UK implementation of the Consumer Credit Directive | Practical Law

UK implementation of the Consumer Credit Directive | Practical Law

In this article, Ian Roberts and Brett Hillis, partners in SNR Denton LLP's Banking and Finance department, assess the key changes to the UK consumer credit regime that are likely to result from implementation of the Consumer Credit Directive (2008/48/EC) (CCD).

UK implementation of the Consumer Credit Directive

Practical Law UK Articles 1-386-4264 (Approx. 10 pages)

UK implementation of the Consumer Credit Directive

by SNR Denton LLP
Law stated as at 12 Jan 2011 • European Union, United Kingdom
In this article, Ian Roberts and Brett Hillis, partners in SNR Denton LLP's Banking and Finance department, assess the key changes to the UK consumer credit regime that are likely to result from implementation of the Consumer Credit Directive (2008/48/EC) (CCD).
The CCD is designed to harmonise the regulation of consumer credit across Europe and to increase consumer protection. Member states must transpose the CCD by 11 June 2010. However, affected UK businesses have until 31 January 2011 to comply with the new requirements.
Any business currently covered by, or exempt from, UK consumer credit legislation needs to assess what effect these changes will have on it.

Introduction and background

The UK consumer credit regime

The Consumer Credit Act 1974 (CCA) is the main piece of legislation regulating lending and credit related activities in the UK. It also covers some hire agreements. It implements the first Consumer Credit Directive (87/102/EEC) (First CCD), and the two later amending Directives (90/88/EC and 98/7/EEC), in the UK, but goes well beyond the requirements in those Directives.
For more information on the CCA, see Practice note, Consumer credit resources.

The Consumer Credit Directive

After lengthy negotiations, the new Consumer Credit Directive (2008/48/EC) (CCD) was adopted at European level in April 2008, and was published in the Official Journal of the European Union on 22 May 2008. The CCD, which repeals the First CCD, must be transposed by member states into national law by 11 June 2010.
The CCD adapts the European consumer credit regime so it is able to deal with modern forms of credit. It is also designed to bring a greater level of harmonisation to the regulation of consumer credit across Europe, and to increase consumer protection. The CCD is a maximum harmonisation directive, which means that the UK authorities cannot maintain or introduce national laws or regulations diverging from its provisions, unless expressly permitted.

