Consumer Credit

Law and Practice

Alexander Hill-Smith

• Publisher: Informa Law from Routledge
• Year: 2015
• ISBN:
  9781317697022
• Edition: 2
• Topic: Jura
• Subtopic: Rechtstheorie & -praxis

The field of consumer credit law has undergone major and fundamental change in the recent past, due in part to the regulation since 1 April 2014 of consumer credit by the Financial Conduct Authority, and this book provides a clear and complete guide to this difficult area of law.

Fully updated for the second edition, the author considers new developments including:

the new authorisation process under the Financial Services and Markets Act 2000, including the interim permission regime, and its consequences; the new regime for financial promotions as applied to credit and hire advertising; the new rules controlling high cost short term lending and peer to peer lending; the new provisions of the recently released Consumer Credit Sourcebook (CONC); the new requirements governing mortgage lending as contained in MCOB; the requirements for distance selling and off-premises contracts as applied to consumer credit and consumer hire including the impact of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013; the jurisdiction of the financial ombudsman service on consumer credit. Also considered is the recent case law on the powerful unfair relationships jurisdiction.

This comprehensive and practical guide is essential reading for legal practitioners, finance houses, credit reference agencies and retail organisations.

1 Key concepts in consumer credit law

DOI: 10.4324/9781315778624-1

Credit

1. The key concept underlying the whole law of consumer credit is of course that of credit. It is not so much defined but elucidated in section 9(1) of the Consumer Credit Act 1974 as including ‘a cash loan and any other form of financial accommodation’.
2. A credit agreement is one under which the lender agrees to provide credit to the borrower. The Consumer Credit Act 1974 describes the parties to the credit agreement as creditor and debtor but the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001,¹ the RAO, refers to the parties as borrower and lender. This is the preferred modern terminology that will be utilised here. Whether any particular agreement is to be classified as a credit agreement is a question to be decided by reference to the circumstances at the date of the agreement.² Moreover, the court, in deciding whether an agreement involves the provision of credit, will not be confined to the literal wording of the agreement but will consider its essential nature.³
3. Central to the concept is the entitlement to deferment of payment that would otherwise fall due. This was explained by the Court of Appeal in Dimond v Lovell,⁴ where Lord Justice Scott said at [54]: ‘If payment for goods of services or land is deferred after the time when, if nothing about payments had been agreed, the payment would be due, the payer is being given credit.’
4. Moreover, the deferment must be a matter of contractual entitlement, not mere forbearance on the part of the lender. This was a point made by Professor Goode in his Consumer Credit Legislation in a passage approved by Lord Justice Scott.⁵
5. In the Dimond case, the hire company supplied cars on hire to victims following a road traffic accident, but under the relevant agreement, payment for the hire did not become due until finalisation of the accident claim. The relevant agreement was found to be a credit agreement as well as a hire agreement. Lord Hoffman, in the House of Lords, said: ‘The only obligation of the [hire company] under the agreement was to provide the vehicle. In the absence of credit, it would have been entitled to payment during or at the end of the hire. All the provisions about pursuit of the claim were express or implied conditions and therefore constituted the granting of credit.’⁶
6. Deferment will not always be easy to ascertain; Lord Hobhouse, in Dimond v Lovell, said that the test would not ‘always be a satisfactory one to apply’.⁷
7. Where the operation of the agreement may or may not give rise to a debit balance, the court is unlikely to find that it gives rise to the provision of credit. In Nejad v City Index Ltd,⁸ Mr Nejad was a customer of City Index with whom he had a credit account. Mr Nejad was entitled to bet on movements of various financial indices and could continue to do so up to the time when his financial exposure as a result of the bets undertaken was up to the limit set on what was described as his credit account. The court rejected an argument on behalf of Mr Nejad that this was a credit agreement as the financial position of Mr Nejad could not be ascertained until the closing of the individual bets, at which time there might or might not be a balance owning by Mr Nejad. Put shortly, the agreement did not give rise to any deferment of an existing liability. The significance of the credit account was that Mr Nejad was not required to put up financial security to cover his financial position but this in itself was not the grant of credit.
8. Likewise, an advance payment for services to be performed in the future is not the grant of credit in that it does not involve the deferment of an obligation to pay. So payment of advance commission was held not to be credit in the employment case of McMillan Williams v Range.⁹ However, it was an important factor in that case that the parties hoped and believed that the amount advanced would be covered by the commission to be earned in due course. It might have been different if the amount of the advance was in excess of what the parties could reasonably have expected the employee to earn in due course.
9. Section 9(3) caters for the case of a hire purchase transaction. The amount of credit is the total price of the goods (i.e. the total amount payable under the agreement including the option to purchase)¹⁰ less the deposit and the other items entering into the total charge for credit. Doubtless this provision is intended to prevent an argument that because a hire purchase agreement is framed as a hire agreement it could not be a credit agreement.
10. Section 9(4) reflects the fundamental concept that credit involves financial assistance to the debtor, not the charges and expenses he or she incurs for the credit.¹¹ It provides that: ‘For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment.’ In relation to any particular credit agreement, it is necessary to consider the total charge for credit rules made by the FCA under Article 60M of the RAO¹² in order to differentiate between an item that forms part of the credit or conversely is part of the total charge for credit. Merely because the credit agreement provides for interest to be charged on an item does not mean that the item forms part of the credit.¹³
11. In deciding whether a particular item is part of the credit, the terms of the agreement, although relevant, are not determinative: ‘The Court must consider all the circumstances including the documents relating to the agreement and may well have to ascertain objectively the purpose of the borrowing.’¹⁴
12. Credit provided in a currency other than sterling is to be treated as provided in sterling of an equivalent amount.¹⁵

