Policy
Response
BERR Consultation on Proposals for Implementing the Consumer Credit Directive
Response by the Building Societies Association|
Contact: Chris Lawrenson Date: 10 Jun 2009 |
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Introduction
1. The Building Societies Association (BSA) represents all 53 building societies in the United Kingdom. Building societies have total assets of £385 billion and, together with their subsidiaries, hold residential mortgages of almost £250 billion, more than 20% of the total outstanding in the UK. Societies hold over £240 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 37% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.
2. This paper provides the BSA’s response to BERR’s consultation on proposals for implementing the Consumer Credit Directive (the CP). As well as certain practical comments, the BSA takes this opportunity to reiterate its disappointment at the way Government continues to introduce wide-ranging domestic legislation even though EU legislation, covering substantially the same ground, is in the pipeline. This practice causes confusion for consumers and unnecessary costs to businesses – it is unwelcome even when market conditions are good but, during a major recession, it is completely unacceptable.
EU Legislation
3. Despite the fact that the Consumer Credit Directive had its first reading European Parliament in April 2004, the Government introduced its Consumer Credit Bill into the House of Commons in May 2005. The two measures covered very similar ground eg pre-contract information, responsible lending etc. The Government subsequently made numerous regulations under the Consumer Credit Act 2006, but businesses and consumers will soon have to revisit these matters, under the Directive – this will be costly, disruptive and confusing.
4. We believe that prospective UK legislation should usually be held-over if EU law, covering substantially the same ground, is expected to be introduced. Unfortunately, this does not happen in practice – the latest example is the Equality Bill, which was introduced in Parliament recently, despite the fact that an equality directive is progressing through the EU.
5. In August last year, the BSA submitted a 12-point plan to BERR in relation to its consumer law review call to evidence. The plan covers, among other things, the point made above about EU legislation and sets out proposals to alleviate the problems of a consumer protection framework that the Government itself has described as –
- complicated
- too costly
- unhelpful to consumers
- burdensome on business
- fragmented
- inflexible
- restrictive, and
- not ‘future proofed’.
In view of the lack of progress in most of the relevant areas, the BSA intends to promulgate its plan over the coming months.
General Points on the Directive
6. BERR proposes to apply any amended provision of the UK legislation equally to all credit agreements, in order to maintain a comprehensive, homogenous set of rules (see paragraph 1.9 in the CP). Nevertheless, BERR recognises that there are good arguments for not applying entirely new Directive requirements to credit agreements that fall outside its scope. Therefore, BERR proposes to adopt a case-by-case approach as to whether or not to apply specific provisions within the Directive to agreements outside of its scope.
7. We recognise certain merits in this approach but, as a matter of principle, are against ‘gold-plating’ of EU requirements. Indeed, the entire exercise would have been much easier to manage had the Government not introduced the 2006 Act but, rather, awaited the EU Directive.
8. Implementation of the Directive will require changes to UK consumer credit law; notably in respect of –
- information and explanations that lenders must give to consumers
- advertisements
- the right for consumers to withdraw from a credit agreement within 14 days without giving any reason, and rights for consumers to repay an agreement early
- calculation of the APR
- the obligation on the lender to check creditworthiness before offering or increasing credit.
9. The Directive is a ‘maximum harmonisation’ measure, which means that individual Member States are not allowed to exceed the rights and requirements set out in the Directive. The spirit of this requirement should be fully reflected - the UK should not gold-plate EU law, unless there is a clear, demonstrable reason for doing so, and domestic laws covering substantially the same ground as an EU regulation or directive should be repealed when the EU law becomes UK law. We return to this point later.
Loans Secured on Land
10. However, the Directive is unlikely to affect loans secured on land because BERR proposes to continue to exempt first charge mortgages (paragraph 1.11) and second charge mortgages would continue to be subject to existing CCA provisions (see paragraph 1.15). We welcome this. The Financial Services and Markets Act 2000 (Consequential Amendments) Order 2008 and Consumer Credit 2006 (Commencement No 4 and transitional Provisions) Order 2008 were very useful provisions that helped to clarify the previous confusion about the application of the consumer credit legislation to land mortgages. We would not want to see a return to the confusion. Indeed, we await the appeal in Heath v Southern Pacific Mortgage Ltd [2009].
11. Also, in this context, we are in contact with the OFT direct about some continuing practical problems in this area concerning licensing.
Information and explanations
12. Pre-contractual information is covered by Articles 5 – 7 of the Directive (see paragraphs 3.1 – 3.30). The required information is similar to the current pre-contractual information requirements as set out in the Consumer Credit (Disclosure of Information) Regulations 2004. However, the information has to be provided in the precise format set out in the Standard European Consumer Credit Information (SECCI) sheet, which is contained in Annex I of the Directive.
13. Naturally, we agree with BERR’s proposal that the requirement to provide pre-contractual information under the Disclosure Regulations should be replaced by a requirement to provide such information in the way set out in the SECCI. BERR proposes to retain the existing regime for products outside the scope of the Directive (these products are listed in paragraph 1.7 and include lending to small businesses, loans below £160 or above £60,260, second charge mortgages etc). This seems sensible.
14. Article 5 requires the lender to give the consumer the information “in good time” and before being bound by an agreement. The Disclosure Regulations provide that the information has to be provided before an agreement is made. The CP considers this point in paragraphs 3.19 – 3.21. No question is asked on this point and we have no particular comment to make.
