Contents

1. What does the Bill do?
2. How will the Bill do this?
3. How will the proposals in the Bill tackle rogue lenders?
4. How will the Bill help consumers?
5. How will the Bill help business?
6. Will the Bill affect my business?
7. Will the Bill mean more costs for business?
8. How much will a consumer pay to resolve a dispute through the Financial Ombudsman Service?
9. What will the Alternative Dispute Resolution scheme cost businesses?
10. Will the Bill introduce maximum limits on interest rates for consumer credit?
11. What were the conclusions of the research on interest rates?
12. When will the Bill come into force?
13. Will the new unfairness test be retrospective?
14. How can I find out more about the Bill?

Glossary:

ADR- Alternative dispute resolution
The Bill - the Consumer Credit Bill, which was introduced into the House of Commons on 18 May 2005.
Consumer credit business - for the purposes of this Q&A we mean a business with a licence under the Consumer Credit Act 1974 to carry on consumer credit or hire or credit-related activities. This can include lenders, credit brokers, debt adjusters, debt counsellors, debt collectors, credit repair businesses, debt administrators.
Consumer credit licence - for the purposes of this Q&A we mean any licence under the 1974 Act
OFT Office of Fair Trading.

1. What does the Bill do?
The Bill will reform the Consumer Credit Act 1974 to protect consumers and create a fairer and more competitive credit market.

2. How will the Bill do this?
The Bill will reform the Consumer Credit Act 1974 to:

• enhance consumer rights and redress to empower consumers and introduce more effective dispute resolution:

o replacing the current “extortionate credit” test with a test based on unfairness, and
o introducing an Alternative Dispute Resolution mechanism

• improve the regulation of consumer credit businesses:

o strengthening the licensing regime, to enable the OFT to keep rogues out of the market; and
o ensuring clear information after an agreement is signed.
make regulation more appropriate for different types of consumer credit transaction:
o extending protection to all consumer credit by abolishing the financial limit that caps protection at loans of £25,000; and
o introducing a more proportionate approach to the enforceability of defective agreements.

3. How will the proposals in the Bill tackle rogue lenders?
Businesses who provide credit or hire, or undertake certain credit-related activities must obtain a licence from the Office of Fair Trading.

The Bill strengthens the OFT’s powers to keep rogues out of the market, by enabling it to look forward to check that a business is competent to undertake credit business before awarding a licence.

The OFT will also have better powers to obtain information about licensees, and to impose requirements on a licensee if the OFT is dissatisfied with their conduct. If a requirement is breached OFT may impose a financial penalty.

The changes in the Bill will also mean that lenders who are behaving badly are more exposed to consumer challenge through the new alternative dispute resolution scheme and the new unfair credit relationships test.

4. How will the Bill help consumers?
Consumers will be able to exercise their rights more effectively to challenge unfair conduct by lenders and to obtain redress. Consumers will also receive better protection through the reformed licensing system and more information about the state of their accounts.

• Effective dispute resolution: If a consumer has complained to a consumer credit business and not received a satisfactory result, he or she will be able to make complaints to an Alternative Dispute Resolution scheme. This scheme will be run by the Financial Ombudsman Service – which already deals with certain financial services products – and will cover all consumer credit businesses. This is a quicker, cheaper and easier route than going to court.
• Challenging unfairness: The new unfair credit relationships test will provide consumers with a broad right to challenge unfair credit relationships in court. The court will have the power, if it finds that a relationship between a debtor or creditor is unfair, to remedy the unfairness by reopening the agreement or even setting it aside. The new test will also deter credit businesses from operating agreements unfairly, increasing competition and therefore raise standards across the industry.
• Informing consumers: Consumers will be kept informed of the status of their accounts throughout the life of their agreement. Lenders will be required to provide regular statements and information when there are problems, like going into arrears.
• Better protection: The OFT’s strengthened powers under the licensing regime will serve to keep rogues out of the market. This means that consumers can have confidence that the businesses they are dealing with meet the OFT’s required standard of fitness.
• Regulating all consumer credit: the Consumer Credit Act will regulate all consumer credit, unless specifically exempted. The only things that will be exempted are mortgages regulated by the Financial Services Authority under the Financial Services and Markets Act and certain transactions involving high net worth individuals. Business lending will not be regulated by the Act, except in very limited circumstances involving small transactions made by very small businesses.
• Protecting small business: The reforms will focus the regulation of business lending on loans of up to £25,000 to small businesses – sole traders, unincorporated associations and partnerships of three or fewer members.

5. How will the Bill help business?
The Bill will improve the way that the Consumer Credit Act works and improve the way the UK consumer credit market works.

