THE CONSUMER CREDIT SOURCEBOOK

Nazeer Chowdhury

RADICAL REVISION: THE CONSUMER CREDIT SOURCEBOOK

 

• The Consumer Credit Act 2006;

• The Consumer Credit Directive; and

• CONC

WHERE TO BEGIN?

 

Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544)

TABLE OF DESTINATIONS

CCA Provision

FSMA RAO

Summary/Comment

s.189(1) 60L(1) “Individual” has become “relevant recipient of credit”

8(1) 60B(3) The definition of credit agreement has not changed

9(1) 60L(1) Definition of credit 9(3) 60L(8) Hire-purchase agreement to be

treated as fixed sum credit under FSMA

10 60L(1) Running-account credit and fixed-sum credit

11 60L(1) and (2)

Restricted-use credit and unrestricted-use credit

12 60L(1) “debtor-creditor-supplier” is now “borrower-lender-supplier”

13 60L(1) “debtor-creditor” is now “borrower-lender”

14 - “credit-token” arrangements not carried forward: not relevant to the FSMA legislation

15 60N Consumer hire agreements

TABLE OF DESTINATIONS

CCA Provision

FSMA RAO

Summary/Comment

16(1) to (4) 60E(1) to (4) and (7)

Exempt agreements where lender is specified by FCA

16(5)(a) 60F Exemption by reference to number of payments

16(5)(b) 60G Exemption by reference to the total charge for credit

16(5)(c) 60C(8) to (10)

Exemption by reference to a country outside the UK

16(6) 60P Exemption for essential services 16(6A), (6B) 60E(5)

and (7) Exemption for housing authorities

16(6C) to (6E)

60C(2) Exemption for regulated mortgage contracts and home purchase plans

16A 60H and 60Q

FCA now deals with the declaration and statement for high net worth individuals

16B 60C(3) to (7)

FCA also deals with exemption for businesses

16C 60D Exemption relating to investment properties

EXAMPLE: BUSINESS EXEMPTION

• Section 16B has been swept away

• Replaced by 60C of the RAO

60C OF THE RAO

(3)     A credit agreement is an exempt agreement if—(a)     the lender provides the borrower with credit exceeding £25,000, and(b)     the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.(4)     A credit agreement is an exempt agreement if—(a)     the lender provides the borrower with credit of £25,000 or less,(b)     the agreement is entered into by the borrower wholly for the

purposes of a business carried on, or intended to be carried on, by the borrower, and(c)     the agreement is a green deal plan (within the meaning of

section 1 of the Energy Act 2011).

SECTION 60C OF THE RAO

(5)     For the purposes of paragraph (3), if an agreement includes a declaration which—(a)     is made by the borrower,(b)     provides that the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower, and(c)     complies with rules made by the FCA for the purpose of this article,the agreement is to be presumed to have been entered into by the borrower wholly or predominantly for the purposes specified in sub-paragraph (b) unless paragraph (6) applies.(6)     This paragraph applies if, when the agreement is entered into—(a)     the lender (or, if there is more than one lender, any of the lenders), or(b)     any person who has acted on behalf of the lender (or, if there is more than one lender, any of the lenders) in connection with the entering into of the agreement,knows or has reasonable cause to suspect that the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.(7)     Paragraphs (5) and (6) also apply for the purposes of paragraph (4) but with the omission of the words “or predominantly”.

AGREEMENTS FOR BUSINESS PURPOSES UNDER THE RAO

 • A credit agreement is exempt if the lender provides the borrower with

credit exceeding £25,000 provided that the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by him (s 60C(3) and (4) of RAO).

• A credit agreement is exempt if the lender provides the borrower with credit of £25,000 or less, the agreement is entered into by the borrower wholly for the purposes of a business carried on, or intended to be carried on, by the borrower, and the agreement is a green deal plan (within the meaning of section 1 of the Energy Act 2011) (s 60C(4) of RAO).