Consultation and implementation of the CCD in the UK

In April 2009, the Department for Business Enterprise and Regulatory Reform (BERR), (which has since been replaced by the Department for Business, Innovation and Skills (BIS)), published a consultation seeking comments on its proposals for implementing the CCD into UK law.
The specific provisions BIS focused on in the consultation (in Section C) are identified in the table below.
CCD provision
Subject
Article 4
Standard information to be included in advertising
Article 5
Pre-contractual information
Article 5.6
Adequate explanations
Article 8
Creditworthiness
Article 9
Database access
Article 10
Contractual information
Article 11
Information concerning the borrowing rate
Article 13
Open-ended credit agreement
Article 14
Right of withdrawal
Article 15
Linked credit agreements
Article 16
Early repayment
Article 17
Assignment of rights
Article 19
APR calculations
Article 20
Regulation of creditors
Article 21
Credit intermediaries
BIS shortened the usual twelve-week consultation period and invited comments on the consultation until 10 June 2009, so it could make the necessary implementing regulations as soon as possible. It wants to give lenders as much time as possible to prepare for the new regime.
Various industry bodies responded to the consultation, including the following:
BIS published the Government's response to the consultation in December 2009. It also published draft implementing regulations in October 2009. However, it advised at that time that the draft regulations may be subject to change before final versions are published.
In January 2010, BIS confirmed that it planned to lay the implementing regulations in March 2010, and advised that the draft regulations that were before Parliament at that time would change. It published a summary of how it was dealing with comments received on the October 2009 drafts, together with some changes it had already planned. BIS also published a new version of examples for early repayment and the Standard European Consumer Credit Information (SECCI) (for more information on the SECCI, see What is the Standard European Consumer Credit Information form?).
On 30 March 2010, BIS issued a press release announcing that the implementing regulations have been made and laid before Parliament. The following regulations were published on the website of the Office for Public Sector Information (OPSI) on 1 April 2010:
  • The Consumer Credit (EU Directive) Regulations 2010 (SI 2010/1010) (EU Directive Regulations). These regulations make a number of amendments to the CCA and associated secondary legislation. The majority of these regulations come into force on 1 February 2011, with a small number coming into force on 30 April 2010 as set out in regulation 99. However, the regulations may apply to certain agreements before 1st February 2011 where conditions A to E in regulation 101 are satisfied.
  • The Consumer Credit (Total Charge for Credit) Regulations 2010 (SI 2010/1011). These regulations come into force on 1st February 2011 or, for prospective or actual regulated consumer credit agreements, at an earlier time and date when Parts 1 to 3 of the EU Directive Regulations apply to such an agreement.
  • The Consumer Credit (Advertisements) Regulations 2010 (SI 2010/1012). These regulations come into force on 1st February 2011.
  • The Consumer Credit (Disclosure of Information) Regulations 2010 (SI 2010/1013). These regulations come into force on 30th April 2010.
  • The Consumer Credit (Agreements) Regulations 2010 (SI 2010/1014). These regulations come into force on 1 February 2011 or, for regulated consumer credit agreements, at an earlier time and date when Parts 1 to 3 of the EU Directive Regulations apply to such an agreement.
The key changes that have been made to the existing regime under the CCA are outlined in section 7 of the explanatory memorandum which has been published alongside the regulations. The explanatory memorandum includes a transposition note in Annex B which sets out the objective of each article of the CCD and how it is to be implemented in the UK.
In recognition of the increased pressure on lenders to prepare for CCD implementation by 11 June 2010 (due to the delay in laying the implementing regulations), BIS decided to introduce a transitional period for compliance with the new requirements. The regulations came into effect from 1 February 2011 and lenders had from 30 April 2010 until 31 January 2011 to comply with them. This meant that those lenders that were in a position to start using the new provisions could do so from 30 April 2010. BIS encouraged lenders to start giving the new consumer rights under the regulations as early as possible during the transitional period. Any agreement signed after 1 February 2011 must comply with the new requirements.
In August 2010, the following new regulations were published on the legislation.gov.uk website:
  • The Consumer Credit (Amendment) Regulations 2010 (SI 2010/1969) (Amendment Regulations), together with an explanatory memorandum. The Amendment Regulations were made on 3 August 2010 and will come into force on 26 August 2010. They make amendments to three of the five sets of implementing regulations) (that is, SI 2010/1010, SI 1010/1013 and SI 2010/1014) to correct drafting errors. As indicated above, lenders were able to start complying with these implementing regulations from 30 April 2010, although they do not have to comply until 1 February 2011. The Amendment Regulations make amendments to the implementing regulations before lenders have to comply with them. However, as some lenders may have chosen to comply with these implementing regulations early, the Amendment Regulations include transitional provisions (regulation 46).
    The Amendment Regulations also make consequential amendments to the Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553) and the Consumer Credit (Cancellation Notices and Copies of Documents) Regulations 1983 (SI 1983/1557).
  • The Consumer Credit (Advertisements) Regulations 2010 (SI 2010/1970) (Advertisements Regulations), together with an explanatory memorandum. The Advertisements Regulations were made on 3 August 2010 and will come into force on 1 February 2011. They revoke and replace the Consumer Credit (Advertisements) Regulations 2010 (SI 2010/1012), which partly implement the CCD in relation to the form and content of advertisements that relate to the provision of credit. The regulations being replaced were due to come into force on 1 February 2010. The Advertisements Regulations address certain drafting defects.
The explanatory memoranda explain that both the Amendment Regulations and the Advertisements Regulations make no changes to the policy of the earlier implementing regulations they are amending or replacing. This is why there has been no formal consultation on the changes that have been made. They also state that the OFT may publish further guidance for creditors on its approach to enforcement of the implementing regulations, as amended by the latest Regulations.
BIS published guidance on the implementing regulations in August 2010, and plans to review this guidance every 24 months.
On 11 January 2011, the Consumer Credit (Amendment) Regulations 2011 (SI 2011/11) were published on the legislation.gov.uk website, together with an explanatory memorandum. These Regulations amend drafting errors in the implementing regulations (that is, SI 2010/1010, SI 2010/1011 and SI 2010/1013).
The sections below assess the key changes to the CCA that are likely to result from implementation of the CCD.

What new requirements does the CCD impose into UK consumer credit law?

The CCD contains some requirements which are substantially new to UK law. These include:
  • A duty on the lender to provide adequate explanations about the credit on offer to the consumer (articles 4, 5 and 6, CCD).
  • An obligation on the lender to check creditworthiness before offering or increasing credit (article 8, CCD).
  • Requirements concerning credit reference databases (article 9, CCD).
  • A right for consumers to withdraw from a credit agreement within fourteen days without giving any reason (article 14, CCD).
  • Requirements to inform consumers when debts are sold on (article 17, CCD).
  • Requirements for credit intermediaries to disclose fees and links to creditors (article 21, CCD).

Are any agreements regulated under the CCA but outside the scope of the CCD?

In some respects, the CCA is wider than the CCD. In particular, the CCD will not cover the following types of agreement regulated under the CCA (known as "out-of-scope" agreements):
  • Lending to small businesses, partnerships and unincorporated bodies.
  • Loans below EUR 200 (which has been set at £160).
  • Loans above EUR 75,000 (which has been set at £60,260).
  • Second charge mortgages.
  • Hire purchase agreements (although it would appear that conditional sale agreements are within scope).
  • Credit with no interest or other charges, and repayable within three months with no interest and no, or only insignificant, charges.
  • Consumer hire agreements.

