Consumer credit - brave new world? - 2nd October 2006

Practitioners, Judges and Consumers alike have long felt our existing Consumer Credit legislation needed a radical overhaul. We now have new legislation: the Consumer Credit Act 2006. December 2003’s White Paper said it was “intended to establish a fair, clear and competitive... consumer credit market in the 21st century”. So what are the initial signs? They are not good.

The central tenet of the 2006 Act is to achieve fairness for debtors and hirers alike. It sets out to do this by removing financial limits on regulated agreements, by rewriting agreements where there is an “unfair relationship” between creditor and debtor i.e. to the detriment of the debtor and it also seeks to provide a free scheme for resolving disputes, by reference to the Financial Ombudsman Service.

But….the Act does not define “unfair relationship”. There is no set list of unfair practices. That may have been intentional, so as to ensure the legislation could move with the times or did not outlaw conduct in one situation, that might be perfectly acceptable in another.

When seeking to define an “unfair relationship”, the Courts will doubtless look at other similar legislation - for instance the 1999 Unfair Terms Regulations and the 2005 Unfair Commercial Practices Directive. The criteria to be applied by the Courts may be, whether the creditors’ conduct, if contrary to good faith or generally accepted standards and market practice, has had an effect upon the debtors’ ability to make an informed decision, i.e. as to whether or not to sign the agreement.

If there was a particular characteristic or peculiarity of the debtor, of which the creditor was aware - a vulnerability - that would work in favour of establishing an unfair relationship. There a creditor would have to work hard to satisfy the Court that the debtor understood his options and obligations.

The 2006 Act does not define “charges” when considering the total charge for credit. Nor is there a definition of a duty not to lend irresponsibly. No limit on interest rate has been imposed. The method of calculating and applying interest - apart from on default charges – is not outlined.

In conclusion, there are some serious uncertainties in this new legislation. There is a concern that when looking at agreements and judging them by reference to the 2006 Act, the Courts may well seek to encourage businesses who are seeking to develop new products and expand their marketplace, by maximising their profits. The 2006 Act may well prove to be business-friendly rather than consumer-friendly.

Creditors who express themselves clearly in their advertising and in their agreements, and who otherwise keep their customers informed, are much less likely to fall foul of this Act – and the OFT. In that respect, although this may well be a simplification of existing legislation, it is certainly not a fortification. Nor, sadly, is it any form of - long overdue - clarification.