• An agreement is presumed to be wholly or predominantly for business purposes if it includes a declaration to that effect by the borrower, in a prescribed form, unless the lender knows or has reasonable cause to suspect that this is not the case (s 60C(5) of RAO).

WHAT ELSE HAS BEEN CHANGED BY THE RAO AND WHERE ARE THEY IN CONC?

CCA Provisions repealed CONC

43-47 on advertising CONC 3 Financial promotions

and communications with

customers

51 Prohibition of unsolicited

credit tokens

CONC 2.9 Prohibition of

unsolicited credit tokens

51A and 51B restrictions on

provision of credit card

cheques

CONC 2.3 Conduct of

business: lenders and

restrictions on provision of

credit card cheques

52(1) and 152 on quotations CONC 4 Pre-Contractual

requirements, particularly

CONC 4.1

55A on pre-contractual

explanations

CONC 4 Pre-Contractual

requirements, particularly

CONC 4.2-4.3

55B on assessment of

creditworthiness

CONC 5 Responsible lending

WHAT ELSE HAS BEEN CHANGED BY THE RAO AND WHERE ARE THEY IN CONC?

CCA Provisions repealed CONC

55C(5), 60(6) and 75A(7) on

declarations for business

purposes

CONC App 1.4.5 and CONC

App 1.4.8 (see also RAO 60C

(3) to (7))

81 on appropriation of

payments

CONC 6.4 Appropriation of

Payments

82A on assignment of rights CONC 6.5 Assignment of

rights

93 on the meaning of total

charge for credit

CONC App 1 Total charge for

credit rules

160A relating to credit

intermediaries

CONC 4.4 Pre-Contractual

requirements: credit brokers

and CONC 3.7 Financial

Promotions and

Communications: Credit

Brokers

 • The Consumer Credit(Conduct of Business)

(Credit References) Regulations 1977,SI 1977/330;

• The Advertisements Regulations, SI 199/2725, SI 2004/1484 and SI 2010/1970;

• The Total Charge for Credit; SI 1980/51 and SI 2010/1011.

• The Consumer Credit (Exempt Agreements) Order, SI 2007/1168 and SI 1989/869.

WHAT REGULATIONS OR ORDERS HAVE BEEN REVOKED?

CONTEXT OF THE SOURCEBOOK

 The FCA guidance (1.1.2 and 1.1.3) notes that:1.1.2 The purpose of CONC is to set out the detailed obligations that are specific to credit-related regulated activities and activities connected to those activities carried on by firms. These build on and add to the high-level obligations, for example, in PRIN, GEN and SYSC, and the requirements in or under the CCA.1.1.3 Firms are reminded that other parts of the FCA Handbook and PRA Handbook also apply to credit-related regulated activities. For example, the arrangements for supervising firms, including applicable reporting obligations, are described in the Supervision manual (SUP) and the detailed requirements for handling complaints are set out in the Dispute Resolution: Complaints sourcebook (DISP). The Client Assets sourcebook (CASS) also contains rules about client money that apply in certain circumstances.

PRINCIPLES FOR BUSINESS

Principle 1 (a firm must conduct its business with integrity); Principle 2 (a firm must conduct its business with due skill, care and diligence); Principle 3 (a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems); Principle 6 (a firm must pay due regard to the interests of its customers and treat them fairly);  Principle 7 (a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading);  Principle 9 (a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment);  Principle 10 (a firm must arrange adequate protection for clients' assets when it is responsible for them); and  Principle 11 (a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice). 

