The provision of credit and the supply of goods on hire or purchase to individuals (including sole traders and partnerships of three or fewer people) in the UK is regulated by the Consumer Credit Act 1974. The ambit of the Act is wide ranging, encompassing not only agreements for cash loans but every form of agreement involving credit (including hire agreements). The scope of the Act has recently been extended by the removal of the financial ceiling of £25,000, with the effect that all agreements by which a creditor provides a debtor with credit of any amount, are now regulated, unless specifically exempted. Recent changes have also introduced more comprehensive rights for debtors whilst imposing extra burdens on creditors.
In light of the greater protection now afforded to debtors as well as the current difficult economic climate, it is becoming increasingly important for creditors to ensure that regulated agreements are correctly identified as such and drafted in accordance with the mandatory provisions of the legislation; otherwise they risk being unenforceable by the creditor. This article examines some of the key issues to consider when drafting consumer credit agreements; issues that may arise during the term of a consumer credit agreement; the most important recent changes; and the consequences of noncompliance with the legislation.
Drafting The Agreement
The form and content of regulated consumer credit agreements are prescribed by statutory instrument. In particular, all regulated consumer credit agreements and consumer hire agreements must contain prescribed financial and other information, which must be set out in a particular order. Failure to comply can result in an agreement being unenforceable against a debtor.
The specific form and prescribed contents vary depending upon the category into which the agreement falls and it is therefore essential to establish from the outset precisely what agreement is being drafted. The following questions need to be answered before any consumer credit agreement is drafted:
- does the agreement relate to running account or fixed sum credit?
- will the credit provided be free to use as the debtor chooses?
- will the credit provided be used to finance the supply of particular goods or services?
- where and how will the agreement be executed?
Cancellable Agreements
A cancellable agreement is an agreement which is cancellable by the debtor, or hirer, within a stipulated period. Broadly speaking, a regulated credit agreement is cancellable under the 1974 Act where the agreement is entered into following face to face oral representations between the debtor and creditor, credit broker or supplier and the agreement is signed away from the business premises of the creditor.
It is important to correctly identify whether an agreement is cancellable or non-cancellable. This is because regulations require prescribed cancellation notices to be included in all copies of cancellable agreements provided to the debtor. Previously, the failure of an agreement to include the correct cancellation notices rendered such agreement irredeemably unenforceable. Although this provision has been repealed in relation to agreements entered into after April 2008, an order from the Court will still be needed in order to enforce an agreement which fails to include the requisite cancellation notice.
Formalities
Pre-contract information must be provided to a customer before a regulated agreement is signed. This information essentially mirrors the information contained in the main body of the consumer credit agreement itself, excluding the signature box. Most creditors choose to give the pre-contract information and statements in an identical form to the information and statements given in the actual agreement.
The agreement itself is executed only when it has been signed by both parties. It is common for an agreement to be signed by the parties at different times and many creditors proceed with credit checks prior to signing a consumer credit agreement. In the event that a creditor does not sign an agreement at the same time as (or before) the debtor, the Act stipulates that a copy of the unexecuted agreement (signed by only the debtor) must be provided to the debtor immediately. A further executed copy (signed by both parties) must then be sent to the debtor within 7 days of the making of the agreement. Similar rules apply when an agreement is sent to the debtor for signature.
If however, the creditor and debtor sign the agreement on the same occasion, just one copy of the executed agreement must be provided to the debtor. Following execution, creditors are required to provide debtors with post contract information, the scope of which has recently been extended.
Modifying Consumer Credit Agreements
It is perfectly feasible that, during the course of a consumer credit agreement, one or more of the parties may wish to modify the terms of the agreement. Indeed, both unilateral variation and mutual variation of a consumer credit agreement are provided for in the Act.
Unilateral variation of an agreement most commonly occurs where a creditor varies a regulated agreement under a power contained in the agreement, for example by varying the applicable interest rate in accordance with a contractual provision allowing it to do so. Creditors should however always be wary about relying on a general power contained within an agreement to vary any term of an agreement unilaterally. Under the Unfair Terms in Consumer Contracts Regulations 1999 such a term may be regarded as unfair.
Mutual variation relates to a situation where the parties, some time after first entering into the agreement, jointly agree to vary or add to its terms in some way (a 'modifying agreement'), for example by providing for a further advance under a fixed sum loan agreement. The 1974 Act provides that such a situation must be treated, for the purposes of the Act, as a revocation of the old agreement and the making of a new 'modifying agreement'.
Secondary legislation prescribes the form and content of modifying agreements and is just as strict and onerous as the regulations which govern the form and content of completely new regulated agreements. Moreover, given that a modifying agreement is treated as a revocation of the earlier agreement, it is just as important that the provisions are complied with. Failure to comply could result in a situation whereby an earlier agreement has been varied (and therefore revoked for the purposes of the Act) by a modifying agreement but the modifying agreement is itself unenforceable because it does not comply with the prescribed form.
In light of this, it is often preferable to avoid entering into a modifying agreement where it is possible instead to enter into a completely new regulated agreement.
Unfair Relationships
A new concept of 'unfair relationships' was introduced by the Consumer Credit Act 2006. The new unfair relationships provisions, which have retrospective effect, repeal and replace sections in the 1974 Act that deal with extortionate credit bargains. They empower a court to make an order that a relationship between a creditor and debtor arising out of a consumer credit agreement is unfair because of one or more of the following (having regard to all matters that it thinks relevant):
- any of the terms of the agreement or of any related agreement;
- the way in which the creditor has exercised or enforced any of his rights under agreement or related agreement; or
- any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).
If a court determines that an unfair relationship has arisen, it has very wide powers in relation to the agreement, including the right to change the agreement; to require a creditor to repay any sum paid by the debtor; and to reduce and even discharge any sum payable by the debtor.
he concept has been criticised for being drafted too widely and for being unfair to creditors. There are concerns that the provisions could result in courts intervening and rewriting consumer credit agreements in a wide variety of situations and that the concept introduces an element of legal uncertainty to consumer credit agreements.
The unfair relationships concept has only been applicable to all regulated agreements since 6 April 2008 and we are yet to see exactly how widely the courts will interpret the provisions or what creditors will need to do to ensure that customers are treated fairly.
Key Conclusions
The legal regime that governs consumer credit in the UK is complex and highly prescriptive. It encompasses a plethora of different types of agreements and imposes obligations on creditors which begin prior to the execution and continue throughout the duration of an agreement extending to its point of termination or cessation. It is therefore imperative that consumer credit agreements are carefully drafted and existing agreements regularly reviewed. The smallest change in circumstances can necessitate the drafting of a very different document.
It is always advisable to consult a lawyer before drafting a new consumer credit agreement and/or a modifying agreement or if you have any concerns about the enforceability of existing agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