15. Article 5.6 requires Member States to ensure that creditors provide adequate explanations to consumers to enable them to assess whether proposed credit agreements are adapted to their needs and financial situation. Recital 27 even suggests that, where appropriate, the relevant pre-contractual information and the essential characteristics of the products proposed should be explained in a “personalised manner”. Nevertheless, Member States are given considerable freedom to determine how to implement these provisions. BERR particularly seeks lenders’ views on this matter.
16. It would be highly impracticable for lenders to be obliged to take on the responsibilities described under the heading ‘maximum’ in paragraph 4.7. To expect lenders to assume responsibilities, in an individualised way, for a consumer’s decision would be unreasonable and would detract from consumers’ own responsibilities and caveat emptor. As BERR will be aware, the FSA is currently consulting on consumer responsibilities and it is important for the authorities to be joined-up on this matter.
17. We broadly agree with BERR’s approach, as set out in paragraphs 4.9 – 4.13. Provided customers are given the relevant information in a clear way, it is up to them to make their decision.
18. Article 10 of the Directive specifies the information that the lender must provide to the consumer at the contractual stage (and the information listed in Article 10 is very similar to that listed in Article 5 ie pre-contractual information – see above). The form and contents of a regulated agreement are currently set out in the Consumer Credit (Agreements) Regulations 1983 and the Consumer Credit (Cancellation Notices and Copies of Documents) Regulations 1983 (both as amended). The Directive is, broadly speaking, less prescriptive than the current UK regime.
19. Nevertheless, BERR proposes that the information regime should maintain its existing coverage and the amendments required should apply to all credit agreements, even those not within scope of the Directive. There are a considerable number of important points, concerning, for example –
- presentation of contractual information
- signatures (and electronic signatures)
- prescribed terms
- copies of agreements
- statutory statements
- modifying agreements
- variations in the borrowing rate
20. We disagree with BERR’s proposals as a matter of principle. As we stated in our response to the consumer law review call for evidence, the UK should not gold-plate EU law, unless there is a clear, demonstrable reason for doing so. We remind BERR that it is part of one of the 5 principles of good regulation, published by the Better Regulation Commission of the Cabinet Office, that "EC Directives should be transposed without gold plating" and we firmly believe that this should be honoured except in very rare cases indeed.
Advertisements
21. Article 4 of the Directive deals with the standard information to be included in advertising and will require amendments to the Advertisements Regulations. Topics likely to require revised treatment include representative examples and APR requirements. In our view, the UK position should reflect that of the wider EU.
Withdrawal and early repayment
22. Article 14.1 of the Directive gives consumers a right to withdraw from a credit agreement within 14 days of the conclusion of the agreement, or from when the consumer receives the terms and conditions if later, without giving any reason. But the right is to withdraw from the credit agreement, not from an agreement for the provision of goods or services (ie the consumer is still obliged to pay).
23. As BERR points out, there is no - across the board - right to withdraw from a credit agreement under the CCA (although there are some limited cancellation rights under section 67). The new right of withdrawal will replace the section 67 rights, with a right to cancel all those agreements that are within the scope of the Directive. BERR proposes extending the right of withdrawal to various other agreements covered by the CCA, but outside the scope of the Directive (see paragraphs 10.1 – 10.43 in the CP). The relevant products are, broadly speaking, not ones that our members offer but, as a matter of principle, we are uncomfortable about the UK super-equivalence implicit in BERR’s policy proposals.
24. Paragraphs 12.1 – 12.58 deal with early repayment. Article 16, among other things, gives the consumer the right to discharge his obligations under a credit agreement - fully or in part - at any time, and the right to a reduction in the total cost of credit corresponding to the interest and costs applicable to the remaining duration of the contract. Under the CCA, consumers already have the right to repay a credit agreement early. However, the right is only to repay in full; there is no right to make partial early repayments.
25. Among other things, BERR proposes a new formula for partial settlement and to extend the types of media in which the consumer may give notice. Again, to the extent that this would make the UK super-equivalent to the rest of the EU, we believe that BHERR must be certain about the need for such gold-plating.
APR calculations
26. Article 19 and Annex I of the Directive set out the requirements on how lender must calculate the Annual Percentage Rate of Charge (APR). It will be necessary to change the formula currently used under the CCA. We have no specific expertise on this matter and will leave it to those more suitably qualified to comment.
Creditworthiness
27. Article 8 requires Member States to ensure that, before the conclusion of the credit agreement, the creditor assesses the consumer's creditworthiness on the basis of “sufficient information”, where appropriate obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database. Recital 26 states that Member States should take appropriate measures to promote responsible practices during all phases of the credit relationship.
28. There is no specific requirement under the CCA to check consumers' creditworthiness, but the OFT has power to consider whether a lender has lent irresponsibly (indeed, the OFT is currently consulting on this matter www.oft.gov.uk/advice_and_resources/resource_base/legal/cca/irresponsible). BERR proposes three levels of creditworthiness-checking that would apply according to a combination of the size of a loan and the kind of credit offered (see paragraphs 5.1 – 5.12).
29. Again, the approach headed ‘maximum’ (paragraph 5.7) would completely change the business role of a lender – consumers must have at least some responsibility for their actions. Indeed, if the authorities proceed down the maximum route, then they would have to take on an equivalent enforcement responsibility in respect of all relevant lenders. There is a genuine risk that reputable lenders will vacate the market and leave it open to rogue trades.