CONTROVENTION OF FSMA

A contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty (under s138D(2) of FSMA) 

CONC

 • CONC 1 Application and purpose and guidance on financial difficulties • CONC 2 Conduct of business standards: general • CONC 3 Financial promotions and communications with customers • CONC 4 Pre-contractual requirements • CONC 5 Responsible lending • CONC 6 Post contractual requirements • CONC 7 Arrears, default and recovery (including repossessions) • CONC 8 Debt advice • CONC 9 Credit reference agencies • CONC 10 Prudential rules for debt management firms • CONC 11 Cancellation • CONC 12 Requirements for firms with interim permission for credit-related regulated

activities • CONC 13 Guidance on the duty to give information under sections 77, 78 and 79 of the

Consumer Credit Act 1974 • CONC 14 Requirement in relation to agents • CONC 15 Second charge lending• CONC App 1 Total charge for credit rules

CONC 5 RESPONSIBLE LENDING

Section 55B of the CCA stated:

55B(1)Before making a regulated consumer credit agreement, other than an excluded agreement, the creditor must undertake an assessment of the creditworthiness of the debtor. (2)Before significantly increasing— (a)the amount of credit to be provided under a regulated consumer credit agreement, other than an excluded agreement, or (b)a credit limit for running-account credit under a regulated consumer credit agreement, other than an excluded agreement, the creditor must undertake an assessment of the debtor's creditworthiness. 

CONC 5 RESPONSIBLE LENDING

(3) A creditworthiness assessment must be based on sufficient information obtained from— (a) the debtor, where appropriate, and (b) a credit reference agency, where necessary… (4) For the purposes of this section an agreement is an excluded agreement if it is— (a) an agreement secured on land, or (b) an agreement under which a person takes an article in pawn.]

CONC 5.2.1 r(3)

 

Rule (3) A creditworthiness assessment must be based on sufficient information obtained from:(a) the customer, where appropriate; and (b) a credit reference agency, where necessary.

FURTHER DETAIL UNDER CONC

(1) In making the creditworthiness assessment or the assessment required by CONC 5.2.2 R (1), a firm should take into account more than assessing the customer's ability to repay the credit.

 (2) The creditworthiness assessment and the assessment required by CONC 5.2.2 R (1) should include the firm taking reasonable steps to assess the customer's ability to meet repayments under a regulated credit agreement in a sustainable manner without the customer incurring financial difficulties or experiencing significant adverse consequences.

 (3) A firm in making its creditworthiness assessment or the assessment required by CONC 5.2.2 R (1) may take into account future increases in income or future decreases in expenditure, where there is appropriate evidence of the change and the repayments are expected to be sustainable in the light of the change.

 

FURTHER DETAIL UNDER CONC

 (4) If a firm takes income or expenditure into account in its creditworthiness assessment or its assessment required under CONC 5.2.2 R (1):(a) the firm should take account of actual current income or expenditure and reasonably expected future income or expenditure (to the extent it is proportionate to do so) where it is reasonably foreseeable that it will differ from actual current income or expenditure over the anticipated repayment period of the agreement; (b) it is not generally sufficient for a firm to rely solely for its assessment of the customer's income and expenditure, on a statement of those matters made by the customer; (c) its assessment should be based on what the firm knows at the time of the assessment.

 (5) An example of where it may be reasonable to take into account expected future income would be, in the case of loans to fund the provision of further or higher education, provided that an appropriate assessment required by this chapter is carried out and there is an appropriate exercise of forbearance in respect of initial repayments, for example, deferring or limiting the obligation to repay until the customer's income has reached a specified level. Any assumptions regarding future income should be reasonable and capable of substantiation in the individual case and the products should be designed in a way to minimise the risks to the customer.

 

FURTHER DETAIL UNDER CONC

(11) Where a firm requests information from a customer for its creditworthiness assessment or its assessment required by CONC 5.2.2 R (1) and the information provided by the customer is false and the firm has no reason to know this is the case, the firm should not contravene CONC 5.2.1 R or CONC 5.2.2 R.

CONCLUSION

–Print off the RAO (as amended) and CONC.–Refer back to the handout setting out the Table of Destinations

Henderson Chambers2 Harcourt Buildings

TempleLondon EC4Y 9DB

Tel: 020 7583 9020clerks@hendersonchambers.co.uk

www.hendersonchambers.co.uk

©

Nazeer Chowdhury 29th May 2014

Nazeer Chowdhury and Rachel Tandy 2014