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Frequently Asked Questions (FAQ) on Consumer Credit Act 2006

Contents:

1. What does the Act do?
2. How will the Act do this?
3. How will the provisions in the Act tackle rogue lenders?
4. Will the Act affect my business?
5. Will the Act mean more costs for business?
6. How much will a consumer pay to resolve a dispute through the Financial Ombudsman Service?
7. What will the ADR scheme cost businesses?
8. Will the Act introduce maximum limits on interest rates for consumer credit?
9. What were the conclusions of the research on interest rates?
10. Will the new unfairness test be retrospective?

1. What does the Act do?

The Act will reform the Consumer Credit Act 1974 to protect consumers and create a fairer and more competitive credit market.

2. How will the Act do this?

The Act will reform the Consumer Credit Act 1974 to:

• enhance consumer rights and redress to empower consumers and introduce more effective dispute resolution: replacing the current "extortionate credit" test with a test based on unfairness, and introducing an Alternative Dispute Resolution scheme.
• improve the regulation of consumer credit businesses: strengthening the licensing regime to enable the OFT to keep rogues out of the market; and  ensuring clear information after an agreement is signed.
• make regulation more appropriate for different types of consumer credit transaction: extending protection to all consumer credit by abolishing the financial limit that caps protection at loans of £25,000; and introducing a more proportionate approach to the enforceability of defective agreements

3. How will the provisions in the Act 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 (OFT).

The Act allows the OFT's to run a more effective and efficient licensing regime by increasing its ability to ensure applicants are fit to hold a licence and to monitor ongoing conduct.  OFT will provide guidance on fitness, which will include assessing a license holder's future competence in addition to its past conduct.

The OFT will also have stronger powers to investigate suspected cases of misconduct and to apply a wide range of sanctions, including fines of up to £50,000 or the suspension for breaches of credit licences.

The Act also establishes an independent Consumer Credit Appeals Tribunal to deal with appeals against licensing decisions.

The Alternative Disputes Resolution scheme and the Unfair Relationships Test, will enable consumers to challenge rogues more effectively.

4. Will the Act affect my business?

If you or your business currently holds a consumer credit licence, then the reforms in the Act 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.

5. Will the Act 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).

Lenders will also be required to provide post-contract information, which we estimate to be around a £1,000 one-off cost for a small business, £5,000 for an intermediate business and £20,000 for a large business.

However, some of these costs will be offset, e.g. by abolishing the concept of automatic unenforceability so that the courts can determine whether or not credit agreement are enforceable in all cases, and the introducing the Alternative Disputes Resolution Scheme, which will reduce instances of costly court cases.

6. 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 (ADR) 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.

7. What will the ADR scheme cost businesses?

The Financial Ombudsman Service will be consulting on the funding model it proposes to use for the ADR scheme.

In general though, it is expected that those businesses that are the subject of a complaint will have two free cases per year. For further cases, businesses will have to pay a case fee. Consumer credit businesses will also have to pay a modest annual levy to cover the running costs of the scheme.

8. Will the Act 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.

9. What were the conclusions of the research on interest rates?

After investigating the effect of interest rate ceilings in France, Germany and the USA, Policis concluded 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.

10. Will the new unfairness test be retrospective?

The new unfair relationships test will apply to all new credit agreements made on or after 6 April 2007. 

The test will also apply to any existing agreements that continue to exist beyond 6 April 2008. This transitional period for existing agreements will 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.