expectations would be appropriate in our Consultation Document.
  
  
• Our intention is to apply this requirement across all products regulated by the CCA.

Database access (Article 9)

• We can confirm that we plan to draft the A9.2 requirement to inform consumers based on only those situations where a database search has occurred in connection with a credit application. Further we will be clarifying that the requirements of A9 in general are with regard to Credit Reference Agencies and not databases in general.
  
  
• Our intention is to apply this requirement across all products regulated by the CCA.

Information concerning the borrowing rate (Article 11)

• The legislation needed to conform to Article 11 should maintain the existing coverage of these Regulations so that they do not apply just to Consumer Credit Directive regulated agreements or only to variations of interest rates.
  
  
• The existing 7-day rule would seem in line with the requirement to give advance notice of changes and would ensure that the consumer has time to act.

Open-end credit agreements (Article 13)

• There will need to be a new, specific provision in UK law to give effect to the requirement in that the consumer can terminate an open-end agreement at any time unless the parties have agreed on a period of notice, that the consumer cannot be required to give more than one month's notice and that the creditor must give at least two months' notice.
  
  
• We are considering whether the implementing legislation should expand on the term “objectively justified reasons” in respect of a termination of a drawdown facility, for example by providing a non-exhaustive list of such reasons, drawing on the factors set out in recital 33

Right of withdrawal (Article 14)

• The consumer will have the right to withdraw from a credit agreement within 14 days but not to return the goods in the case of a linked credit agreement (he must pay for them in another way). However, if the consumer wishes to return the goods and the supplier is willing to take them back, the legislation will not prevent this.
  
  
• It is not proposed to define more closely when the 14 day period starts. When the contract is concluded may differ depending on the type of credit agreement and it should be clear in the circumstances.
  
  
• Notice of withdrawal may be given in writing, in another durable medium or orally where the creditor has indicated he is content to accept oral notice.
  
  
• The date the money is deemed to have been repaid will be the date of despatch rather than the date of receipt.
  
  
• We propose to extend the right of withdrawal to credit agreements below €200, credit agreements above €75,000 for the purpose of debt consolidation, pawnbroking and all hire purchase and conditional sale agreements. We have not formed a definite view on whether the right of withdrawal should be extended to small business lending up to £25,000; this will be left as an open question in the public consultation.

Joint and several liability (Article 15)

• We propose to keep section 75 of the CCA unchanged and introduce a new provision applying Article 15.2 to those agreements that fall outside the scope of section 75 but within the scope of the CCD, specifically linked credit agreements for amounts of more than £30,000 but not more than €75,000.
  
  
• The new Article 15.2 provision would apply to hire purchase and conditional sale agreements for amounts of more than £30,000 but not more than €75,000 (£60,260) but not to any other agreements outside the scope of the CCD.

Early repayment (Article 16)

• We take the view that our current early repayment regime implements Article 16.1 (as it relates to full early repayment).
  
  
• The current regime for full early repayment (including the formula, the 28 day settlement period and the 30 day deferral) would be retained, with only a few minor changes (e.g. the consumer could give notice of early repayment in writing, in another durable medium or orally).
  
  
• It would be extended to cover partial early repayment, to provide a single, uniform regime for early repayment (with the possible exception of the right to request a settlement statement).
  
  
• We take the view that Article 16.2 relates to compensation for changes in interest rates for a period in which the borrowing rate is fixed - where a loan on a fixed rate is repaid early and interest rates have fallen so the lender has to lend out the money at a lower rate, thereby incurring a cost. This is not currently a feature of the UK regime.
  
  
• The legislation would not be prescriptive on how this compensation should be worked out. This would be left to lenders to decide, and to justify if challenged.
  
  
• We would take up the Member State option in Article 16.4(a) to restrict Article 16.2 compensation to early repayments exceeding €10,000.
  
  
• We would not take up the Member State option in Article 16.4(b) to allow higher Article 16.2 compensation in exceptional circumstances.
  
  
• This is our position on the Member State options because we believe our current regime strikes a fair balance and we want to maintain that balance as far as possible. We have to allow some additional compensation under Article 16.2, over and above what creditors would get now, but we don't see any reason to disturb the balance further by allowing more than the minimum.
  
  
• The scope of Article 16 would be extended to loans below €200, loans above €75,000, hire purchase and conditional sale agreements, pawnbroking, loans below £25,000 to small business and modifying agreements which are the outcome of a court settlement.

Assignment of rights (Article 17)

• As previously indicated, we plan to create a new regulation to cover the A17.2 requirement to inform consumers of an assignment, except where the original creditor continues to service the credit arrangements; we will be requiring the advice of assignment to be provided by the original creditor and not the assignee.
  
  
• We plan to apply this regulation across all consumer credit related agreements, both existing and new.

Calculation of the APR (Article 19 and Annex I)

• We had hoped that clarification of the outstanding APR issues would be provided at the Transposition Workshop in November; unfortunately this did not occur and the Commission has now engaged a consultant to undertake the clarification work on A19 - it is unlikely that formal output from this issue will occur until late February at the earliest.
  
• We have nevertheless moved ahead and will consult on the basis that
      o Annex I.II (b) – the most common drawdown mechanism will be based on volume of activity across the individual lender’s portfolio of active accounts.
      o Annex I.II (d) – the assumption of repayment over 12 equal instalments will relate to the total charge for credit in addition to the credit itself (that is, continuation of existing UK practice).
      o Annex I.II (e) – this assumption relates only to fixed term credit agreements and not running account credit agreements.
      o Annex I.II (g) – despite unclear discussion elsewhere in the Directive regarding use of representative examples, our favoured option in this regard is to adopt (g), €1,500 (£1,200) as the value of credit to be used in Advertising and Pre Contractual Information in order to ensure that there continues to be a common basis for calculating APRs in the interests of comparison. However, see also comments on Article 4, above.
      o Calculation Tolerances – we are seeking to retain the existing UK tolerances in that we believe these are focussed on execution/monitoring acceptability rather than the A19 objective of the calculation methodology itself.
  
  
• Lastly in terms of scope, other than 2nd charge lending, we plan to apply the new assumptions across all consumer credit agreements caught by the CCA.

Regulation of creditors (Article 20)

• No action is necessary to implement Article 20.

Obligations of credit intermediaries (Article 21)

• We propose to use the CCD definition of credit intermediary for the requirements in Article 21 rather than the CCA definition of credit brokerage. However, we will be asking for views as part of the public consultation on how many businesses would fall within both definitions or only one.
  
  
• Our intention is that the requirement in Article 21(a) could be met by the these sort of statements:
      o “ABC Credit Intermediaries Ltd is independent and offers a wide range of credit products from a number of different creditors.” or
      o “ABC Credit Intermediaries Ltd offers loans to purchase vehicles exclusively from X Credit & Loans Ltd.”
  
  
• We intend to define the term “independent”.
  
  
• The documentation should be that intended specifically for consumers (e.g. not a business card) but we do not propose to define precisely which documents should show the information.
  
  
• The Article 21 requirements would apply to most agreements covered by the CCA but outside the scope of the CCD: loans below €200, loans above €75,000, hire purchase and conditional sale agreements, interest free credit, credit repayable within three months with only insignificant charges, modifying agreements which allow deferment of payment of an existing debt free of charge, modifying agreements designed to avert court proceedings and lending to small businesses up to £25,000.