New CCA tightens up secured loans

Kevin Paterson takes a weekly look at the latest developments in the market and brings you what’s hot and what’s not in the world of mortgages

Secured loans are about to become more attractive to brokers and consumers. A quiet revolution has been under way in the past 12 months and is set to intensify thanks to new legislation coming into force next month.

Secured loans have long been seen as the poor relation of the mortgage market, sitting on the edge of regulation and predominantly targeted at clients with little equity or poor credit records. For these borrowers remortgaging is either too costly or unavailable. But brokers who have embraced secured loans as an extra string to their bow have found they can be lucrative.

In the past, a largely ineffective Consumer Credit Act offered little protection to consumers taking out secured loans. As a result, the sector became the stomping ground of unscrupulous brokers who took advantage of their clients.

These unprincipled brokers foisted high arrangement fees, chunky interest rates and hefty redemption penalties on their clients, but all this is about to change.

From April 6, the Consumer Credit Act 2006 comes into force. Stopping short of full Financial Services Authority regulation, the updated CCA seeks to tighten up the secured loans market.

A major change is the removal of the previous ceiling for credit agreements covered by the CCA. All will now be covered so there will be no more £25,001 loans to circumvent the act by breaching its ceiling.

The new legislation has been a long time coming. After all, the 34 year old CCA desperately needed a makeover. Besides the removal of the £25,000 ceiling the act also features an unfair relationships test.

This sounds ambiguous for good reason. It has been designed to give the courts the widest possible remit when assessing whether agreements fail the test. It replaces the current extortionate credit bargains test, which has been difficult to enforce.

The types of issue the courts may look at when considering if agreements fail the test could include their terms and the way in which they’re operated by creditors. They may also consider previous deals that were consolidated into new agreements. Crucially, this element of the legislation will be retrospective.

A big fear is that claims management companies are lining up to pursue claims based on this, the vaguest part of the CCA. And because it is retrospective, many firms could be caught out even if they tighten their criteria and operating practices to comply with the new rules.

Last year’s Hurstanger versus Wilson case brought commission disclosure to the fore. Many brokers disclosed commission anyway but because there had been a lack of en- forcement most did not disclose fees.

So it doesn’t require a huge leap of the imagination to see this being one of the unfair relationship tests that could be claimed as an influence on clients’ decisions to take out secured loans in the first place.

On a positive note, the revamped CCA makes secured loans more attractive to borrowers because of its banning of the hefty redemption penalties lenders used to charge.

They will now be allowed to charge a maximum of one month’s interest and one month’s notice. This makes secured loans more acceptable as an alternative to remortgaging in the right circumstances.

The CCA also features an increased obligation on lenders to provide borrowers with more information, especially when it comes to enforcing agreements, claiming interest on arrears and imposing penalties on defaults.

The Office of Fair Trading will also have increased powers when granting licences. These permits were largely waved through in the past but the OFT will now apply a tougher fitness test to licence applications, allowing it to consider past conduct and the future suitability of applicants too. There will also be a greater onus on firms to disclose material details.

Licences can be granted for indefinite periods, removing the need to reapply. This comes with additional OFT powers to impose special conditions on licensees if consumers are at risk. It might not be full regulation but the revamped CCA is a significant improvement on its predecessor and brings secured loans into the limelight at last.