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Frequently Asked Questions (FAQ) on Consumer Credit Act 2006

Contents:

1. What does the Act do?
2. How does 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. Where can businesses find out more information on the FOS service?
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 reforms the Consumer Credit Act 1974 to protect consumers and create a fairer and more competitive credit market

2. How does the Act do this?

The Act reforms the Consumer Credit Act 1974 by:

• enhancing consumer rights and redress - empowering consumers and introducing more effective dispute resolution - replacing the current "extortionate credit" test with a test based on unfairness and introducing an Alternative Dispute Resolution scheme (provided by the Financial Ombudsman Service).
• improving regulation of consumer credit businesses - strengthening the licensing regime enabling the OFT to keep rogues out of the market; and will ensure clear information after an agreement is signed (from 1 October 2008).
• making regulation more appropriate for different types of consumer credit transaction - extending protection to all consumer credit by abolishing the financial limit that caps protection of loans at £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 introduces a stronger, more effective consumer credit licensing regime giving the OFT increased powers to take action against rogue traders and unacceptable practices.

From 6 April 2008 the OFT will assess a company’s ability to run its business in a fit manner in the future as well as assessing past conduct and monitor the conduct of a licence holder on an ongoing basis. OFT will target businesses that work in areas where there is a high risk of consumer detriment, such as the home credit market, subjecting these businesses to more in-depth scrutiny.

OFT also now have stronger powers to investigate suspected cases of misconduct with a wide range of sanctions available including fines of up to £50,000 for a breach of a licensing requirement or even suspension of their licence.

The Act also establishes a transparently independent Consumer Credit Appeals Tribunal (part of the Tribunals Service) to deal with appeals against licensing decisions.

The Alternative Disputes Resolution scheme (provided by the Financial Ombudsman Service) and the Unfair Relationships Test, enable consumers to challenge rogues more effectively.

4. Will the Act affect my business?

If you or your business currently hold a consumer credit licence, then the reforms in the Act 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 (repair) services or debt administration then you will need to have a licence from OFT from 1 October 2008. If you have specific questions about licensing please contact OFT.

5. Will the Act mean more costs for business?

The reforms mean that businesses will face additional costs, but these should be considered in the context of an improved credit market.

The strengthened licensing regime allows OFT to use a targeted approach to assessing fitness to hold a licence – those operating in areas where there is a high risk of consumer detriment, such as debt collection, will face more in-depth scrutiny.

Lenders will 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 introduction of 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 can now make complaints to the Financial Ombudsman Service as its remit was extended - under this Act - to cover consumer credit in April 2007.

7. Where can businesses find further information on the FOS service?

By visiting the FOS website for consumer credit businesses: http://www.financial-ombudsman.org.uk/publications/technical_notes/consumer_credit_resource.html

8. Will the Act introduce maximum limits on interest rates for consumer credit?

The Government analysed independent research and decided not to introduce an interest rate ceiling in the UK. Introducing caps would harm the very consumers they are supposed to help. Caps would reduce the range of credit products available, force vulnerable consumers to use inappropriate alternative products or even to go outside the regulated market to loan sharks. However, we will look again, for example, if presented with fresh evidence that overturns the original findings.

9. Will the new unfairness test be retrospective?

The new unfair relationships test applies to all new credit agreements made on or after 6 April 2007 and to all existing agreements from 6 April 2008. The transitional period was intended to allow creditors to ensure that any agreements continuing beyond 6 April 2008 comply with the new test.

The old extortionate credit 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.