Consumer Credit Directive 2010: further changes are on the way!

Having been subjected to years of regulatory transformation previously, lenders are once again faced with implementing additional changes to consumer credit processes, systems, advertisements and agreements as a result of the Consumer Credit Directive 2010 (CCD).
The draft regulations implementing the Consumer Credit Directive into UK law (the Regulations) have now been published and are expected to be passed through parliament shortly prior to being fully implemented in the UK by the EU deadline of 11 June 2010.
We have summarized the key modifications to the legislation below and strongly advise that you review your systems and documents in line with the proposed amendments to ensure you are ready for 11 June 2010.

Scope

The CDD is much narrower in scope than Consumer Credit Act (CCA) and certain agreement types currently regulated by the CCA, fall outside the scope of the Regulations, these include:
- consumer credit agreements over £100,000;
- loans to sole traders, small partnerships and unincorporated bodies;
- second charge mortgages;
- agreements secured on land and “other comparable surety”; and
- interest and charge free credit.
The above agreements, although not subject to the new requirements of the Regulations, will continue to be regulated, as before, by the CCA. In addition, some agreements (eg overdrafts) which were outside the scope of the CCA and were previously unregulated will now be caught by the requirements of the new Regulations. The Regulations will not have retrospective application.

Advertising

Under the CCD, any credit advertisement that includes an interest rate or figure relating to the cost of credit must include certain standard information in the form of a ‘representative example’ which should be based on an APR at which the lender reasonably considers at least 51% of the agreements will be set at as a result of the advertisement. The example should be set out as a worked example and be more prominent than any other information in the advertisement relating to the cost of credit.
Where the agreement relates to running account credit and where the amount of credit is not known, the representative APR should be based on £1,200 (or an amount equal to the limit if lower).

Creditworthiness and adequate explanations

The Regulations introduce a new obligation for lenders to assess the credit worthiness of debtors before entering into an agreement or significantly increasing the credit available. This applies to all unsecured consumer credit loans covered by the CCA except pawn broking and consumer hire agreements. Information should be obtained from the debtor themselves and a credit reference agency where necessary in the circumstances. Lenders who refuse credit to customers on the basis of credit reference database information have to notify the borrower of this and provide them with details of the relevant credit reference agency. It is anticipated that the Office of Fair Trading (OFT) will issue guidance on what it considers to be “irresponsible lending”.
The Regulations also impose new obligations on the lender or credit intermediary (except in hire agreements and those providing credit over £100,000) to provide clear explanations to the consumer about the appropriate use of the agreement, cost, adverse effects, right of withdrawal, consequences of non-payment and how to obtain more information. The consumer must also be given an opportunity to ask questions.
Importantly, breaches of either of these requirements (credit worthiness and/or adequate explanations) will not affect the enforceability of the credit agreement, but may affect the creditor’s ability to hold a CCA license.

Calculation of APR

Lenders will be required to calculate APR using new criteria as set out in the Schedule to the Consumer Credit (Total Charge for Credit) Regulations 2009. The new formula contains an increased number of assumptions within the calculation and is designed to produce a more accurate calculation. Systems will need to be changed to reflect the new formula.

Pre-contractual information

Pre-contract information must now, however, be provided using the Standard European Consumer Credit Information form (SECCI). This is expected to replace the current pre-contract information requirements and as such, lenders will have to update their pre-contractual systems and documentation. The information contained in the SECCI is not overly dissimilar to the current requirements, nevertheless, the format and content must be followed exactly and the SECCI must be provided to the consumer in ‘goodtime’.
Importantly, lenders who enter into agreements at a distance and provide a SECCI will be deemed to have complied with the Financial Services (Distant Marketing) Regulations 2004.

Right of withdrawal

A 14-day right of withdrawal without reason will apply to most agreements within the scope of the CCD (except those already falling within the distance selling or distance marketing regimes where cancellation rights already apply). The period for withdrawal ends 14 calendar days after the day after the agreement is made.
The debtor will have to repay the credit and accrued interest within 30 days of providing notice of their withdrawal. This will change the current position where there is no such broad right to withdraw.

Content of agreements

The Regulations stipulate a number of additional requirements for agreements on top of those prescribed by the CCA. These requirements include:
- details of the consumer’s right to receive, on request and free of charge, at any time during the lifetime of a fixed term credit agreement, a ‘capital amortisation table. (These tables are not commonly used in the UK and it is difficult to see that there will be a big demand for this type of information from the typical UK consumer);
- the specific procedure to be followed in order to terminate/withdraw from the agreement; and
- a statement showing the conditions, periods and charges associated with the agreement.
Lenders should review their agreements to ensure all additional information is included.

Open-ended credit agreements

Agreements with no fixed term will be cancellable by debtors upon the provision of the notice contained within the agreement (maximum one month). Lenders must give the debtor at least two months notice of cancellation, except where there has been a breach of contract. Cancellation will be free of charge to the debtor.

Early settlement

Under the current CCA regime, there is a statutory right to fully repay any credit. Under the new Regulations, consumers will have a right to full or partial early repayment and, where this right is exercised, the consumer will be entitled to a reduction in any interest and other charges due for the remaining duration of the agreement.
Lenders will be entitled to fair and objectively justifiable compensation for costs incurred as a result of the debtor’s early repayment (up to certain limits) where:
- the borrowing rate is fixed;
- the amount of the (full or partial) repayment exceeds £8,000 or where more than one repayment is made in a year, the total of those repayments exceeds £8,000; and
- the agreement is not in respect of an overdraft on a current account.

Assignment

The lender will be obliged to inform the debtor of any assignment of their rights under except where the arrangements for administering the credit will not change as a result of the assignment eg the lender will continue to deal with the debtor in relation to the agreement. It is difficult, however, to envisage a situation where they may continue to do this. Notice should be given on the first occasion that the arrangements for administering the credit change after the date of the assignment.