Amid the interest generated by this year’s first Treating Customers Fairly deadline, it may have been easy for busy brokers to ignore the changes to the Consumer Credit Act that come into force on April 6 – less than a week away.
While the mortgage market continues to suffer funding difficulties, many brokers are looking to diversify their income streams. Secured second charge loans offer them fresh opportunities, although no sector is immune from the ongoing liquidity problems.
And in a week’s time, the landscape for secured and unsecured personal loans will have changed thanks to the CCA. Everyone in the industry needs to be aware of what the changes are, how they affect mortgage and secured loan brokers and what’s going to happen next.
Before looking at the current changes, it’s worthwhile reviewing the reasons for updating the act. In July 2001, Patricia Hewitt, the then secretary of state for trade and industry, announced a review of the 1974 CCA.
This was followed in December 2003 by a White Paper called Fair, clear and competitive – the consumer credit market in the 21st century, together with a plan to tackle overindebtedness. Eventually, the CCA 2006 received royal assent on March 30 that year.
A number of changes to the act were implemented in April 2007, including redefining the individuals who are entitled to protection under the act as individual borrowers, partnerships of not more than three partners, sole traders and unincorporated associations.
A new consumer credit jurisdiction was added to the Financial Ombudsman Service’s mandate, allowing consumer credit customers to take complaints to the FOS if they complain to credit suppliers and do not receive a satisfactory response.
New conditions regarding the exemption of high net worth clients and greater discretion for the courts to enforce invalidly executed agreements were also introduced.
In April 2007, an unfair relationships test replaced the old extortionate credit bargain rules. This test applies to all new consumer lending, not just deals regulated by the act, except mortgage contracts regulated by the Financial Services Authority. This provision will enable the courts to make orders that the relationship between debtors and creditors is unfair and is designed to offer beefed up protection for consumers.
Going back to TCF for a moment, it now applies across all non-FSA regulated consumer credit as well as first charge mortgages.
Moving on to the 2008 changes, the removal of the top loan limit regulated by the CCA – formerly £25,000 – is viewed as the most significant change as it means all consumer loans will be regulated by the act irrespective of size.
There are also new post-contract transparency requirements for lenders to provide statements and information to borrowers, and interest on default sums must be restricted to simple interest.
After the act comes into force, more companies’ activities will need consumer credit licences, including debt administration and credit information services.
Perhaps the least discussed but most important change for brokers who wish to obtain or renew their CCL is the test the OFT will apply to gauge the fitness of applicants to hold the licences.
The CCA requires the OFT to publish guidance on fitness and this 32-page document can be downloaded from the department’s website.
When considering fitness, the OFT will take account of any past misconduct, the skills and knowledge of the staff involved and the practices and procedures proposed for the applicants’ businesses.
Applying the now familiar risk-based approach, the OFT will scrutinise higher risk applications more carefully. This scrutiny will focus on evidence that raises doubts, together with business activities that have greater potential for consumer detriment.
If you think this is starting to look like double regulation for some brokers, this issue has been addressed by a joint consultation organised by the Treasury and the Department for Business Enterprise and Regulatory Reform. The consultation period recently closed but I’ll return to the subject once the results have been published.