What approach will be taken to "out-of-scope" agreements?

BIS is applying a case-by-case approach to whether or not to apply specific provisions within the CCD to "out-of-scope" agreements.
Where it would be complex to apply the changes the CCD requires to some agreements while leaving others outside the scope subject to existing UK rules, BIS will give lenders a choice to either comply with the existing UK requirements or comply with the new requirements of the CCD.

What about business lending?

Although the CCD does not cover any business lending, BIS proposes to apply the amending provisions of the CCD to business lending covered by the CCA (that is, business lending up to £25,000). However, the following CCD requirements would not apply to this business lending:
  • Advertising requirements (not currently covered by UK legislation) (article 4, CCD).
  • Mandatory use of the Standard European Consumer Credit Information form (SECCI) (see What is the Standard European Consumer Credit Information form? below for a brief description of this form) (although pre-contractual information would still have to be provided) (article 5 and Annex II, CCD).
  • Mandatory compliance with CCD contractual information requirements (although contractual information would still have to be provided) (article 10, CCD).
  • The requirement to provide amortisation tables (that is, a table detailing each periodic payment of interest and the principle balance of a loan) on demand (article 10, CCD).

What about loans above £60,260?

BIS proposes that loans covered by the CCA that are above the CCD threshold of £60,260 should be subject to the CCD's requirements. However, the following provisions of the CCD would not apply to such loans:
  • Mandatory use of the Standard European Consumer Credit Information form (SECCI) (see What is the Standard European Consumer Credit Information form? below for a brief description of this form) (although pre-contractual information would still have to be provided) (article 5 and Annex II, CCD).
  • Mandatory compliance with CCD contractual information requirements (although contractual information would still have to be provided) (article 10, CCD).
  • The right of withdrawal (article 14, CCD).
  • The requirement to provide amortisation tables (that is, a table detailing each periodic payment of interest and the principle balance of a loan) on demand (article 10, CCD).
  • The requirement to provide adequate explanations (article 5, CCD).

What is the Standard European Consumer Credit Information form?

The Standard European Consumer Credit Information form (also known as the "SECCI") is the standard form for disclosure of pre-contractual information under the CCD (set out in Annex II to the CCD). The European Commission has made this mandatory with minimal scope for change.

What about existing UK exemptions?

The existing exemptions from the UK regulated agreement requirements are provided for in section 16 of the CCA, and in the Consumer Credit Agreements (Exempt Agreements) Order 1989 (SI 1989/869) (as amended) (Exempt Agreements Order). Some of these exemptions are affected by article 2 of the CCD and will need amendment, such as the existing derogation for credit which has to be repaid within twelve months by not more than four instalments (section 16(5), CCA and article 3, the Exempt Agreements Order). Under the CCD, this exemption should apply only to credit agreements where:
  • the credit is granted free of interest;
  • without any other charges; and
  • the credit has to be repaid by a limited number of payments (four or fewer) within a year.
Where an existing UK exemption is affected by the CCD and requires amendment, BIS plans to apply the change to all CCA regulated agreements qualifying for the exemption, and not just to agreements falling within the scope of the CCD.

What is happening to the "high net worth" exemption?

The CCD does not allow the UK to apply the "high net worth" exemption (that is, the exemption that enables very wealthy individuals to opt out of regulation) to loans below £60,260 (section 16A, CCA and articles 2-5, the Consumer Credit (Exempt Agreements) Order 2007 (SI 2007/1168)). However, BIS intends to continue to apply it for loans above the threshold.

What steps should businesses take to prepare for the CCD regime?

Any business currently covered by, or exempt from, UK consumer credit legislation should be in the process of assessing what effect the CCD changes will have on it. In particular, consideration should be given to the following key areas:
  • Advertising.
  • Credit agreements. Lenders, such as credit card issuers, will need to decide whether they wish to take advantage of the simplified process for entering into credit agreements. Some lenders will need to review their credit agreements process.
  • Other customer-facing materials. Lenders will need to change their existing standard documents to meet the new requirements on the form and content of agreements.
  • Business processes. These should be reviewed. For example, until a creditor has decided not to proceed to the conclusion of the credit agreement, the creditor must be able to provide a draft consumer credit agreement at the customer's request with all the fields completed in the same way as the version sent to the customer for signature.
  • Staff training. It will be important to ensure ongoing compliance with the implementing regulations. For example, businesses must give adequate explanations on certain features of the credit agreement orally, both face-to-face and on the telephone.
  • IT systems. Many lenders will need to make substantial changes to their IT systems to accommodate the new requirements and may, at the same time, want to consider reviewing and updating their current documentation generally, not just to meet the latest CCD requirements.

Key primary source material