Consumer credit agreement

1. A consumer credit agreement is an agreement concluded between a lender and the borrower, being an individual for the provision of credit of any amount.¹⁶ It embraces both regulated agreements and exempt agreements for the purposes of the Regulated Activities Order. The 1974 Act uses the terms ‘creditor’ and ‘debtor’, and not ‘lender’ and ‘borrower’, but the Regulated Activities Order uses the latter terminology so those terms will be used here.
2. At the time of the coming into force of the Consumer Credit Act 2006, the definition of ‘consumer credit agreement’ limited such agreements to those in which the amount of credit did not exceed £25,000.¹⁷ However, this definition led to difficulties as the calculation of the amount of credit was not always straightforward, depending in some circumstances on whether an item did or did not form part of the total charge for credit, and whether or not an agreement was or was not a multiple agreement. The removal of the financial ceiling by the 2006 Act thankfully largely removed this area of controversy. The financial ceiling was lifted from credit agreements concluded after 6 April 2008.¹⁸ However, an exception was made for a certain category of ‘relevant agreements’ as defined in the relevant Commencement Order where the applicable date was 31 October 2008.¹⁹ A relevant agreement is one secured by land mortgage on overseas property, or one secured on property in the United Kingdom where less than 40 per cent of the land is used in connection with a dwelling.²⁰

The definition of ‘creditor'

1. The lender with whom the consumer credit agreement is concluded can of course be either an individual or body corporate; in fact, the latter is more common. By virtue of section 189 of the Act, the term also includes an assignee of the lender. The definition provides that ‘unless the context otherwise requires, “creditor” means the person, providing credit under a consumer credit agreement or the person to whom his rights and duties under the agreement have passed by assignment or operation of law, and in relation to a prospective consumer credit agreement, includes the prospective creditor’.
2. In Jones v Link Financial Ltd,²¹ the original lender had assigned the benefit of a debt accruing under a loan agreement to Link Financial, who duly gave notice of the assignment of the debt to the borrower. Link Financial then took proceedings on the debt. In defence, the borrower contended that Link Financial was not a creditor for the purposes of this definition since, it was argued, Link Financial had not taken an assignment of any duties owed by the lender under the loan agreement. Therefore, it was said, Link Financial could not recover the debt from the borrower. This argument was rejected since Link Financial had taken on the obligations necessary to be fulfilled in connection with recovery of the debt (for instance, service of a default notice) and was therefore a creditor for the purposes of the definition.

The borrower

1. The borrower under a consumer credit agreement must be an individual. Credit agreements concluded with borrowers who are not individuals are entirely outside the ambit of the Act.
2. The natural meaning of the term ‘individual’ is that of a natural person but it has an extended meaning under the Consumer Credit Act 1974. It can of course include an agreement concluded with more than one individual and this situation is catered for by section 185 of the Act.
3. The term ‘individual’ is defined by section 189(1) to include a partnership of two or three persons, provided that not all of the partners are bodies corporate. It can also include an unincorporated association provided that not all of the members of the unincorporated association are bodies corporate. This definition was introduced by the Consumer Credit Act 2006 and is the same definition as is found in the RAO.
4. An agreement entered into with an individual and a body corporate is a consumer credit agreement and the body corporate is treated as an individual for the purposes of the Act.²² Where an agreement is entered into with more than one individual, anything to be done in relation to an individual has to be done in relation to each of them.²³
5. What is important for the purpose of the definit...