• Quick, cheap dispute resolution: Disputes are costly for business. The Bill will introduce an ADR system, to allow for the cheap, efficient and quick resolution of consumer disputes, at considerably less cost than court action.
• A single standard: The introduction of the new test of an unfair relationship is intended to provide a single standard of conduct to all
consumer credit businesses, which is consistent with industry codes and FSA regulation.
• Confidence in business: A strengthened licensing regime will keep rogues out of the consumer credit and hire industry. Businesses will therefore be confident that those they deal with are fit to hold a consumer credit licence. This will also increase consumer confidence in the industry and strengthen competition.
• Fairness for business and consumers: parts of section 127 of the 1974 Act which render agreements unenforceable if certain requirements of the Act are not complied with (however technical the breach) will be repealed. Instead, courts will be given discretion in relation to enforceability in all cases when provisions are not complied with. This allows the courts to make a judgment proportionate to the detriment caused to the consumer.
• Protecting and encouraging small business: Small businesses will be afforded the same protections as consumers up to £25000, enabling easy access to credit.

6. Will the Bill affect my business?
If you or your business currently holds a consumer credit licence, then the reforms in the Bill will affect your business. Creditors and owners, including those that only enforce agreements, will require a licence under the reforms.
If your business is engaged in credit information services or debt administration then you will need to obtain a licence from OFT once the new reforms take effect. If you have specific questions about licensing please contact OFT.

7. Will the Bill mean more costs for business?
The reforms will mean that business will have some small additional costs, but these should be considered in the context of an improved credit market.

We expect that licence fees will approximately double to around £220 over five years for sole traders and £550 for incorporated bodies (though OFT will consult on the new fees and structure).

There are also new requirements for provision of post-contract information, which we estimate to be around £1, 000 one-off for a small business, £5,000 for an intermediate business and £20,000 for a large business.

For further details see the Regulatory Impact Assessment.

8. How much will a consumer pay to resolve a dispute through the Financial Ombudsman Service?
Bringing a complaint to the Financial Ombudsman Service will be free to the consumer. If a consumer has complained to a consumer credit business and not received a satisfactory result, he or she will be able to make complaints to an Alternative Dispute Resolution scheme. This scheme will be run by the Financial Ombudsman Service – which already deals with certain financial services products – and will cover all consumer credit businesses.

9. What will the Alternative Dispute Resolution scheme cost businesses?
For those businesses that are the subject of a complaint, the first two cases per year will not have a case fee. For further cases, businesses will have to pay a case fee of around £360. Consumer credit businesses will also have to pay a modest levy to cover the running costs of the scheme, which will be around £10-20 per year.

10. Will the Bill introduce maximum limits on interest rates for consumer credit?
No, the Government has decided not to introduce an interest rate ceiling on the basis of research by Policis (an independent company) on the effects of maximum limits interest rates in other countries. However, the Government will keep the decision not to introduce interest rate controls under review.

11. What were the conclusions of the research on interest rates?
Policis concluded, after investigating the effect of interest rate ceilings in France, Germany and the USA, that:

• the market does not provide credit for small loans repayable over a short period, excluding some low-income consumers from the market or leading others to take out larger loans than they need;
• the choice of products is reduced, limiting competition;
• some low-income consumers will take out credit on products that have extra charges that are not included in the interest rate calculation, but which low income consumers are particularly likely to incur, such as late payment charges; and
• the percentage of consumers who admitted to having borrowed from unlicensed or illegal lenders was twice as high in Germany and France as in the UK.

Policis also found no evidence that rates tend to climb towards the ceilings in those countries.

12. When will the Bill come into force?
The date that the reforms come into force and their implementation depend on how long it takes to progress through Parliament. We are working with key stakeholders to develop a timetable for implementation so that the reforms are in place as soon as possible.
The Office of Fair Trading will also consult on and publish guidance about its powers before the new provisions come into force.

13. Will the new unfairness test be retrospective?
The new unfairness test will have some retrospective effect.

The new unfair relationships test will apply to all new credit agreements made after the date that the reforms commence and will apply to any agreements already made which continue in existence at a specified date after commencement. We will consult with consumers and industry as to when this date will be.

The period between the commencement date and the specified date will be a transitional period, to allow creditors to ensure that any agreements that will continue beyond the end of the transitional period comply with the new test.

The old test will continue to apply to agreements that have been completed (e.g. no party has any further obligations under the agreement because no further sums are payable) before the end of the transitional period. The new unfair relationships test will not apply to these agreements.

14. How can I find out more about the Bill?
Read the Bill and its explanatory notes on the UK Parliament website;
Visit the Bill's web pages on this site;
Call the DTI Enquiry line: 020 7215 5000