Stakeholder Notice November 2007
1. This note provides an update on arrangements to implement the Consumer Credit Act 2006. It relates specifically to the third Commencement Order and the proposed Legislative Reform Order to exempt buy-to-let lending from consumer credit regulation.
Consumer Credit Act 2006: Commencement Order (No 3) 2007
2. The Commencement Order was registered on 23 November 2007. It is available on the Office of Public Sector Information (OPSI) website www.opsi.gov.uk/si/si2007/20073300.htm and will shortly be available from the BERR website as well.
3. This Order commences all the remaining provisions in the 2006 Act, except for section 2 (removal of the financial limit) which we intend to commence in March 2008 (see below). In general, this Order:
- enables the OFT to publish guidance on fitness and the use of penalties;
- enables the Ministry of Justice to take forward work on transferring consumer credit appeals to the Tribunals Service, effective from 6 April 2008;
- enables the strengthened licensing regime to be in place for 6 April 2008;
- enables the exemptions for high net worth individuals and business lending above £25,000 to come into force on 6 April 2008;
- enables the post contract transparency provisions to enter into force on 1 October 2008; and
- creates two new categories of business: debt administration and credit information services, on 1 October 2008.
Legislative Reform Order (LRO)
4. We are proposing a LRO to amend the Consumer Credit Act 1974 to address some unintended consequences of the provisions introduced by the 2006 Act. These are as follows:
- a specific exemption for buy-to-let lending to ensure that, when the £25,000 financial limit is removed in April 2008, such lending meeting the new definition will not become a regulated activity;
- under the post-contract transparency provisions, clarification that statements should cover consecutive periods of not more than one year and be given within 30 days of the period they cover; and
- provide definitions of “payments” for the purpose of issuing notices of sums in arrears.
5. We intend to consult on these proposals before Christmas and the consultation will run for 12 weeks. We will email the consultation document to everyone on our Stakeholder Notices distribution list and will also arrange meetings with all key stakeholders throughout this period to discuss the proposals. Following the consultation, and subject to Parliamentary approval, we aim to make the LRO by the end of July 2008 and to bring it into force on 1 October 2008.
6. In view of the disconnect between the removal of the financial limit in April and the coming into force of this LRO we will include a transitional in the fourth Commencement Order which will ensure that buy-to-let lending meeting the new definition is not temporarily brought into regulation. This will remain in force until such time as the LRO comes into force. We have therefore, not included section 2 in the third Order as it makes sense to include all issues relating to section 2 in a separate Commencement Order (to be made in March 2008, following the LRO consultation).
Other issues under consideration for possible legislative change
7. Industry has raised a number of additional issues that may require a change to the primary legislation. These include:
- the requirement to continue to send statements and notices to customers who have “gone away” i.e. moved address but not informed their lender, and deceased customers, in order to be able to enforce the agreements;
- the requirement to send statements and notices to customers where IVA or bankruptcy proceedings are in place; and
- the impact of the lifting of the financial limit on the marine finance industry.
We will be discussing all these issues in more detail with industry in the new year.
Transitional arrangements
Commencement of section 2
8. A number of mortgage lenders have raised concerns regarding the interaction of section 2 of the 2006 Act (the removal of the £25,000 financial limit) and section 82 of the 1974 Act (variation of contracts). Concerns have been raised in relation to contractual variations which take place after 6 April 2008 where the original contract which is varied was entered into prior to the commencement of the FSA regime for first charge residential mortgages, “M Day” (i.e. prior to 31st October 2004) and which, at the time it was entered into, was unregulated under the 1974 Act because the total borrowing exceeded the then financial limit of £25,000. Lenders are concerned that these previously unregulated agreements should not be brought into regulation under the 1974 Act where the variation concerned does not involve the provision of further credit, such as, rate switches, change to mortgage term, transfers of equity, change of repayment type from, for example, an interest only mortgage to a capital repayment. BERR is proposing to deal with this issue through a transitional provision in the fourth Commencement Order to the effect that the financial limits should continue to apply in respect of previously unregulated agreements varied in this way.
Section 82(2)
9. HM Treasury and BERR are currently consulting jointly on an amendment to section 82 using powers under the Financial Services and Markets Act 2000 (FSMA) which aims to rule out the possibility of dual regulation of regulated mortgage contracts (RMCs) under both FSMA and the 1974 Act. The proposal is to amend section 82 such that sections 82(2) and 82(3) are disapplied when a RMC which is currently exempt under section 16(6C) is modified by a later agreement. This measure is intended to remove the risk of dual regulation in the particular case where an exempt RMC is modified by a second agreement involving no new credit, for example, where a consumer wishes to change interest rates or their repayment period. As the law currently stands there is a risk that, in such circumstances, the full modified agreement could be brought into regulation under the 1974 Act with the original RMC still regulated under FSMA. The scale of this potential problem is currently very small. However, the lifting of the financial limit in April 2008 may put significantly more agreements at risk. HM Treasury and BERR therefore wish to ensure that their amending order will be in force by April 2008. The consultation is available at:
www.hm-treasury.gov.uk/media/4/5/consult_modifiedcreditagreements211107.pdf
The closing date for responses is 14 February 2008.
10. Lenders have also queried whether s82(2) should continue to apply where a previously unregulated agreement is varied by a later contract which does involve the provision of further credit, but which is itself exempt from regulation under section 16, 16A or 16B of the 1974 Act. BERR are currently considering this request and will shortly enter into discussions with the mortgage industry. We would welcome any views stakeholders may have on the costs and benefits of this suggested change. Please send your comments to CCA.06@berr.gsi.gov.uk by 31 January 2008.
Miscellaneous issues under consideration for possible transitional provisions
11. Industry has also raised a number of issues where transitional provisions might be needed. These include:
- issuing notices of sums in arrears for accounts applying daily interest;
- dispensing notices; and
- the period covered by the first statement under the new s77A.
We will be considering these issues in detail with industry early in the new year.
Further information on the Consumer Credit Act 2006
12. Either visit the BERR website or email CCA.06@berr.gsi.gov.uk